Loading summary
Transcript174 lines
- [00:00]
Matt Levine
You're listening to an iHeart podcast.
- [00:05]
Kelly Cavagnaro
Hi, I'm Kelly Cavagnaro, Managing Director, Head of North America Institutional Distribution at Janice Henderson Investors we believe working together is the way to work better. Like combining your portfolio plans and our in depth strategy, your valued assets and our valuable insights, your mission and our vision working in harmony to seek the right investment opportunities. Janice Henderson Investors Investing in a Brighter.
- [00:33]
Unknown
Future Together There are presentations and then there are Canva presentations. With Canva, you can use AI to take your presentation to the next level. You can generate dynamic slides and text with a simple prompt. You can drag and drop graphics and charts from Canva's media library and add interactive elements to plus up your deck. And with collaboration tools built in, the whole team can work together better. You'll love the presentations you can easily design with Canva. Your clients and co workers will too love your work with canva presentations@canva.com how.
- [01:06]
Is Microsoft security helping customers stay ahead of 600 million attacks without slowing down business? From automakers to sports organizations and digital banks, Microsoft Security delivers deeper insights, scanning trillions of signals daily to help you see around corners and protect your business. Security is your job, and it's theirs too. With Microsoft Security, you have a partner that helps your business move forward confidently. To Learn more, visit Microsoft.com CISO that's Microsoft.com CISO.
- [01:40]
Bloomberg Audio Studios Podcasts Radio.
- [01:45]
Matt Levine
News hello and welcome to the Money Stuff Podcast, your weekly podcast where we talk about stuff related to money. I'm Matt Levine and I write the Money Stuff colum for Bloomberg Opinion.
- [01:57]
Katie Greifeld
And I'm Katie Greifeld, a reporter for Bloomberg News and an anchor for Bloomberg Television.
- [02:03]
Matt Levine
Katie, you're off next week.
- [02:05]
Katie Greifeld
I am so excited. It's my birthday on Sunday, which is huge. It's my favorite day of the year. On Saturday, I'm riding in a horse show and then immediately how is that.
- [02:15]
Matt Levine
Not your favorite day of the year?
- [02:16]
Katie Greifeld
You know, I'm not going to the Olympics. It's a fact that I accepted a couple years ago, 20 minutes ago. I'm doing this horse show on Saturday and then Saturday night we're leaving the country for Ireland for my birthday. And I'm really excited. But that means, practically speaking, that we just recorded next week's episode and now we're recording this week's episode. And we've already spent too much time together today.
- [02:41]
Matt Levine
Too much time together. But next week's episode is a special episode. We'll have guests. Yes, our second and third guests.
- [02:47]
Katie Greifeld
Huge.
- [02:48]
Matt Levine
Talking about the subject dear to Katie's heart.
- [02:51]
Katie Greifeld
Good Lord. It's about puzzle hunts.
- [02:54]
Matt Levine
It's about puzzle hunts, which are cool. Which are dear to my heart and somewhat less dear to Katie' than horses.
- [03:00]
Katie Greifeld
I was just happy for Matt, listening to Matt, having fun. As someone who's never done a puzzle hunt, probably never will.
- [03:07]
Matt Levine
It's for the large subset of Money Stuff fans who are also puzzle hunt fans and for those who want to.
- [03:15]
Katie Greifeld
Learn about puzzle hunts, value and respect. All those people that like puzzle hunts.
- [03:18]
Matt Levine
It's amazing. Katie, I saw you this afternoon checking your 401k.
- [03:26]
Katie Greifeld
I actually was, I was inspired to after reading about Basic capital, which you wrote about in one of this week's money stuff. Basically $4 of leverage for every. Yeah. For every $1 that you invest. What could go wrong?
- [03:41]
Matt Levine
I didn't actually know this when I wrote this, but there's a fascinating history of this idea. Right. So the idea is that when you are a young person, you invest a little bit of money in the stock market and then as you get older you move up in your career and you start investing more money. And so by the end of your career you are investing more of your money is in stocks than at the beginning of your career. And if you think about this from a theoretical perspective, you will think you should have more money in the stock market early on and relatively less money later on. That you should diversify your stock market risk by taking more of that risk early instead of taking almost all of it at the end. And so people think about this theoretically and there's a sort of well known 2008 paper by Ian Ayers and Barry Nelbuff. Ian Ayers taught at the law school I went to. Basically saying what you should do is you should lever up your investments early on your retirement investments early on you should take a margin loan from your brokerage or buy long dated call options that look like levered futures. And you should have more than 100% of your money in the stock market early on and then have less than 100% of your money in the stock market later on. And that's going to smooth your returns over time and give you better returns than if you just invested your cash as it came in over the course of your career. And they wrote this paper. If you look at it on like SSRN, the date on the paper is like May 2008, which is like auspicious time. Yeah. After I wrote about like the Basic capital idea, a couple of people emailed me. There's a famous post on the Bogleheads investing forum.
