We're doing great!I have probably spent as much time as anyone on earth making fun of WeWork, so now, for variety, I think I am going to pivot to being a wild-eyed WeWork bull. To be fair, I have always had sort of a soft spot for the business model. The business model is, like, you rent a building, you divide it into a lot of small offices and individual workstations, and you rent the pieces out to customers for more than you pay to rent the building. It is not insane to think that that would work, and while WeWork's financial disclosures were never exactly a model of clarity, it was not even really insane to think that it did work, that WeWork was basically able to do exactly that trade when it put its mind to it, though it was never profitable because it chose instead to funnel all of its money into opening new buildings. But it always said that would change, and why not? Last September, as WeWork's initial public offering was going poorly, but before it was pulled in disgrace, I wrote: One possibility here is that SoftBank Group Corp., its affiliated Vision Fund and WeWork's other private investors own stakes in a high-quality business with fundamentally sound unit economics. Given the attractive market opportunity, they would like it to raise another giant slug of money to continue its rapid growth. But public investors have started to doubt the quality of its business, and are not willing to fund its growth at a price reflecting its strong fundamentals. So WeWork can step back, remain private, slow its growth, flip to profitability and just harvest the rich rewards of renting out office space for more than its costs. … One nice thing about postponing the IPO is that you get to find out. Missing out on the $10 billion of public money would slow down WeWork's growth plans, but if WeWork is right then there is just a dial that it can turn between "Growth" and "Profit," and dialing down the growth automatically dials up the profits. If you are confident that you possess this dial and that it works this way, then delaying the IPO is a no-brainer: Sure you delay your positive-expected-value growth, but you get to keep ownership of a good lucrative business rather than selling it too cheap. On the other hand, if the dial turns out not to work, then you'll end up wishing you'd sold it cheap.
Well, after I wrote that, events occurred that might cause you to have some doubts. For instance, after the IPO was pulled in October, WeWork more or less immediately needed a giant bailout from SoftBank; it turned out that huge frequent cash infusions were not just a nice-to-have way to boost growth but a necessity to keep WeWork going. And then the coronavirus happened, people stopped going to work, open shared offices in particular became less attractive, and the WeWork model seemed a bit doomed. But! The Financial Times reported yesterday: WeWork is on track to have positive cash flow in 2021, a year ahead of schedule, after it cut its workforce by more than 8,000 people, renegotiated leases and sold off assets, its executive chairman said. Marcelo Claure said in an interview that the SoftBank-backed office space provider had seen strong demand for its flexible work spaces since the start of the coronavirus pandemic. In February, Mr Claure set a target of reaching operating profitability by the end of next year and he said WeWork remains on track to meet it. … "Everybody thought WeWork was mission impossible. [That we had] zero chance. And now, a year from now, you are going to see WeWork to basically be a profitable venture with an incredible diversity of assets," said Mr Claure.
Even the pandemic isn't all bad news. One story that you could tell about WeWork is that it is in the business, specifically, of office management, that it allows companies—small startups or big multinationals—to outsource their office-management function to WeWork. In normal times some companies will find that appealing and others will say "no, it's fine, we can manage our own office space, that is not an especially difficult or high-value-add job." In pandemic, though, office management is both harder and higher-value-add; if you can say "as specialists in office management, we have figured out how to make offices safe," you can sell that service to a lot of companies that haven't. (I don't know that WeWork has figured that out, by the way, but if not they really should!) And while you might think that it's bad, for an office-rental company, that no one is going to the office, the upside is that if and when anyone does go to the office, flexible office space—WeWork's product—will be in demand. From the FT: While the shift to homeworking has seen a reduction in office space demand, some companies turned to WeWork to provide satellite offices closer to where their employees live and to spread out their staff beyond their main offices, said Mr Claure. ... "We have companies like Facebook, Google and Amazon who have told their employees that they can work from wherever they are. We have a lot of those employees who basically now come to a WeWork facility to use it one day, a week, two days a week, three days a week," Mr Claure added.
