Slate Money – "The You Guys PIK Edition"
Date: January 20, 2018
Host: Felix Salmon (with co-hosts Anna Szymanski and Jordan Weissmann)
Episode Overview
In this edition of Slate Money, Felix Salmon, Anna Szymanski, and Jordan Weissmann tackle a week of fascinating financial stories—some deeply technical, others curiously engineered, and all with their trademark mix of skepticism and enthusiasm. The central topics are:
- Larry Fink’s “corporate responsibility” letter and BlackRock’s influence
- “Super PIK” bonds—what they are and why they're a sign of market exuberance
- The Gates Foundation's unusual approach to eradicating polio through strategic debt repayment
- A rapid-fire “Numbers Round” with tidbits from Amazon HQ2 to asset returns research
The episode covers corporate power, capital market innovations (and hazards), and the strange bedfellows of global philanthropy.
Key Discussion Points & Insights
1. Larry Fink, BlackRock, and Corporate Social Responsibility
[00:33–16:46]
BlackRock's Long-Termism Message
- Larry Fink, CEO of the world’s largest fund manager BlackRock (over $6 trillion AUM), sent a letter urging companies to focus on long-term strategy and social responsibility—not just quarterly earnings.
“He says...I want you guys to have a very explicit long-term investment strategy that you spell out for all of your shareholders. And I think that companies need to have a better sense of mission, like social mission in this world, and they have to do some good as well.” – Felix [04:05]
The Paradox of Passive Investing
- BlackRock's influence is both overstated and understated—while controlling trillions, much is invested passively, with limited direct corporate control except through proxy voting.
- Proxy votes afford some influence, but “usually...issues around the margins of the company. It's not the kind of core of what they do, right?” – Anna [07:45]
- Engaging in dialogue—even outside proxy fights—is a shift, albeit with uncertain results:
“If you do that with thousands of different companies year in and year out...somewhere along the line, I think the world is going to change.” – Felix [10:23]
Cynicism and Political Dimensions
- Skepticism: Is this real change, or PR cover with little impact?
"It provides cover for not actually doing anything." – Anna [10:31]
- Fink may also be aiming to preserve finance's access to political circles as Democrats shift left:
"He is still trying to put forth the idea that you can have socially responsible capitalism and that I can be the representative of that." – Anna [15:23]
Memorable Quote:
“In Washington, no one gives a shit about the buy side versus sell side distinction. You know, that's the bottom line.” – Anna [14:52]
2. Super PIK Bonds – Financial Alchemy
[16:47–26:01]
What is a PIK? ('Payment in Kind')
- Instead of paying interest in cash, companies can pay bondholders...more debt.
“You receive interest in additional debt. So then when the bond matures, your principal is higher.” – Anna [17:23]
What Makes a "Super PIK"?
- A super-PIC is even riskier: debt so deeply subordinated it's owed not just by the operating company, but by a holding company of a holding company.
“This is a holding company of a holding company of an operating company, which means you are subordinated to the debt of the operating company...and if all of those people get paid out, then you get paid, which means you're not getting paid.” – Anna [20:21]
Why Issue These at All?
- Market exuberance: Investors are hungry for yield, and crazy structures can get funded.
- The discussed Irish glass bottle manufacturer’s “super PIK” bond is oversubscribed despite its risks.
Financial Engineering Masterpiece
“This is his masterpiece. This is everything just come to fruit. It's all coming together for him in this moment.” – Anna [21:38]
Key Takeaway
- The popularity of super PIKs doubles as a signal of "frothy" markets:
“It is indicative of complete craziness in the debt market that you can sell absolutely anything to absolutely anyone. And this thing was mass two and a half times oversubscribed.” – Felix [22:59]
3. Apple, Corporate Cash, and Changing Capital Markets
[26:10–28:40]
- Apple, famous for borrowing money to fund dividends while hoarding cash overseas, may now change its ways after U.S. tax reform. This could subtly shift the corporate bond market, as Apple becomes less of a lender/buyer.
