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- [00:11]
A
Hello and welcome to the Pancake Brains edition of Sleet Money, your guide to the business and finance news of the week. I'm Felix Salmon of Axios. I'm joined by Emily Peck of HuffPost.
- [00:26]
B
Hello.
- [00:26]
A
Who has a big scoop this week all about how women's brains are like pancakes. My brain is more like a colander, to be honest. Things come through and it just comes straight out the other side. I retain nothing. But here to help me learn stuff, as ever, is Anna Shymansky of Breaking Views.
- [00:46]
C
Hello.
- [00:47]
A
We are going to be talking about WeWork because that is the big, big news of the week. What is going on with WeWork and its shareholder, SoftBank? Its biggest shareholder is now going to be 80% shareholder of WeWork. We are going to talk about Emily's big scoop about pancake brains. You learned this week from Ernst and Young that women's brains are like pancakes, whereas men's brains are like waffles.
- [01:14]
B
That is correct. And I feel hungry every time we talk about it.
- [01:18]
A
So this is going to be a hungry, making edition of Slate Money. We are also going to talk about my book review and about this book called Darkness by Design by this chap called Walter Matley and the theory he has, which I think I'm kind of convinced by that the stock market all went to shit after 2005. That and a slate plus segment on Chile, all coming up on Slate Money. Let's start by talking about WeWork, because in the annals of corporate implosions, there are many. But this one was impressive even by, you know, historical standards. It's not just the valuation falling from 47 billion to 8 billion in the space of like a blink of an eye. It's also just the way that the whole glorious edifice of unicorns and minotaurs and all of these other things that I, you know, that we talk about has just seems to have crumbled overnight. It's amazing.
- [02:16]
B
So this week we're talking about WeWork again, because SoftBank has basically come to its rescue.
- [02:22]
A
Right?
- [02:22]
B
They're putting in how much more money into the company? $5 billion, mostly debt.
- [02:27]
A
But they're also spending $3 billion buying up equity from employees, mostly from Adam Newman.
- [02:35]
B
Right.
- [02:36]
A
They're spending $970 million buying Adam Newman's shares from him, which seems like not the highest and best form of $970 million if you want to rescue.
- [02:46]
C
We were agreed. Although I think obviously that's because they want to reduce his power and, you know, but it is.
- [02:52]
A
No, they're doing that this is the thing. They're doing that by paying him another 185 billion. Sorry, $185 million in a quote unquote consulting contract, which is basically a payment for him to reduce his stake from three votes per share to one vote per share. Once he goes down to one vote per share, which he does for $185 million, then at that point he doesn't control the company anymore.
- [03:19]
C
Right.
- [03:19]
A
So you don't need to spend another 970 million buying back his stock.
- [03:24]
C
I think, I mean, there are a lot of reasons why SoftBank has structured the deal as they have. I mean, I think it's interesting. I mean, part of the reason that they've structured as they have is because they, they want to basically have control without having voting control. I mean, it's a little, it's a little complicated because they don't want to bring the liabilities onto their balance sheet.
- [03:44]
A
Yeah, it's kind of weird. They say they're going to own 80% of the company when this is finished, but not control it. Which I'm, I don't even know how that's possible.
- [03:51]
C
Yeah, I mean it really is, it's accounting shenanigans is really what it is. And you understand why. Obviously they don't want to bring all of those liabilities onto their balance sheet. But at the same time you're like, okay, so now like what, like $16 billion, you've plowed into a company that you're saying is worth 8 billion.
- [04:06]
B
Right.
- [04:06]
A
So wait, are you saying that if.
- [04:07]
C
They control 8 billion pre money.
- [04:09]
A
But are you saying that if they controlled the company, then they are. That the SoftBank corporate would then become liable for those debts.
- [04:17]
C
They'd have to put it onto their balance sheet. Yeah, there's a, it's, there's a different accounting depending on.
- [04:21]
A
Well, I mean that's, I just want to know what you mean. You use that term. So they basically, they are liable. If. So if we work default, then they have like a soft bank guarantee for all wework debt at that point.
- [04:34]
C
Well, yeah, and also it would just. Yes. And they would have to bring it onto their books. So then that would also degrade the quality of SoftBank.
- [04:44]
A
Huh.
- [04:44]
B
So now that, I mean, SoftBank I guess has temporarily come to the rescue because the company was about, I think it was going to run out of cash by November or something.
- [04:53]
A
My favorite, my favorite detail is the bit where they couldn't afford to fire people because they didn't have any money to pay them.
- [04:59]
C
That's always bad.
- [05:00]
B
So they're going to lay off, I guess, like, 4,000 people. I read yesterday, and it's not clear.
- [05:05]
A
Not including Adam Neumann. Right.
- [05:08]
B
And those people are understandably quite angry that Adam Newman's walking away with about 2. I mean, it's like, what, $2 billion?
- [05:14]
A
It's a bit unclear, like, 1.7 billion.
- [05:17]
B
He.
- [05:17]
A
He has to use 500 million of the proceeds of his stock sale to pay down the. Basically the bridge loan he's getting from soft magazines he owes. He's kind of in default already on $500 million that he owes to JP Morgan. So SoftBank is going to lend him that $500 million take on that debt, but as soon as they buy the stock from him, he then needs to use that money to pay them back on the 500 million. So that leaves him with only 470 million, which he actually needs to pay a bunch of capital gains tax on that. So I don't know how much money he's actually going to end up with at the end. But according to Bloomberg, you know, he's still a billionaire. I don't think he's going to need to sell his house in the Hamptons.
- [06:00]
B
Right.
- [06:00]
C
So, I mean, he has a lot of liabilities. I mean, he has a lot of loans on stage. But you're right. At the end of the day, like, I think he'll be okay.