- [05:14]
Katie Greifeld
Yeah.
- [05:15]
Matt Levine
Where like this grad student did this starting like 2007 and he just ran into a buzzsaw like he lost all of his money and then like a little bit more than all of his money because he had borrowed to do it. Yeah, I think he got better over time because like, you know, the point of this is like you're sort of spreading your risk. And so he just unfortunately took a lot of risk going into a great financial crisis. But then he got better. But anyway, that's the idea. And for various reasons, including that this idea had a brie of Vogue in 2008 before it became a terrible idea. There's not like a ton of implementations of it. But BAS Capital, which Suzanne Woolley at Bloomberg wrote about this week, they are doing a sort of implementation of it where they will let you borrow money to lever up your 401k. The pitch is that you're borrowing the money in kind of a nicer way than broker margin loans. Like they give you a term loan. There's no margin calls. If your stocks go down, they're like, that's fine, just wait five years, they'll come back. So it's an interesting idea in that respect.
- [06:19]
Katie Greifeld
It's interesting that friend of the show Bill Ackman is an investor here only because it seems like we've been talking about him for several weeks in a row. And I wanted to say his name again. The way this works though is that most of your exposure is to credit. It's not actually in stocks.
- [06:34]
Matt Levine
Right. This is what I wrote about. It's like you sort of wake up in the middle of the night. You're like, people should be able to get 4 to 1 leverage on their 401ks. You come into the office and you're like, okay, how do we do that? And you're like, well, we'll just lend them 80% of the money of their portfolio. And that's probably fine because even, even if stocks go down, if you have a long term loan, the stocks will come back up. The idea of losing money on a five year loan against an 80% LTV loan against stocks is not that big a risk. Then you realize the real problem is interest. You're making this loan and it's going to charge interest. The interest is 6, 7% a year. It's SOFR plus 2%. It's meaningful interest. How are these people going to pay that interest? And it's really just optically difficult to make them pay the interest. You have to either make them make contributions to their retirement fund every year to pay the interest. Or you have to sell some of their stocks to pay the interest. Or you can put enough of the money into fixed income that pays a yield to pay the interest. And if the fixed income stuff that you buy has a higher yield than the SOFR plus 2% that you charge, then it's fine. But it's like if it has a 25% higher yield, you have to put 80% of the stuff into fixed income. And so in fact, Basic's proposal is like you put something like 85% of your portfolio into fixed income. Fixed income being maybe a bond fund, maybe some private credit, which I do.
- [08:10]
Katie Greifeld
Want to talk about.
- [08:10]
Matt Levine
Yeah, I want to talk about it too. But some private credit in your 401. But so the point is that you're levering up your 401 and then kind of walking most of that back by putting it into bonds rather than stocks. So Instead of putting 200% of your retirement account into stocks, you're putting 75% of your retirement fund into stocks and another 425% into credit. It's a nice effort to achieve this interesting theoretical idea, but doesn't quite accomplish exactly what you'd ideally want it to accomplish.
- [08:39]
Katie Greifeld
Yeah, so you describe this as cool in your pocket.
- [08:42]
Matt Levine
It's cool. Which, by the way, I will say I used to be a derivative structure. And so often you're like, oh, this is a great idea we should do. And then you're like, it doesn't work practically. And then you're like, what is the awkward compromise that kind of like captures the spirit of it but isn't quite what you wanted? This feels like that. It's like, yeah, okay, I like this awkward compromise.
- [09:01]
Katie Greifeld
Well, you calling it cool is already on the Basic Capital website. It's attributed to Bloomberg ringing endorsement.
- [09:09]
Matt Levine
It's a reasonable compromise to achieve an abstract aim. Yeah.
- [09:14]
Katie Greifeld
So leverage to a lot of folks. Sounds scary. It kind of sounds scary to me. If you're talking about younger generations.
- [09:20]
Matt Levine
I feel like everyone's first instinct is like, oh my God, you're borrowing money to. You're taking margin loans in your free retirement account. It's like, yeah, fine, but okay, this is not margin leverage. So it's like you have a five year term loan. Right. The chances that your portfolio will end up 20% below where you started and therefore your entire retirement savings will be wiped out. They're not that big, but they exist. There's a risk. The story suggests that most people who do this they dabble in it. They put a little bit into the weird level levered thing and then they put a lot into regular stuff. But yeah, it amplifies your risk, it amplifies your returns. I think the case is that right now virtually everybody makes a huge concentrated bet with 80% leverage in their financial lives. Not virtually everybody, but a lot of people in America buy a house with an 80% mortgage or sometimes more than 80% mortgage, and they are taking a very concentrated leveraged risk. And if house prices decline by more than 20%, they will lose all of the money they invested in their house. Now, there are differences. One of them is that you get to live in the house, whereas you don't get to live in your stocks. But another difference is traditionally it's hard to get non callable leverage on stocks. And so your mortgage, if your house price goes down, you don't really notice necessarily because you're just paying the mortgage for 30 years. If your stock prices go down, then you'll notice and you'll be like, oh no, the equity in my account is zero or whatever. But the sort of trick here is to think about it more like a mortgage and not worry that your stocks have gone down because in 30 years they'll probably recover.
