No Kiddie Pool

Summary

Money Stuff: The Podcast

Episode: No Kiddie Pool
Date: July 31, 2026
Hosts: Matt Levine, guest host Sylvia Killingsworth (standing in for Katie Greifeld)

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Overview

This episode of “Money Stuff: The Podcast” digs into some of the week’s more eccentric and complicated stories from Wall Street and finance—true to the show’s unique blend of technical insight and dry wit. With Matt’s regular co-host Katie Greifeld on parental leave, Bloomberg Ideas & Culture editor Sylvia Killingsworth jumps in to discuss:

• The dramatic margin call story at AI-focused hedge fund Situational Awareness
• A confusing biotech merger gone awry due to a record date mix-up
• The underlying mechanics of structured notes, especially as banks rush to issue them on volatile stocks like SpaceX
  The episode showcases how technical flaws, finance jargon, and over-leveraged bets can spin up chaos—and opportunity—in modern finance.

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Key Discussion Points and Insights

1. The Hedge Fund “Situational Awareness” Margin Call Blow-Up (01:41–11:43)

• Background:
  Situational Awareness, a hedge fund founded by ex-OpenAI employee Leopold Aschenbrenner, made massive AI-related bets with high leverage.

  • “He wrote some essays in 2024 called Situational Awareness, the gist of which is like, oh, boy, AI is going to be really big.” (Matt, 03:00)
  • “He worked at OpenAI. He knows a lot of stuff. He understands how it works.” (Sylvia, 03:34)

• What happened:
  As AI and chip stocks suffered a drawdown, prime brokers issued margin calls, forcing Aschenbrenner to liquidate major positions. Citadel ended up owning many of these public stock bets.

  • “Citadel now owns a lot of his stock bets. And by the way, all of his trades, like, have recovered today... Citadel has made probably a lot of money in 12 hours.” (Matt, 04:57, 05:11)
  • “His bets weren’t wrong. He just kind of caught [was] out at a bad time.” (Sylvia, 05:11)

• Why it happened:
  The interplay of leverage and short-term financing in a long-term thesis exposed the fund to forced selling.

  • “You will get margin calls and your prime brokers will make you sell your positions and you will be blown out of these long term bets because you had essentially short term financing.” (Matt, 06:13)

• Risk management culture:
  Citadel’s consistent focus on funding risk contrasts with upstart managers.

  • “The deep thing they [Citadel] do is think about like if something bad happens, how do we survive? How do we make sure that our funding doesn't get pulled?” (Matt, 06:22)

• Historical parallel:
  Comparison to how Sam Bankman-Fried’s leveraged AI bets (funded with FTX customer money) blew up for much the same reason.

  • “You can be blown out of the bets prematurely.” (Matt, 08:46)

• Lesson:
  Long-term, volatile trades require matching long-term funding, not short-term credit lines or excessive leverage.

  • “To make a long-term bet like that you need long-term funding.” (Matt, 10:20)
  • “If they had not had any leverage, they would have returned, I don't know, 200%... and they'd be fine.” (Matt, 10:57)
  • “Seems like they weren't really very aware of the situation.” (Sylvia, 11:43)

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2. Biotech Royalty Co. Exoma: Record Date Mix-Up (14:12–22:04)

• The Set-Up:
  Exoma, a biotech royalty company, sold itself to Ligand for $39/share plus a CVR (contingent value right) tied to ongoing litigation—an “IOU” potentially worth $5.

  • “It's called the CVR, contingent value, right. So, like, if in the next few years, they win the litigation, the old shareholders get some money.” (Matt, 15:15)
  • “It's like potentially an IOU.” (Sylvia, 15:27)

• Record Date Confusion:
  Exoma issued a press release stating a “record date” for the CVR was the day before the merger closed, conflicting with standard merger practice and previous language.

  • “Normally, if you own the stock when the merger closes, you get whatever you get… But...the press release seemed to say you didn't get the CVR because you wouldn't settle until the next day.” (Matt, 15:45)

• Market Reaction:
  Confusion caused shares to trade unpredictably around the merger, as investors tried to game the record/CVR mechanics.

  • “So it traded like 40 bucks. But a lot of people did a trade where you would buy the stock on Friday, you would get the cvr and then you'd sell the stock on Monday thinking that you would keep the CVR…” (Matt, 17:15)

• Outcome:
  Two days after closure, Exoma reversed itself, confirming the press release was an error.

  • “They put out a shameful press release saying, nope, never mind, we're not using the record date. This was all wrong.” (Matt, 17:52)

• Why the mix-up?
  Discussion about misunderstanding distributions vs. mergers; some companies treat merger contingent rights as if they’re dividends with record dates.