- [06:05]
B
So I feel like a lot of the coverage this week was just like, you're, as you'd expect, people being really angry at this guy Adam Newman. But then there was this, like, strand of reasoning that was like, what happened with we work was kind of like a victimless heist. Like, Adam Newman was kind of like an idiot savant ripping off rich people. He was kind of like a perverse Robin Hood kind of situation.
- [06:26]
A
Right? I mean, basically, the losers here are the Saudi royal family, who plowed a whole bunch of money into the SoftBank Vision Fund, and Mahsa Son, the Korean Japanese billionaire. And all of these people who you really can't have a lot of sympathy for and who created this monster in the first place. It's. You know, the real losers are things like the janitors in WeWork locations who, you know, have been on WeWork's payroll. And now, because they need to cut costs, they're all gonna be fired and replaced by some, like, subcontracting nightmare, right?
- [06:59]
B
And they're not gonna get, you know, millions of dol dollars in severance or consulting fees for the other cleaners to help them when they take over. So it's not entirely victimless, but it's not like there's not seemingly as much contagion from like other big company implosions.
- [07:15]
A
Although there's a lot of.
- [07:17]
B
But I want to talk about the.
- [07:18]
A
Real estate companies are like going down. Like Amazon, Twitter, they're all kind of, you know, they're coming out with earnings and people. I feel like right now there's something in the air that stock market investors are grabbing onto any excuse to be bearish and downgrade companies. And this is what we saw with WeWork. The reason why WeWork is in such trouble is because they filed to go public and they wanted to go public at some enormous valuation of like $50 billion plus. And investors were like, no. And then, so then what happened is the underwriters said, well, okay, if you won't buy it at a $50 billion valuation, will you buy it at a $20 billion valuation? And in most normal markets, if it's remotely reasonable that people will buy it at 50, then they'll definitely buy it at 20. And this market doesn't work like that. They get offered this like 60% discount and everyone goes, yeah, no, like if it doesn't make sense at 50, it doesn't make sense at 20. And it probably doesn't even make sense at 1. Like, it just, it's just like this horrible cash burning monster and I want nothing to do with it. And that was the real problem is that it's not that the valuation went down, it's just that the valuation just evaporated.
- [08:31]
C
Right. And I think that this goes back to what we've talked about a little bit. When we were talking about IPOs in general and specifically when we were talking about Uber and Lyft and just this, this fact that the, the markets are not as willing to believe these stories about these firms that do not create profits, that have no real path to profitability. And, and I think we work is just this kind of extreme example of this.
- [08:55]
B
Yeah. And it does seem like some kind of delusion has lifted from, from everyone's.
- [09:01]
C
Eyes except for Masa Sun.
- [09:02]
B
Like, well, even there was a piece in the Journal today that SoftBank was pivoting to making money. Like they're prioritizing the investments they've already made and trying to work on corporate governance and getting more profits out of what they already have.
- [09:17]
C
It's true. But like, I don't know. This is part of me. It's like a, the way the Vision One fund was set up and the way that not only were they giving companies just way too much capital, it was basically structured so that they had to spe it quickly, which is just pretty much a horrible idea.
- [09:29]
A
No, I mean, you're right that the Vision Fund was set up that way. They can't. That's sunk cost at this point. That's water under the bridge. The question is, when Mahafsa goes to Riyadh next week to the Future Investment Initiative and pals around with his friend Mohammed bin Salman and he's trying to get another, you know, $50 billion or whatever vision Fund to is he going to say, well, Vision Fund 2 is going to have the same structure in the same idea as Vision Fund 1, or are we going to do what Emily said and like, pivot to trying to make money?
- [10:02]
C
But then, but then at a certain point, then, like, what's like almost what's the point of that? Like, in the sense of massive. Son's whole idea is like, I have this 300 year vision and that's why you're giving me all this capital that I'm plowing to all of these companies. And it's like, okay, now what does he have? Well, he has a. He has a company that he's plowed $16 billion into that fundamentally rents real estate. Like, it's a harder sell to people. Like, give me billions so that we can expensively.
- [10:28]
A
No, no. But I mean, we don't know that Vision Fund 2 is going to invest in WeWork.
- [10:32]
C
No, I understand that.
- [10:33]
A
And SoftBank needed to rescue WeWork just to protect the money it's already put in.
- [10:38]
C
No, it didn't matter.
- [10:40]
A
Well, I mean, so that's an interesting question, right?
- [10:42]
B
I think you have to do it before.
- [10:44]
A
Was it possible, Was it ever possible that SoftBank could just sit back with its existing stake? Watch we work, put together a financing deal from JP Morgan, let Adam Newman retain control of the company, and, you know, sort of just sit on the sidelines as a passive investor. Was that realistic?
- [11:04]
C
Just two things. Like, one, I think that the debt deal that JPM was trying to put together never made any sense.
- [11:11]
A
Exactly. I agree.
- [11:11]
C
I agree with you on that totally. However, I feel like if you're looking at the Vision Fund, the Vision Fund's stake was like 2 billion because the rest of it was just put in by SoftBank. So, like, they could have just written that down. That's a small percentage in the grand scheme of the Vision Fund. To me, this is just, it is a walking, talking sunk cost fallacy. Like, he does not want to admit that he made a massive error. Although, you know, so he's throwing good money after bad.
- [11:36]
A
Like if you do Invest on a 300 year time horizon then it is almost certain that at some point your, your, your you know, assets on a mark to market basis will go down by like 90%. And you just need to, you need to have the courage of your convictions. And I look, you know, the 300 year thing is hilarious. I don't know if you saw that wonderful bit about Adam Newman where he was talking about how in literally 300 years time he wanted his great great, great great granddaughter to be walking into a board meeting and say like, but are you really elevating the world's consciousness?