- [10:55]
Katie Greifeld
Yeah, I guess I have a hard time making my brain work that way.
- [10:59]
Matt Levine
I think most people do. I think everyone's natural reaction is like, oh, this is so risky. But it is in some ways riskier to have everyone have 200% of their net worth concentrated in houses. And having 200% of your net worth in a diverse diversified portfolio of stock and credit investments is maybe safer than having it all in house. But maybe not. Investment advice here, but I don't mind the leverage that much. I mind the fact that it's not stocks, but you can't win them all. I will say, I will say. The only thing is, if you told me you can get 80% LTV leverage against the S and P and hold it for 30 years and then retire, I'd be like, yeah, it's a good product. If you told me same thing against the broad bond index, I'd be like, well, that's a less good product, but you're probably not going to lose all your money against the private credit portfolio. Is there some chance that private credit is in a bubble that is going to burst? Maybe.
- [11:51]
Katie Greifeld
You're definitely seeing more of those fears out there.
- [11:53]
Matt Levine
Yeah, I'm not super worried about that. But saying I will take 80% leverage on a portfolio of private credit there's not a lot of history to point to there.
- [12:02]
Katie Greifeld
It's interesting to read this article this week about basic capital and how much exposure there's going to be to private credit in this because you also had Empower come out this week, Bloomberg News reporting that Empower is going to start offering private assets working with firms such as Apollo and Franklin Templeton.
- [12:19]
Matt Levine
We talk about it every week. It's like there's this gold rush to put private assets into 401s because there's a long running tradition in Democratic administrations of regulators being very skeptical of high fee products and 401s to the point that people kind of worry that they have a fiduciary responsibility to only put index ones and 401s. And now there is this complete reversal where it's like, oh no. But people want private assets in 401 s and obviously those have high fees. And so now everyone's like, let's put high fee products into 401s. It's a real gold rush. And that's the cynical take. The sensible take is like, retirement savers do have 30 year time horizons and it's really discouraged to take money out of a 401 before retirement. So it's like if you have a long time horizon, you should be taking illiquidity, you should be taking some risk. It's truly the case that 401ks are a good place to put private assets. It's just like, but if I have.
- [13:21]
Katie Greifeld
This 30 year time horizon, why would you want to be anywhere but stocks? One of the pitches for private credit is that it's diversified, it is non correlated to the S&P 500. But if I'm investing over that time period and I'm going to get probably low double digit returns in the S&P 500 on an annualized basis and I'm investing for 30 years, I'd probably still just want US stock exposure.
- [13:44]
Matt Levine
You can't guarantee that you're getting low double digit returns on U.S. stock exposure. And diversifying credit is really good. Also, there's this line that I quote all the time. Someone says, if you can get 12 to 14% returns in private credit, what else would you want to do with your life? If you can get 12% from pretty solid private credit products, why would you want 12% from the s and P?
- [14:12]
Katie Greifeld
Because I feel like you're going to get it for lower fees. And that's a big reason why. And I can see it every single day. I mean, this was the first time I checked my 401 in quite a long time. But I mean history is a guide. You're probably going to get that in public equity. So like why bother?
- [14:28]
Matt Levine
But yeah, it was too short spent sight. If you can get 12 to 14% returns in senior secured private credit, what else would you want to do with your life? I explain a lot of things with fees. I also feel like one of the main things that is happening in the financial world right now is a lot of people have that same thought of if you can get 12 to 14% in first lien private credit, what else would you want to do with your life? That's why it's hard to do private equity. Because if you're in private Equity you're paying 12 to 14%. If you're in private credit, you're receiving it. It's a good deal. But I hear you.
- [15:00]
Katie Greifeld
Yeah, it doesn't quite sway me.
- [15:02]
Matt Levine
I hear, I think that if you ask what should normal retirement savers be doing? I think there's a decent case to be made that essentially zero cost equity exposure to the US economy is a good product and very high cost exposure to leveraged loans and other weird structured stuff is a great product to sell to you and possibly less good of a product for you to buy. But that is not obviously true. I do want to say one other thing about private credit and this basic capital structure. In basic capital they lend you 80% of the value of your portfolio. Where does that money come from? I don't know. I think it might come from their balance sheet early on because they're just ramping this up. But in the long run they have to find a source of capital for that. And I don't know who that source of capital is going to be. I'd be surprised if it's Citigroup. I would not be surprised if it's private credit or private credit ish firms like insurance companies or whatever. Where I really want this to go in the long run is the, the Ouroboros where private credit firms are lending its SOFR plus 2% to retirement savers who then use those loans to buy slightly spicier private credit stuff from the private credit firms. At SOFR plus 6%, that's a good financial product right there.