  • “I think they just got confused about whether it was a distribution...or whether it was just what happens in the merger.” (Matt, 19:59)
  • “Maybe they were treating it like a dividend.” (Sylvia, 20:32)

• Bigger lesson:
  Financial documents often confuse even market professionals, creating trades based on who reads the fine print best.

  • “There's a trade of, like, reading documents better than someone else—or even better than the company.” (Matt, 21:12)

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3. Structured Notes & SpaceX: How Banks Source Risk from Retail (24:32–31:41)

• What’s a Structured Note, and What Happened with SpaceX?
  Following SpaceX’s public listing and steep post-IPO drop, banks rushed to issue structured notes to retail clients, designed to look like “SpaceX with downside protection.”

  • “So there's a Bloomberg story this week about basically banks or financial firms...rolling out structured notes on SpaceX.” (Matt, 24:42)
  • “A structured note is kind of...there’s two ways to think about the trade.” (Matt, 24:40)

• Bank Motivation:
  For banks like Morgan Stanley, these notes let them buy puts on SpaceX from retail investors, providing big clients (like hedge funds) the protection they really want.

  • “To Morgan Stanley, looks like they have bought a put on SpaceX...insurance on SpaceX’s stock from their retail customers.” (Matt, 27:08)

• Structure of the Note:
  Example: invest $100, get $140 back in 18 months—unless SpaceX is down more than 50%, in which case you share the full downside.

  • “So you put in $100 today, in 18 months you get back $140. Unless SpaceX is down a lot…if SpaceX is down 60%, you get back $40.” (Matt, 26:58)

• Client Perspective:
  The notes are marketed as a risk-limited way to participate in SpaceX, which only loses you money if the stock totally crashes. But the real transaction is banks outsourcing tail risk to individuals.

  • “They are sourcing, like, weird volatility risk from your retail customers so that you can sell it to hedge funds.” (Matt, 30:09)

• Why not just buy direct puts?
  Professional counterparties don’t want tail risk, and neither do banks. Retail customers might not realize the exposure they're taking.

  • “It’s a way for them to buy very out of the money puts on SpaceX from people who don’t quite realize that they’re selling…puts on SpaceX.” (Matt, 29:59)

• Meta-reflection on Structured Products:
  Matt, a former derivatives structurer, emphasizes that turning complex risk exposures into attractive products for retail is the core business.

  • “You're in the derivatives lab. You have a bucket of stuff...How do I make this thing look cool? How do I tell a story that this stuff is...you should really buy this stuff.” (Matt, 31:08)

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Notable Quotes & Memorable Moments

• On Citadel’s business:
  “Citadel is in the business of thinking about funding risk, and funding the funding risk blew up situational awareness and now Citadel owns their bets on AI.” —Matt Levine (07:21)
• On biotech merger confusion:
  “Apparently this is common in biotechs to mess up record dates. I don’t really know why.” —Matt Levine (18:31)
• On reading the fine print:
  “There's a trade of like, reading the documents better than someone else or, like, reading the documents better than the company...” —Matt Levine (21:12)
• On structured notes as retail-facing derivatives:
  “Structured notes are sourcing, like, weird volatility risk from your retail customers so that you can sell it to hedge funds.” —Matt Levine (30:09)
• On the perils of leverage:
  “If you're unlevered, and your portfolio returns 200%, like you don't need more leverage. You're fine...and they instead got 1,000% and then got blown out this week.” —Matt Levine (11:26)
• Sylvia’s kicker on hedge fund hubris:
  “Seems like they weren’t really very aware of the situation.” —Sylvia Killingsworth (11:43)

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Timestamps for Important Segments

• [01:41] — Introduction and background on guest host change & episode theme
• [02:41–11:43] — Situational Awareness hedge fund blow-up: Leverage, margin calls, and Citadel’s maneuver
• [14:12–22:04] — Exoma’s biotech merger record date confusion and trading fallout
• [24:32–31:41] — How structured notes work, especially with SpaceX & retail participation

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Overall Tone & Style

Deadpan and self-deprecating, but deeply insightful. Matt Levine’s wry, lawyerly approach surfaces the odd logic and perverse incentives that drive Wall Street. Sylvia’s contributions bring a curious, slightly outsider’s perspective, often focused on the human error or communication breakdowns that make technical finance stories unexpectedly funny.

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Summary Takeaways

• Even the smartest, most connected funds are ultimately at the mercy of financial plumbing (like prime brokerage and leverage terms) and market herd behavior.
• Communication failures—from biotech executives to financial structurers—can create temporary confusion, strange trading opportunities, and even lasting lessons for finance pros.
• Structured finance’s magic is in turning exactly what big institutional clients don’t want to hold (tail risk, volatility insurance) into something just shiny enough for the mass market.
• Reading the fine print—and understanding what’s really being sold—is a persistent, lucrative edge in modern finance.

