Looking Back, or Around, at the Crisis
(Bloomberg Opinion) -- Crisis retro.
We are just a few days away from the tenth anniversary of Lehman Brothers Inc.’s bankruptcy filing, and the volume of financial-crisis reminiscence is crescendoing. Though perhaps “reminiscence” is the wrong word. Here is John Cassidy on Adam Tooze’s new history of the financial crisis/crises, “Crashed,” whose central argument is that much of our current geopolitical situation—the nativism and fragmentation and general rejection of decades of stability and elite consensus—is a consequence of the 2008 financial crisis and the flawed response to it. Here is Andrew Ross Sorkin arguing that “it is hardly a stretch to suggest that President Trump’s election was a direct result of the financial crisis.” I suppose there is a contrarian case to be made that we are not so much remembering the crisis as we are still experiencing it.
But mostly it doesn’t feel like that—markets are pretty bouncy, etc.—which of course means that the Lehman retrospectives are an opportunity to look ahead to the next crisis. Often the assumption that the next crisis will be much like the last one. So here is an op-ed from Ben Bernanke, Tim Geithner and Hank Paulson titled “What We Need to Fight the Next Financial Crisis,” but it should really be titled something more like “What We Needed to Fight the Last Financial Crisis, and Had, But No Longer Have.” It argues that the Federal Reserve, the Federal Deposit Insurance Corporation and the Treasury relied on more or less vague but broad authority to backstop the financial system in 2008, and that “in its post-crisis reforms, Congress also took away some of the most powerful tools used by the FDIC, the Fed and the Treasury,” for the fairly straightforward reason that boundless bank bailout authority is not especially politically popular. I sympathize with this view, but I am perhaps less worried than they are that a run on U.S. short-term wholesale funding markets will precipitate the next financial crisis. We already had that one, you know? The next one will be weird and unexpected, not a replay of 2008 with a more handicapped Fed.
Probably this week’s best look ahead to the next crisis is “Can We Survive the Next Financial Crisis?” from Bloomberg’s Yalman Onaran, which is a nuanced look at the important ways in which the system that led to the last crisis has become safer and also the pockets of risk that have grown since 2008. A more counterintuitive theory of the next crisis is this from Nathaniel Popper, who used to cover Wall Street and who now covers Silicon Valley, and who writes that “a decade after the start of the financial crisis, I have a creeping sense of déjà vu as I go about my job.” It does feel like the big tech companies have been slotted into the villainous role formerly occupied by banks, though without exactly causing a crash of their own.
- “A Decade After Lehman Collapse, Investors Still Shun Bank Stocks.”
- “Decade After Repos Hastened Lehman’s Fall, the Coast Isn’t Clear.”
- “Weathering the financial crisis: how seven lives were changed.”
- “Many lawmakers and aides who crafted financial regulations after the 2008 crisis now work for Wall Street.”
- “How the Financial Crisis Still Affects Investors.”
- John Authers on not reporting on bank runs.
- Matthew Klein: “The 7 Best Books About the Financial Crisis.”
- And here, somewhat unseasonably, is “A Retrospective on the Demise of Long-Term Capital Management.”
Finally here is a passage I found interesting from Tooze’s “Crashed,” on quantitative easing, political volatility, and the U.S.’s flirtation with defaulting on its debt in 2013:
That the astonishing events in Congress in 2013 did not lead to an immediate crisis in the bond market pointed to the resilience of the US Treasurys as the global safe asset of choice. Though the Chinese and Germans might complain and the market blipped, demand for US Treasurys quickly recovered. Ultimately, the market for IOUs drawn on the American taxpayer was underwritten by the Fed. Unlike the ECB, America’s central bank left no doubt that it backed its governments’s debt. QE3 bond purchases provided immediate support, keeping prices up and rates down. This provided at least one point of stability for global investors. But after the events of 2013 questions could no longer be avoided. Was one of the unintended side effects of the stability generated by the Fed to free politics from market constraints and thus enable Republican extremism? Did America’s ability to ride out short-term budget crises like those of 2011 and 2013 lead contemporaries to underestimate the future dangers that the degeneration of American democracy might bring with it? And how long would the Fed’s technocratic interventions compensate for America’s lackluster economic recovery and the shambles in the legislative branch?