- [12:10]
B
You had one amazing statistic, I think it was in your newsletter where it said for every dollar we work lost, the share price rose $10.
- [12:18]
A
I mean that wasn't entirely scientific, but it was more it like people would put money into we work precisely because you know, the, the bigger the losses, the faster the growth, the greater the valuation and the wework. I know sales pitch, really the Adam Neumann sales pitch was I can just keep this rocket ship growing by losing more and more money. So the more money you give me to lose, the more money you will make. It's a Ponzi scheme and, and it's a little bit Ponzi esque to be, to be true and, and like, and the people who won were, you know, commercial landlords and people like that who just got to lease out their class office buildings all over London, New York and San Francisco.
- [13:06]
C
This is interesting to me just because like Minsky, like when he talks about like the kind of different stages of bubbles, the last one he always says is when you essentially have these Ponzi loans that just make no rational sense. And to me like this all comes back to something I know I've said 150,000 times. But it's have so much capital trying to find a home. And that's often frankly because of like income inequality. But as a result it's, it's not as surprising that you're going to have these ridiculous things because there just aren't enough amazing things to plow money into.
- [13:39]
B
Sounds like it's time for a wealth tax.
- [13:41]
C
Anna, I still don't believe in a wealth tax. That does not mean I don't think we need to dramatically reduce inequality. I just think that a wealth tax is not the best way to get there.
- [13:49]
B
Just raise some taxes.
- [13:50]
A
There's so much raise taxes on Adam Newman.
- [13:53]
C
Yeah, I'LL agree that.
- [13:54]
A
I mean, I do have stupid things. I do have a thing that I put in my newsletter every so often, which is ban private jets. And I do think that the, you know, the wework private jet was really the, the sign that this thing was out of control. The way that he would go surfing in the Maldives and then while the S1 was being put together, he would like send his private jet to pick up executives from New York and fly to the Maldives to meet him because he didn't want to miss like a good wave.
- [14:26]
B
We were just talking about this. And meanwhile he was going to NASDAQ and the New York Stock Exchange and telling them they had to ban meat and plastic cups from that cafe.
- [14:34]
C
And he was in the Maldives, which is literally under the water.
- [14:39]
B
There should be some kind of private jet indicator. Felix, cook something up.
- [14:43]
A
I feel like any startup, any pre IPO company with a private jet just short all of them.
- [14:50]
B
Blacklist.
- [14:50]
A
Blacklist. Emily?
- [14:53]
B
Yeah?
- [14:53]
A
Can we talk about waffles?
- [14:55]
B
Well, I'll try, but my pancake brain might not be able to explain this to you.
- [15:00]
A
So, I mean, I know that you're a woman and all, but maybe you can explain what happened to Ernst and Young.
- [15:05]
B
I'll do my best. So this week I published a story about Ernst and Younger, EY as they're called, about a training they held in June 2018 for executive order women. It was called Power, Presence and Purpose. And it was billed as like women's empowerment. But I obtained this, the presentation used, it's like a 55 page document from this presentation. And I was working on it for a while, so I stopped being shocked by it. But when I put out the story, the reaction was pretty. People were shocked. Basically. There's a whole section on appearance. Women should take care not to wear short skirts, not have bottle blonde hair. They shouldn't speak with a shrill or high pitched voice. Then there was some shocking things they were told about their brain. So women were actually literally told that women's brains are 6 to 11% smaller than men's brains. And, and it's not clear why they were told this. I spoke to a woman who attended who was just appalled by the whole, the whole thing. And I kept pressing her like, well, okay, so they told you women's brains are smaller, but did they tell you why this is relevant? And she said no. I even called a neurologist at Rockefeller University and I was like, these women were told their brains are small. And he was like, the reason you tell women their brains are Small is to make them feel stupid. That's all. And women were also told, this is where pancakes and waffles come in. They were told, women's brains are like pancakes. When you pour the syrup, the syrup is the information. When you put the information onto their brain, they absorb it, you know, like a pancake, like, flat. But men's brains are like waffle brains. So when you pour the syrup on a waffle, as I'm sure we all know, the syrup collects in each little waffle square. So men, women are able to compartmentalize the information. But at this presentation on women, again, I'll repeat. Empowerment presentation. Women's empowerment presentation. They were told that if you dress, if you show too much skin as a woman, it would scramble the brains of the men who.
- [17:04]
C
It would scramble their waffle brains. I feel like we're mixing breakfast metaphors.
- [17:08]
B
It's a lot of scrambling and syrup. And every time I talk about it, I get a little hungry. But. But, yeah, I wrote about it, and I even, like, got on the phone to a bunch of women who do leadership training for women to be like, am I overreading this? Is there a reason this presentation is like that? They went through a list of. They call them invisible rules that went through these stereotypes about women. In conversations, women ramble and miss the point. You can't talk face to face with a man because I'm looking at Felix as I say this, because it intimidates them. I'm so intimidated and they feel angry or whatever.
- [17:47]
A
But honestly, my brain is scrambled because, like, you're wearing, like, the wrong clothes and it's awful.
- [17:54]
B
So, yeah, so I had these three experts kind of look at it, and they all just said, I don't see any utility. Like, it's useful to go over.
- [18:01]
A
So was it like this or was this. These are just bits of it.
- [18:03]
B
This is the most shocking bit. Yes.
- [18:06]
A
And then this was run by a woman called Marcia Clark.
- [18:09]
B
Not that one.
- [18:12]
A
Who. Did she only do this at Ernst and Young, or did she do this all over the show?
