Programming note: Money Stuff will be off tomorrow, back on Thursday. How's Tesla doing?Man, this is how you give a quote about a stock: "Tesla's valuation doesn't make sense by any traditional measure," said Ivan Feinseth of Tigress Financial Partners. However, "it is not a traditional company, so how do you put a traditional measure to it?"
See, saying something like that to a reporter is kind of a bearish bet. If Tesla keeps climbing, becomes the world's biggest company, and ends up making all the cars and solving climate change and running the transportation infrastructure for all of our space colonies, then no one is going to be like "oh yeah Feinseth called it" or whatever. (In fact, he didn't call it.) But if Tesla goes to zero tomorrow, if Chief Executive Officer Elon Musk is caught stuffing all the corporate cash into his novelty branded short shorts and trying to flee to Mars, then that's gonna be the quote for Tesla. That will be the "permanently high plateau" of the Tesla boom, and Ivan Feinseth will be famous for a hundred years. "Hahaha back in 2020 people thought that just because Tesla was 'not a traditional company' it could be worth whatever you want," people will say, in 2120, complaining about some other alleged bubble. I mean the answer to his question is something like "you project its future cash flows and discount them back to present value." Obviously that is not a very good answer—who knows what Tesla's future cash flows will be, etc.—but it is a very traditional answer, and it is one that applies to all sorts of non-traditional companies. The point of stock-market valuation is, exactly, that it makes different things commensurable, that it allows you to take a bank and a social media company and a coal company and an electric car company and reduce them all to a set of cash flows and compare them on the same metric (money). Traditionally the way this works is that investors all like money, and when they exchange their money for shares of stock, they are doing so because they expect to get back more money. You buy stock in banks or social media companies or coal companies or whatever not because you love banks or social media or coal, but because you love money and think that banking or social media or coal or whatever is the way to get more money. But I suppose it is not an iron law of nature that it has to work that way. You could buy stock in an electric car company just because you really love it. If you get some intrinsic joy from owning Tesla, if you buy Tesla because you have a quasi-religious faith in Elon Musk or because it's a good way to fit in with your buddies on the message boards, then there is no reason that the price you pay should have to be constrained by your expectations for Tesla's future cash flows. Just pick a fun price instead.[1] Musk himself knows this; when he was pretending that he was going to take Tesla private, he said he'd do it at a price of $420 per share, not because he thought that was the company's intrinsic value but because he "thought his girlfriend 'would find it funny, which admittedly is not a great reason to pick a price.'" No, no, it's a great reason, it's fine. (420 is a weed joke.) I guess my point here is that Feinseth is right and you can't value Tesla on traditional measures? Still feels weird. Anyway that quote comes at the end of a Bloomberg article about how Tesla's stock price is really really high. It's really really high. It closed at $1,371.58 yesterday, a record, up 13.5% over the weekend, and was up again this morning. The market capitalization is over $250 billion. On Twitter the other day, "Quantian" proposed that Tesla should do a big stock offering, "wipe all the debt off their books, and then use the remaining giant pile of cash to fund operations until 2030, completely destroying the bear case." Seems right to me! Tesla did a bit of that back in February, selling $2.3 billion of stock at $767 per share; in May, with the stock at $761, Musk tweeted "Tesla stock price is too high imo." Presumably at $1,371 it is also too high, and the thing that you do, with a stock price that is too high, is sell stock. If Tesla's stock is not just a reflection of its future cash flows, but of Elon Musk's cult status or day traders' boredom or some other sort of je ne sais quoi, then Tesla should monetize as much as it can of whatever that is, and use the money to build cars and generate cash flows. Everything is money launderingWhat an odd thing to say: "Banks are the first line of defense with respect to preventing the facilitation of crime through the financial system, and it is fundamental that banks tailor the monitoring of their customers' activity based upon the types of risk that are posed by a particular customer," said Ms. Lacewell, the regulator's superintendent.
