The Krautrock Edition

Summary

Slate Money: The Krautrock Edition

Date: September 30, 2017
Host: Felix Salmon
Co-hosts: Anna Shymansky, Jordan Weissman
Special Guest: Justin Kalifowitz, CEO of Downtown Music

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Main Theme

This episode dives into the economics of the music industry—especially the financialization of music royalties—as well as major developments in global economic policy, with a sharp focus on German politics, the evolving situation in Puerto Rico, and their reverberations in the world of finance. The podcast offers both expert technical knowledge and lively banter, maintaining its trademark irreverent, conversational tone.

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Key Discussion Points and Insights

1. Economics of Music Royalties and Mini IPOs (00:14 – 15:48)

Introduction to Guest and Topic

• Justin Kalifowitz, CEO of Downtown Music, joins to share his expertise in the business of music royalties.
• Central Story: The sale of Eminem royalties via a mini-IPO raises broader questions about music as an asset class and investment vehicle.
• Memorable banter: Felix expresses excitement about One Direction, and the panel jokes about unique artist preferences.

Eminem Royalties and Royalty Flow

• Anna: Describes the mini-IPO: Royalty Flow, a company now owning a stake in the "Bass brothers'" Eminem royalties, is offering shares to investors via a Reg A+ filing (raises up to $50 million, open to non-accredited investors) (02:12 – 04:12).
• Justin: Clarifies the distinction between types of royalties:
  • In this case, it’s master recording royalties, not songwriting royalties.
  • Master royalties come from the actual recording (mainly streaming), whereas songwriting generates thousands of smaller income streams (radio, TV, toys, covers, etc.)
    Quote:

  “There are literally thousands of unique income streams for song copyrights that don't exist for the master recording.” (03:34 – 04:12)

The Streaming Revolution in Music

• Justin: Details the industry’s transition from CDs and downloads to streaming, citing massive growth and still largely untapped global potential (06:22 – 07:59).
  Quote:

  “100 million paid streaming subscribers around the world is really just scratching the surface.” (06:53)

• Market projection: Goldman Sachs predicts the industry could reach $40 billion by 2030, up from $16 billion in 2016.

Global Markets and Piracy

• Justin: Highlights growth in emerging markets (China, India, Africa) where music is increasingly monetized as copyright laws strengthen and local companies invest (07:59 – 10:02).
  Quote:

  “There used to be bootleg CDs were a huge business in emerging markets. China’s growing super fast. India is growing super fast....” (08:24)

Investment Risks in Music Royalties

• Felix: Raises skepticism around investing in illiquid, untested offerings like Royalty Flow—typically, the show’s advice is to “run screaming.”
• Justin: Notes previous attempts haven’t stuck. Critical issues:
  • Who manages royalty collection is crucial; systems vary in modernization and transparency.
  • Reg A+ filings have lighter disclosure requirements, increasing information asymmetry for investors.
    Quote:

  “There are fundamental questions about how music royalties are collected around the world that investors should be considering.” (10:35 – 11:05)

Comparison to Bowie Bonds

• Jordan/Anna: Unlike the Bowie Bonds (a bond structure backed by David Bowie’s catalog with fixed coupons), Royalty Flow is offering equity, not a bond, which is much riskier for investors due to lack of guaranteed payouts or liquidity (13:18 – 13:56).
  Quote:

  “When you’re talking…you have no guaranteed income stream whatsoever. They don't have to pay dividends…there’s no guarantee these shares will actually be listed.” (13:20)

Transparency and Artist Reluctance

• Justin: Notes most artists prefer to keep royalty flows private, so attracting additional rights owners could be difficult for Royalty Flow due to mandatory disclosure.
  Quote:

  “Well known established artists do not want their royalty flows... public. And obviously, this upends that whole concept.” (14:03)

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2. Puerto Rico: Bondholder Power Plays (15:48 – 23:18)

Context and the Prepa Crisis

• Felix: Puerto Rico’s power authority (Prepa) is in financial crisis post-Hurricane Maria. Bondholders offered a $1 billion new loan if granted repayment priority (a “debtor in possession”—DIP—loan).
• Anna/Jordan: Prepa rejected the deal, recognizing bondholders were exploiting the crisis for priority payment and favorable restructuring terms (17:01 – 20:28).
  Quote:

  “Prepa looked at this deal and said, 'no, you're just trying to game the fucking system to get paid back earlier.' This deal is not actually that great.” – Jordan (17:56)

The Real Motive and Stakeholder Impact

• Anna: Bondholders use the crisis to advance a previously rejected restructuring deal, now with DIP status giving them even more power in bankruptcy proceedings.
  Quote:

  "The creditors are taking advantage...but now we have priority. And not only that...we now can't be crammed down. We have way more power in a restructuring.” (19:51)

Larger Context

• Felix: Focuses on the core issue—Puerto Rico’s urgent need for new money, not bondholder interests.
• Anna/Jordan: Skeptical Prepa won’t find alternative funds; current offers aren’t sustainable long-term and resemble failed Greek-type “extend and pretend” debt deals.

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3. German Politics, Krautrock, and the AfD Surge (23:18 – 35:56)

Political Earthquake and Scheuble’s Departure

• Felix/Anna/Jordan:
  • Wolfgang Schäuble (Finance Minister) is moving to Speaker of the Bundestag amidst the rise of the far-right AfD (Alternative für Deutschland), which now holds 13% of parliamentary seats.
  • AfD’s entry is especially significant given Germany’s postwar history.
    Quote:

  “There are Nazis in parliament in Germany...in Germany it's especially important.” – Felix (27:07)

Why is Schäuble Moving?