- [18:17]
B
She had many other clients she lists on her website, I think, including JPMorgan Chase and PepsiCo. A host. Other clients that she named.
- [18:26]
A
Presumably she did the same thing at these other companies?
- [18:28]
B
I think so. I mean, I look through some of her other materials, and the brain stuff comes up in them. To be fair, there are women who say, I had a few write to me who say, I took Marcia Clark's training, and you're really underselling it. I thought it was really valuable. And Empowering. And women, generally speaking, even at these, like, fix the women type trainings, where women are told the reason you're not getting ahead is because you're not doing it right or whatever. The experts I spoke to say even at those kinds of places, just getting all the women together in a room is somewhat empowering because you get to meet other people. Or in some ways, is this like.
- [19:05]
A
A post lean in kind of thing where, like, women are told that they. If they change their behavior or do this rather than that, then they can have more success? I feel like there was a wonderful, wonderful piece that came out. I can't remember where it was a couple years ago where some woman went to sort of 27 consecutive women's empowerment conferences in a row, and they all just started merging into a gray glob of you go, girl.
- [19:32]
B
Yeah, I mean, I think this has always been how it is in corporate America. Women are told, look, if you just, you know, you just go learn how to play golf, drink more martinis, you know, wear shoulder pads, if you just fit in and learn how to do it, then you will succeed.
- [19:47]
C
Well, and what I think is interesting, too, if you kind of look at how the advice has changed, I mean, I feel like back in the 80s, it was much more like, kind of be like a man, right? That was the kind of golf shoulder pads thing. And then it kind of shifted to this idea of like, well, no, people don't like women who try to be like men. So now you have to walk this weird balance where you're traditionally feminine. However, you're also assertive and, you know, taking your place at the table and you're like, you know, these things seem to contradict each other.
- [20:15]
A
But don't be. But don't be blonde.
- [20:17]
C
Don't be blonde.
- [20:18]
B
Don't be bottle blonde. According to the presentation, you can be blonde. Oh, we should say that the chairwoman of EY in the US is a woman, Kelly Greer.
- [20:27]
A
What color is her hair?
- [20:28]
B
And her hair is blonde. And although did you know that female CEOs are more likely to be blonde? Like, the percentage of women leaders who are blonde is like 30%, although in naturally occurrence of blonde people is like 5%.
- [20:41]
A
Well, they can afford it.
- [20:42]
B
Sidebar. But she came out and she said, if I had taken the advice. So EY finally admitted, oh, yeah, this was a mistake and it was offensive. And she said, if I had actually taken the advice in this training, I would never have made it to the top of the company myself.
- [20:56]
C
And this is a thing that I Feel like is interesting recently because, you know, with, with the MeToo movement, you often had this kind of generational thing where you had younger women being like, no, we shouldn't just have to kind of put up with this. And then sometimes you had older women being like, well, you kind of have to do this to get ahead. And, you know, I kind of feel like the younger women have proven that they're right, which is that if you keep just saying, well, no, these are the rules. So we have to follow these rules. And, well, men make the world. So we just kind of have to go with, then literally nothing will ever change.
- [21:27]
B
Yeah, nothing will change. And I did. I did hear from a few women who. So Marcia Clark, who did the training, she worked at eds, which is the Ross Perot Texas tech company famous for.
- [21:38]
A
Its haircut rules, not just for women, but for men. Like, he had. You had to wear white shirts, you had to have short hair. There was a whole bunch of, like, the dress code there was insane.
- [21:48]
B
So that's where she was. Spent 20 years as an executive. So it must have been. I can only imagine, because she refused to talk to me, but it must have been just a bitch to be a woman there. I can't imagine it was easy. And so the strategy, like Anna was saying, of going, going around the men or working within the system they've sort of laid out for you is the only way to survive. Like, you're not gonna survive at Ross Perot's company if you're, you know, just decide to be yourself.
- [22:13]
A
Can you talk a little bit about this whole sort of women's leadership industrial complex and whether it's got any utility whatsoever?
- [22:24]
B
Well, like I was saying before, I think there. There are women who just find it valuable, especially those who are working in industries with very few of them, to just be put in a room with other women who have similar jobs and problems just to. It feels good to just get together. But if they're just given vapid lean in kind of advice, that's not. You're going to walk away from that and it's empty. Right. You're not going to be helped by that. But maybe theoretically, if the training helps you think about how to change the culture in your firm, maybe then something can be done. Like one of the trainers said to me, like, there's this phenomenon that happens, like, in at work where, like, women wind up doing, like, the administrative tasks. Like, if you're in a room, like, the woman goes to get the coffee, the woman organizes the birthday cake celebration, does all this crap and you don't even think about it half the time because you're like, oh, Stacey's just really good at like getting the card and getting everyone to sign it. And you know, and Melinda's really good at like bringing the cake or whatever. But it's bad to have only women doing that kind of stuff. So if a training would maybe call your attention to that and then you can go back to work and then you, a senior woman, can see that the junior women are all going and doing all these like secretary esque kind of of things. You can like, put a stop to that. And this is a very minor thing, obviously.
- [23:41]
A
But no, it's important.
- [23:42]
B
If there's a way you can kind of shift, you can teach women in these trainings to shift the culture. That could be helpful. But to my mind, I'm like, well, why can't you teach the men that too? Like, why does it have to be sex segregated?
- [23:53]
A
And the other question, the other big question I have is how much of this is, is on ey? Like, to what degree is this a situation where a bunch of women's groups within EY were like, we should have some leadership training coming in. And the EY people are like, okay, have some leadership and they bring in this Marsha Clark woman. And then like, can you blame EY for this or is this just something that they had their heart in the right place. They just wound up hiring the wrong person by mistake.