- Critique of Apple’s status as a pseudo-bank in response to global tax tactics.
Memorable Moment:
“The classic piece of personal finance advice is never have a savings account and credit card debt at the same time? Because that's really stupid. That's basically where Apple is.” – Felix [26:39]
4. The Gates Foundation, Polio Eradication, and Innovative Aid
[28:40–37:43]
The Puzzle:
- Why did the Gates Foundation pay off Nigeria’s $76 million loan to Japan?
The Mechanism:
- In 2014, Gates agreed to repay Nigeria’s debt to Japan if Nigeria hit polio immunization targets.
- The arrangement incentivized performance:
“If you make it a loan and then promise that you will, you know, then forgive that debt...should you accomplish it, then you're going to actually maybe see some results.” – Jordan [31:10]
Why involve Japan?
- Repaying a debt to a third-party government (Japan) ensures enforceability and sticks to international financial norms—Nigeria “really wants to keep on the good side of its bilateral lenders.” – Felix [34:01]
Broader Use and Effectiveness
- Such “financial engineering” is already being repeated with Pakistan, and may become a model for global health interventions where outcomes need to be verifiable.
Memorable Quotes:
“What you really do want is that those skills and those abilities to be built up within the government and the ministries and civil society rather than having to rely on foreigners.” – Felix [37:09]
“Jordan, have we answered your question? Have we finally found some financial engineering which is good?” – Felix [37:49]
“Yeah. I'm no longer befuddled at the Gates Foundation's use of its philanthrodollars.” – Jordan [37:51]
5. Numbers Round
[38:33–45:21]
- Jordan: 20 – Number of cities on Amazon’s HQ2 shortlist, with a jab at how personal factors (like Jeff Bezos’ home) can dictate big business decisions. [38:33]
- Felix: $12.99 – New Amazon Prime monthly price; highlights the huge premium for non-annual subscribers as a nudge toward annual commitment. [40:01]
- Anna: 145 years – Span covered by a major economic paper analyzing returns to asset classes and supporting the Piketty framework (R > G). [42:29]
Dialogue Highlights:
- On Amazon HQ2:
“It's pretty clear. Jeff Bezos looks like he's going to build a headquarters next to his giant server farm in Northern Virginia and his mansion in D.C.” – Jordan [39:09]
- On real estate as an asset:
“I'm much more of a fan of economic history and what has actually happened as opposed to economic theory and what people think should happen.” – Anna [43:01]
Notable Quotes & Memorable Moments
- On BlackRock:
"As Larry Fink says in his letter, when you get involved in proxy fights, it's kind of too late...What he's doing with this letter is...engaging with these companies in a way that passive investors have historically never engaged." – Felix [09:06]
- On market risk:
"If you are lending money to a company, you want to lend it as far down the capital structure as you can...this is one of the counterintuitive facts about the debt market, which I kind of love." – Felix [21:47]
- On incentive aid:
"If you make it a loan and then promise...that you will, you know, then forgive that debt...maybe you see some results. So it seems like a clever instrument for doing this." – Jordan [31:10]
Timestamps for Major Segments
- Larry Fink / BlackRock Letter: [00:33–16:46]
- Super PIK Bonds: [16:47–26:01]
- Apple & Capital Markets: [26:10–28:40]
- Gates Foundation / Polio Funding: [28:40–37:43]
- Numbers Round: [38:33–45:21]
Summary for New Listeners
This episode interweaves skeptical inquiry and technical clarity, mixing high-profile stories (BlackRock’s vision for capitalism, Apple’s shifting financial role) with arcane market developments (Super PIK bonds) and clever global philanthropy. It’s a fast-moving, accessible dive into why financial markets—and the players within them—behave the way they do, and how the lines between social good, market innovation, and risk sometimes blur in unexpected ways.