Obviously one can disagree with some of the characterizations there. But one thing that we used to talk about a lot around here was that people were worried that people weren’t worried enough: Financial-market volatility seemed eerily low given the apparent instability of, you know, the world. That worry turned out to be overstated—volatility picked back up without causing any particular crisis—but it really was a bit eerie: Apparent actual volatility in the world kept not causing volatility in asset prices. But an implication of Tooze’s argument is that some of the causality went the other way: Because financial markets were calm in the face of geopolitical instability, they enabled more geopolitical instability. If you don’t have bond vigilantes checking up on you, then you can get up to a lot of weird stuff.
What would happen if Elon Musk came to Tesla Inc.’s board of directors today with an offer to take Tesla private at $350 per share? I don’t mean like weird tweets or whatever, I mean a real, fully financed offer to buy all of Tesla’s stock at $350 per share, backed by financing commitments from Volkswagen and Saudi Arabia or whoever, with commitments from Musk and a few other large existing shareholders to roll their stock into the private Tesla. That’s about a $60 billion equity value, but some $12 billion of that is Musk’s own stock, and he has claimed that a majority of big shareholders would be happy to roll over. Assuming half of them (including Musk) do, then you only need $30 billion, which Musk supposedly was able to raise when he did his vague gesture at going private last month. The money is—sort of!—there. And $350 represents about a 25 percent premium to the current stock price. It’s a good deal!
Should the board take it? The pros would be:
- Get public shareholders out at a premium in a risky time for Tesla.
- Musk has argued— unconvincingly, to me, but apparently sincerely—that Tesla would be better off as a private company, so if the board is convinced they should let it go private.
- Honestly it would be hilarious.
The cons are:
- Musk has apparently persuaded the board that Tesla should be worth a zillion dollars—the board recently awarded him incentive pay based on growing Tesla’s market cap to $650 billion—so selling at $60 billion seems like a bit of a lowball deal.
- The stock was above $350 back in June (and of course back in August during the last round of going-private noise, when the price that Musk threw out was $420), so it’s not like shareholders are getting all that rich.
- You really can’t reward this sort of thing.
That last con is, I think, dispositive: After tweeting on Aug. 7 that he might take Tesla private, which pushed up its stock price, Musk has spent the last month diligently working to lower Tesla’s stock price. The fake going-private process, the weird interviews, the erratic public behavior, the continued baseless accusations of pedophilia against his Twitter enemies: If your theory of Tesla’s problems is that short sellers are secretly bribing Tesla employees to sabotage the company from the inside, you might have to start considering that they’ve somehow bribed Musk.
Of course they haven’t: Musk owns billions of dollars of Tesla stock, and stands to get billions more if it grows rapidly, so all his incentives are to push up the price. Unless, of course, he really does want to take it private! If Musk is a buyer of Tesla, then he wants the stock price to be as low as possible. This is a well-known conflict; for instance, in Dell Inc.’s going-private deal, investors argued that Michael Dell had sandbagged the company’s performance in order to buy it more cheaply. I don’t … think … that’s what’s going on at Tesla. Lord knows it would be pretty convoluted. But it is fun to think about.
Anyway: “Nomura Instinet analyst Romit Shah downgraded Tesla this morning to neutral from buy in a note titled ‘ No Longer Investable,’” based on Musk’s “erratic behavior.” And here is more worrying about how Tesla can raise more money in the stock or bond markets, given its cash needs and recent weirdness. As a strategy for running a public company all of this is terrible. But as a strategy for taking a company private, it is … well, also pretty terrible, but in a crazy and funny way, which is kind of Musk’s thing.
If you are the board of directors of a public company, and you face these two issues, which one do you deal with first?