- [24:21]
B
I mean, EY is a big, well managed company. And I mean, the CEO, the chairwoman herself said like, we typically vet vendors and we vet training. And she said, mistakes have been made in this case and they didn't do that vetting. So I think we absolutely can blame ey. They were spending thousands upon thousands of dollars to get this training done. No one looked into what it was. No one thought about it. Yeah, maybe they thought they were just checking a box. I don't know. I'm speculating.
- [24:50]
C
I mean, I think you're right that obviously this is an extreme example. But honestly, like when I was looking at this, I'm like, this actually didn't surprise me that much because you see this in this, like kind of, as you said, Felix, this kind of like women's empowerment, industrial comple. Like you do see a lot of this stuff. And to me, like, I am just, I've never been a fan of this stuff in general because even though I agree with you that yes, sometimes maybe you can point out things that people can change, I think, you know, the Bigger issue is just that once more women are in power, both men and women, their understanding of what it means to be a leader, what a leader looks like, changes.
- [25:25]
B
Yeah.
- [25:26]
C
You know, like, I think of this example a little bit with Elizabeth Warren, you know, in relation to Hillary Clinton, that. I'm not saying that there isn't sexism directed at Elizabeth Warren. However, I feel like the discussion around her has been very different. And I. And I feel like part of that is because maybe, like Hillary Clinton to a certain extent, made people more comfortable with the idea of having a woman in this position. And then now people are. I'm not saying they're over it, but things have changed a little bit.
- [25:53]
B
Yeah, the. One of the pieces of research I looked at was pretty old from the 90s, I guess, but it looked at law firms with. With small percentages of women versus law firms with higher percentages, and in the ones with a small percentage of women, people really believed in all the sex stereotypes. You could even come up with, you know, men are more aggressive, women are more soft spoken and caring, blah, blah, blah. When there weren't that many women in senior partnership roles, everyone believed that, you know, that men are from Mars and women are from Venus or whatever. But in the firms where there are more women in leadership roles, the stereotypes kind of fell away a bit more because you got to see it to know what it is. So instead of doing the training, just hire more women. It's so much easier.
- [26:34]
C
The reason I also think that that's important is because they often show that when you have these, like, training programs that, you know, men might have to go through, it makes them more sexist, just like, you know, so that's why I'm kind of like, maybe just like, have more women in leadership and then don't have these stupid training programs that everyone hates.
- [26:52]
B
I think that's right.
- [26:53]
A
I would like to talk about my book review. Can I talk about my book review?
- [26:58]
B
Go for it, Felix. Didn't everyone already read your book review?
- [27:01]
A
I don't think everyone has read my book review. We've got a special link in the show notes this week, which I'll make sure Jessamine puts in, which has lots of extra numbers and letters and things so that it gets around the paywall so that everyone can read it for free. Because the Foreign affairs paywall can be hard to navigate.
- [27:21]
B
So Felix has a big piece in Foreign affairs about why the stock market is totally a mess and ruined. And he explains everything.
- [27:29]
A
Well, I mean, well, the person who explains everything is this guy called Walter Mattley, who wrote this book called Darkness by Design. And I kind of wanted to hate this book because when I looked at the book, when I first picked it up, I thought it was tirade against high frequency trading. And I remember the last time I read a tirade against high frequency trading, it was called Flash Boys by Michael Lewis. And there was lots of anecdote and white hats and black hats and goodies and baddies. And it was deeply unconvincing. And I wrote a long book review and Slate about that one. This one I feel is different. He's not claiming that mom and pop investors are being ripped off. He's not, he's just making a very simple claim basically that there was this kind of golden era, I would say between about 2000 and 2005. Although he goes way, way back to the New York Stock Exchange for decades and decades. And he basically says when the New York Stock Exchange had a monopoly on stock market trading, that was good for the market as a whole. When it wasn't owned by the big banks and it wasn't a for profit corporation, like that was good. It had a huge amount of incentive to regulate everyone, to keep a level playing field, to make sure trading was smooth. And then when everything like exploded after 2005, when there are now 23 different exchanges, there's no one who can do that anymore. Regulators can't do that anymore. All of the exchanges are incentivized to, to basically do whatever the high frequency traders want them to do because that's, that's where all that money comes from.
- [29:06]
B
You had this great anecdote, I guess it's from the book that sort of is a signifier of how well regulated the New York Stock Exchange used to be. And it involves a guy who went to the bathroom.
- [29:16]
A
So yeah, there was this market maker in the New York Stock Exchange and his job was to ensure smooth, continuous trading of whatever stock it was he was market making in. And this doesn't exist anymore. This job like technically exists. But realistically, no one is breathing down these market makers neck saying you need to make sure that if the last Trade was at $75, next trade can't be at $74. It needs to go smoothly down. They can't jump down. No one's in charge of that anymore. But back, back then, this is back in the 1980s, that was his job. And this stock was trading down and he could see that it was trading down. And he's like an expert and he was doing a good job at making it trade down smoothly and he was buying the stock he was the main buyer of while everyone else was selling. And of course the more he bought, the more he lost because the stock was going down. But that was his job was basically to lose money in cases, in situations like that and provide liquidity and make sure that the trading was smooth. And then he did this for like 4 hours and then really needed to pee, which happens. And so he got his, his assistant to take over and miscommunicated to his assistant. Basically what the job was. He's like, don't buy too much of this because it's still got a lot of got further to fall. And his assistant didn't buy. He wasn't putting new money in to keep the trading smooth. And the stock like gapped down 75 cents. And then he came back after peeing, he was gone for like seven minutes. And he got this fifty thousand dollar fine because he didn't keep the stock trading smoothly. And the guy at the exchange on the, you know, the, the sort of discipline panel board, basically he said he did such a good job for hours, he lost loads of money. It's not like he was, you know, doing a bad job. And the guy and, and they said no, we're gonna find him because don't tell me that he stopped at like 20 lights before blowing through the red one. Like it's, you know. And that culture was a super interesting culture and I think it was a good culture. And I think on some level that guy who paid the fine knew that it was better that way. He expected to be fined. When he came back from the bathroom and he saw what had happened, he's like, ah, shit, I'm gonna get a fine now. And then he paid his fine and he was glad on some level to pay his fine because he knew that everyone else would be fined the same way and that everyone was gonna be held to this super high standard. And if everyone is held to that super high standard, then everyone wins. Now no one is held to that super high standard and everyone loses.
