Robinhood It is well known that one of the best services a retail broker can provide is not answering the phones during a crash. The market is down, the customers panic, their timing is terrible, they want to sell at the bottom, they call you up to say "sell everything," you say "we're sorry all our representatives are assisting other customers, your call is important to us," they hang up and get distracted, the market rallies, they forget about selling, you have saved them a fortune, good work. I don't think any retail broker has this as an official policy; it seems legally dicey and hard to pull off in practice. (What if customers want to buy the dip? What if they want to sell, and you stop them, but they were right and the market keeps going down?) Also I am not sure it has much marketing appeal; people who are doing frequent single-stock trades with a retail broker presumably don't want to be told to stop trading. Still it seems like something to aspire to. A lot of retail financial advisers say that their job is to keep investors calm, to reassure them in turbulent markets so that they don't dump all of their stocks at the worst possible time. If you could scale and automate that—if you could notice the worst possible time to sell stocks and then prevent customers from selling automatically, quietly, by omission—then that would be valuable.[1] Or consider Cliff Asness's argument that illiquid assets might actually trade at a premium, because "many investors actually realize that this accurate and timely information will make them worse investors as they'll use that liquidity to panic and redeem at the worst times." If you could offer selective illiquidity—"when you are probably panicking, we probably won't answer the phone"—then rational (or, rather, rational-about-their-irrationality) investors should be willing to pay you for it. I am sorry to say that Robinhood has not worked out all the kinks: Online brokerage platform Robinhood suffered an outage that lasted the entire U.S. trading day and prevented customers from making trades as stocks surged after last week's rout. The system-wide issue began as the markets opened with clients unable to access their accounts. Almost two hours later, Robinhood Markets Inc. said the problem had been identified and its staff was working on a fix. By 4 p.m. in New York, access had not been restored. Clients blasted the closely held company on social media and several said they would close their accounts. "One of the most anticipated trading days and your service is down at market open," one user wrote. Another user said: "What is going on -- I can't do any trades -- you will lose me as customer going forward. This is ridiculous." Yeah no look if your website broke last Monday, and stayed down all week, then you'd have something. I'm not exactly sure what you'd have; lots of Robinhood customers are making all sorts of bets and doing weird options strategies, and for all I know lots of them made money last week as the broad market fell. (Also if you sold all your stock last Monday, you're still ahead of people who held through yesterday.) But in broad stereotypes, taking off the week of a crash might help a lot of clients. Unfortunately Robinhood's website was down yesterday, and taking off the day of a recovery rally when the S&P was up 4.6% probably just hurts clients. Obviously this is bad for business: The outage sparked a backlash online from Robinhood users, who threatened to join rival platforms and sue the company. One user created a new Twitter profile calling for a class-action lawsuit and gained more than 4,000 followers by the end of the day. And in Bloomberg's Fully Charged newsletter, Julie Verhage writes: It wasn't that long ago that Robinhood was pretty much the only game in town when it came to free trading. Now, that's hardly the case. Charles Schwab Corp., Jack Dorsey's Square Inc. and Fidelity Investments offer commission-free trading, to name a few. After an outage like the one Robinhood customers experienced, it's easier than ever for customers to take their business elsewhere. Yes, true. But my impression of Robinhood, which pioneered the idea of trading single stocks (and later single-stock options, and Bitcoin) for free on your phone, has always been that, more than most retail brokerages, it appeals to gamblers. If you're running a complex single-stock options strategy from your phone, you enjoy a bit of risk. Maybe the risk of the website crashing won't bother you too much? Maybe it adds to the excitement? Waymo money Alphabet Inc., the parent company of Google, is good at making money and has a lot of it. As of Dec. 31, it had about $120 billion of cash and marketable securities. Its cash flow from operations in 2019 was $54.5 billion, or a bit more than a billion dollars a week; its net income was $34.3 billion. Alphabet does not need to plow all that money back into running Google. There are some servers, you gotta spruce up the maps a little, I don't know, the search algorithm kind of runs itself. There is extra money. Some of that money goes to the usual boring things that tech companies do when they have more money than they know what to do with, like buying back stock or hoarding money in a giant internal investment fund. But some of it goes to the usual exciting things that tech companies do when they have more money than they know what to do with, like ending death. Really Google was like "we have so much money coming in from selling online search ads, we should spend it on something nice," and the nice thing that they decided to spend it on was human immortality. It's a nice thing! That is some self-confidence right there. Not just in the science—you really have to believe in yourself to think you can cure death—but also in the money. That's a pretty long-term project. You don't want to spend years searching for the fountain of youth with nothing to show for it, only for some accountant to show up and say "sorry you're over budget for curing death, project's over, get back to the online advertising mines." It is better if every week the accountants come to