That's Linda Lacewell, the superintendent of the New York Department of Financial Services, and what crimes do you think she is talking about? Obviously there are some crimes that are financial crimes; you might expect banks to be the first line of defense against Ponzi scheming or sanctions violations. Other crimes are business crimes, and use and generate a lot of cash; perhaps banks would be the first line of defense against illegal drug dealing. But the crime at issue here is child sex trafficking, and Lacewell's comments came in connection with a settlement between the New York DFS and Deutsche Bank AG in which Deutsche Bank agreed to pay a $150 million penalty for being sloppy in how it handled Jeffrey Epstein's accounts.[2] Substituting terms, Lacewell essentially said that "Deutsche Bank is the first line of defense with respect to preventing sex trafficking," which I think a lot of people would find surprising. As the consent order tells it, Jeffrey Epstein became a Deutsche Bank client in early 2013, years after his 2007 guilty plea to soliciting a minor for prosecution "in exchange for a deferred prosecution agreement providing him with immunity from extensive federal sex-trafficking charges." Deutsche Bank knew that he was a registered sex offender, and that there were credible allegations that he was involved in sex trafficking, but it nonetheless took his money and was fairly casual about checking up on him. This sort of thing: On January 24, 2014, Deutsche Bank opened checking and money market accounts for an Epstein-related trust named "The Butterfly Trust." The Butterfly Trust included a number of beneficiaries, including, among others, CO-CONSPIRATORS 1-3, and a number of women with Eastern European surnames. When Bank personnel asked Epstein and Epstein's representatives about his relationship with the beneficiaries, Epstein represented that they were employees or friends … While Epstein held accounts at Deutsche Bank, he used the Butterfly Trust account and various other accounts to send over 120 wires totaling $2.65 million to beneficiaries of the Butterfly Trust, including some transfers to alleged co-conspirators or women with Eastern European surnames, for the stated purpose of covering hotel expenses, tuition, and rent.
At some point Deutsche Bank tried harder to monitor Epstein's account for unusual transactions, but it took a peculiar view of what counts as "unusual": Specifically, AML OFFICER-2 interpreted the clause "transactions [with] unusual and/or suspicious activity or are in a size that is unusually significant or novel in structure" to mean transactions that were unusual, suspicious, or novel as compared to the prior history of transactions related to the Epstein relationship. He communicated this interpretation to the rest of the transaction monitoring team responsible for the Epstein relationship. The interpretation was exemplified by a later email exchange in March of 2017, when a member of the transaction monitoring team responded to an alert about payments to a Russian model and Russian publicity agent, stating, "[s]ince this type of activity is normal for this client it is not deemed suspicious."
The DFS consent order does not allege that any of the women with Eastern European surnames were children,[3] or that they were trafficked, or that any of the money was used for crimes. It just suggests that, given the publicity around Epstein, Deutsche Bank should have done more to check.[4] Which is fine as far as it goes, I do not really disagree, it's just … you know who else knew about Epstein's record, and the federal allegations against him that were subject to deferred prosecution? The police, New York prosecutors, Florida prosecutors, and federal prosecutors. Those people all had reason to keep an eye on Epstein. They are all in the business of preventing sex trafficking. If you asked people on the street "who is responsible for preventing sex trafficking?," I suspect more of them would say "the police" than "banks." But in fact there is a long list of notorious failures by authorities in the Epstein case to stop his alleged crimes, beginning with that 2007 deferred prosecution agreement and continuing through New York prosecutors' efforts to reduce his sex-offender classification up to his death in jail last year. "Mr. Epstein's suicide derailed a prosecution that his accusers had hoped would finally show how he had been allowed to commit what they said was a string of depraved crimes for so many years — and what role his wealth, privilege and connections played," noted the New York Times at the time. Perhaps you could tell a story like "law enforcement would have stopped Epstein earlier, if Deutsche Bank had only told them about these suspicious financial transactions," but that seems implausible to me. I would argue something more like: The government and Deutsche Bank both had some responsibility for stopping Epstein's sex crimes, and they both were on notice that they should watch Epstein, and they both failed to stop him for a long time, but now the government is fining Deutsche Bank for missing obvious red flags. I often write that "everything is securities fraud," that creative regulators can find a way to transform any misbehavior by a public company into securities fraud. They do this for various reasons: because securities fraud is easier to prove than the underlying misbehavior, because the underlying misbehavior is politically controversial and not actually illegal, because big companies are more willing to settle than the individuals who do the bad stuff, or because those companies have more money. This feels like an extension of that theory. Financial regulation is universal regulation, and it is in a sense easier regulation than the rest of the law. If police and prosecutors wanted to stop Epstein, they would have had to arrest him and have a public trial in which they proved to a jury that he was still doing