- [31:54]
B
So what, what's changed? So now stocks go down 75.
- [31:59]
A
Now there are mini Flash crashes. This is something I learned in the book. There are mini flash crashes in more or less every stock, more or less every day. Especially the big stocks like Google and Apple and companies like that. They can drop a huge amount, like many dollars per share in a microsecond and then it will come back up a microsecond later and there's no one preventing that.
- [32:23]
C
Right, but isn't there like bid ask spreads, especially among like large cap stocks have declined.
- [32:31]
A
So yeah, so that's true. The bit the bid ask spread, there are two different things that happened and this is why I say that the golden era is between 2000, 2005, 2000 was decimalization and 2000 when you stopped trading stocks in like an eighth of a dollar or a sixteenth of a dollar, you just traded them in dollars and cents. And once you were able to trade every stock in increments of $0.01, that brought the bid ask spreads down. The degree to which a tight bid ask spread is really necessary or sufficient for liquidity is something we can debate and put to one side for the time being. But generally a smaller bid ask spread is a good thing. And that happened after 2000 when they decimalized. And then in 2005 they did this thing called REG NMS which basically created this explosion of stock exchanges and it meant that the New York Stock Exchange lost its monopoly and became a for profit corporation. And that didn't. The bid ask did not widen out after that, but they didn't particularly narrow much either. But that was. It's 2005 which is when things went bad.
- [33:38]
C
Right. I think there's a little bit of a difference if you're talking about large cap versus small cap because I think small cap the bid ask spreads have not narrowed as much as they have in large cap just because you do have so much volume and because those tend to be where high frequency traders really kind of consolidate.
- [33:58]
A
You can make a good living as a high frequency trader. As a high frequency trader just trading Apple stock.
- [34:04]
C
Right. And if there are huge gaps, I mean that's also an arbitrage opportunity.
- [34:08]
B
So if there are these little Flash crashes during the day, are people making like a ton of money off the little flash crash?
- [34:13]
A
Absolutely. And it's the algobots and the HFTs and people like virtue and people like that who are making the money. It's not real money investors and no.
- [34:25]
B
One is policing those big profit bumps off the little Flash crashes.
- [34:30]
A
That's what you say in the piece of fact. Quite the opposite. The stock exchanges are all competing with each other to attract those traders and trying to make it as easy as they can for those traders to make that money. Because the more money that you can make trading mini Flash crashes in Apple for instance, the more money you're willing to pay that exchange for co locating your computer server or something like that, which by the way was illegal under SEC regulations for a good five or six years. Before the stock exchanges finally asked permission to allow co location. And then the SEC said yeah, sure, you can do that and retroactively made it legal. You know, it's ridiculous.
- [35:13]
B
So in your piece you say, basically you say our concept of who the little guy is is kind of crazy in the stock market world where we think the big guys are like the fidelities and the big brokerages, but actually they're also little guys and it's the HFTs have sort of like taken over these mark these stock markets.
- [35:32]
A
So there's three different players that I think of in the stock market very broadly. One is the kind of people that Michael Lewis would consider to be the little guy, the mom and pop investors. People with their Charles Schwab account or their Morgan Stanley brokerage account or something like that. They're buying and selling individual, you know, shares doing individual trades. And now we just had the news today. Like if you have the Square Cash app, you can trade stocks on your phone through the Square Cash app. And that's just like dreadful. Don't do that.
- [36:01]
C
It's a bad idea.
- [36:03]
A
It's a very bad idea. But like, so that's one idea of the little guy. But the fact is that most people with most brokerage accounts are actually quite rich. The kind of people who trade the stock market, the kind of people who subscribe to barons, the kind of people who consider themselves to be individual investors.
- [36:22]
B
Mother and father, not mom and pop.
- [36:24]
A
They have seven figure sums invested in the stock market. These are not poor people. Whereas the actual, you know, broad middle classes of America, they don't have brokerage accounts. What they have is insurance policies and pension funds and, and things like that and that. And they wind up investing invisibly via these huge institutional investors. So you know, some massive insurance company is going to want to buy like a million shares of IBM. And that's what's really impossible now in this fragmented market because it's the big insurance company wanting to buy a million shares of IBM who winds up getting front run and picked off by the HFTs.
- [37:05]
B
I wrote down stock market is rigged a scam, but also where all my retirement money and college savings for my kids is. What now, Anna?
- [37:15]
C
Well, I guess I'm just kind of curious and I've not read the book so I obviously. But I'm curious what is the, the actual impact, dollar impact of the potentially having HFTs like front running? Like, because my, I guess my question is.