• Schäuble’s shift is partly to confront the challenge posed by AfD in parliamentary norms and process.
  Quote:

  “We actually need this motherfucker, like, in the Speaker’s role…” – Felix (28:23)

Coalition Politics and Fiscal Implications

• Anna/Jordan:
  • The incoming Finance Minister is likely from the Liberal Democrats (FDP), with different fiscal priorities: hawkish but more inclined toward tax cuts, less pro-EU, and potentially less flexible with Greece and other debtor states.
    Quote:

  “They're much more apt to spend in terms of tax cuts especially...they are much less pro euro and pro Eurozone in EU than shoibler.” – Anna (29:50 – 30:02)

Eurozone Impact and EU Integration

• The FDP could block further EU fiscal integration or collective action—bad news for prospects like France's Macron’s “United States of Europe” vision.
• Broader macro impact: A potential increase in German spending could soften its giant current account surplus, possibly benefiting the rest of the Eurozone.
  Quote:

  “If Germany's current account surplus comes down, then that could be good for Europe.” – Felix (32:18)

The Greek Debt Dilemma

• Panel predicts more “extend and pretend” for Greece, regardless of who holds Germany’s purse strings: sustainable deals remain elusive.

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4. Lightning Numbers Round (35:56 – End)

Panelists' Numbers of the Week

• Jordan: Mentions a (corrected) 18% figure—the Obama Treasury’s estimate of the share of corporate taxes falling on workers, which the Trump Treasury tried to suppress for political reasons (36:03 – 39:13). Quote:

  "This is now... they're trying to hide evidence that maybe Treasury's own economists thought that their talking points were bullshit." (36:03–37:30)

• Anna: Cites 73—the number of days activist Lejein al-Hathloul was detained in Saudi Arabia for driving, marking significance now that women are permitted to drive (37:50). Quote:

  “This really is a big deal for them.” (38:01)

• Felix: $3 million—the annual salary top coders can now make at Chinese tech firm ByteDance, illustrating global competition for tech talent (38:16).

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Notable Quotes & Memorable Moments

• Felix on investing in music royalties: "Whenever Slate Money talks about these kind of weird, illiquid offerings, we always just say no, this is a scam. Like run screaming.” (10:02)
• Justin on streaming’s global potential: “If you think about it, 100 million paid streaming subscribers around the world is really just scratching the surface.” (06:53)
• Anna on the transition of German fiscal leadership: “...this could be a big change in terms of what it means when they're negotiating with countries like Greece. But...this could be good for Europe overall.” (31:38, 32:12)
• Felix on German politics: “There are Nazis in parliament in Germany...in Germany it's especially important.” (27:07)
• Jordan (with apology): "Sorry to all listeners who've been complaining about my profanity..." (39:21)
• Felix (signing off): “Don’t speak like us, speak like, you know, Mr. Rogers.” (39:36)

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Key Timestamps

• 00:14: Show intro, panel/guest introductions
• 02:12 – 15:48: Music royalties, streaming, and risks of investing in Royalty Flow's mini-IPO
• 15:48 – 23:18: Puerto Rico, Prepa debt, bondholder tactics
• 23:18 – 34:24: German elections, AfD rise, Schäuble’s legacy, Eurozone/EU implications
• 35:56 – End: Numbers round, miscellanea, sign-off

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Takeaway

This episode offers a thorough, accessible (and entertainingly explicit) exploration of how music and finance intersect, the risks of new music-investment vehicles, the political-economic shakeups in Germany, and debt drama in Puerto Rico. The show unpacks complex topics using expert guests, real-world analogies, and relatable banter, always with an eye toward how these stories shape the broader worlds of money and power.

Transcript

[Justin Kalifowitz]

The following podcast contains explicit language.

[Felix Salmon]

Hello, and welcome to the Krautrock edition of Slate Money, your guide to the business and finance news of the week. I'm Felix Salmon and Fusion. I'm here, as ever, with Anna Shymansky and Jordan Weissman.

[Jordan Weissman]

Hey, everyone.

[Felix Salmon]

And we are going to be talking about German economic policy because there was big news on the finance minister front this week. We are going to be talking about Puerto Rico, which should have been making more headlines than it has been. But there is one particularly juicy little headline which got missed about how bondholders might be trying to help out and actually give some money, like a lot of money, to Puerto Rico, which would be very interesting. But before all of that, this is the most exciting edition of Slate Money you've heard in at least a week, because we have Justin Kalifowitz here. Justin, say hi.

[Justin Kalifowitz]

Hello.

[Felix Salmon]

Yes. Who are you? Introduce yourself.

[Justin Kalifowitz]

I'm the CEO of Downtown Music. We have a number of businesses, including a music publishing business that owns and manages song copyrights for clients like John Lennon, One Direction, Hans Zimmerman, One Direction.

[Felix Salmon]

Oh, my God.

[Justin Kalifowitz]

Zane, indeed.

[Jordan Weissman]

Of course, that's the one. It's like, unique choice to get excited about.

[Justin Kalifowitz]

We also operate a technology company.

[Felix Salmon]

I mean, some people get excited about John Lennon. I know, but I get excited about Zane.

[Jordan Weissman]

I mean, typical. Anyway.

[Felix Salmon]

But basically the short version of this is that Justin knows everything about the economics of music because this is actually how you make your living.

[Justin Kalifowitz]

Correct.

[Felix Salmon]

And Anna found an amazing little story today or earlier this week about the owners of a whole bunch of Eminem related income.

[Anna Shymansky]

Yes. So they have a stake in these two Bass brothers who receive Eminem royalties. And so this company, Royalty Flow, now owns this stake.

[Felix Salmon]

So basically they quote, unquote, like, discovered Eminem before he was the Bass brothers.

[Anna Shymansky]

Before. Before Dre discovered him.

[Felix Salmon]

Before Dre discovered him. And so they own some massive percentage of his royalties.

[Anna Shymansky]

And this current stake, I believe is. Was about like 5. How much was it last year?

[Justin Kalifowitz]

They said it was about $5 million. $5 million last year.

[Felix Salmon]

So. So wait, just to. So the first thing I need to ask Justin is this is songwriting royalties, right?

[Justin Kalifowitz]

No. In this instance, the brothers are apparently receiving income from the master, the sou. The piece that's actually owned by the record company. It doesn't apparently include any of the songwriting royalties themselves.