you and say "hey we just got another billion dollars and we can't figure out how to spend it, can you help?" You can help! Human immortality might turn out to be a side effect of online search advertising. Evolution is amazing. Other nice things too. Self-driving cars, why not. Once you've built nice map software, you might as well also build self-driving cars, is a thought process you might have if you had to find ways to spend a billion dollars a week. Alphabet's Waymo subsidiary is generally considered a leader in developing self-driving cars, due to similar sorts of confidence-in-the-science-and-the-money reasons. I was a little surprised by this: Waymo, the Google sister company that sparked the race to build driverless cars, has raised $2.25bn from a group of outside investors, the first time it has looked beyond parent company Alphabet for capital. The investment matches the $2.25bn that SoftBank last year ploughed into Cruise, the General Motors driverless car unit, and points to an acceleration of efforts by the leading autonomous vehicle companies to launch full robot taxi services. The injection of outside capital is also the latest sign that holding company Alphabet is preparing to give up more control over some of its "moonshot" projects as it looks to turn them into commercial ventures with outside backers. "Certainly, it's always been on the road map" for Alphabet units such as Waymo to "become completely independent, spun-out entities", said John Krafcik, Waymo's chief executive. He stopped short of saying Waymo would definitely follow that course, adding only: "That's certainly a possibility for us." But with external investors one day needing to sell their stakes, such fundraisings have widely been seen as a prelude to eventual spin-offs. Waymo is a scrappy startup-ish company that is spending a lot of money to develop a complex expensive risky product that doesn't bring in a lot of revenue right now. Usually when companies like that raise money, it is because they need money. But Waymo is also a subsidiary of Alphabet, which is constantly facing the problem of finding ways to spend the extra billion dollars it brings in every week. There is, you would think, a trade there: Waymo needs money and Alphabet needs to spend money. In broad strokes that explains the existence of Waymo, and of Calico (the cheating-death subsidiary) and the rest of Google's "other bets." You take a successful money gusher, you hook it up to an ambitious money guzzler, everyone's happy. So why raise outside money? The obvious business reason is just to impose some capital discipline. If, like Alphabet, you have more money than you know what to do with, and you see the Waymo people in the cafeteria every day, you are going to be inclined to give them as much money as they want, which is probably more money than they need. If you force them to raise outside money, then they will have to come up with a business plan and pitch it to arms-length outside investors and get those investors to commit money at some valuation that reflects their estimate of the present value of its future earnings. Alphabet's implicit view of the matter is something like "ugh, earnings, we have enough trouble spending our earnings now, just make cool cars." The new investors are people like Silver Lake and Mubadala and the Canada Pension Plan Investment Board,[2] who will want their investment to produce profits eventually. If you want Waymo to turn into a viable business—and at some theoretical level you probably do, you run a business, the projects are supposed to have positive net present values, all that stuff—then kicking it out of the cozy nest and making it raise external money is probably an important step. It seems relevant to mention that, three months ago, Alphabet announced that Google Chief Executive Officer Sundar Pichai would become CEO of Alphabet, taking over the parent company from its founders. The general interpretation of that move was that handing control of Alphabet to a professional CEO, rather than a pair of founder visionaries with super-voting stock who had grown bored of Google, would lead to stuff like this. "This may mean that the Other Bets have to start really functioning as businesses and there won't be a two-tier system where Google is run as a business and the other projects have infinite time horizons to reach profitability," said Vineet Buch, and now here we are. There is a related corporate finance reason to raise outside money. If you have a business that spends a lot of money trying to invent self-driving cars, and generates only a little bit of money selling rides in self-driving cars, then that business will lose a lot of money. On your financial statements that will look bad. If on the other hand you are a big investor in a business that has raised money at a multibillion-dollar valuation ("The valuation placed on Waymo by its first arm's length investment was not disclosed, but the latest round in GM's Cruise division valued that business, which is widely seen as the closest rival to Waymo in terms of its technology, at $19bn"), then you have a valuable asset. Not necessarily, immediately, on your financial statements—presumably Alphabet will still consolidate Waymo—but perhaps in people's minds, and perhaps ("prelude to eventual spin-offs") eventually on the financial statements too. When Uber Technologies Inc. was shopping a minority investment in its self-driving-car subsidiary, I wrote: "Once you print this deal at a $10 billion valuation, you can replace 'and here is where we lose a lot of money but we're hoping to change that' to 'we have a majority stake in a $10 billion business.'" A basic function of finance is to transform a stream of cash flows into an asset, but a more advanced function of finance is to transform a stream of losses into an asset. Stakeholderism One theory of corporations is that they should ruthlessly maximize shareholder value at the expense of everything and everyone else. Another theory is that they should nicely maximize shareholder value, that being nice to everyone else—paying workers well, respecting the environment, etc.