Oh WeWork The first thing to realize is that, when WeWork's initial public offering was falling apart last October, when we were mercilessly making fun of WeWork on a daily basis, when it was rapidly running out of money and needed a bailout from its biggest investor, SoftBank Group Corp., when it was pushing out its founder and chief executive officer, Adam Neumann, when it was a hilarious catastrophe and a symbol of the excesses of the startup unicorn boom—those were the good times. Even as I made fun of WeWork's bad governance and silly behavior and overambitious valuation, it always seemed like a reasonable enough business. Lease office buildings, spruce them up, make them nice, carve them into smaller time-and-space slices, and rent them out by the desk and the month to other businesses for more than you pay. Strip out the blather about WeWork being a new state of consciousness and, you know, seems fine. Now is the bad time. WeWork is not a unique hilarious catastrophe anymore; it is just a sad catastrophe like so many other businesses. If your city shuts down, if everyone fears the plague, if office workers are told to work from home, no one will be coming to a WeWork, just like no one is going to restaurants or movie theaters. No one is going to lots of other offices either, but it's a bigger problem for WeWork than for most office landlords because so much of its business model was about giving tenants flexibility. If you are a big company with a multi-year lease on 10 floors of a midtown office building, you're probably not going to stop paying rent just because your employees are working from home for a few months. When things recover, you'll want that space back; your stuff is there; you signed a long-term commitment. If you are a startup renting a few desks month-to-month at a WeWork, sure, stop doing that for a while, why not. "We pioneered a 'space-as-a-service' membership model," said WeWork, back in the good times. "Across our global portfolio of locations, we offer individuals and organizations the flexibility to scale workspace up and down as needed, with the ability to consume space by the minute, by the month or by the year." If you offer organizations the flexibility to scale workspace up and down as needed, they will all scale it down in a pandemic. Meanwhile WeWork is that big company with a multi-year lease on a lot of floors. Short-term rent could stop coming in, but long-term rent will have to keep going out. As of its failed IPO, WeWork had almost $2.2 billion of "non-cancelable operating lease commitments" due in 2020. In a certain light WeWork's business model looks like banking: It is in the business of maturity transformation for office space, committing its money long-term but getting short-term commitments from customers. That is a good business model most of the time—you can charge customers a premium by giving that flexibility—but it is prone to crises, and the crisis is here. The second thing to realize is that if you had committed to buy $3 billion of WeWork stock back in October, but you hadn't actually paid the money yet, you'd be trying to find ways to get out of that commitment too. WeWork was worth a lot more then, in the good times, than it is now, in the bad times. Oh sure it was worth even more in early 2019, when people were talking about a $65 billion IPO, but that is water under the bridge. In October, when SoftBank announced plans for "a tender offer worth up to $3 billion to all non-SoftBank shareholders at a price of $19.19 per share," that price—about an $8 billion valuation—took into account WeWork's failed IPO and scaled-back ambitions and continuing losses, sure, but it also implicitly assumed that customers would keep paying WeWork rent. That assumption looks a lot riskier today. And so: SoftBank Group Corp. is backing away from part of its planned bailout of WeWork, people familiar with the matter said, privately citing several regulatory investigations of the office-sharing company. A notice sent to WeWork shareholders Tuesday said that SoftBank believes regulatory probes into the startup's business, including from the Securities and Exchange Commission and Justice Department, give it an out under the deal struck last fall to purchase $3 billion of WeWork shares from existing investors. That would include Adam Neumann, former chief executive of WeWork parent We Co., who had the right to sell up to $970 million in stock as part of the October deal that led to his ouster from the company's board. The development won't affect the $5 billion lifeline SoftBank agreed to give WeWork directly—cash the startup badly needed then as it ran out of runway, and which it is likely to continue to need as the worsening coronavirus outbreak empties out its desks. Yeah "regulatory probes … give it an out" is the right way to put that. SoftBank is WeWork, a little bit; SoftBank sits on WeWork's board, those probes are not exactly news to it, and some of the craziness that led to the probes can be traced to SoftBank's influence. In October, SoftBank negotiated an agreement with WeWork's board to buy stock from WeWork's investors, including not only Neumann but also lots of other investors who are considerably less to blame for WeWork's troubles than SoftBank itself is. SoftBank probably negotiated that agreement with pretty full awareness of, and some responsibility for, all of the goofy stuff at WeWork that has led to regulatory probes. What happened here is not that SoftBank thought that WeWork was pristine in October, and then learned of some regulatory probes in March and changed its mind. What happened here, though, is that SoftBank's agreement