[Felix Salmon]

Ah, okay.

[Justin Kalifowitz]

Which is interesting. There's a significant distinction between those two rights.

[Felix Salmon]

So just the sound recording royalties are running $5 million a year from Eminem.

[Justin Kalifowitz]

The share that the Bass brothers are.

[Felix Salmon]

So. So. So the total song. So the total royalties from Eminem are more than that. And their share, which do we know how much of a stake a share there is?

[Justin Kalifowitz]

Didn't indicate.

[Jordan Weissman]

What would you generally prefer to have if you had to pick one? The songwriting ro or the master? The royalty from the master.

[Justin Kalifowitz]

I'm a music publisher, so I always defer to the song copyright. But the truth of the matter is that there is a significant distinction. The sound recording, you would only generate revenue from that particular recording and how it's exploited. So with Eminem copyrights, it would only be Eminem's actual version of those songs, and the vast majority of the income would be through streaming. These days, with the song copyright, it's slightly different. You're entitled to radio performance royalties, film and television licensing fees, lyric usage. When they create a cover version and put it in a little toy that you shake up and down. There are literally thousands of unique income streams for song copyrights that don't exist for the master recording.

[Jordan Weissman]

Okay, so this is pretty limited, comparatively. Correct. Okay.

[Felix Salmon]

Okay. So we have this income stream, which is probably small by the grand standards of how much money Eminem is bringing in from all of these different sources. But it's still $5 million a year, which is not chump change.

[Anna Shymansky]

Right.

[Felix Salmon]

And now the brothers are doing what?

[Anna Shymansky]

They are going to be engaging in a mini IPO. Very many a very mini IPO. So this is a reg a plus filing, which essentially is an IPO where you can only raise up to $50 million, but you don't have to be an accredited investor to take part. So essentially, almost any investor can take.

[Felix Salmon]

Part in this IPO, and they're selling off a small chunk like 15% of that $5 million income stream.

[Jordan Weissman]

So my understanding is that what they're doing is they're selling equity in a company.

[Anna Shymansky]

Exactly.

[Jordan Weissman]

And the company's called Royalty Flow.

[Felix Salmon]

And the sole income, the company is.

[Jordan Weissman]

The income stream right now.

[Anna Shymansky]

Right.

[Jordan Weissman]

And so they're talking about eventually, presumably adding more royalty streams. Eventually. But I mean, like, this is down the line. This is what they're promising.

[Anna Shymansky]

And this is part of the problem with this, is that most of this is down the line, because, again, this mini IPO does not mean that these shares will actually be listed in a way that you can trade them.

[Jordan Weissman]

Yeah, these are illiquid securities. It's not like this is going to be a stock that you can just go and, you know, trade on E trade.

[Anna Shymansky]

In theory. They're saying they're going to be listing it on NASDAQ at some point, in the same sense that in theory, they're going to be purchasing more things than just M&Ms.

[Felix Salmon]

Okay. But in practice, if you want to buy this stuff, what you're buying is essentially the amount of money that is generated by streaming Eminem songs. Like, overwhelmingly, this income stream is from streaming, which is correct. And so, just to give us a bit of background here, Justin, this is a sort of weirdly unanticipated uptick in the music industry's financial fortunes. Right. That everyone thought that everything was dying, and then suddenly streaming revenues have become a thing.

[Justin Kalifowitz]

Yeah, absolutely. And it certainly most impacted the master recording, the record companies, and then anyone who participates in those royalties through producer arrangements or artist royalties and things of that nature. This has really been a huge shift. So the CD business fell off a cliff. The record companies kind of all attached themselves to Apple and itunes, and then downloads started to peter out. And then all of a sudden you had Spotify, Apple Music, Amazon, all these different streaming services around the world, local ones in different markets, growing. And it's really completely changed the fortunes of the business. It's also helped that you have Goldman Sachs and a handful of other entities out there putting out these reports saying that this is really only the beginning. We've barely scratched the surface. And if you think about it, 100 million paid streaming subscribers around the world is really just scratching the surface of the number of people who could pay for a monthly subscription.

[Felix Salmon]

So theoretically, you could reach, say, a billion paid streaming subscribers. They're paying, say, $10 a month. That's $10 billion a month. That's $100 billion a year. That's real money. I mean, presumably that's actually on a level with, or even possibly greater than what people used to be making from CDs.

[Justin Kalifowitz]

Absolutely.

[Anna Shymansky]

Well, I mean, Goldman said that 2030, the music industry could be worth about 40 billion, as opposed to about 16 billion last year.

[Jordan Weissman]

Could be.

[Felix Salmon]

But how much was it worth, like, at its height?

[Justin Kalifowitz]

I don't know the number offhand, but.

[Felix Salmon]

If this is $100 billion a year income stream, then presumably, yeah, I think.

[Anna Shymansky]

That 40 billion would be close, if not more. Granted, it's in the future, so it's different, but, yeah, I mean, this would be significant if it all happens.

[Felix Salmon]

Yeah.

[Justin Kalifowitz]

And what they're looking at is if you look at where streaming took off first, particularly in Scandinavia, you're seeing penetration rates. 60, 70% of households have a streaming subscription that we're not even nearly there in the U.S. or Canada or France or the U.K. australia, we're not near there in those markets. Then there's all the emerging markets around the world that have never really monetized music before, at least not in a legal way. There used to be bootleg CDs were a huge business in emerging markets. China's growing super fast. India is growing super fast. You're seeing different markets in Africa growing, Nigeria particularly growing really fast. These are markets that never participated in the CD business.

[Felix Salmon]

So you are getting money. I mean like downtown music publishing is getting money from China and India and Nigeria in a way that like even big record labels never used to get in the first.

[Justin Kalifowitz]

Starting to, yeah, starting to.

[Anna Shymansky]

This is my question though. If in the past a lot of these emerging economies were not purchasing music in the same way for a number of reasons, why do we now think that they're going to be accepting this payment model in the future?

[Felix Salmon]

Because you could pirate CDs, but it's much harder to pirate Spotify.