—is a good way to maximize long-term shareholder value. A third theory is that they should maximize different things, somehow, simultaneously: The company should not only maximize shareholder value but should also independently prioritize worker pay and the environment and other goals, and should sometimes choose those other goals even if it reduces shareholder value. Nobody really believes the first theory. There are no corporate-finance textbooks that are like "stiff your customers and break the law as long as it makes an extra buck for shareholders." Everyone who believes in shareholder value understands that doing certain greedy short-term things will be bad for shareholders in the long run, though there are of course empirical disagreements about which things are bad. So the second theory is largely a matter of rhetoric. Some people say "we should maximize shareholder value," and other people say "no, actually, treating workers well and respecting the environment is good for long-term shareholder value." Well, right, yes, fine. Those people agree with each other about the goal of the corporation. They just might, or might not, have some practical empirical disagreements about how to achieve that goal. The third theory is genuinely different! Saying "we should pay workers well even if it is bad for shareholders' long-term interests" is different from saying "we should pay workers well because it is in shareholders' long-term interests." You can pretend that there is no difference and that the other nice things you want are always in shareholders' interests; you can assume away any conflict between workers and shareholders. It seems, in the long run of economic history, like a weird thing to assume away. If the company is doing well and making money, someone has to get the money: Is it the workers, or the shareholders? The second and third theories are, in some vague mashed-together way, rather popular these days. We have talked a couple of times about a big announcement that the Business Roundtable made about the purpose of the corporation, saying that corporate leaders should consider "all stakeholders" in making decisions, which sounds a little like the third theory and is in any case a very self-conscious rejection of the first. And there is BlackRock Inc.'s Larry Fink, who sends an annual letter to corporate chief executive officers with some flavor of the second theory, along the lines of "be nice, because it is good for long-term shareholder value." But here are a blog post and paper from Lucian Bebchuk and Roberto Tallarita about "The Illusory Promise of Stakeholder Governance." As the title suggests, they are skeptical. For one thing, unlike a lot of stakeholder-governance advocates, they try to draw a clear distinction between the second and third theories, and dismiss the second theory as just another form of shareholder value: According to the "enlightened shareholder value" version, corporate leaders—a term we use throughout to refer to the directors and top executives who make important corporate decisions—should take into account stakeholder interests as a means to maximize shareholder value. Such an instrumental version of stakeholderism, we show, is not conceptually different from shareholder primacy; it is merely a semantic change, and we show that there are no good reasons for adopting it. In the third theory, on the other hand, "corporate leaders can and should regard stakeholder interests as ends in themselves": This view, which we call "pluralistic," posits that the welfare of each stakeholder group has independent value, and consideration for stakeholders might entail providing them with some benefits at the expense of shareholders. But they point out that most advocates of considering stakeholder interests have no theory for how to do these tradeoffs. Which means in practice that corporate leaders—CEOs and boards of directors—get to decide: In particular, stakeholderists have commonly avoided the difficult issue of determining which groups should be considered stakeholders, leaving this decision to the discretion of corporate leaders; have tended to overlook the ubiquity of situations that present trade-offs between the interests of some stakeholders and long-term shareholder value; and have generally not provided a method to aggregate or balance the interests of different constituencies in the face of such trade-offs, leaving this matter again to the discretion of corporate leaders. Thus, the effects of pluralistic stakeholderism would critically depend on how corporate leaders choose to exercise discretion. … Acceptance of stakeholderism would insulate corporate leaders from shareholder pressures and make them less accountable. Indeed, we argue, the support of corporate leaders and their advisors for stakeholderism is motivated, at least in part, by a desire to obtain insulation from hedge fund activists and institutional investors. In other words, they seek to advance managerialism by putting it in stakeholder's clothing. The increased insulation from shareholders, and the reduced accountability to them, would serve the private interests of corporate leaders. It would also increase managerial slack and undermine economic performance. If you make CEOs answerable to everyone—not just shareholders but also employees and customers and suppliers and the environment and community values—then they're answerable to no one. If they have discretion to balance among all those people's interests, they will tend to use it in their own interests. On the other hand If you do want a CEO to be answerable to someone other than shareholders, why not make her the CEO of a trust rather than of a corporation? Here are Lee-ford Tritt and Ryan Scott Teschner: In our recent article, Re-Imagining the Business Trust as a Sustainable Business Form, we proffer the business trust as an alternative organizational form for pursuing sustainable practices while maintaining profitability. Despite states' attempts to free corporations from the strict shareholder primacy model through constituency statutes