crimes. Perhaps they would also have faced political pressure from Epstein's well-connected friends. Given all of this, it took a long time for the authorities to work up the nerve to arrest him. If Deutsche Bank had wanted to stop processing payments for Epstein, they could have just sent him a letter saying "we're closing your account" with no explanation and no appeal. That wouldn't necessarily have prevented crimes, but it would have at least inconvenienced him. (In fact Deutsche Bank did that, in December 2018, months before federal authorities got around to arresting him.) It is not a perfect substitute for the actual enforcement of written laws by officially empowered agents of the state, but it is something, and it is fairly fast and efficient, and in hindsight, in the case of Jeffrey Epstein, it seems like it would have been a good idea. When it is hard for the government to enforce the laws, sometimes it is easy for banks to enforce them, sort of, a little bit. And if the banks don't do it, the government will be disappointed. PPPYesterday the U.S. Small Business Administration released a list of companies that got loans of $150,000 or more under its Paycheck Protection Program. You can download the CSV file here and search to see if your favorite local restaurant or bookstore is on the list.[5] No, I'm kidding, you're not going to do that, you're going to search to see if your favorite local hedge fund is on the list. A lot of hedge funds and venture capital funds and law firms and politically connected businesses and fancy nonprofits and, generally, rich people got PPP loans, and a gigantic CSV file listing them is a good source of gossip. Bloomberg has a roundup of headlines, things like "Trump's Waikiki Partner, Kushner Family Among PPP Borrowers" and "Firm Linked to Pelosi's Husband Got Virus Loan, Data Show" and "Kanye West Sneaker Brand Received Millions From Government Loan." "Fallen Hedge Fund's Head Among Money Managers Getting PPP Relief." "Small Business Loans Helped the Well-Heeled and Connected, Too," reports the Wall Street Journal. Institutional Investor reports on "The Asset Managers Approve for PPP Money." Etc. Intriguingly, a bunch of venture capital firms appear in the SBA's list but say that they never got any PPP money. Sometimes this is a matter of mistaken identity, but in several cases they say that they started a PPP application—talked to their banker, filled out some forms, whatever—and then decided not to pursue it for some reason. (They decided they didn't meet the program's requirements, they didn't need the money, they worried about public embarrassment, etc.) But they ended up in the huge CSV file anyway. This is nice, it gives cover to everyone else, it's like the 2008-era policy decision that all banks should be forced to take bailout money to avoid embarrassing the ones who really needed it. If the hedge fund industry was smart, every hedge fund should have started a PPP application; then the ones who actually finished their applications and got the money wouldn't be identifiable.[6] I have engaged in this sort of gossip before, but for the most part I am pretty chill about "inappropriate" businesses getting PPP money. The idea of the PPP is that if a smallish business lost revenue, the government would give it a cheap loan, and if it kept people on its payroll then it wouldn't have to pay back the loan. The goal of the PPP was not to reward the virtuous and punish the insolent; it was to keep people employed so the economy wouldn't collapse while everyone stays home. It was in various ways inadequate to that task, since the unemployment rate hit 14.7% in April and is 11.1% now. Presumably some hedge funds got PPP loans and used the money to keep people on the payroll, and unemployment would be even higher if they hadn't. Presumably if more hedge funds had taken out PPP loans and used the money to keep people on the payroll, unemployment would be lower and the economy would be in better shape. Reasonable people could disagree, but it does not seem to me that the biggest problem in the U.S. economy right now is that too many businesses got government money to preserve employment. So it seems a bit silly to criticize the ones who did. On the other hand it is endlessly, gloriously funny that "the Ayn Rand Institute received a PPP loan of between $350K and $1 million." You can read their reasoning here. BoutiquesHere is a Financial Times article titled "What does an M&A boutique do when the deals dry up?," and I assumed that the answer would be "golf." Mergers and acquisitions advice is a lumpy business; some months you do a huge deal and make a $100 million fee; other months you do no deals and spend your time on planes going to low-probability meetings with small potential clients. If there are no deals and you're not getting on planes, that leaves golf. The big fees in the good times subsidize a lot of plane tickets in bad times; in very bad times, you're not buying plane tickets and the money goes even further. If you are the head of an M&A boutique, you are not insulated from a downturn by having other business lines that pick up during the downturn; you are insulated from a downturn by making a whole lot of money during the good times and not having a lot of fixed costs. You just, you know, spend the money. Well, fine, you have one other business line that picks up in downturns: Above all, the fortunes of the independent investment banks — whose founders typically left large institutions to strike out on their own — now depend more than ever on whether they can mitigate the drop in M&A revenues by helping companies to restructure and giving them strategic advice on how to navigate the crisis. Shares of PJT and Houlihan Lokey — which have prominent restructuring practices — have risen this year. Evercore, Lazard and Greenhill — which are more vulnerable to a downturn in traditional M&A — are down between 24 per cent and 42 per cent.