- [16:24]
Katie Greifeld
I also just wanted to talk about the founder really quickly. Abdul al Asad. He's 30 years old, which is also pretty cool.
- [16:32]
Matt Levine
It's the right age to be thinking about these things.
- [16:34]
Katie Greifeld
Definitely.
- [16:34]
Matt Levine
How can I lever my retirement service?
- [16:36]
Katie Greifeld
He went to Harvard Business School. That's where he was when he pitched Bill Ackman. He also previously worked in leveraged finance at Goldman Sachs. So of course you were going to think this is cool.
- [16:47]
Matt Levine
Oh yeah.
- [16:47]
Katie Greifeld
Yeah, this is cool. This is like it's a resume after your own heart. Yeah, this is like I bet he loves puzzle hunts.
- [17:00]
Kelly Cavagnaro
Hi, I'm Kelly Cavagnaro, Managing Director, Head of North America Institutional Distribution at Janice Henderson Investors. We believe working together is the way to work better. Like combining your portfolio plans and our in depth strategy, your valued assets and our valuable insights. Your mission and our vision. Working in harmony to seek the right investment opportunities. Janice Henderson Investors Investing in a brighter.
- [17:28]
Unknown
Future together Men if you're ready to reclaim your edge, listen up. I used to be held back by constant bathroom trips with multiple wake ups during my sleep and looking for restrooms whenever I was out. Then I discovered Better Man. After just two months, I started experiencing fewer trips to the bathroom, less urge to go, and I even slept through some nights. I feel a noticeable boost in my overall well being, even sexual stamina. It gives me the freedom and confidence to live life on my terms. Better man is clinically tested and trusted by thousands of men over 25 years, ready to take back control. Go to be better now.com to order your supply today. That's be better now.com these statements have not been evaluated by the FDA. This product is not intended to diagnose, treat, cure or prevent any disease. Use as directed. Individual results may vary.
- [18:16]
Felix Salmon
What are the consequences of getting on Europe's bad side?
- [18:19]
Kelly Cavagnaro
The rationale is more like those guys.
- [18:22]
Felix Salmon
How is stealth wealth changing retail?
- [18:25]
Katie Greifeld
You can have taste and still buy dupes.
- [18:27]
Felix Salmon
What does a $6.2 million banana have to do with any of us? People don't like the attribution of serious financial value to comedy. Join me, Felix Salmon and my co hosts Emily Peck and Elizabeth Spires as we talk about the most important and obscure stories in business and finance. Follow Slate Money wherever you like to listen.
- [18:59]
Katie Greifeld
You know who else probably loves puzzles?
- [19:03]
Matt Levine
The president of the private equity club at every university.
- [19:07]
Katie Greifeld
I was gonna say these poor kids being hazed at these student finance clubs. This really bums me out.
- [19:14]
Matt Levine
It is not anything like what I experienced in college. And it's like a sort of thing that I've been noticing even from my time in banking. But yes, there's a Business Insider article this week about college student finance clubs, which are so insanely competitive. I think we've talked about this on the show where it used to be private equity firms would Hire people after their two year analyst program at a bank because they knew stuff and they'd like, you work as an analyst at a bank. And then as you came to the end of your two year program, you'd interview for new jobs and private equity firms would interview and they'd hire you. It was an advantage for a private equity firm to interview two weeks earlier than the other firms. And so it got pushed back to the point that now people are interviewing before they start their banking jobs. You graduated from college, you're about to start a banking job. But first you interviewed a private equity firm where they ask you, so how's your banking job? And you're like, well, I haven't been there yet. So everything's getting pushed back earlier. And one symptom of that is that being in these exclusive elite finance clubs at universities is viewed as being important for your resume to get the good finance jobs. And so you interview as a freshman and they give you a bunch of difficult financial modeling questions. And there's someone in the story cried during their interview.
- [20:28]
Katie Greifeld
Been there.
- [20:29]
Matt Levine
If you make it through, then you're in the finance club. And being in the finance club gives you the inside track to getting the investment banking job that'll get you the private equity job.
- [20:38]
Katie Greifeld
Yeah. It did read suspiciously getting into Greek life at a college or university. Not that the college I went to had Greek life, but it did sound a lot like rushing a fraternity.
- [20:51]
Matt Levine
Not a lot.
- [20:53]
Katie Greifeld
It's hyper.
- [20:53]
Matt Levine
Drink until you pass out.
- [20:55]
Katie Greifeld
Well, no, but there's other forms of hazing.
- [20:57]
Matt Levine
Yeah. Like DCF modeling.
- [20:59]
Katie Greifeld
Yeah. Which would you rather do? I don't know.
- [21:01]
Matt Levine
Someone in the story was like, high school kids, before they arrive on campus are like, you know, you spend your senior spring of high school studying up on finance so that you can get into the finance club your freshman year. Seems insane.