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For more from Matt Levine, subscribe to his Money Stuff column at Bloomberg Opinion. For literary takes on finance, check Sylvia Killingsworth’s “On Books” newsletter at Bloomberg.

Transcript

[Katie Greifeld]

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[Matt Levine]

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[Matt Levine]

News who are you?

[Sylvia Killingsworth]

I'm Sylvia Killingsworth.

[Matt Levine]

How much introduction should we do of you?

[Sylvia Killingsworth]

I could give you my title. I could give you my middle name. I could give you my date of birth, Social Security number.

[Matt Levine]

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 column for Bloomberg Opinion.

[Sylvia Killingsworth]

And I'm Sylvia Killingsworth. I'm an editor at large for Bloomberg Ideas and Culture, and I run a great newsletter called On Books, which Matt has been featured in and will be featured in again.

[Matt Levine]

The podcast has been featured in. This Is the Money Stuff podcast, which usually features me and Katie Greifeld, my co host, but she's away for six months. Katie is on parental leave, and so our plan was to have a rotating cast of guest hosts and you are the first sacrificial victim.

[Sylvia Killingsworth]

Here I go.

[Matt Levine]

Here you go. Should we talk about situational awareness or no?

[Optum/Healthcare Advertiser Voice]

Yes.

[Matt Levine]

Okay. You want to?

[Sylvia Killingsworth]

Yes.

[Matt Levine]

I don't have much to say. The guy blew up. I mean, sorry. The guy didn't blow up. The latest report so this is There's a hedge fund called Situational Awareness. It was started by Leopold Aschenbrenner, who's a former OpenAI employee who, like, left.

[Sylvia Killingsworth]

Yeah, he's like, 25, graduated from Columbia, 19, valedictorian.

[Matt Levine]

He wrote some essays in 2024 called Situational Awareness, the gist of which is like, oh, boy, AI is going to be really big. And enough people found that compelling that they gave him a lot of money to run a hedge fund to basically bet that AI would be really big, which, broadly speaking, was a bet that worked really, really, really well for the last two years. And he's returned, like, a thousand percent by June.

[Sylvia Killingsworth]

And

[Matt Levine]

he's very plugged into AI and seems to make good bets on who will be the winners of the AI boom and all this stuff, and did great.

[Sylvia Killingsworth]

He worked at OpenAI. He knows a lot of stuff. He understands how it works.

[Optum/Healthcare Advertiser Voice]

He.

[Sylvia Killingsworth]

He can see the future.

[Matt Levine]

So, sorry. The news today is that he apparently got blown out of a lot of his positions because his prime brokers sent him margin calls. They, like, didn't have enough money, and so the prime brokers kind of helped him offload a lot of stuff. Citadel, the big hedge fund, ended up owning a lot of his public stock positions. He still has, like, a big anthropic stake. And, like, the reporting that I saw today was that his assets under management have declined to, like, $10 billion. But so that's the story basically. Like, he got margin called, you know, because there's been a drawdown in AI bets in the last couple of weeks. And so he was very long. A lot of AI companies, memory chip companies, things like that, and very short, you know, like software companies. And both of those moved against him for whatever reason.

[Sylvia Killingsworth]

Sure.

[Matt Levine]

Fundamental reasons, technical market sentiment reasons, people knowing that he had them and maybe hunting him, like, I don't know. But anyway, they moved against him. He got margin calls. He got blown out of a lot of his positions. Citadel now owns a lot of his stock bets. And by the way, all of his trades, like, have recovered today. This is recording this on Thursday, which is, like, what happens when these things happen. Right.

[Sylvia Killingsworth]

Oh, like, as a result of this.

[Matt Levine]

As a result of, like, the problem being fixed. And it's like these positions have moved from weekends of people who have a lot of margin leverage and might have to sell to strong hands.

[Sylvia Killingsworth]

Yeah.

[Matt Levine]

Citadel.

[Sylvia Killingsworth]

Yeah.

[Matt Levine]

Who, like, the strong, got them at a discount. And so now there's no more worry about selling pressure coming in these positions. And so everyone feels better, everything's recovered. And so Citadel has made probably a lot of money in 12 hours.

[Sylvia Killingsworth]

His bets Weren't wrong. He just kind of caught out at a bad time.

[Matt Levine]

Yeah, like they're down in the last month, but like they're way, way up since the beginning of the year. Overall, kind of every stock he bought at the beginning of the year is up, you know.

[Sylvia Killingsworth]

Right.