[Justin Kalifowitz]

Yeah, right, Absolutely. And plus it comes sort of like in a lot of instances it may not be a paid by consumer, but paid by advertisers or paid by the telcos. In the US this hasn't really taken off, but in a lot of other markets the telcos subsidize music streaming. Move over to our platform, you get a year of streaming and they're paying the rights holders. You're also seeing significant investment by local entities into copyrights for the first time. That's really what happened with China is you have these large local entities investing in music and music and they want to create an economy locally around that. The foreign music obviously comes in and is consumed as well. Different markets have different percentages of foreign versus domestic. But you see the local economies really investing and large scale media companies wanting to make a lot of money off of music or film. Ultimately it strengthens the economy there and it also puts more pressure on stronger copyright law, which didn't exist in a lot of these markets.

[Felix Salmon]

If I'm excited about the future of streaming, and I think that people are going to be streaming Eminem songs in China for decades to come, I might want to get in on this offering and, and then have a nice little check coming to me for years to come. Is now. I mean, whenever Slate Money talks about these kind of weird, illiquid offerings, we always just say no, this is a scam. Like run screaming. Is this a scam? Should we run screaming?

[Justin Kalifowitz]

It's been tried before. I would say that many of the articles that I read on this offering mention some others that have been tried in the past and you hear about them and then you kind of don't hear about them again. I'm not an expert on why they work or don't work, but it's certainly anytime something is completely brand new like this, there are questions to ask. I think there are fundamental questions about how music royalties are collected around the world that investors should be considering.

[Felix Salmon]

Two big issues here, which I think investors might not be thinking about. The first one is who is managing this. Right.

[Anna Shymansky]

Yeah.

[Justin Kalifowitz]

I mean, obviously the different platforms that are utilized to collect music royalties around the world vary dramatically. There are some that are super modern and were built over the past five or 10 years and can deal with streaming and understand how to audit all the income sources that come in. And there are some that are literally 100 years old, as old as copyright itself or music copyrights themselves in the US and the uk. And you have to be wary about who is actually controlling the flow of the income.

[Anna Shymansky]

And this is really significant actually, because part of the issue with Reg A filings is that they don't have nearly the disclosure requirements. As an investor, you don't need to know as much and you don't receive as much information from the company that suggests it may not be the wisest investment.

[Felix Salmon]

Yeah. And you certainly don't really understand the details of the special purpose vehicle which owns the shares and what can happen to that. And there's a bunch of risk around the sort of legal structure which you're buying into, which has nothing to do even with the music.

[Jordan Weissman]

So, Anna, I actually have a question for you.

[Felix Salmon]

Okay. You need to really specify who you is.

[Jordan Weissman]

I said Anna.

[Felix Salmon]

Oh, okay.

[Jordan Weissman]

Did you not hear me?

[Felix Salmon]

No, no.

[Jordan Weissman]

I said Anna oh. For once in my life did I speak too quietly? So I actually have a question for Anna, because in the past when companies have tried to securitize music royalties, it's tended to be a bond. The most famous example is the Bowie bond where he basically took the royalties from his back catalog and made it into a security and, you know, sold that off in like 1997. And anyway, there's a lot of mythology about that. Every once in a while that story comes back up. But other artists have done this in the past. I think Curtis Mayfield may have even at one or someone may have done that with his. As one of the sort of kind of soul legends has done it. But this again is not a bond. Right. It is an illiquid security. That's. That's equity. How, you know, what are the differences and does that make it more or less likely to actually work out for investors? I'm curious.

[Anna Shymansky]

Less likely.

[Jordan Weissman]

Less likely. Okay.

[Anna Shymansky]

When you're talking, if you look at those Bowie bonds, again, if you held those till maturity, yeah, you did pretty well. Especially. And even if you sold them slightly earlier, you were earning an 8% coupon, which granted, rates were higher than. But that's not nothing. Where as opposed to equity, you have no guaranteed income stream whatsoever. They don't have to pay out dividends. And there's no guarantee this is going to increase in value. And there's no guarantee they're going to list it in a way that you can easily trade it. That there's a, there's a reason that we consider bonds in general safer investments because you do have guaranteed payments.

[Jordan Weissman]

Yeah, you don't have that in.

[Anna Shymansky]

In equity.

[Jordan Weissman]

So this is sort of a riskier version of something that's been tried before and hasn't necessarily always worked out swimmingly.

[Anna Shymansky]

Exactly.

[Jordan Weissman]

Okay.

[Justin Kalifowitz]

There's also a challenge, as Anna, you identified with respect to their ability to win new deals. I think one of the things that people need to understand is that when companies in the music space negotiate to acquire rights, one of the most heavily negotiated part of the process is the NDA to make sure that the information about those financials do not become public. Because well known established artists do not want their royalty flows. They don't want people speculating or knowing anything about how much they're making. And obviously this upends that whole concept. So I think, you know, getting folks over and convincing folks to use this platform to monetize their assets, when they then have to publicly list how much they're worth might be. It might be an issue.

[Felix Salmon]

Okay, so now this is my, this is my opportunity to say we have Justin Kalifowitz in the studio and he actually has seen behind these NDAs and he knows how much money people are making from these thousands of different income streams. And he is personally making money from these thousands of different income streams. And we are going to ask him about that and we are going to do that in a little Slate plus segment after the show. So if you want to hear Justin Glivowitz talk about a bit more nerding out on how the music industry works, just go along to slate.com moneyplus plus get your slate plus membership and we will enlighten you. Okay. Let's, let's talk about Puerto Rico because I'm, this is a subject I've been obsessed with ever since like long before they Declared bankruptcy partly because no one even knew that they could declare bankruptcy. It was kind of amazing that they even managed to do that.

[Jordan Weissman]

Congress helped and quite a bit.