- [21:14]
Katie Greifeld
Yeah.
- [21:15]
Matt Levine
I did not do this.
- [21:16]
Katie Greifeld
No. I was so far from this. This just bummed me out. Like you said, all of this is getting pushed forward. And I do wonder, what's the breaking point? When does it turn in on itself? And I don't quite know. It just feels like, where does it go from here? There's nowhere else to go. If you have high school seniors in their senior spring studying, of course there's.
- [21:35]
Matt Levine
Somewhere else to go.
- [21:36]
Katie Greifeld
Where, middle school?
- [21:37]
Matt Levine
Yes.
- [21:38]
Katie Greifeld
It's horrible.
- [21:39]
Matt Levine
It's like someone who's like, this is like travel, sports. Right. This is another thing that people talk about all the time. It used to be that kids played the little League and they played for their High school sports teams. And it was like sports and fun. And now it's like when you're seven, you try out for the travel team and you have to spend all this money to be on the travel team. And it's pitched to parents as your kid will never get into college if they're not on the elite 7 year old soccer team or whatever. And I don't know, man, that's everything. All of these markers of status have become so competitive and people witness that competition and are like, well if I start a year earlier than everyone else, I'll have an advantage. And everyone does that. And so it just moves further and further back until the seven year olds are trying out for the travel financial modeling team.
- [22:29]
Katie Greifeld
As a parent, does this stress you out?
- [22:31]
Matt Levine
Yeah, yeah, yeah.
- [22:34]
Katie Greifeld
I'm not a parent but I'm thinking a little bit.
- [22:36]
Matt Levine
Well, this is why I'm working with my daughter on her DCF model.
- [22:39]
Katie Greifeld
Very good. Yeah, I have a cat, so it doesn't quite apply to me. But I think of it Little Xanadu in like I don't know, 15 years. And I worry about my.
- [22:49]
Matt Levine
That's a great callback.
- [22:50]
Unknown
That was so cool.
- [22:50]
Katie Greifeld
Thank you. I was hoping that. I hope that.
- [22:52]
Matt Levine
I shouldn't even said anything. I should have just like let it.
- [22:55]
Katie Greifeld
Hang out in the air.
- [22:55]
Matt Levine
But Little Xanadu, your hypothetical named after child.
- [23:00]
Katie Greifeld
The New Jersey American Dream Mall, Meadowland Xanadu. That's kind of why I hope it turns in on itself because it just doesn't seem sustainable.
- [23:07]
Matt Levine
Yeah, people have said that for a long time about a lot of things like college admissions and stuff. And the ratchet keeps turning. I will say that like there are counter trends to this where I always think of the very prestigious financial firms. I think of Renaissance and Bridgewater and to some extent Jane street is like this. There's a notion that they don't hire people from traditional Wall street training. They don't hire MBAs or people from the street. They like to hire people who are not tainted by traditional Wall street thinking. And it's weird for people to channel themselves so intensely into the traditional paths. But maybe it's not that weird. Maybe those firms are outliers.
- [23:48]
Katie Greifeld
Pre med. There's certain things you need to learn and know about science to become a doctor. But I could see a Bridgewater thinking. I want to make sure I have an edge, that I'm not just hiring someone who has been programmed by someone other than myself. I want the creative thinker.
- [24:05]
Matt Levine
You want the kids doing puzzle hunts.
- [24:07]
Katie Greifeld
Not the Kids doing finance club, Come on. So maybe that will be a forcing action for turning it on itself.
- [24:13]
Matt Levine
I don't know. I mean, the other thing is that, and I wrote about this when I was in college, there were a lot of aimless smart people who graduated from college and were like, well, I guess I'll do investment banking recruiting because they're there. And in some ways that's not good for a bank. Or some ways, if you're running a desk at a bank and you can choose between the president of the financial modeling club and the classics major who's like, well, I guess I'll do investment banking. You'd rather have the president of the financial modeling club because they can do financial models and they'll be useful to you. But I think taking a step back, if you're the CEO of a bank, there's a real value to having a broad selection of ambitious, smart people who don't necessarily care about banking. Because some of those people will be really good bankers because they're a little bit broader minded and less rigid than the people who are just the financial modelers. But some of them will not be good bankers and will be politicians or media people or other things.
- [25:19]
Katie Greifeld
Podcasters.
- [25:20]
Matt Levine
Podcasters. And their two years at a bank will reflect well on you and sort of lead you to continue to do well in recruiting. I just think that if you're an investment bank and you're only hiring people who are have been interested in investment banking since they were 18, you're sort of undermining your own prestige.
- [25:40]
Katie Greifeld
Yeah. Wow.
- [25:43]
Matt Levine
This is like my very selfish disclosure. I used to work at Goldman. It used to be kind of cool to be like, yeah, I used to work at Goldman. And you'd go around to different places in life and people are like, oh, I also used to work at Colbin. Right.