[Matt Levine]

But what I wrote today is basically like if you're making like long term bets on like things like anthropic that were kind of like didn't exist five years ago are now like trillion dollar companies, if you're making these long term extremely volatile bets, you have to expect that at some point there will be some volatility. Right. Like some of these memory stocks will like go up a thousand percent. This is a little too much and it'll go down a little bit. Right. And if you are constantly running at, I don't know what his leverage was, but let's say three times leverage. If you have 10 billion of your own money and you're making $30 billion of bets and you're constantly scaling up the bets as you make more money then will always be fragile and at some point there'll be a drawdown and you will have to pay back your debt and you will get margin calls and your prime brokers will make you sell your positions and you will be blown out of these long term bets because you had essentially short term financing. Short term financing, which is kind of what hedge fund margin debt is.

[Optum/Healthcare Advertiser Voice]

Right.

[Matt Levine]

And you know, if you think of like what Citadel does, all they do, I mean they do a lot of things but like the deep thing they do is think about this, right? The deep thing they do is think about like if something bad happens, how do we survive? Like how do we make sure that our funding doesn't get pulled? And so some of that is having contracts that say, you know, instead of like we can get a margin call and blown out in 24 hours, it's like, you know, we have longer term debt. Big hedge funds issue bonds for these reasons. But some of it is like just having a risk culture and a reputation of not getting blown up so that your prime brokers will not worry about you. Whereas if you're like a 25 year old who started hedge fund two years ago, your prime brokers will worry about you. And if you get a margin call and you're like, I need more time guys, they'll say no. So I do think that like, you know what I wrote today is that situational awareness is like essentially in the business of like thinking about the long term future of AI, which has been a great business for them until two weeks ago.

[Sylvia Killingsworth]

Sure.

[Matt Levine]

Citadel is in the business of thinking about funding risk and funding the funding risk blew up situational awareness and now Citadel owns their bets on AI. Ah, and I also, like I mentioned this in a footnote, but there's another guy who had bad funding for his anthropic bets. Like one way to think about Sam Bankman Fried is that he was a really smart venture capital investor in AI. Like he bought, I think he had a couple of other very cool positions, but certainly he was a very early, very big investor in Anthropic and bought a stake in Anthropic that they sold it a couple of years ago in the bankruptcy estate. But he had 8% of anthropic. Enormous stuff that's worth tens of billions of dollars today. But he bought that with the very worst short term funding imaginable, which is money stolen from the customers. Crypto exchange, he would say. Not stolen, right. Money, borrowed money mean whatever money from the customers of a crypto exchange. And when you're crypto exchange, you know, when people try to withdraw money and you're like, I'm sorry, I can't give you the money, I. It sounds really, really bad. Even though like we're like, you know, the technically agree is great. And so that worked out very, very poorly for him. Leopold Aschemetter did work in some sort of FTX fund at some point.

[Sylvia Killingsworth]

Yes.

[Matt Levine]

Like crucially did not do that. Like he borrowed money from banks on prime brokerage terms. Very, you know, in very normal ways. But it does sort of lead to the same problem, which is you can be blown out of the bets prematurely. Right. Like, you know, if Sam Bankman Fried had kept his anthropic bet, it would be worth $100 billion today. Right. If situational awareness had kept their AI bets like, you know, they'd probably be, you know, an $80 billion fund in a year. Right. Like, like it's just like you can't, you haven't able to weather this volatility.

[Sylvia Killingsworth]

Is it the leverage or is it the term of the financing? Like the time?

[Matt Levine]

I mean their equity value is not zero. So if they had non callable leverage, right, like if they had issued bonds to finance these positions, if they had issued like 10 year non puttable bonds, they would just have the money and they'd be fine. I do think that the answer can

[Sylvia Killingsworth]

be both, I guess. Right? Yeah.

[Matt Levine]

It's like I thought about this sort of thing a lot in like the crypto world, like this is what three hours was up to. In crypto. There are a lot of people who like think they're doing a, like liquid markets trade, but are kind of doing a like venture capital trade. And if you're funding a venture well, like, like in crypto this was more obvious because like people were putting money into like, you know, things that had just been invented, right? But like situational awareness was making a long term bet on like a market going from like almost nothing to enormous. And so to have that bet pay off, you need to see it through for the long term. Like you could be wrong for a while, right? And they were really right for a while, which they just levered up the bet and that worked out poorly. Like to make a long term bet like that you need long term funding. The other thing that like is crazy to me is their returns in their first like two years were a thousand percent, which is like too good. It's too good. If they had not had any leverage, they would have returned, I don't know, 200%. Like, oh, like it would have been so good. And then they'd be fine, right? They'd be down, you know, 30% this month and they'd be like, well, sorry guys, you're still up 200%.