[Felix Salmon]

And yet they are still under, they're still under various laws. The bankruptcy regime doesn't prevent them having to cough up a certain amount of money. For every billion dollars that FEMA spends and that kind of stuff, there's a weird, like FEMA matching protocol. Yes. And so here's the interesting thing, like in, in the face of what seems to be incredible lethargy and I don't care from the White House about what's going on in Puerto Rico, which is a major humanitarian disaster, guess who's stepping up is. Well. Or who claims to be stepping up is the bondholders of Prepper.

[Anna Shymansky]

Right.

[Jordan Weissman]

Well, they got rejected.

[Anna Shymansky]

Yes.

[Jordan Weissman]

So did you see the. Did you see the follow up, Felix?

[Felix Salmon]

So wait, okay, so like I'm, I'm a, I'm a bondholder and I'm saying, I mean this seemed like. Okay for me, Felix, this seemed like quite a clever thing. What Puerto Rico really needs is new money. And yet what happened, Jordan, Puerto Rico was offered a billion dollars and said, no, yeah.

[Jordan Weissman]

Okay, I'll give it. And then Anna, we'll tag team this. So, yeah. So basically Puerto Rico's a disaster zone. It's been devastated. It has no power. People don't have drinking water. And specifically bondholders went to the power authority, which is one of the entities that Prepa. Prepa, exactly. That owes all this money because the debts are spread around different parts of Puerto Rico.

[Anna Shymansky]

17 different entities.

[Jordan Weissman]

Exactly. It's almost impossible to keep track of all this. But. And they said, we will give you a billion dollars in loans if you, if you essentially put us at the front of the line for getting paid back. It's a debt. They were offering them what are called debtor in possession loans. And if they got. If Prepa then took billion dollars, they would get matching funds from FEMA. So theoretically this could lead to about $9 billion total. Prepa looked at this deal and said, no, you're just trying to game the fucking system to get paid back earlier. This deal is not actually that great.

[Felix Salmon]

Yeah, okay.

[Anna Shymansky]

Exactly. Now this is, this is really important because when you look at it on its face, you might think, oh look, they're giving them new financing. Isn't that great? Yeah, no, that's not really what they're doing. So essentially this is a type of dip financing referred to as a roll up, which is we can think of somewhat like an exchange which is basically, they're saying we had this $1 billion liability that's now becoming an $850 million liability. So, yes, we're accepting less money back as a creditor, but we now have priority to all other debtors.

[Felix Salmon]

Right, Right. So this is. This is all. This is totally what I understood, that in exchange for getting priority, they would throw in new cash. Are you saying they're not throwing in new cash?

[Anna Shymansky]

No, they are throwing in new cash. But the. But the way that this debt financing works is the way to think of it is it's like an exchange. So, yes, they are giving them new cash now, but that what ends up actually happening. And it would be like an exchange, so they would still owe money to the debtors, but now they owe a different type of money. So essentially.

[Felix Salmon]

Okay, but all I'm saying is, let's put the details of it to one side. I have this idea that this is a good deal for Prepa and for Puerto Rico because it is a billion dollars of new money. Now, I totally understand that this might be a bad deal for all of the other debtors of Prepa. I mean, all the other creditors of Prepa. It might be a bad deal for the shareholders of Prepa, but ultimately, I don't care what happens to those bondholders. What I care is that Puerto Rico gets as much new money as it can.

[Anna Shymansky]

Wait, so. So this is actually, like, it's kind of important in terms of. What's really happening here is that these bondholders had been trying to push through this deal previously, which was a 15% haircut. These bonds had been trading in the 40s. That's a big difference. So now they're essentially taking advantage. The creditors are taking advantage of this situation and saying, oh, will give you new financing, but you have to accept the deal that you previously said you wouldn't accept, and now we have priority. And not only that, as a holder of DIP financing, we now can't be crammed down. We have way more power in a restructuring.

[Jordan Weissman]

So I just want to add to that point a little bit with a little bit of the backstory, which is that prepa, the power authority, and the bondholders actually sort of were nearing a deal at one point. And then the. The financial advisory board that Congress created as part of this whole bankruptcy structure came and looked at it like, this is. This is not going to work. And that, like, shocked everybody because everyone assumed this financial advisory board basically existed to get the bondholders paid as much as. I mean, like, that was. That was really the common assumption here, and they were like, this is we can't even abide by this.

[Anna Shymansky]

No.

[Jordan Weissman]

And so what they are pushing is, as far as I understand, was sort of a variation on that deal. It was like their piece of that deal. Essentially. They just wanted to jump in line to get it.

[Anna Shymansky]

Exactly. And I actually had to laugh a little bit when I saw that Natalia Yarresco is the head of the Puerto Rican advisory board because Franklin Templeton is one of the main creditors. And I don't know if anyone else was following the Ukraine debt restructuring as closely as I was, but there were adversaries then.

[Felix Salmon]

They're adversaries again here who are Franklin Templeton.

[Anna Shymansky]

Franklin Templeton and Natalia Rescuke because she's the finance minister of Ukraine. She's an American who was made a Ukrainian citizen so she could become their finance minister.

[Jordan Weissman]

Oh, wow.

[Anna Shymansky]

And she's now the person that they're facing again. And in Ukraine, she got them to accept a 20% haircut and a maturity extension.

[Jordan Weissman]

So if she could do it once, she could maybe do it again.

[Anna Shymansky]

Granted, the Ukrainian people had to accept a lot of cuts, which the Puerto Ricans are going to probably.

[Felix Salmon]

So. Okay, so in terms of fresh cash coming into Puerto Rico, because, like, I'm keeping my eyes on the prize here, which is Puerto Rico needs a lot of money to rebuild the island from the devastation of Hurricane Maria. Is my takeaway from this that because of some, you know, financial shenanigans, Puerto Rico will not be getting this fresh cash.

[Anna Shymansky]

I find it very hard to believe that they aren't going to be able to get in some other way. I have a really hard time believing that FEMA is going to be like, you know what? You can't put up cash. We're not doing anything. I think that they're going to be able to get it in another way where they won't have to prioritize one credit over another.

