Money Stuff: The Podcast

Episode: Full of Mirth: 401(k), Clubs, TSLA
Release Date: May 16, 2025
Host/Author: Bloomberg
Hosts: Matt Levine and Katie Greifeld

Introduction

In this episode of Money Stuff: The Podcast, Matt Levine and Katie Greifeld delve into a variety of financial topics, including innovative approaches to retirement investments, the competitive nature of finance clubs in universities, and the complexities surrounding Elon Musk's compensation at Tesla. The conversation is both insightful and engaging, blending technical analysis with light-hearted banter.

Leveraging 401(k)s: Basic Capital’s Approach

Exploring the Idea

Matt introduces the concept of leveraging 401(k) investments through Basic Capital, a company Suzanne Woolley at Bloomberg recently covered. The idea revolves around allowing individuals to borrow against their 401(k) to amplify their investment potential.

[03:18] Matt Levine: "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."

Historical Context and Risks

Matt provides historical context, referencing a 2008 paper by Ian Ayers and Barry Nelbuff, which suggested leveraging retirement investments early in one’s career to smooth returns over time. However, real-world applications have shown significant risks, especially during financial crises.

[05:14] Matt Levine: "There's a famous post on the Bogleheads investing forum where like this grad student did this starting like 2007 and he just ran into a buzzsaw like he lost all of his money..."

Basic Capital’s Implementation

Basic Capital offers term loans instead of traditional margin loans, reducing the immediate risk of margin calls. However, Matt points out the challenge of managing interest payments and the necessity of allocating a significant portion of the portfolio to fixed income to cover these costs.

[06:18] Matt Levine: "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."

Risks and Considerations of Leveraged Retirement Accounts

Amplified Risk and Return

Katie expresses skepticism about the perceived safety of leveraged 401(k)s, highlighting the inherent risks associated with leveraging investments, even if structured differently from traditional margin loans.

[09:13] 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."

Comparison to Mortgages

Matt draws parallels between leveraged 401(k)s and home mortgages, noting that both involve significant leverage but differ in liquidity and asset type. He argues that while leveraging stocks is risky, similar to mortgage risks, the latter offers the tangible benefit of homeownership.

[10:54] Matt Levine: "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."

Intentions vs. Reality

While the theoretical benefits of leveraging are sound, Matt emphasizes the practical challenges, such as high interest rates and the difficulty in ensuring borrowers can cover these costs without adversely affecting their retirement savings.

[11:50] Katie Greifeld: "You're definitely seeing more of those fears out there."

[11:52] 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."

The Rise of Private Credit in 401(k)s

Trend Towards Private Assets

Katie discusses the increasing trend of incorporating private credit into 401(k) plans, citing recent moves by Empower to collaborate with firms like Apollo and Franklin Templeton. This shift marks a departure from the traditional focus on index funds.

[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."

Fee Concerns vs. Potential Returns

Matt debates the merits of private credit, noting the attractive returns (12-14%) compared to public equities but raises concerns about high fees and the sustainability of such models.

[13:44] Matt Levine: "if you can get 12% from pretty solid private credit products, why would you want 12% from the s and P."

Structural Challenges

The conversation highlights structural issues, such as the sourcing of capital for leveraged loans and the potential for a cyclical problem if private credit firms start to loan money back into their own products.

[16:23] Matt Levine: "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."

Competitive Finance Clubs and Their Impact on Students

Hyper-Competitive Environment

Matt and Katie discuss a Business Insider article detailing the intense competition within university finance clubs. These clubs now resemble hazing rituals, with multiple rounds of rigorous interviews and financial modeling challenges.

[19:13] Matt Levine: "There's a Business Insider article this week about college student finance clubs, which are so insanely competitive."

Early Specialization

The trend of students preparing for finance careers even before starting college is examined, raising concerns about the sustainability and mental well-being of young individuals caught in this high-pressure environment.

[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."

Impact on Personal Development

Katie reflects on the implications of this competitive nature, questioning the long-term effects on students' personal growth and the broader implications for the finance industry.

[21:35] Matt Levine: "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."

Elon Musk's Compensation and Tesla's Strategy

Background on Tesla’s Stock Options

Katie and Matt shift focus to the ongoing saga of Elon Musk’s compensation through Tesla stock options, originally granted in 2018 when Tesla was valued at $60 billion. These options are now worth approximately $100 billion, leading to legal challenges.

[31:08] Matt Levine: "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."

Legal and Fiscal Implications

Matt explains the Delaware court's decision to nullify the stock options and Tesla's subsequent move to incorporate in Texas to circumvent similar legal challenges in the future. Texas legislation now limits the ability to sue companies, creating a more favorable environment for such compensation structures.

[32:20] Matt Levine: "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."

Current Efforts and Future Solutions

Tesla is exploring alternative compensation methods to reward Musk without incurring massive tax and accounting liabilities. Matt humorously suggests some unconventional ideas, acknowledging their impracticality, while also presenting a reader's suggestion involving the acquisition of Musk-owned companies to funnel stock.

[34:05] Matt Levine: "Another thing you could do is you could acquire a company that he owns... 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..."

Ongoing Developments

The episode concludes with anticipation of future discussions on this topic, as Tesla delays its proxy statement to address Musk's compensation, hinting at more revelations in upcoming episodes.

[38:58] Katie Greifeld: "They want to come to shareholders with some thing that the shareholders can vote on to give Yolanda's money."

Conclusion

In this episode, Matt Levine and Katie Greifeld provide a deep dive into the evolving landscape of retirement investments, the pressures faced by aspiring finance professionals, and the intricate dynamics of executive compensation in high-profile companies like Tesla. Their discussion offers valuable insights for both financial enthusiasts and everyday investors, highlighting the balance between innovative financial strategies and the inherent risks involved.

Notable Quotes

• Matt Levine [03:18]: "They're doing a sort of implementation of it where they will let you borrow money to lever up your 401k."
• Katie Greifeld [09:13]: "So leverage to a lot of folks. Sounds scary. It kind of sounds scary to me."
• Matt Levine [10:54]: "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."
• Matt Levine [21:01]: "It seemed insane for high school kids to be studying finance before even starting college."
• Katie Greifeld [27:28]: "Having so much fun."
• Matt Levine [34:24]: "It's a good deal, but you can't win them all."

Thank you for tuning into this episode of Money Stuff: The Podcast. Stay informed and make smarter financial decisions with us each week.