[Sylvia Killingsworth]

Your point being? Like, that's like maybe a red flag kind of number.

[Matt Levine]

No, it's not exactly a red. It's just like they.

[Sylvia Killingsworth]

So you just said too good.

[Matt Levine]

Yeah, but I don't mean like, you know, it's not like fake. It's just like that's the result of leverage. And I think it's, you know, because they were a hedge fund and they're like, well, hedge funds borrow money and like we really believe in this bet, so we want to, you know, make it as big as possible.

[Sylvia Killingsworth]

Right?

[Matt Levine]

But if you're unlevered portfolio returns 200%, like you don't need more leverage. You're fine. 200% is great. Like you can just get 200%. And they instead got 1,000% and then got blown out this week.

[Sylvia Killingsworth]

So seems like they weren't really very aware of the situation.

[Katie Greifeld]

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[Matt Levine]

Investing Brokerage Services by Open to the Public Investing Inc. Member FINRA and SIPC Advisory Services by Public Advisors, LLC, SEC registered advisor complete disclosures available at public.com disclosures Amazon Health AI presents painful thoughts why did I

[Sylvia Killingsworth]

search the Internet for answers to my cold sore problem? Now I'm stuck down a rabbit hole filled with images of alarmingly graphic sores in various stages of ooze. I can clear my search history, but I can never unsee that.

[Matt Levine]

Don't go down the rabbit hole. Amazon Health AI gets you the right care fast. Healthcare just got less painful. You're the first guest host and I sent you I think like last Friday. Yes, I was so excited about this I don't even know how to pronounce it. This company, this biotech royalty company called Exoma, they did something so weird and I was like, you are really getting thrown into the deep end. We are starting your podcast with a record date mix up.

[Sylvia Killingsworth]

There is no kiddie pool for me

[Matt Levine]

and you I think rolled your eyes but I didn't see it. So should we talk about Exoma?

[Sylvia Killingsworth]

Yes.

[Matt Levine]

Should I tell this story?

[Sylvia Killingsworth]

Yes you should. Because what is a record date?

[Matt Levine]

So there's two biotech royalty companies. Exoma has this litigation going on. So what they did is they sold themselves to Ligand for $39 a share in cash. Plus like a claim on that litigation. It's called the CVR contingent value, right. Contingent, basically.

[Sylvia Killingsworth]

Value, right.

[Matt Levine]

Contingent value, right. So, like, if in the next few years, they win the litigation, the old shareholders get some money. If they don't, they don't.

[Sylvia Killingsworth]

It's like potentially an iou.

[Matt Levine]

Yeah, it's a flyer on this lawsuit. So, like, instead of like, Ligand paying them cash for the expected value of the lawsuit, they get the upside and the downside of the lawsuit. And. And like, the CBR is probably worth about five bucks, like, in expected value. And they agreed to sell themselves for those two things. And the merger closed on July 14th. And a few weeks before the merger closed, they put out a press release being like, the record date for the distribution of the contingent value rights is 5pm on July 13, which is the day before the merger closing date. And so you had this situation where if you owned the stock on July 13, you got the CVR, which is worth about five bucks. And if you own the stock on July 14, you got the $39 in cash. But those are slightly different mergers. Those are the merger considerations. It's the merger closing date. So if you own the stock when the merger closed, you got the cash. Normally, if you own the stock when the merger closes, you get whatever you get, right? Just cash or stock or CVRs or whatever. But for some reason, they put out an announcement saying that the CVR had a record date the day before the merger closed. And what that means, because stock trades settled T plus one. So, like, if you buy stock on Monday, you got the stock on Tuesday. What that means is that if you bought the stock on July 13, which is like the Monday, the day before the merger closed, if you bought the stock on July 13, the press release seemed to say you didn't get the CVR because you wouldn't settle until the next day. So you would get the $39, but you wouldn't get the CVR.

[Sylvia Killingsworth]

That seems unfair.

[Matt Levine]

It seems unfair and strange and not how mergers work. And also not what they had previously said in, like, the merger proxy. They were like, you'll get the consideration at the merger closing. But they put out this press and people believed it, including, like Nasdaq, which told traders, like, you need to own it by Friday, July 10, to get the CVR. And so on July 13, the stock traded down. Basically, it traded down like it didn't trade to 39. Some people thought, no, this is wrong. I will get the CVR. So it traded like 40 bucks. But a lot of people did a trade where you would buy the stock on Friday, you would get the cvr and then you'd sell the stock on Monday thinking that you would keep the CVR because the record date was different from the merger closing date. And then like two days after the merger closed, they put out a shameful press release saying, nope, never mind, we're not using the record date. This was all wrong. Like mergers close when they close and sorry about that. So I've heard from people who like, did this trade and were sort of laying low because they worried that the company would take the CVR away from them. But that appears to get it. They appear to have got it.