- [37:33]
A
Well, I mean you can, you can tell that by looking at two things number one is the profits the HFTs make. And certainly if you're looking at Knight and Citadel and Virtue, they make billions and billions of dollars. So those billions of dollars are coming from somewhere and than they're coming from mostly from big institutional investors. But in fact it's bigger than that because you also need to look at the profits that the exchanges make. There are 23 different exchanges out there, plus all of the futures exchanges and the foreign exchange exchanges and places like that. They all make billions of dollars as well. And most of those billions of dollars in one way or another come from charging rents to the HFTs. The HFTs pay billions of dollars for colocation services and that kind of stuff. So add those two billions of dollars together and then on top of that, add in all of the extra few billion dollars that the HFTs are paying to do things like build super fast microwave transmission lines between exchanges for arbitrage purposes and that kind of stuff, and that all of those billions give you a pretty good idea of how much money is being skimmed off here.
- [38:45]
B
So the HFTs are kind of like in control rentiers on the whole stock market. They're social.
- [38:51]
A
The exchanges are the rentiers.
- [38:53]
B
The HFTs are just these socially useless monsters that run everything. But then when you have like to go back to WeWork, like, and to.
- [39:02]
A
Be clear, they're not actually socially useless because one of the things they do do is allow good stock trading for mom and pop investors. But that's just not worth it.
- [39:09]
B
Okay, so both. Well, what I was going to ask was in the case of WeWork, right everyone, the story about the company is that because it was going to go public, it finally got exposed as a scam because investors wouldn't let that happen. But if those investors don't matter, why did they have to have a say in what gets to go public? Does that make any sense?
- [39:33]
A
So the HFTs don't generally participate in IPOs, you know, okay, but they'll participate on like after 0.005 seconds after the IPO. And then they'll start like arbitraging the stock and trading the stock up and down in a fraction of a second. But the big asset allocation decisions about should I buy this stock, should I not buy this stock, how much should I buy it for as a fundamental investor holding for the long term. Those decisions they have no interest in.
- [40:03]
B
So they have all this power, but they're not using it fully so that the institutional investors still have some kind.
- [40:08]
A
Of say they're not using it for discovery. So the, one of the, one of the main things that the market does is this thing called price discovery. And so there is this convention that, like, if you want to know how much a company is worth, what you do is you look at the stock price and you multiply it by the number of shares outstanding and you get the market cap, and that's how much the company is worth. And the reason why we have that convention is because we understand that the stock market is a price discovery mechanism and that the price of the stock at any given time is the best price. We have to give an idea of how much the company. Company is worth. And yeah, HFTs are not bad for price discovery, but they're not good for price discovery. They're just not really part of that market.
- [40:53]
C
Well, and there, and there's one other thing with HFTs that I think can be an issue in that what they can often sometimes do, even if it's just in, like, microseconds, is amplify movements that are already happening in the market. And by doing that, they can actually widen bid ask spreads. Exactly right. And so that is an instance where you would think, oh, well, they're adding this kind of volume to the market that should narrow. But it doesn't always.
- [41:17]
A
Yeah, it's not good liquidity, it's bad liquidity. It's like, not all volume is good volume and not all volume is liquidity. It's. There's a lot of. It is just what Larry Simons would call noise trading. And noise trading is. Is not a great way to be able to provide large numbers of shares to institutional investors or to be able to provide you. So that kind of important liquidity is. It does not show up in volume figures. And the other thing the HFTs do, of course, is this thing called stuffing. So you can look at the order book. There's this public order book in the stock market. You can see how many. You can see, like, let's say there's a share which is trading at $75, and you can see a whole bunch of orders at $74.99 to buy and a whole bunch of orders that at $75 and $0.01 to sell. And, you know, and you. And then you can also see how many orders There are at 74.95 or 7490 or 73 or 72 to see how much actual demand there is. And that used to be really useful, that order book, when people could learn about where the demand was for the stock at any given time now it is completely useless because all of those orders are spoofed, they're fake and they are never intended to be filled, has been put in by hfds.
- [42:34]
C
And one other thing, and other people may disagree with me about this, but I also think, like, you meet a lot of people who work at some of these shops and they're brilliant, they're super, super smart people. And there's a. Sometimes a time where you're like, is this really the best use of all of this brain power? Like, it just seems that, you know, and you understand why people do it. Right. Because it can be very, very lucrative. But it does raise the question of, of, you know, how this benefits parasites.
- [43:01]
A
Yeah. I mean, that's Lord Turner, right? Adair Turner's big thing about socially useless financial innovation. This is the classic socially useless financial innovation. The only real positive externality from all this is slightly faster telecommunications. And that's about it.
- [43:17]
B
Burn it all down.
- [43:19]
A
Let's have a numbers round. Anna, do you have a number?
- [43:21]
B
I do.
- [43:22]
C
My number is 800 billion. 800 billion Brazilian reai.
- [43:29]
A
So what's that, like $200 million?
- [43:31]
C
Close. 195 ish. Not bad. Not bad. Yeah. So if you're in emerging market investment, Brazilian pension reform has been this thing people have talked about for like over 20 years. It's been one of these things, like Brazilian pension reform. Well, it's finally happened. You finally had a Brazilian pension reform. And, and granted it was actually like extraordinarily needed. Like, the Brazilian pension system was an absolute mess. Like if they hadn't fixed it, you'd get to a point where like 20% of GDP would be spent on pensions, which is, let's just say, not entirely sustainable. So this 800 billion REI is like the kind of estimated savings over a decade. And so it's a. It's a big deal now, granted, I don't love the person who pushed it.
- [44:15]
A
So savings, savings being like the amount the pensions have been cut.
- [44:20]
C
It's not necessarily the amount, the mess. It depends on what you mean by that. Right. Because a lot of what they've had.
- [44:25]
A
Happen is, well, what's the delta here? 800 billion is the delta between what and what?