[Jordan Weissman]

I think we have to remember that the reason they rejected this deal in the first place, because it just wasn't realistic long term. Like, that was the idea, it was not sustainable, that you were not able to pay off these debts and basically shoulder the burden onto Puerto Rican residents long term, the way you would have had to. It just. The math wasn't going. It was. It was like kind of a. It was the Puerto Rican version of one of those Greek debt deals.

[Anna Shymansky]

You know, stand and pretend and pretend.

[Jordan Weissman]

Exactly like which we'll get to that in a bit. But it's. So, yeah, I think that trying to Agreeing to that in order to get a fresh infusion of cash when it seems like there will probably have to be some sort of rebuilding plan, no matter what. Given the devastation that has taken place on this island, it just seems like a bad idea. It's not something you do in the heat of the moment.

[Felix Salmon]

Okay. On which note, I feel there's a natural segue to Greece. And when I say Greece, I mean Germany because. Because they're two sides of the same coin. Really. Yeah.

[Anna Shymansky]

When somewhere Yanis Varoufakis is really, really.

[Jordan Weissman]

Like two cars in a wreck where Germany is like the Mack truck and Greece was the tiny little Mini that just got the bad end of it.

[Felix Salmon]

So. So yeah. So Yanis Varoufakis is. Is famous to Slate Money listeners as the one guest we ever had who didn't turn up.

[Jordan Weissman]

Yeah, I am not surprised. We had an addition called the Yanis Varoufakis Slate Money Edition.

[Anna Shymansky]

Oh, that's awesome.

[Felix Salmon]

He did actually turn up at the studio when he had his book, when he was on his book tour, but there wasn't someone to greet him at the door and he got so annoyed about that that he threw all of his toys out of the pram and refused to come on the show, got.

[Jordan Weissman]

Back on his motorcycle and just drove off.

[Anna Shymansky]

All the way out.

[Felix Salmon]

Yep. He needs his VIP's treatment. This Yanis Varoufakis. Yanis Varoufakis great opponent in the. In the Greek restructuring wars was the legendary German Finance Minister Wolfgang Scheubler, who has been in German politics for I think about 3,400 years.

[Anna Shymansky]

I mean, like, give or take.

[Felix Salmon]

No one can remember a time before Schaubler.

[Jordan Weissman]

He certainly looks like a vampire. Who has lived that long.

[Felix Salmon]

He is absolutely terrifying. He is the one person who can strike fear into the heart of Janisarev practice or anyone else. He in many ways is a much more important architect of Germany's economy and fiscal austerity or fiscal position and economic policy and post war strength in Angela Merkel than virtually anyone else.

[Anna Shymansky]

I would argue that they tend to play good cop, bad cop.

[Felix Salmon]

But he's the bad cop.

[Jordan Weissman]

Yeah.

[Felix Salmon]

Yes.

[Jordan Weissman]

And now he's leaving his post.

[Felix Salmon]

He has been Finance Minister for a very long time. He was part of the force behind creating the European Union, the Euro.

[Anna Shymansky]

Reunification of Germany.

[Felix Salmon]

Reunification of Germany. He has been around for all of it. And now he is taking on this role of speaker of the House, which is a fascinating role because constitutionally has an important role. I mean, constitutionally president is an important role and no one can even name the German president. Yeah.

[Jordan Weissman]

He's technically second highest on the pecking order, but actually less powerful than the Chancellor.

[Felix Salmon]

Right. But this is the fascinating thing. There's actually a real reason why he is becoming speaker of the House and giving up his position at the Finance Ministry. And that's the German elections.

[Anna Shymansky]

Yes.

[Felix Salmon]

Because the afd, the let's, you know, not mint for Deutschland. That's not mince words. The Nazis.

[Anna Shymansky]

The Nazis.

[Felix Salmon]

The Nazis got 13% of the vote and 97 seats in the House.

[Anna Shymansky]

Yes. I mean about 6 million Germans voted for them. Or I should. I want to point out about 6 million German men. I'm just saying. Another example of maybe we should rethink this whole disenfranchisement. Just saying.

[Felix Salmon]

Yeah, like guys aren't very good at it. Although. So Trump won white women. Anyway, there was this electoral earthquake in Germany in a way that you might not notice if all you were looking at was, oh, Angela Merkel got reelected and she did quite well. And I guess nothing really changes.

[Jordan Weissman]

It's something Raisa May esque result.

[Anna Shymansky]

Yeah. Although I'm going to argue that it's not quite as extreme as some people in the news are making it out to be. At the end of the day, I don't think this is going to change things enormously.

[Felix Salmon]

No. But the fact that there are Nazis in parliam in Germany is like. Is important in a way that it wouldn't be important in any other country. Like it would be important in any country. But in Germany it's especially important.

[Jordan Weissman]

There aren't. Germany was supposed to be the country that was resistant to. Was Nazi resistant. Right. Like they had sort of built it up over the. We thought they'd been inoculated. Turned out.

[Anna Shymansky]

Turned out.

[Felix Salmon]

And, and this is absolutely terrifying to everyone I know in Germany and to Angela Merkel and to Wolfgang Scheibler and Scheubler is saying we are going to need to address this threat head on. If there are going to be 97 Nazis in the German Parliament, I want to be there because German parliament is not going to act the way the German parliament has acted until now and where you used to have the Greens in opposition and the Reds in power or whatever. Like there were certain norms that everyone adhered to and it's pretty obvious that the AfD is not going to adhere to those norms. And we actually need this motherfucker, like in the Speaker's role doing.

[Jordan Weissman]

And I want to get back to what this means for Europe more widely because there are A lot of important implications there both for Germany, Greece and, and even France really at the moment.

[Anna Shymansky]

The world.

[Jordan Weissman]

The world. But just to stick to the kind of domestic politics of this. What can he do as speaker to kind of tame the barbarians, tame the Nazis? Is there anything.

[Felix Salmon]

I think, I mean, I think.

[Jordan Weissman]

We.

[Felix Salmon]

Won'T know until he takes on that job and he starts doing that job.