[Sylvia Killingsworth]

Why would they put out a press release like that?

[Matt Levine]

I don't really know. People get very.

[Sylvia Killingsworth]

When you said earlier, that's not how mergers work. And it was a press release just to say, oh, by the way, the cvr.

[Matt Levine]

Yeah, it's very strange. People don't understand this stuff. People get confused about how record dates work and X dates work. And in fact, I've mentioned Axoma previously bought another biotech company that also messed up its record date stuff. It put out a press release.

[Sylvia Killingsworth]

Basically Exoma bought a company that did this and then Exoma sold itself to a company and did this.

[Matt Levine]

Yes, yes. Apparently this is common in biotaxes to mess up record dates. I don't really know why.

[Sylvia Killingsworth]

Was it a similar thing where they put out a press release saying, by the way.

[Matt Levine]

No, they put out an ambiguous press release. Oh, right.

[Sylvia Killingsworth]

It said opposing things in the same press release.

[Matt Levine]

Yeah. So like the press release said if you own it through like August 25th, then you get the thing. But it also said that August 25 was the X date, which is a technical term meaning you don't get the thing. So it said you do and don't get the thing on August 25th. And eventually they had to clarify it after the fact, after the. And the stock traded in between the price of the thing and the price without the thing, because some people read the press release one way and some people read the press release the other way. Similarly here the stock traded between the price with the CVR and the price without the cvr because people genuinely didn't know how to take things and different people had different opinions and that's what makes the market.

[Sylvia Killingsworth]

I know you don't really care about this, but I'm really hung up on this idea of why did they put out a press release saying what day the record date was or changing the record date? Do you think that they thought like, is it like a full on clerical error of like. Because like Would you put out a press release that just says, like, by the way, the closing date is this.

[Matt Levine]

Well, I think that, like, there's sort of not a record date for a merger. When the merger closes, the people who own the stock get, like, the stuff.

[Sylvia Killingsworth]

Right.

[Matt Levine]

But, like, I think that it occurred to someone at the company, we are distributing something. We have, like, this thing, the cvr, and we're giving it to people.

[Sylvia Killingsworth]

Yes.

[Matt Levine]

And when a company gives shareholders something, that's a distribution.

[Sylvia Killingsworth]

Right.

[Matt Levine]

With a record date. And I think they just got confused about whether it was a distribution quote or whether it was just what happens in the merger. And, like.

[Sylvia Killingsworth]

Right. Do you think that they thought that they were trying to clarify, like, by the way, whoever has the CVR on this date gets it?

[Matt Levine]

I think they were thinking that, like, the mechanism for giving the shareholders the CVR was a thing called a distribution. And to do a distribution, you need to distribute it to shareholders of record as of a certain date. And so they were just like, this is how we give them the cvr. But that's not how you give them the cvr. The way you give them the CVR is the merger closes and poof, they get the cvr.

[Sylvia Killingsworth]

Right.

[Matt Levine]

It's just like a different mechanism.

[Sylvia Killingsworth]

So you're saying they were maybe treating it like a dividend. When you do a dividend, do you put out a press release and say, everyone who. Okay, so maybe they were.

[Matt Levine]

Yeah, they thought it was a dividend.

[Sylvia Killingsworth]

Right, I see.

[Matt Levine]

Right. That's right. I think. What do I know?

[Sylvia Killingsworth]

That's a good enough guess. Have you ever seen that before?

[Matt Levine]

Well, just those two times.

[Sylvia Killingsworth]

Just those two times?

[Matt Levine]

Yeah. Like, you see this in, like, people trading credit trades, like, where they. Some people read a bond and nurture one way and some people read it the other way, and they think, like, the company can or can't strip assets from creditors or something, and they don't really know until either the company does it or, like, years later when they litigate it.

[Optum/Healthcare Advertiser Voice]

Right.

[Matt Levine]

There's a certain, like, trade of, like.

[Sylvia Killingsworth]

Right. The trade is like, somebody is guessing that it is or isn't included, and they have different pricing.

[Matt Levine]

Yeah. There's a trade of, like, reading the documents better than someone else or, like, reading the documents better than the company or, like, reading the documents, like, something

[Sylvia Killingsworth]

you might do if you were, like, a law school person. If you went to law school and you are like, oh, I noticed in the contract that it says this. I'm going to.