- [25:54]
Katie Greifeld
And probably Goldman is proud of you.
- [25:57]
Matt Levine
Oh, I hope so. Yeah, they'd better be.
- [25:59]
Katie Greifeld
I don't know. It's kind of similar in journalism. You want to hire people. Not always, but you want to have some journalists such as yourself, that came from outside the industry.
- [26:09]
Matt Levine
Right. And both because it is vaguely prestige enhancing, but also because having that diversity of experience probably does improve the doing of the job. Whereas if everyone has the same training since they were 18, you're probably missing things. Well, maybe the training is really good. Maybe these finance clubs are like, you.
- [26:30]
Katie Greifeld
Know, they sound brutal.
- [26:32]
Matt Levine
Right. There's this tension in the article where these clubs are very selective and it's like, well, you could just take more people and you could probably teach them how to pick stocks and maybe they wouldn't be great at it, but who cares? Some of them are investing small portfolios of the college's money. Some of them are not. Okay, you didn't pick a good stock. But. But I think part of it is they want to be selective because the main thing they're doing is saying we were selective so that they are the place where the banks want to hire from.
- [27:07]
Katie Greifeld
Yeah, I did love this line from the Business Insider article. Some clubs conduct three to five rounds of interviews. Students told bi, which can involve a resume review. Yes, your high school resume, a social assessment, and multiple technical rounds in which you'll be grilled on real world finance questions. My high school resume was written in crowd prey on so I would love to see some of these.
- [27:29]
Matt Levine
I do love the phrase a social assessment, which does that mean that you have to drink until you pass out once? Because it's still a college club, they probably still have parties, right?
- [27:39]
Katie Greifeld
I hope so.
- [27:40]
Matt Levine
I hope so too.
- [27:41]
Katie Greifeld
Yeah. I don't know. Maybe some of these students will write in and tell us about their investment club.
- [27:47]
Matt Levine
I wrote about it and several people did write in to tell me about their investment club, including one person who pointed out that the competition goes two ways and the banks compete to get in front of these clubs because if you have the first meeting with the club, then that club is more likely to send students to you and so you'll be able to pick them off instead of them going to other banks. And so there is a competition, including the banks love to sponsor stuff for the clubs or just give them money because that helps with their recruiting. And so it goes both ways. But yeah, in general, I got a number of emails from people who are in these clubs and none of them were like, no, it's great. That article is all wrong. They're all wrong.
- [28:27]
Katie Greifeld
Having so much fun.
- [28:29]
Matt Levine
It's pretty bad.
- [28:29]
Katie Greifeld
Yeah.
- [28:30]
Matt Levine
I have a friend whose daughter is in one of these competitive clubs and they asked me to speak and I talked at their club. But I also found it. I was like, why are you in this competitive finance club?
- [28:41]
Katie Greifeld
Did they seem happy? Were their smiles? Was there any mirth?
- [28:44]
Matt Levine
Well, I was speaking, so it was great.
- [28:46]
Katie Greifeld
Oh, so everyone was smiling. It was full of mirth and clapping.
- [28:49]
Matt Levine
It was, I mean, stamping, cheering.
- [28:51]
Katie Greifeld
It's probably the highlight of their college experience.
- [28:53]
Matt Levine
Then they went back to doing DCF models.
- [29:01]
Kelly Cavagnaro
Hi, I'm Kelly Cavagnaro, managing director, head of North America Institutional Distribution at Janice Henderson Investors. We believe working together is the way to work better. Like combining your portfolio plans and our in depth strategy, your valued assets and our valuable insights, your mission and our vision. Working in harmony to seek the right investment opportunities. Janice Henderson Investors Investing in a brighter.
- [29:28]
Unknown
Future Together Men if you're ready to reclaim your edge, listen up. I used to be held back by constant bathroom trips with multiple wake ups during my sleep and looking for restrooms whenever I was out. Then I discovered Better Man. After just two months I started experiencing fewer trips to the bathroom, less urge to go, and I even slept through some nights. I feel a noticeable boost in my overall well being, even sexual stamina. It gives me the freedom and confidence to live life on my terms. Betterman is clinically tested and trusted by thousands of men over 25 years, ready to take back control. Go to be betternow.com to order your supply today. That's be betternow.com these statements have not been evaluated by the FDA. This product is not intended to die, diagnosed to recur or prevent any disease. Uses directed Individual results may vary.
- [30:16]
Felix Salmon
What are the consequences of getting on Europe's bad side?
- [30:20]
Kelly Cavagnaro
The rationale is more like those guys.
- [30:22]
Felix Salmon
How is stealth wealth changing retail?
- [30:25]
Katie Greifeld
You can have taste and still buy dupes.
- [30:28]
Felix Salmon
What does a $6.2 million banana have to do with any of us? People don't like the attribution of serious financial value to comedy. Join me, Felix Salmon and my co hosts Emily Peck and Elizabeth Spires as we talk about the most important and obscure stories business and finance. Follow Slate Money wherever you like to listen.