Restructuring is kind of like M&A, in that it often involves selling bits of the business to be restructured, and in that it is a high-stakes, high-fee, advisory sort of business. If you can do both well, then you do mergers in the good times and restructuring in the bad times and are always busy. More generally, the M&A advisory business itself is really two businesses: - Befriending corporate chief executive officers, having dinner with them, doing them favors, giving them advice on strategy and corporate finance and investor relations and industry dynamics and family and personal finances, and generally being a smart trusted person whom they call with their thorniest problems; and
- Occasionally buying or selling companies for them and collecting enormous fees.
The first part occasionally brings in some revenue: If you're an M&A banker at a big bank you might get some credit for referring a CEO to your debt capital markets or private-wealth divisions; even at an advisory boutique you might pick up some sort of paid strategic-advice assignment. The second part is much more lucrative; mergers tend to be bigger than other corporate transactions, and more important, so clients are willing to pay a lot to get them right. If you could only do the M&A part, and not the advising and hand-holding and baby-kissing part, you would have a much more efficient business. But you can't. If a CEO calls you up in the middle of the night and says "my largest shareholder is criticizing our environmental record, what should I do," and you reply "I am going back to bed, call me when you've got a merger to do," she will not. She'll call the banker who is helpful all the time, even when she's not paying for his help. The M&A fees don't just pay for the merger advice; they pay for all the other, free advice along the way. So good M&A bankers don't think of the M&A drought as an M&A drought; they think of it as an opportunity for client bonding: Effectively, the top rainmakers at the boutiques are trying to turn relationships they have developed with chief executives over deals into all-round consiglieri roles, advising on anything from M&A to picking the best debt provider or how to face a geopolitical crisis. The goal is to make themselves essential to clients, who during hard times might be inclined to reward larger Wall Street firms for extending much-needed financing through the crisis. Most
Except that it's not a client bonding opportunity in one respect, which is that you can't actually go see the clients: Peter Weinberg, head of Perella Weinberg Partners, said the firm had won new clients since the coronavirus outbreak without meeting clients in person — "but it's hard", he added. Blair Effron, co-founder of Centerview, one of the fastest-growing boutiques, said that there was still an "opportunity to continue to expand and invest" during the crisis. The firm was "selectively trying to figure out" where it could add clients in a world where forging bonds was "harder".
Things happenPalantir, One of Silicon Valley's Oldest Startups, Files to Go Public. Apollo Launches Platform to Make Big Loans. Ecuador reaches provisional debt deal with bondholders. Argentina sweetens debt offer to bondholders to break deadlock. History Is a Nightmare From Which Stock Pundits Refuse to Awake. SoftBank Hits 20-Year High With $68 Billion Climb Out of Nadir. Chinese Trading Apps Struggle as Millions of Investors Pile In During Rally. Behind Oil's Rise Is a Historic Drop in U.S. Crude Output. The Bank Drive-Through Makes a Covid Comeback. Librarians Want You To Stop Microwaving Books. 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] I wrote last month: "Some (most?) companies are exactly as fun as their cash flows; if you want a sound investment, you should pay $X for them, and if you want to have a good time you should also pay $X for them. (Because their cash flows will pay for an amount of fun with a present value of $X, etc.) Other companies are less fun than their cash flows, and you should demand a discount to invest in them. And some companies are much more fun than their cash flows, and people will buy their stock for entertainment without worrying too much about conventional valuation." And: "Tesla Inc. is the paradigmatic fun stock: It is run by a cartoony billionaire who sends rockets into space and messes around with flamethrowers, it has a huge and volatile valuation that often seems disconnected from its financial results, it is beloved by message-board day-traders. It is also regularly one of the most shorted stocks in the market. One way to interpret that is that people who care about valuation sold all their stock to people who love fun, and then had to go and borrow more stock to sell to the fun people because the demand for fun was so insatiable." [2] The settlement also covers two unrelated and more traditionally "financial" failures, in Deutsche's dealings with Danske Bank Estonia and FBME Bank. [3] A Deutsche Bank compliance officer "instructed the relevant transaction monitoring team to verify, using internet searches, that any woman involved with transactions related to the Epstein relationship was at least 18 years old." [4] Also this is weird: "From the time of Mr. Epstein's onboarding, the relationship was classified by Deutsche Bank as 'high-risk' and therefore subject to enhanced due diligence. Although the Bank did not initially classify Mr. Epstein as a politically exposed person ('PEP'), the Bank did designate him an 'Honorary PEP' because of his connections to prominent political figures. The high-risk classification and informal designation as an Honorary PEP resulted in enhanced transaction monitoring of activity within Epstein's accounts." [5] Disclosure, I am on the board of a small nonprofit that got PPP funds. [6] I mean, probably nobody could have predicted that the disclosure would be this buggy. Still. | 
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