[Matt Levine]

There's definitely, like, an industry of former lawyers who now do. Like discovering flaw trades at hedge funds. Although it doesn't. You don't have to go to law school. Like, one thing I learned in finance is that you can. There are people who are good, intuitive, natural lawyers, even if they haven't been to law school.

[Sylvia Killingsworth]

But it would have been fun. I would have had a lot of fun.

[Matt Levine]

Yeah. I mean, right? There are people who are good, intuitive, like finders of flaws and documents who can be hedge fund managers without going to law school. And there are people who are good at spotting italicized commas who also.

[Sylvia Killingsworth]

Right. To be clear, my profession as an editor is finding flaws in documents.

[Matt Levine]

Yeah. Well. Yeah. Different kinds. Different kinds. Like not the. Not the lucrative kinds. Always.

[Sylvia Killingsworth]

No, they don't pay me for the bolded commas.

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[Sylvia Killingsworth]

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Me slow when network is busy. See terms.

[Matt Levine]

Feel like I spent all morning talking to you about structured notes.

[Sylvia Killingsworth]

Yes.

[Matt Levine]

What do you want to know about structured notes?

[Sylvia Killingsworth]

Okay. Is this a structured note? Technically.

[Matt Levine]

Okay, let's do what this is. Okay. So there's a Bloomberg story this week about basically banks or financial firms are rolling out structured notes on SpaceX. So SpaceX went public about a month ago. Its stock has fallen below the IPO price. It went up and then it went down. It's had a rough time. And banks are rushing to sell people structured notes on SpaceX. And I think stuff like this is interesting because a structured note is kind of. There's two ways to think about the trade. One way is we have these, let's say retail clients, high net worth clients, individual clients, and we want to sell them stuff that they want to buy. And so the story here is something like SpaceX went down. We want to give you something that has SpaceX in the name but protects you from some downside. It won't go down as much as SpaceX. And so the Bloomberg story by Lu Wang was like about banks are rushing to sell these high net worth clients, something that looks like SpaceX with some downside protection. But if you look at the notes, they are something slightly different. Which is the other way to think about structured notes is that banks have these retail clients. The retail clients, yeah, they kind of buy whatever you sell them. And so the job of the structured notes business is to sell them the stuff you want to sell. And what happened here, I think it looks to me from like looking at these structured notes is that the banks wanted to buy puts on SpaceX. They wanted to buy protection against SpaceX going down, probably because they had other clients who wanted to buy it from them and they wanted to buy it from someone else. And it is actually very easy to buy puts in the form of a structured note. And so these structured notes have like roughly the shape of the retail investors give the bank money. The bank holds onto the money for a while, for a year or two. When the note expires in a year or two, the bank gives the customers money back with a big interest payment. So like there's one, there's a Morgan Stanley one that pays back 140 cents on the dollar. So you put in $100 today, in 18 months, you get back $140. Unless SpaceX is down a lot. I think in that case it's down 50%. SpaceX is down 50%, then you lose the same percentage of your money. So if you put in $100, SpaceX is down 60%, you get back $40.

[Sylvia Killingsworth]

Gotcha.

[Matt Levine]

So that to Morgan Stanley, looks like they have bought a put on SpaceX.

[Sylvia Killingsworth]

Yeah.

[Matt Levine]

Like they have bought insurance on SpaceX's stock from their retail customers. Doesn't say that.

[Optum/Healthcare Advertiser Voice]

Right.

[Matt Levine]

What it says is like, this is a thing that is linked to the price of SpaceX.

[Sylvia Killingsworth]

This is a structured note for the customer. This is a structured Note linked to SpaceX.

[Matt Levine]

Yeah.

[Sylvia Killingsworth]

That gets you what exactly? What does the retail investor think they're getting or what are they getting?

[Matt Levine]

So this is the thing actually says in the prospectus, which I don't know if anyone reads, but the securities are for investors who seek a return based on the performance of SpaceX and who are willing to risk their principal and forego current income and returns above the upside payment in exchange for the upside payment feature and the limited protection against loss of principal. So what they're sort of saying is this is a way to get some exposure to SpaceX. But if SpaceX goes down a little bit, you don't lose money a little bit.

[Sylvia Killingsworth]

Up to a certain point, yeah.

[Matt Levine]

If SpaceX goes down 49%, you don't lose money. If SpaceX goes up 39%, you get a 40% return, which is better. SpaceX goes up 100%, you get a 40% return because you always get a 40% return unless it goes down a lot. So there's a payoff graph in the thing, and it's just like a flat line above a certain. Above, down 50% and then below that, it looks like you own SpaceX.

[Sylvia Killingsworth]

So it's limited at the top, but not at the bottom.