Man, good for them. I hope it works. There is an obvious standard story of WeWork in which it was a symbol of tech-bubble excess, with a huge valuation based on growth and hope and fundraising rather than business fundamentals, and then it came crashing down when it finally met the reality of the public markets. But there was always an alternative story available, something like "public markets are not good at long-term thinking and dismiss real innovators, so public investors couldn't understand the value of WeWork's story." I am not a big believer in that story, generally, but it would be really funny if it was true here. Public markets couldn't understand real innovation like renting office space at a loss, why not. There are even funnier possible stories. I have told the WeWork story as a win for founder Adam Neumann, who handed SoftBank his broken company and walked away with vast riches. But perhaps you could tell it the other way? Perhaps SoftBank saw WeWork's value the first time Masayoshi Son met with Neumann, and Son wanted to appropriate all that value for SoftBank. But WeWork was a fast-growing, popular, successful business that was on track to go public; the question was how could SoftBank gain control of it for cheap. The answer "buy a big stake at a series of insane and ever-increasing valuations, puff up the founder-CEO so that he believes that he's invincible and starts to behave irrationally, let the company file to go public with a silly prospectus that is short on business plan and long on conflicts of interest, watch the proposed IPO collapse and then buy the whole thing on the cheap" is not exactly intuitive! But maybe it worked! (If this is your story, you might find it intriguing that WeWork's private valuation was pumped up by SoftBank's Vision Fund, while the October bailout ended up with SoftBank itself owning the biggest chunk of the company at fire-sale prices.) Anyway now that things are good WeWork should totally do an IPO, that is what the world needs now. Honestly WeWork should try an IPO every year, we deserve it. Fed vs. TreasuryThere are a lot of banks, and they compete with each other. Each bank has two desires: - Not to lose money by making bad loans, and
- Not to lose market share by refusing to make good loans.
These desires are in tension. If you don't lend money to some dodgy customer, your competitor will, you will lose market share and develop a reputation for being too tough, everyone will go to your competitor, and your business will dry up. You can try to be a little bit better at underwriting and managing credit risk than your competitors are; you can try to be smart around the edges so that fewer of your loans go bad than theirs. But you can't try to be vastly better, because then you won't do any business. (And conversely: If you are rapidly growing market share, something has gone terribly wrong, or is about to.) This leads to many, many stupid consequences—"As long as the music is playing, you've got to get up and dance," is Chuck Prince's infamous line just before the financial crisis—but at least loans get made. If you have no commercial imperatives to do loans, it is too easy to focus all your attention on not losing money, and then this happens: Disagreements between leaders at the Federal Reserve and Treasury Department in recent months slowed the start of their flagship lending initiative for small and midsize businesses, according to current and former government officials. The differences centered on how to craft the loan terms of their $600 billion Main Street Lending Program to help support businesses through the early stages of the coronavirus pandemic. Fed officials generally favored easier terms that would increase the risk of the government losing money, while Treasury officials preferred a more conservative approach, people familiar with the process said. Treasury, which has put up $75 billion to cover losses, resisted recent changes to relax loan terms. The disagreements over relatively narrow design issues reflect broader philosophical differences over what the program is trying to accomplish and how much risk the government should take as a result. The upshot is that the program, announced in March, went through multiple revisions and opened for business this past week. As of Wednesday, it hadn't purchased any loans.
I have been thinking a lot recently about the lawyers who wrote the term sheets for the Fed's lending programs. We have talked in the last few weeks about the Main Street Lending Program, and about the parallel program (Primary Market Corporate Credit Facility) for bigger companies, both of which do not … exactly … seem designed to do any lending? They were announced in March, when credit conditions were bad, but only rolled out recently, when credit conditions were improved and the problem that the Fed wanted to solve was largely solved. But the lawyers were already at work on drafting the documents, and if you hire lawyers to draft documents they are going to draft documents, whether or not you still need them. So there are documents. Meanwhile if you were at an actual bank, and you were developing a program to lend money to new customers, and you noticed that none of your customers were interested in the program, you would revise the program. There would be some person in charge of the product, and her bonus would depend on doing business (and perhaps in future years her bonus might depend on minimizing credit losses, but first things first), and she would have strong—perhaps too strong—incentives to make sure that the program was designed so that someone could use it. Free from those pressures, though, the Fed and Treasury worked for weeks to build a lending program so pristine that it hasn't made any loans. 13FsEvery quarter, hedge funds and mutual funds have to report what stocks and bonds they own, using the U.S. Securities and Exchange Commission's Form 13F. I forget why? Here's the SEC's current explanation for the requirement (which started in the late 1970s): The section 13(f) disclosure program had three primary goals. First, to create a central repository of historical and current data about the investment activities of institutional investment managers. Second, to improve the body of factual data available regarding the holdings of institutional investment managers and thus facilitate consideration of the influence and impact of institutional investment managers on the securities markets and the public policy implications of that influence. Third, to increase investor confidence in the integrity of the U.S. securities markets.