to do the tender offer had the ordinary legal provisions saying things like "we can change our mind if there's a big undisclosed regulatory probe," and SoftBank has some plausible argument that some of the regulatory probes trigger those provisions, and—this is the important part—WeWork's business got a whole lot worse. The regulatory probes aren't the reason that SoftBank might back away; there were always going to be regulatory probes after that IPO fiasco, and honestly I doubt that they'll be all that serious. (It's not like WeWork ever actually sold stock to public investors!) But the probes are a good excuse, because it is customary in situations like this to give the buyer an out if the seller is concealing illegal behavior, etc., while it is not customary to give the buyer an out for a global pandemic. Because if a global pandemic happens, the seller is really going to want the buyer to close! But also, if a global pandemic happens, the buyer is really not going to want to close! And if you've got the regulatory probes as an excuse, you take it. The Fed, etc. Well, they are doing the best they can, in two respects. For one thing, the Federal Reserve is pretty comprehensively using its powers to address the risk of a financial crisis. Financial crises all pretty much have the form of bank runs: Long-term assets are funded using short-term liabilities, those short-term liabilities come due and can't be rolled over due to panic, and the result is fire sales and further panic. The way to stop a financial crisis is to step in and lend when no one else will, and so that's what the Fed will do, for pretty much anything you've got. Last week the market for U.S. Treasury bonds got scary, so the Fed announced hundreds of billions of dollars of repo funding: If you borrowed money to buy Treasuries, and your loan is due and you can't borrow any more, now you can borrow from the Fed for cheap. This week as the crisis spread, the Fed announced a Commercial Paper Funding Facility to buy short-term debt, and a Primary Dealer Credit Facility to finance pretty much anything. "Credit extended to primary dealers under this facility may be collateralized by a broad range of investment grade debt securities, including commercial paper and municipal bonds, and a broad range of equity securities." You have some American Airlines stock and need money? Sure, wave it in, the Fed will give you money at 0.25% interest. It is not a complete solution. If you borrowed a lot of money to hold assets, and those assets lost a lot of value, the Fed will not lend you enough money to pay back your old loans, so you'll still have problems. If you're a mutual fund facing redemptions, borrowing from the Fed is not a real option. (Also the PDCF is intermediated through primary dealers; not just anyone can borrow directly from the Fed.) If you were doing a highly levered basis trade and the basis blew out, you know, oops. Things are still bad: Recent moves in risk-free assets -- in money and rate markets -- is "puzzling" strategists at Citigroup led by Matt King, citing rising inflation-adjusted yields and falling gold. "Our best guess is that these have been exacerbated by margin calls, by the oil sell-off, and by the unwinding of loss-making positions by risk-parity and other hedge funds and by absolute return funds," King wrote in a note on Tuesday. "Basically investors have been liquidating positions everywhere, whatever their rationale." And: "This is fire-selling of liquid assets by those who need to meet redemptions," said Mike Riddell, a portfolio manager at Allianz Global Investors. "A lot of people need cash and they're liquidating the only thing that they can." But what the Fed can do is lend people a lot of money to finance their financial assets, and that's what it's doing. The other thing that the Fed is doing is prefacing everything it does with a little incantation about how it is intended for regular people, not the financial system. The announcement of the Primary Dealer Credit Facility begins with an invocation of its purpose: "To support the credit needs of American households and businesses." Do low-interest loans to bond dealers to help finance their (and their customers') inventory support the credit needs of American households and businesses? Do those loans help the restaurants that are shuttered indefinitely, or the cooks laid off from those restaurants who have rent payments due? Well, I mean, in some general macroeconomic sense sure (it'd be worse for everyone if the banks and financial markets collapsed), but not in any particularly direct sense. You can finance commercial paper or municipal bonds or equity securities at the PDCF, but you can't get a loan against, like, the possibility that your restaurant job will come back in three months when social-distancing rules are eased. That is not the Fed's job; that is a job for Congress. Still it is nice of the Fed to at least mention the households and businesses; maybe it will inspire someone else to help them. It is by the way striking that the Fed is pulling out much of its 2008-era financial-crisis emergency-powers playbook without much pushback or criticism from the political system or the public. Financial assets need financing, the Fed will finance them, the end. Part of the explanation for the lack of pushback may be that the crisis is not at all the banks' fault in the way that 2008 was, but financial crises hit banks pretty much the same no matter whose fault they are. Elsewhere: The Federal Reserve and other Wall Street regulators are considering changes to leverage limits and accounting rules as they look for ways to free up bank capital