- [44:30]
C
So the difference is between if they had not had the reform and the savings. If obviously now that they do have the reform. And the difference. Yes. Is the fact that people are going to have to retire at later ages and they are going to have to contribute more to their pensions, which. Yes. But the Reality is, like, the system was completely unsustainable.
- [44:48]
A
Like, okay, right, but okay, so now Brazilians will be retiring later, a few years later, and they will be paying more money into their pension plans.
- [44:57]
C
Right? But it won't completely blow up their economy, which is kind of important.
- [45:02]
A
My number is £5 and 50p.
- [45:07]
B
I just had a heart attack because I thought it was my number, but.
- [45:08]
A
It'S OK. £5.50 is the new, cheapest fare on the Heathrow Express. I don't know. Have you guys both taken the Heathrow Express? The Heathrow Express is the most expensive train in the world. Like, it used to be that you would have to pay up to 25 pounds for a single on this thing. This is the fast train. It's super fast, it's super efficient. It's by far the easiest and quickest way to get from Heathrow into London. Go straight into Paddington, no stops, but ludicrously expensive. Except now there is this new thing called Crossrail. And Crossrail is competing with the Heathrow Express. And it used to be that the Heathrow Express people were like, oh, we need to charge this much money because something, something, investment, something, something fixed, cost, something, something, you know, recoupa something, something. And people would grumble, but there was nothing they could do about it. The minute the Crossrail turns up, they're like, oh, actually, turns out we can sell. First of £5, 50.
- [46:04]
B
Competition.
- [46:04]
C
Funny how that works out. Yes, I did take that because I was recently in London and I had not been in London for a little while, just not thinking. And I got in and I just got in a cab and I was like, take me to Canary Wharf. And two hours later, £200. I was like, and I'm taking the Tube on the way back.
- [46:24]
B
Oh, my gosh, My number is five hours. That is the workday at this small German tech company that was written up in the Wall Street Journal this week. And it's founded by this man who I didn't write down his name, but his last name is Ryan Ganz and He has like 15 employees or something. And at his last job, before he started his own company, he asked his bosses, he said, can I work less hours and I'll take a pay cut to do, you know, to do it, because I want to spend more time with my family. They were like, fine. So he started working fewer hours, but he found he was still doing the same work. His productivity didn't change at all. So he went back to his bosses and he said to them, I want My salary reinstated because I'm still doing all the same work. And they grumbled a bit, but they gave it to him. Now he went off to start his own company. He's like, you know what, we can do this work in less time. So everyone only has to work 5 hour days, not 8 hour days. They come in at 8, they leave at 1. They're more efficient. Apparently. They, they say they don't, they don't have as much time to like call home or do like personal stuff, but they have more time in their day.
- [47:26]
A
Do they have to like turn their phones off?
- [47:28]
B
Yeah, they have to turn their phones off.
- [47:30]
A
I mean, turning your phone off. That, that like, that's three hours right there.
- [47:34]
B
Right there.
- [47:35]
C
Yeah.
- [47:35]
B
This is my, you guys, this is the way it should be in the knowledge worker industry. Can we please just admit, all of us, how much time we waste? I have.
- [47:44]
C
So, yeah, I agree. I have slightly mixed feelings about this. On the one hand, I think obviously, like, there's that specific law that's like however much time you have, you'll fill up. Right. But the other thing I'll just say is that part of working in an office.
- [47:57]
B
I knew you were against this.
- [47:58]
C
No, no, no. It's just that one of the nice things about being in an office are that time you waste like talking to people like that, you know, so.
- [48:06]
A
But just think.
- [48:06]
B
No, I know what you're saying.
- [48:07]
C
I'm just saying that.
- [48:09]
A
Can I, can I just put a counter, can I put a counterfactual in here though? Which is the. If you spent less time making small talk with the people who happen to work in your office and you spent all of that time instead making like actually socially meaningful conversations with your friends and your loved ones, wouldn't that be an improvement?
- [48:33]
C
I mean, perhaps. I mean, it's fair. I mean, like, I, it hurts. No, I, like, I do think there's definitely some value here with the idea that, you know, you hear this all the time where people be like, I work 14 hour days and I'm like, you spend 10 of them doing nothing.
- [48:49]
B
So yeah, it's, I think it's, look, if I'm gonna run for president, that is my platform right there. Five hour days for everybody. Come on.
- [48:56]
C
And. Well, and one other thing I guess I will say going back to women issues is that I often find, and not to stereotype by gender, but that a lot of women like, they're. Because they do tend to have more issues outside of work. They have. So they would really benefit from that. Potentially.
- [49:11]
A
I'm just going to come out and say I'm in favor of 5 hour work days, but I am against 5 hour work days starting at 8 o' clock in the morning. Come on people. If it's only going to be five hours, can't we start, can't we do it from like 11 to 4?
- [49:24]
B
Yeah, I think it should be more flexible. You can start whenever.
- [49:26]
C
I get in at like 7 because I am like, like I get up. I am a morning person. Like I am you. Because I am useless after like 3pm you're at 7. Well, because I'm in the media, I'm useless after.
- [49:37]
B
I mean, so amazed by that.
- [49:39]
C
I just, I'm a morning person.
- [49:41]
B
I'm the morning person too. My commute is 17 hours long.
- [49:43]
C
So fair.
- [49:44]
A
Wait, just, just, just wait until you've been a journalist for another like few months. You'll, you'll get over it. Okay, I think that's it for us this week. Many thanks for listening to Sleep Money. We do appreciate it. Keep the emails coming. Slate money@slate.com Many thanks to Jasmine Molly for producing Stay tuned for a Slate plus segment all about the crazy conflagration going on in Chile and in other countries. I think you need to hear about that and we will talk to you next week on Slate Money.