[Anna Shymansky]

I think it's also important though to remember that part of the reason he is being replaced is because they're forming this new, most likely this new coalition government. So they're probably going to be giving the finance Minister to the Liberal Democrats.

[Jordan Weissman]

Yeah. So my sense from reading, you can correct me if I'm wrong, Felix, is that they had to offer the Finance Ministry as a bargaining chip to create this coalition. And at that point that gives shape. I will never pronounce his name Schoebler, Scheibler in my life. I'll never pronounce it correctly. But he has a choice. He can either kind of recede from German politics and say so long it's been a great ride, or he can go and do this new task he's choosing to go.

[Anna Shymansky]

And this is actually a big deal because if what we're going to probably see with the Liberal Democrats, the people who will probably become the finance minister, they're still going to be fiscally hawkish, but they're much more apt to spend in terms of tax cuts especially.

[Jordan Weissman]

Oh, are they really?

[Anna Shymansky]

Yeah.

[Jordan Weissman]

Interesting.

[Anna Shymansky]

In terms of tax cuts now when it comes to the rest of the Eurozone, they are much less pro euro and pro Eurozone in EU than shoibler. So that doesn't bode well for Greece.

[Jordan Weissman]

Yeah, they're like the, they're so from. Again from. Because I'm not an expert in German politics, but it seems like the reason Greece needs to be quaking is because these guys are about as hard line on deficits and fiscal responsibility and all of that. And they're actually less cuddly, which is hard to believe.

[Felix Salmon]

It is not possible to be less cuddly than Wolfgang Shoib. I mean the only politician I can think of who's less cuddly than Wolfgang Scheideler is probably this guy Norman Tebbett in England. But like that's about it.

[Jordan Weissman]

So like Schauibler would. Okay, so one of like the, the famous moments from the Greek German standoff was Greece started talking to France and Italy and started, you know, making noises about some sort of bigger haircut, some sort of broader forgiveness program and, and Germany respond or Scheudler specifically responded by saying, I think we should contemplate the idea of letting Greece temporarily leave the euro. And it was like a crazy fucking plan. And everyone looked at this and went like, what is it? And it sounded really apocalyptic, but. Or it sounded like he just kind of gone off the ledge. But what a lot of people kind of in retrospect said was actually that was a pretty canny political move. It just kind of got everyone back into a room where it's like, listen, Germany, can never abide by what you are saying. This is my way. Or by. Can never abide by the deal you guys are talking about. This is going to bring everyone into their zone of reality where we can actually negotiate another extended pretend deal, but at least it's going to negotiate something that keeps us all together.

[Anna Shymansky]

Yeah.

[Jordan Weissman]

I would argue as these people who are now coming in would just be like, go fuck yourselves. And that would be it.

[Anna Shymansky]

To a certain extent. Yeah. I mean, I would argue that that was theater on both sides, both on the Greek and the German side in that particular instance. But yes, it is certainly true that people often said that you would not find a more pro EU politician than Joy. Yeah. So this could be a big change. This could be a big change in terms of what it means when they're negotiating with countries like Greece. But to kind of change the topic a little bit to. I know Jordan's favorite topic, which is Germany's current account surplus. This could be good for Europe overall.

[Jordan Weissman]

Okay. I mean, well, wait, wait.

[Felix Salmon]

So wait, let's just unpack that a little bit.

[Jordan Weissman]

Yeah, yeah.

[Felix Salmon]

Germany's current account surplus is bad for Europe. So if Germany's current account surplus comes down, then that could be good for Europe. Why would the departure of Schaubler mean that the current accounts have come down?

[Jordan Weissman]

Schoebler is very. I mean, he's, he's, I wouldn't say he's into austerity for Germany. He was, he. But he's, he's prudent. He's, he is the.

[Anna Shymansky]

I would say he's into austerity for Germany.

[Jordan Weissman]

Well, sometimes. But he was talking about tax cuts recently. Right. And like, there is that. He was finally kind of giving some ground. He said, okay, we have like 15 billion euros worth of tax cuts after the next election. So he was into the idea of, you know, loosening up the purse strings a little bit. But the party that's coming in is actually. They're described. I mean, they're closer to the US Republican Party. Closer to. I mean, they're not really equivalent, but apparently they are much more into the idea of big tax cuts that will return more money to German pockets. So theoretically, you get more spending in Germany. That should bring down the current account surplus in Germany and thus mean more money flowing to the rest of the world. Some of that may end up to more imports coming into Germany, more money flowing out to the rest of the world, some of that money flowing into the rest of Europe. So that could be good.

[Anna Shymansky]

And it's also important that again, we have a coalition government. We don't have someone with the strength of a Schauible. And so we're going to also have the Greens, most likely in this coalition, which they keep calling a Jamaica coalition, which they need to stop calling it that.

[Felix Salmon]

Oh, geez, I can't. What's wrong with calling it a Jamaica offensive to Jamaica? It's the colors of Jamaica.

[Jordan Weissman]

Is there a single black person in the German par. No, there's not, of course.

[Anna Shymansky]

So right now, Germany actually has a bigger fiscal surplus than they thought they were going to have. So it looks like you're going to get potentially some infrastructure spending and spending on education, which is what the Greens want, and you can get tax cuts, which is what the Liberal Democrats want. So again, this could be good for Germany and it could encourage them to continue to spend, to bring down the current account surplus. So this could be a positive.

[Felix Salmon]

But on the other hand, and we get to keep Angela Merkel as leader of the free world. So that's good, too.

[Jordan Weissman]

That is good, but. So then let's come back to the rest of Europe, which is there are two things here, right? One, you know, there was all this talk in France and. Or really Macron was just talking about this idea of really creating the United States of Europe. He actually gave a big speech about this recently, and that seems like that's dead now. I mean.

[Anna Shymansky]

Well, this is interesting. I would argue that. I mean, I do think it probably is.

[Jordan Weissman]

Okay.