- [30:59]
Katie Greifeld
Well, this is really fun to talk about, but I'm really just in knots over how Elon Musk is going to get more money. Specifically Tesla options.
- [31:09]
Matt Levine
Yeah, this is not super newsy but like the FT reported that that Tesla is trying to figure out a way to give him a giant bag of money. They gave him some stock options in.
- [31:18]
Katie Greifeld
2018, going all the way back to.
- [31:20]
Matt Levine
2018 when Tesla was a $60 billion company. I mean it's not like a one point something trillion dollar company. But the options all worked out. He did great. They awarded him on the order of $100 billion from these options. And then the shareholders sued in Delaware and the Delaware judge said this is a conflicted transaction that was not fair to shareholders. And so the options are gone and Elon Musk and frankly Tesla's board and Tesla's shareholders were all kind of mad about that. We've talked about it in the past and one thing they did was vote again to give him back the options and the judge said, no, that doesn't work. The options are gone. Another thing they did was vote to move to Texas. So Tesla's now incorporated in Texas. So the next time they give him stuff, you can only sue in Texas. And this week, the governor of Texas signed a bill about limiting how much you can sue a company in Texas. And the answer is, you really kind of can't. It's meant to be much more protective of decisions like this than the equivalent law in Delaware. So if they were to give him another $100 billion today, it would be fine. No one would be able to check. But if they were to give him $100 billion today, they would have a huge accounting hit and he would have a huge tax hit. Basically, it would be a multibillion dollar expense to Tesla, which would hurt its income, and it would be a huge tax bill to him. He would pay like 57% taxes on the value of the award. What's nice about what happened in 2018 is that, broadly speaking, there are not a lot of tax consequences or a lot of accounting consequences to giving him this award. Because the options weren't worth very much in theory, because the stock was low and there were a lot of ambitious targets that he had to hit in order to get the options. Then, like, seven years later, the options are worth a lot of money because he hit the targets. That's how it's supposed to work. Now they're gone. And giving him new options would be really bad for tax and accounting purposes. So Tesla's trying to figure out what's the right way to solve this in a way that gives him what he wants, which is both a giant pat on the head for being so good, and also more control of Tesla, but in a way that doesn't create a huge tax bill or an accounting mess.
- [33:38]
Katie Greifeld
Yeah, specifically, the FT reported that they formed a special committee to explore Elon Musk's pay. The committee comprises of just the Chair of the board, Robin Denholm, and Kathleen Wilson Thompson. It's going to explore alternative ways to compensate him for past work should Tesla fail to reinstate that 2018 pay deal. You had kind of a suggestion for them.
- [34:00]
Matt Levine
So I've had two suggestions this week. One is my stupid suggestion and one is a reader's. Both of them are somewhat tongue in cheek suggestions.
- [34:06]
Katie Greifeld
Okay.
- [34:07]
Matt Levine
Essentially the problem is that the stock price of Tesla is too high. In 2018, they were like, we'll give you a huge pile of Money if you 10x the stock price. And then he did it. And then now, they can't be like, well, we'll give you another huge pile of money for 10xing the stock price previously, because that would have tax consequences.
- [34:25]
Katie Greifeld
Poison chalice.
- [34:26]
Matt Levine
The solution to the stock price being too high is to make the stock price lower. And so I don't think this is original to me. I think I've been writing about Elon Musk for years and I've been getting somewhat conspiratorial emails from readers for years. And I think somewhere a reader emailed me, like, if they want to give him stock options again, and it's very important that the options be granted up the money, and he wants them to be very valuable. The thing to do is to make the stock very volatile, tank the stock, give new stock options at a low price, and then bring the stock back up, and the stock options will now be worth a lot.
- [35:01]
Katie Greifeld
Turns out.
- [35:02]
Matt Levine
Is that what he's been doing? The stock went down a lot as he was doing Doge antics. He's a little bit retreated from the Doge antics and said things like, I will spend more time at Tesla and the stock has gone up. And it's like, well, you could turn the dial all the way to Doge. Stock plummets, give them stock options. Be like, with these options, I'm now motivated to spend more time in the company, turn the dial more to Tesla, stock goes up and everything's fine.
- [35:30]
Katie Greifeld
Yeah, there you go.
- [35:31]
Matt Levine
That's one solution. It's not a very good solution.
- [35:33]
Katie Greifeld
That was your solution, so I'm not going to insult you.
- [35:36]
Matt Levine
No, it's pretty stupid.
- [35:37]
Katie Greifeld
What was the reader suggestion?
- [35:39]
Matt Levine
The reader's suggestion is there are various ways for Tesla to give Elon Musk stock. Let's say the traditional way to give a CEO stock is to do it as incentive compensation. And that runs into the problems that we have here, where, like, if you want to incentivize him for work he's already done, like you have a big tax bill. Another thing you could do is you could acquire a company that he owns. Right.