[Matt Levine]

Yeah, right. It's a flat return in almost all cases, except when SpaceX crashes, you lose money. And so for Morgan Stanley, that's like, we have bought insurance against a SpaceX crash from our retail customers. And for the retail customers, it's like, oh, I get 40% unless things go bad.

[Sylvia Killingsworth]

Right, right. Everyone sees what they like to see.

[Matt Levine]

The marketing is sort of like you're getting some sort of SpaceX path that is like downside protected or whatever. But from Morgan Stanley's perspective, they're sourcing puts on SpaceX and it's hard to buy very out of the money puts. Why? Two reasons. So let's say you're working something. You just want to buy insurance against SpaceX going down a lot. Right. So you're like, I don't care if it goes down 10%, that's fine. But like, I want to buy insurance against it going down 50%. One people don't like to sell you that because that's a very out of the money put. It's not worth very much. It has a very low probability of paying out. And so they can't charge you that much for it because it's like improbable. But in the state of the world where it pays out, it's very bad for them. They have to pay out a lot of money. And also, like, something has gone wrong. Yeah. Like the AI boom has collapsed or something. So in a world where SpaceX insurance pays out, like, the people selling it to you will be very sad. And so they don't want to sell you that except at a very high price. And the other reason is like, conversely, you don't want to buy that insurance from like some hedge fund.

[Sylvia Killingsworth]

Yeah.

[Matt Levine]

Because in a world where that insurance pays out, like, that hedge fund might have blown up.

[Sylvia Killingsworth]

Right. So you're saying this is a way for them to get out that put without touching the very out of the money actual put, this is a way

[Matt Levine]

for them to buy very out of the Money puts on SpaceX from people who don't quite realize that they're selling very out of the Money puts on SpaceX. They're retail customers, so they didn't want

[Sylvia Killingsworth]

to do it, so they got the retail customers to do it.

[Matt Levine]

Of course. Of course. That's what structured notes are. It's like structured notes are sourcing, like weird volatility risk from your retail customers so that you can sell it to hedge funds.

[Sylvia Killingsworth]

So that's not a structured note, was just a note with a derivative in it.

[Matt Levine]

Yeah, but why did they put that derivative? I mean, part of it is marketing. Part of it is like people want particular trades, but part of it is like they have some inventory.

[Sylvia Killingsworth]

Part of it is like.

[Matt Levine]

And they're like, what weird stuff can

[Sylvia Killingsworth]

we shoot two birds with one stone? You're sort of meeting several obligations at once.

[Matt Levine]

Right. And like, the real magic.

[Sylvia Killingsworth]

I'm going to think about structured notes differently now.

[Matt Levine]

Yeah, you tell me that you keep getting pitched structured notes.

[Sylvia Killingsworth]

I guess I should be more skeptical.

[Matt Levine]

I think I told my financial advisor on my first day, like, by the way, I'm a former derivative structure. So don't come at me with these structured deaths. But anyway, no, I mean, the whole game is like, you're in the derivatives lab. You're like a bucket of stuff. And you take stuff out of the bucket of stuff and you're like, how

[Sylvia Killingsworth]

do I turn this into something?

[Matt Levine]

How do I make this thing look cool? How do I make this? How do I tell a story that's like, oh, this stuff is. You should really buy this stuff.

[Sylvia Killingsworth]

As you said, you have inventory.

[Matt Levine]

Like, yeah, it's interesting because you don't exactly have inventory. You have, like, some list of, like, options, exposures, and, like, volatilities. And you're like, how can I turn this into a product that people will be excited to buy? And there are answers. And, like, a lot of what banks are doing is, you know, buying some puts from retail. But, like, you never say that.

[Sylvia Killingsworth]

Is this financialization? Is this financializing something?

[Matt Levine]

Is it financializing SpaceX stock? This is just like, you know, this is the business. I don't know. Structure notes are a old and noble business. And that was the Money Stuff podcast. I'm Matt Levine.

[Katie Greifeld]

And I'm Katie Greifeld.

[Sylvia Killingsworth]

And I'm Sylvia Killingsworth.

[Matt Levine]

You can find my work by subscribing to the Money stuff newsletter on bloomberg.com

[Sylvia Killingsworth]

and you can find me by subscribing to the on books [e-mail] we'd love

[Matt Levine]

to hear from you. You can send an email to moneypodlumberg.net Ask us a question and we might answer it on the air.

[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.

[Matt Levine]

The Money Stuff podcast is produced by Anna Mazarakis and Moses Ondahm.

[Katie Greifeld]

Our theme music was composed by Blake Maples.

[Matt Levine]

Amy Kean is our executive producer, and Cheryl Brumley is Bloomberg's head of podcasts. Thanks for listening to the Money Stuff podcast.

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