Those goals are all a little vague. When the SEC has a rule like "companies have to publish annual audited financial statements on Form 10-K," the purpose and audience for the rule are obvious: Potential investors in the company will read its financial statements to inform their investment decisions, and it is good and only fair if they get accurate information. But when the SEC has a rule like "investors have to publish what they own," the purpose and audience are less clear. I suppose investors in the funds—clients of hedge funds and mutual funds—have a right to know what their managers own, but that doesn't require public disclosure; a hedge fund could tell its clients without telling the world. Competitors of the funds are interested in knowing what their competitors are up to, and might want to copy the most successful funds, though it's not clear why that's something the SEC should encourage. Also 13F requires reporting your holdings as of the end of the quarter, and the deadline is 45 days after quarter-end, meaning that if you did use 13Fs to inform trading decisions you'd often be wrong. Corporate managers tend to like to know who their shareholders are, and 13Fs are one way to do that, and giving corporate managers tools to handle their shareholders does seem like a purpose of a lot of 1970s-era shareholder-disclosure rules. Still it's not like chief executive officers are going to make corporate decisions based on 13Fs in the same way that investors are going to make investing decisions based on 10-Ks. I'm left with the vague residual of "improve the body of factual data available regarding the holdings of institutional investment managers and thus facilitate consideration of the influence and impact of institutional investment managers on the securities markets and the public policy implications of that influence." I don't know what those implications were in the 1970s, but we talk about them all the time now: the rise of index funds, the concentration of voting power in the biggest institutional asset managers, the "Problem of Twelve" in which a dozen managers will control almost all companies, the antitrust and governance implications, etc. Now the SEC wants to scale back the 13F requirement: It currently applies to managers with at least $100 million of assets, and the SEC has proposed to raise that threshold to $3.5 billion. (The U.S. stock market has grown by about 35 times since 1975, from $1.1 trillion to $35.6 trillion, so this would be proportional.) It points out: The new threshold would retain disclosure of over 90% of the dollar value of the holdings data currently reported while eliminating the Form 13F filing requirement and its attendant costs for the nearly 90% of filers that are smaller managers.
That is, unsurprisingly, 90% of the shares own by 13F filers are owned by the biggest 10% of 13F filers, who would still have to file after this rule change. Also: Under the proposed amendments, the aggregate value of section 13(f) securities reported by managers would represent approximately 75 percent of the U.S. equities market as a whole, as compared with 83 percent without the proposed amendments and 40 percent in 1981, the earliest year for which Form 13F data is available. The proposed amendments to the Form 13F reporting threshold thus also reflect the changes in the structure of the market that have occurred over time.
In 1981, 40% of shares were owned by institutions that owned at least 0.01% of the total U.S. equity market (that is, at least $100 million of assets in a $1 trillion market). In 2020, 75% are. If the purpose of 13F was to "facilitate consideration of the influence and impact of institutional investment managers on the securities markets," it has certainly given us something to think about. Everything is securities fraudIs it securities fraud for a public company to have no Black members of its board of directors? My friends, it is like I always say: Everything is securities fraud. Here's a shareholder lawsuit against Oracle Corp. and its board of directors: Actions speak louder than words. If Oracle simply disclosed that it does not want any Black individuals on its Board, it would be racist but honest. But Oracle's Directors, wishing to avoid public backlash, have done the opposite — they have repeatedly made gross misrepresentations in the Company's public statements by claiming to have a multitude of policies, internal controls, and processes designed to ensure diversity both at the management level and the Board itself. These policies, however, are not worth the paper they are printed on. At Oracle, it is "Do As I Say, Not As I Do." Oracle's Board, which has no Black individuals, has consciously failed to carry out Oracle's written proclamations about increasing diversity in its ranks. The Board, as well as the Company's executive officers, remain devoid of Black people and other minorities. In short, Oracle remains one of the oldest and most egregious "Old Boy's Club" in Silicon Valley. A sign advising applicants "Blacks Need Not Apply" might as well hang at the entrance to the Company's headquarters at 500 Oracle Parkway in Redwood Shores, California. Oracle's Directors have deceived stockholders and the market by repeatedly making false assertions about the Company's commitment to diversity. In doing so, the Directors have breached their duty of candor and have also violated the federal proxy laws.