in response to the coronavirus crisis, according to three people familiar with the talks. And: Germany's financial watchdogs eliminated a key capital requirement for the country's banks to keep credit flowing to an economy that's approaching a standstill as the coronavirus spreads. Work from home forever I spent enough time in investment banking to know that talking to clients on the phone, or over videoconference, is not nearly as good as meeting with them in person. The in-person meeting is just more personal; you shake their hands and see them up close and walk with them to the elevator after the meeting and just have the sort of awkward embodied physicality of being around them. You become part of their world in some tangible literal sense; they have no choice but to think about you as a person; they can't press a button to make you disappear back into the internet. If your job is to explain the structure of an interest-rate swap to them, this might not matter—though it might; looking them in the eyes up close might help you gauge their understanding of what you're saying—but your job is never just that. Your job as a banker is also to build a relationship, to sell yourself, to make the client like you and feel a sense of connection and obligation to you personally so that they will eventually give you a lucrative mandate to do the transaction that you are ostensibly there to explain. On the other hand a videoconference is, what, 20% worse? Fifty percent? I don't know, pick a number. Not 100% worse. You can build a rapport over the phone, you can get some of your personality across over video, and anyway you can explain interest rate swaps or whatever remotely. In a world of abundance you are going to optimize for effectiveness: The payoff to a bank of landing a big transaction is so big that you'll do everything in person; it doesn't make sense to even consider meeting virtually to save a few thousand dollars of airfare if the potential payoff is a $30 million merger fee. But in a world of social distancing, I mean, yes, duh, obviously, you do the meeting remotely, it's fine, you make do, and anyway your competitors are in the same boat. Also though pandemics are not the only reason to stay home? For one thing, in-person meetings might be twice as effective as remote ones, but you can't do nearly as many of them because you'll spend so much time flying to your clients' offices. For another thing, home is nice; it's where your family live, and you might want to see them sometimes. "I like seeing my family so I will not be traveling to this important client meeting, I'll just dial in," is not, traditionally, an easy thing for ambitious investment bankers to say, but it is a reasonable thing for them to think. (As an unambitious investment banker, I thought it all the time, and spent much of my time and energy on finding plausibly work-related excuses for not flying to meetings.) But if everyone does virtual meetings for month, that might reset expectations? Here are Bloomberg's Cathy Chan and Katia Porzecanski: Virtual finance may far outlast the coronavirus. Around the world, there are early signs that some of the emergency measures Wall Street is rolling out to keep employees safe in a pandemic will become a lasting practice in an industry that's long mythologized the handshake. That's likely to hearten working parents who've struggled to persuade managers to let them log in from home, as well as many younger recruits at ease doing things digitally. … UBS's travel costs for Asia plunged 90% in February after the outbreak restricted movement, one person familiar said. Now local executives are discussing whether a long-term shift toward remote meetings is viable for bankers who cover the sprawling region, people familiar said. The firm's dealmakers recently completed at least five pitch meetings on about $2 billion of stock sales with corporate clients via Skype and Zoom as they dialed in from home or from separate rooms, the people said. Citigroup Inc. bankers have been pitching via video conference on five to 10 transactions a week this year across mergers and acquisitions, equity and debt issuance, said Jan Metzger, head of Asia Pacific banking, capital markets and advisory. "With today's technology you can interact quicker with a client than ever before and this could be a model for the future even when this situation resolves itself," Metzger said. I think in the long run "we'll save money on airfare" or "we'll get to see our families more" are not going to be winning messages here. The trick, I think, is to find some way to make this seem more hardcore, more client-focused, more effective, probably less pleasant for bankers personally. What you want is to replace the banking norm of "someone who cares about winning business will always hop on a plane to see a client" with a norm like "only lazy people spend all day on planes, people who really care about winning business will be on Zoom with clients all day." Metzger's line about how you can "interact quicker with a client than ever before" is exactly the right approach; "interact quicker with a client" feels both meaningless (why quicker?) and also appropriately hardcore and disinterested. Or this: Michael Rosen, a Los Angeles-based investor in hedge funds, said he's enjoying the efficiency. Instead of spending time traveling to meetings, he's using it for more conversations via video-conferencing programs like Zoom. Tell your bosses that you're going to stop traveling so you can go to more of your kid's soccer games and they will question your commitment; tell your bosses that you're going to stop traveling so you can meet