[Anna Shymansky]

But what I do think is interesting, when you talk about greater integration of the eu, you have to remember that the German idea of that and the French idea of that have always been very different. They use the same term. But when you're talking about Germany, they're thinking of we want greater integration so that we can have greater control over other countries. When France talks about that, it's more with this idea that we would have a common budget, that we would have risk sharing, that we would have transfer payments. So they've always been really far apart. So I think that was Always.

[Jordan Weissman]

But there was some movement where Merkel and Trey Blair were like, okay, maybe we do need some of this because the last few years have been so bad, maybe some of these ideas are finally conceivable.

[Anna Shymansky]

Right. That was also when macron's popularity was 10% higher.

[Felix Salmon]

And also ultimately, if Britain leaves, getting everyone else on the same page is going to be easier because Britain was always the sand in the Vaseline.

[Jordan Weissman]

But so finally, I guess back to Greece again. Every one of the deals that they've had is a version of extend and pretend. There is never. There is no sustainable Greek deck deal. At some point there will be another big renegotiation with this new German government.

[Anna Shymansky]

And they will extend and pretend again.

[Jordan Weissman]

Okay, you think?

[Anna Shymansky]

Of course they will. No, that's what they're gonna do every time.

[Felix Salmon]

Awesome. Okay, let's have a numbers round.

[Jordan Weissman]

Lightning numbers round.

[Felix Salmon]

Lightning numbers round.

[Jordan Weissman]

Because, yes, we're running out of recording time.

[Felix Salmon]

Jordan, what's your number?

[Jordan Weissman]

My number is 12%. And it's going to take a little bit of explanation, but. So the Treasury Department, Donald Trump's Treasury Department, recently took down a working paper that looked into how much of the US corporate income tax falls on workers and how much of it falls on shareholders. Right. There's this idea that some of the burden of the corporate tax, because it comes out of profits, falls on shareholders, the people who actually get dividends and such. But some of it, because it reduces investment, things like that in new factories also falls onto workers. So they in effect pay part of it. And so the Treasury Department concluded that workers end up paying about 12% of the corporate tax. The current, and this was under the Obama administration, the current Treasury Department, which is now trying to push a massive corporate tax cut, decided it was not good to have this on its website. And so they, this is like the first time they've ever done this. They took down the working paper which the Wall Street Journal found out about. And meanwhile, you know, this made it into a bigger news story. And now, so Steve Mnuchin is running around Streisand effect. This is exactly, this is now. So it's now been implemented that they're trying to hide evidence that maybe Treasury's own economists thought that their talking points were bullshit. And so now Steven Newshin's running around saying, we think actually 70% of the corporate tax falls on workers. And that's, you know, that's, that's why our corporate tax is a really a middle class tax cut. So they've managed to like, like just.

[Felix Salmon]

Ham Fisted Steve Mnuchin is also going around saying that this massive tax cut is going to reduce deficits by a trillion dollars. Which basically is all to say that you just shouldn't listen to anything that Steve Mnuchin says because he is perfectly happy just lying about everything, just as a rule. Anna, what's your number?

[Anna Shymansky]

My number is 73. Those are the number of days that Lejein Al Haflo spent being detained in 2014 for the crime of driving in Saudi Arabia.

[Felix Salmon]

And now she can drive.

[Anna Shymansky]

Now she can drive. So yes, even though I would argue that, you know, there's still many bigger problems in Saudi Arabia right now, especially in terms of women, I think for all the women who've been protesting this since the 90s, this really is a big deal for them. And so that's why I wanted to say bring it up.

[Felix Salmon]

And My number is 3 million, which is the number of dollars that Beijing ByteDance Technology is paying its top coders each year. That if you want to make really large, you know, seven figure salaries in the technology industry, you don't need to be in Silicon Valley anymore. You can be in China. And you know, we can argue about whether Beijing ByteDance technology is actually like good or bad. They seem to be built on a massive copyright violation, but they have a lot of money to pay their coders.

[Anna Shymansky]

Yeah, it's better than having to sign a non compete.

[Jordan Weissman]

Guys, I fucked up my number. It's 18%. I'm just gonna. Damn, we're gonna keep it. I'm gonna correct my number. It's 18%. The paper said 18% that he took down. Sorry listeners, I hope you made it to the end of the segment.

[Felix Salmon]

Jordan always Jordan all Jordan just, you know, he always gets his number. At the last minute he gets his laptop out.

[Jordan Weissman]

You see, this is. For once, I actually had this number last night. For once.

[Anna Shymansky]

That was the mistake.

[Jordan Weissman]

And that was the mistake because it wasn't fresh in my mind. I had it and then I looked it up on my phone just now. I was like, ah, fuck. Anyway, sorry to all listeners who've been complaining about my profanity by the way too. I tried to.

[Felix Salmon]

Can you shut the fuck up? Yeah. Apologies to all children listening to this. Don't speak like us, speak like, you know, Mr. Rogers. It's much better. Anyway, that is it for us this week. Thank you to Justin Kalifowitz. I can tell you, having recorded the Slate plus Extra segment, that it's amazing and Dan Schrader is suffering greatly because it went on way longer than he wanted it to, and he kept on making these signs at me. Can you say, can you just wrap this up? These things are meant to be, like, five minutes long, and this is way over that. This is a really great slate plus segment. So go along to slate.com moneyplus sign up for slate plus. Listen not only to Justin Kalifowitz on the music industry, but also to the entire episode of Cathy o' Neill just being Cathy o'. Neill. Awesome, because that's totally worth it as well. And I need to say also, get 30% off tickets to our live show, which is coming up on November 15th at the Bell House in Brooklyn. It's part of a big Brooklyn podcasting festival, which means that people will be coming and listening and buying tickets who aren't even listeners to this show. So if you want tickets, get those tickets now because they will sell out. Go to sleet.com live, get your tickets there, and get 30% off if you're a Slate plus member. So with that, many thanks to Dan Schrader, Justin Kalifowitz, and everybody else involved in this show. And we will talk to you next week on Slate. Money. It. You know that, you know that, you know that, you know that.