Obviously—as the excerpt above concedes—it is not actually securities fraud to have a non-diverse board of directors. But the theory here is that it is securities fraud to (1) have a non-diverse board of directors and (2) make public statements saying that you value diversity. The public statements are material and false, shareholders are misled, etc., you know the drill. As a connoisseur of "everything is securities fraud" lawsuits, I have to say that this one seems like a stretch, but I pass them all along to you. We talked a while back about a theory that having a corporate ethics policy is bad: If you have an ethics policy, and it says "our executives are not supposed to do bad things," and they do bad things, then someone will sue you for securities fraud on the theory that the ethics policy was a lie. This is the same general idea. One thing to think about is, if this works, what incentives does it create? The first-order incentive is, you should have a more diverse board of directors. The second-order incentive is, you should get rid of your diversity policies: If you stop saying that you value diversity, people won't be able to sue you (for securities fraud) for being insufficiently diverse. Arguably this is an unintended consequence, but it's also possible that this is exactly the intent of the lawsuit: Right now it is just good business to announce that you value diversity, whether or not it's true, but this lawsuit is designed to make costless expressions of support for diversity costly. If it is still good business to say that you value diversity, it will be hard for companies to give up their policy statements, so they might have to take them more seriously. Dissertation analyzedHere is an analysis of Alex Karp's dissertation on Theodor Adorno, which Karp submitted to J.W. Goethe University in Frankfurt in 2002. Karp is the chief executive officer of Palantir Technologies, the spying-and-surveillance-and-big-data company, and I suppose that his views on Marxist critical theory are important to understanding the modern world. And to be fair this does kind of sound like social media? The full title of Karp's dissertation captures its patchwork quality: Aggression in the Life-World: Expanding Parsons' Concept of Aggression Through a Description of the Connection Between Jargon, Aggression, and Culture. "This work began," the opening sentences recall, "with the observation that many statements have the effect of relieving unconscious drives, not in spite, but because, of the fact that they are blatantly irrational" (Karp 2002, 2). Karp proposes that such statements provide relief by allowing a speaker to have things both ways: to acknowledge the existence of a social order and, indeed, demonstrate specific knowledge of that order while, at the same time, expressing taboo wishes that contravene social norms. As result, rather than destroy social order, such irrational statements integrate the speaker into society while also providing compensation for the pains of being integrated.
The lesson is that if you want to start a successful modern tech company you should seek out graduate training in irrationality, the relief of unconscious drives, and the breakdown of social order. Seems right! There is also this good bit of tech/academic gossip: Tech industry legend has it that Karp wrote his dissertation under Jürgen Habermas (Silicon Review 2018; Metcalf 2016; Greenberg 2013). In fact, he earned his doctorate from a different part of Goethe University than the one in which Habermas taught: not at the Institute for Social Research but in the Division of Social Sciences.
Sure he got his degree from a school in Frankfurt, but not from the Frankfurt School; it was the one next door. Good scam?I dunno: Tamil Nadu police today arrested three people for running a duplicate branch of State Bank of India (SBI). Among the three people, one was the son of former bank employees. … The three-month-old branch came under the lens after an SBI customer noticed it in Panruti and took the matter up with his Branch manager. ... SBI officials visited the place (the duplicate branch) and were surprised when they saw the entire set, which was exactly like a bank branch, with all the systems and infrastructure in place. SBI officials immediately launched a complaint following the three people were arrested, said police officials. They added that thankfully no transactions had taken place, so no one lost money.
I feel like the idea has promise, though I am not exactly sure what the promise is. In the olden days you might think "people deposit money in banks, so I will set up a fake bank and they will deposit money with me and I will steal it." But in the modern world I am not sure that all that many people are actually showing up at banks with sacks full of cash that they want to deposit. (Particularly in India, which has been moving to a cashless economy.) I guess people could come in and fill out mortgage applications and you could steal their identities, but that seems a little tedious. Anyway this branch was running for three months and "no transactions had taken place," which is a pretty poor return on investment. I like to imagine that this guy, a son of retired old-school bankers, thought "I will open a fake bank because people love to deposit money in banks and I will steal it," and took his time to get all the details right, and then put on a suit and came into his fake branch every day to smile at customers, and then got increasingly frustrated as months went by and nobody came into the bank with any cash. That's not how it works these days! It's all online! Now if you want to get rich, the business to be in is fake digital money transfer. Things happenPPP Data Errors Raise Questions About Effectiveness of Stimulus. Hedge Fund Chatham Wins Bankruptcy Auction for McClatchy's Newspapers. Burger Chain Turns Pioneer for New Small-Business Bankruptcy Law. The $6bn judgment pitting Nigeria against a London court. Investors Find New Safe Place to Hide: Chinese Bonds. After 133% Rally, SoftBank Investors Bet There's More to Come. Harvard Burger School. Manchester City's Champions League Ban Is Overturned. "Exhibit 1 attached to the petition is a birthday card, not a deed." Weird caterpillar uses its old heads to make an elaborate hat. 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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