with more clients and they will applaud your initiative. Don't go to shareholder meetings either Shareholder meetings are pretty much worthless to begin with so this is fine: Shareholder meetings are going virtual as companies adapt their mandatory annual gatherings to the coronavirus. Corporate proxy season is already underway, with companies filing annual statements ahead of thousands of planned general meetings stretching from April to July. Most firms are required by law to hold gatherings to approve corporate policies. In recent years, meetings at companies like Exxon Mobil Corp., Wells Fargo & Co. and Facebook Inc. have become popular for activists urging action on climate change and social responsibility. But the Covid-19 pandemic has changed all that. Citigroup Inc. and Bank of America Corp. said this week that they are considering alternative arrangements for their meetings, and Starbucks Corp. will hold a virtual annual gathering on Wednesday instead of in a Seattle theater due to "public health concerns." If you enjoy going to shareholder meetings to heckle management, though, something will be lost. "One of the dangers of virtual meetings is that companies can just cut out questions and not answer them," said James McRitchie, a prominent shareholder activist who submits dozens of proposals a year to companies. He said he would still prefer a hybrid model, with some portion of the meeting happening in public—or as close to public as possible. "Ideally, shareholders should be able to see and communicate with other shareholders, even at a virtual meeting," McRitchie said. Exceeds expectations Man this is so smart: Facebook Inc. will give all of its full-time employees an additional $1,000 in their next paycheck and will give everyone the same "exceeds expectations" performance review for the first half of the year. By giving all of its roughly 45,000 full-time staffers the same review, Facebook is ensuring that all of those employees receive their biannual bonuses. It's not like "exceeds expectations" is even the top rating. (That's "redefines.") The message here is that everyone is in this together, that you shouldn't worry about the subtle status and performance differences between you and your equally ambitious coworkers, that this is not a time to reward the best and weed out the worst, but just a time for everyone to pitch in and do what they can. Sure it triggers their bonuses but it is also a form of non-monetary compensation; the compensation comes in the form of camaraderie, which, in a crisis, can be more motivating than money. It is such a good idea. Also the compensation comes in the form of not having to worry about your performance review, which surely, to a well-paid and high-strung tech employee, is worth many thousands of dollars. Perhaps something to think about post-pandemic too. People are worried about bond market liquidity Here you go: Extremely volatile conditions across the US fixed income market because of the coronavirus pandemic have led to a highly unusual pricing dislocation in Vanguard's $55bn total bond market exchange traded fund, one of the world's largest ETFs. The ETF, known by its ticker BND, saw the gap between its closing price and the net asset value of the fund surge to a 6.2 per cent discount on March 12. … Rich Powers, head of ETF product management at Vanguard, the world's second-largest asset manager after BlackRock, said it was "not unusual" to see this type of divergence in stressed market conditions. "Market prices for ETFs can move more rapidly than the net asset value. That is part of the price discovery process." You should really put quotation marks around the phrase "net asset value" these days. The argument that ETF market prices move faster than NAVs because "of the price discovery process" is an argument that the "NAV" does not reflect the ETF's actual net asset value: The bond prices used to calculate NAV might not reflect the actual prices that you could get for those bonds, if the bonds don't trade frequently or in large size; the ETF's market price, meanwhile, reflects market participants' views of the actual value of the underlying assets in a liquid market with willing buyers and sellers. (We have talked about this recently here, here and here.) When the ETF trades at a 6.2% discount to NAV, that arguably means that the bonds are worth 6.2% less than they seem to be worth. Meanwhile what about non-ETF bond mutual funds? A major corporate bond fund managed by Vanguard has raised the cost imposed on unitholders seeking to take their money out by up to twelve times, the latest twist hinting at genuine distress in the fixed income market, The sell spread on the Vanguard Australian Corporate Fixed Interest Index Fund blew out to 1.79 per cent, from 0.15 per cent, meaning the underlying investor has to accept a 1.79 per cent haircut on what the underlying investment is worth to exit. Things happen Some Top Asset Managers Argue Financial Markets Should Close. Euronext CEO Says There's No Reason to Close Markets Over Virus. Private equity firms target dealmaking opportunities amid turmoil. The Saudis Have a High-Stakes Plan to Win the Global Oil War. Government Is Broadening Investigations of Spoofing-Like Practices. In Just Hours, America's Family Businesses Hurtled Into Limbo. Cannabis Is Deemed Essential Business in Bay Area Virus Shutdown. Medical company threatens to sue volunteers that 3D-printed valves for life-saving coronavirus treatments. The Tamagotchi Hacking Community's Quest to Cheat Death. March Sadness. 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! | 
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