and new corporate forms such as the benefit corporation and social-purpose corporation, corporate law has remained largely static concerning sustainability issues. In contrast, the business trust affords the structure and the flexibility necessary to advance the sustainable management model without breaching shareholder primacy's potential profit-maximization restrictions. ... Business trusts are unincorporated associations carried on for profit, created at common law by a trust agreement. Business trusts are similar to corporations in that they separate assets from creditors and offer limited liability to the trust's beneficiaries as well as to the trustee. However, trusts do not face many of the restrictions that corporations face, such as requirements for a board of directors, annual shareholder meetings, and residual claims. In particular, two characteristics of the business trust make it particularly suitable for implementing sustainability practices without breaching shareholder primacy's profit maximization restrictions: (i) inherent flexibility through default rules that can be modified through drafting and (ii) trustees' role as fiduciaries instead of agents of the beneficial owners.[3] We do not talk a lot about business trusts around here; they had a vogue in the … 19th century? But we did talk about one last year, the Texas Pacific Land Trust, which had absolutely wild corporate governance including three trustees elected for life. So if the theory here is "forming a business as a trust instead of a corporation is a good way to not have to answer to shareholders," I guess I believe it. Some more WeWork Are you tired yet of WeWork postmortems? No, good, me neither, here's a great one from Moe Tkacik that focuses on Adam Neumann's wife and co-founder Rebekah Neumann (born, "ensconced in wealth and bad energy," Rebecca Paltrow). Adam, WeWork's deposed chief executive officer, is often thought of as its sole founder, with Rebekah as a sort of weird interloper, but Tkacik's argument is that much of the vision for WeWork was really Rebekah's: If WeWork seemed like an heiress yoga instructor's idea of a company — "redefining success to include fulfillment and sharing and generosity," is how Rebekah explained it to The School of Greatness — that's precisely what it was. She was instrumental in WeWork's early days: Even though Rebekah's name was absent from WeWork's original literature — leading to accusations that the company rewrote its history to make her a co-founder — the business bore the hallmarks of her thirst for enlightenment and mystic milieu. It was Rebekah who, according to the couple's own mythology, transformed Adam from a chain-smoking pretty boy with such profound dyslexia he could barely read his text messages into the shamanic figure who wooed so many overconfident white guys in Silicon Valley. Also they got the business up and running with, um, a million-dollar wedding gift: "I am nothing without you," he often told her, including from the stage as he delivered the Baruch commencement address. Financially speaking, it was true: In addition to all those life lessons, she gave him a million dollars, which was a lot of money to have in the bank during a credit freeze. The money was a wedding gift from her parents, for a down payment on an apartment. They moved into a tiny East Village space and saved the money for a "capitalistic kibbutz," or communal office space, inspired by a business plan Adam had originally dreamed up in a college entrepreneurship contest. A professor had mocked the idea back then on grounds that Adam would never manage to raise the funds to secure the necessary real estate — but that professor had not factored in the possibility that his student would marry into wealth on the precipice of the greatest real estate crash New York had seen in decades. Yeah I mean it is weird, in some respects everything about WeWork went wrong except that they were really good at raising money. "This is a great idea except where will you get the money" seems like a pretty bad diagnosis of WeWork. Also here's another theory that I don't quite know what to do with: "It felt like a lot of people from Great Neck, Long Island, and people from Great Neck take care of other people from Great Neck," says a former WeWork staffer. "That was my sense of how they got so much financing when their business, on paper, was a disaster." Well, no, they raised something like $18.5 billion from SoftBank Group Corp., a Japanese company investing a lot of Saudi money, none of those people are from Great Neck. Still I like the idea that high-stakes international finance can all be mapped somehow onto specific towns on Long Island. Things happen UBS's Ermotti to Take Over as Chairman of Swiss Re in 2021. StanChart Chairman Sounds Out Bankers to Replace CEO Winters. How Iraq Pulled Off One of the Biggest Sovereign Debt Restructurings of All Time. Meet the hedge fund wunderkind looking to oust Twitter CEO Jack Dorsey. Twitter Employees Start #WeBackJack To Protect CEO Jack Dorsey From Activist Shareholders. How Do You Solve a Problem Like Fannie and Freddie? 'Knowing the right people': the luxury concierge with elite connections. Laundering cryptocurrency for North Korea. For Decades, Cartographers Have Been Hiding Covert Illustrations Inside of Switzerland's Official Maps. If you'd like to get Money Stuff in handy email form, right in your inbox, please subscribe at this link. Or you can subscribe to Money Stuff and other great Bloomberg newsletters here. Thanks! [1] Obviously in general if you could identify bad times to sell stocks, and by implication also good times to buy stocks, that would have value beyond running a nice retail brokerage franchise. But you know what I mean. [2] Though also people like Magna International and AutoNation, who presumably have business-partnership-y reasons as well as pure financial ones. [3] I think a lot of people would say that corporate directors are fiduciaries, but not quite agents, of shareholders, but I guess the matter is debatable. | 
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