- [36:07]
Katie Greifeld
Maybe one that begins with X.
- [36:10]
Matt Levine
Not necessarily. Yes. So there's a business logic to. I mean, there's arguably a business logic to Tesla acquiring Xai, because Tesla's an AI company and Xai is an AI company. But Tesla has in the past acquired SolarCity, which was a company that was partially owned by Elon Musk. And there were some allegations that Tesla was overpaying for SolarCity because Elon Musk wanted it to, and that it was essentially a bailout of Solarcity to enrich the CEO. And the shareholders sued and he lost. And the Delaware court at the time said, nah, this was good enough. But in Texas, like, you could probably be even faster and looser. And so the solution that my reader suggested was like, look, you have an Elon Musk company. You overpay for it in the form of Tesla stock by $90 billion, and you've given Elon Musk $90 billion of stock that is not immediately taxable to him and does not reduce your earnings. So it kind of solves the problem of rewarding him for his past work. And the objection to it is that if a Delaware company was like, we're going to just buy our CEOs, like, random small startup for $90 billion, they'd get sued and they'd go to court. And a Delaware Chancellor would review whether the transaction was entirely fair to shareholders. And given both the cynicism with which I'm describing this and Delaware's history with Elon Musk, the Chancellor would probably say, no, this is not entirely fair to shareholders. You have to give back the stock. But being in Texas, anything goes. And the thing about this is, I'm describing it in this very cynical way, but you could imagine Tesla's board saying, this CEO is very valuable to us. We owe him for the good work he did increasing the stock price in the past that the Delaware Chancellor took the stock away from him for. Shareholders have already voted to give him that stock back. And the Chancellor said, no, that doesn't work. What we're going to do is we're going to give him the stock in this alternate way where we're buying this company from him. You know, and I know the company isn't worth $90 billion, but, like, he's our guy. We like him. Let's give him the $90 billion. You could imagine disclosing that clearly. And the shareholders saying, sure, yeah.
- [38:32]
Katie Greifeld
So we have two potential solutions on the board right here.
- [38:36]
Matt Levine
No one would ever cite this podcast if they implemented either of these solutions, because you'd probably get in trouble doing these things explicitly but implicitly.
- [38:48]
Katie Greifeld
Well, this is a watch this space sort of moment. Tesla did say in a filing that its proxy statement will be delay. That indicates that perhaps.
- [38:57]
Matt Levine
Yeah, they're working on how to do it.
- [38:59]
Katie Greifeld
Yeah, their annual meeting will be delayed. Usually the annual meeting is in May or June, so maybe sometime in the summer.
- [39:05]
Matt Levine
They want to come to shareholders with some thing that the shareholders can vote on to give Yolanda's money.
- [39:10]
Katie Greifeld
We're going to talk about it on this podcast.
- [39:12]
Matt Levine
But not next week.
- [39:12]
Katie Greifeld
No, no, next week. Next week we have something far more sinister.
- [39:20]
Matt Levine
And that was the Money Stuff Podcast. I'm Matt Levine.
- [39:22]
Katie Greifeld
And I'm Katie Greifeld.
- [39:24]
Matt Levine
You can find my work by subscribing to the Money stuff newsletter on Bloomberg.com.
- [39:28]
Katie Greifeld
And you can find me on Bloomberg TV every day on Open Interest between 9 to 11am Eastern.
- [39:34]
Matt Levine
We'd love to hear from you. You can send an email to moneypodloomberg.net Ask us a question and we might answer it on air.
- [39:41]
Katie Greifeld
You can also subscribe to our show wherever you're listening right now and leave us a review. It helps more people find the show.
- [39:46]
Matt Levine
The Money Stuff Podcast is produced by Anna Mazarakis and Moses Andam.
- [39:50]
Katie Greifeld
Our theme music was composed by Blake Maples.
- [39:53]
Matt Levine
Brendan Francis Newnham is our executive producer.
- [39:55]
Katie Greifeld
And Sage Bauman is Bloomberg's Head of Podcasts.
- [39:58]
Matt Levine
Thanks for listening to the Money Stuff podcast. We'll be back next week with more Stuff.
- [40:14]
Unknown
Men if you're ready to reclaim your edge, listen up. I used to be held back by constant bathroom trips with multiple wake ups during my sleep and looking for restrooms whenever I was out. Then I discovered Better Man. After just two months, I started experiencing fewer trips to the bathroom, less urge to go, and I even slept through some nights. I feel a noticeable boost in my overall well being, even sexual stamina. It gives me the freedom and confidence to live life on my terms. Better man is clinically tested and trusted by thousands of men over 25 years, ready to take back control. Go to be betternow.com to order your supply today. That's bebetternow.com these statements have not been evaluated by the FDA. This product is not intended to diagnose, treat, cure or prevent any disease. Use as directed. Individual results may vary.
- [40:59]
Matt Levine
You're listening to an iHeart podcast.