- Your chief executive officer faces multiple credible public accusations of serious sexual misconduct, and
- Your controlling shareholder is trying to push through a merger with another company she controls that you think is not in the interests of other shareholders.
I feel like the right answer to this question is to shout “look behind you!” and then run out of the room. There is no good answer. “We would diligently address both of those issues” is a fine thing to say, but in the case of CBS Corp. they were in direct conflict: Getting rid of CEO Les Moonves, who was accused of sexual misconduct but who was also a powerful figure pushing to keep CBS independent, would strengthen the hand of controlling shareholder Shari Redstone; zealously fighting off Redstone’s desire to merge CBS with Viacom meant presenting a united front of the other directors, including Moonves.
Also no one trusted each other. And so, according to this Wall Street Journal acccount, when Redstone called CBS directors in January to ask about not-yet-public rumors of sexual misconduct involving Moonves, “some board members were skeptical, believing Ms. Redstone was spreading the rumors.” And they focused on Redstone’s threat instead, filing a weird lawsuit to try to get rid of her as a shareholder. Ultimately it all sort of worked out, and CBS’s settlement yesterday both blocked a Viacom merger for two years and got rid of Moonves with no promise of severance pay unless an investigation clears him. But it was not a particularly smooth path to get there, and I suspect that some shareholders will second-guess the board’s delay in acting against Moonves.
The Journal story also mentions that “Mr. Moonves was accidentally copied on an email to the entire CBS board detailing damaging findings in the law firms’ investigations and discussing how to proceed should he need to be put on leave,” oops. It is a commonplace to say that bad governance, boardroom battles, hostile takeover attempts, etc., create “distractions” for companies, but this story is a good illustration of how that actually works in practice. CBS’s board had a real managerial problem to deal with, but it was also fighting a battle for corporate control with its biggest shareholder, and it turned out to be hard to handle both at the same time.
Blockchain blockchain blockchain.
Here is another story about how “there are myriad pilot programs” for blockchain platforms in the financial industry, “but none have yet succeeded in launching a mainstream, commercial product.” Here is an interesting diagnosis of the problem:
“We hit a wall a little more than a year ago with respect to our customers’ willingness to take the ultimate step, launching and operating a network of their own,” Mr. Ludwin said in an interview. Customers would rather use a decentralized network they don’t have to maintain and operate, he said.
Well but … then how is it decentralized? Like part of the point of a shared ledger is that the people who share the ledger share in maintaining it, so they can all trust it and they don’t need to invest in inefficient processes to replicate it. If you want to have a ledger that everyone can look at, but that you don’t have to maintain, then, I am sorry to be a broken record about this, but that technology actually exists. It is called a centralized ledger. Like, you hire some intermediary—a depository or stock exchange or bank or trustee or someone—and they keep a list of who owns what. The advantage is that you don’t have to maintain the list of who owns what. The disadvantage is that you don’t get to maintain the list of who owns what. You get to choose which you want! If you don’t want to maintain the ledger you don’t have to! It’s just, you might have to stop calling it a blockchain.
Elsewhere, here is a story about how crypto exchanges “are turning to unorthodox practices to boost activity and win market share”:
Bitfinex, FCoin and OKex are encouraging startups to drive depositors to their online-trading platforms to get coins listed. Other exchanges, such as Binance and KuCoin, are embracing listing fees that can differ by project. Many exchanges are also rolling out their own "native coins," which traders then use to vote on potential listings.
Literally as I was reading that story I got an email from a crypto exchange I’d never heard of saying “Our team is researching for new coins and tokens for listing on our exchange, so we would like to propose adding your project for trading on the platform.” They’d charge me 3 Bitcoins for a “basic listing” and 2 Bitcoins for each additional currency pair. I do not have a cryptocurrency project, but I suppose it never hurts to ask!
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Matt Levine is a Bloomberg Opinion columnist covering finance. He was an editor of Dealbreaker, an investment banker at Goldman Sachs, a mergers and acquisitions lawyer at Wachtell, Lipton, Rosen & Katz, and a clerk for the U.S. Court of Appeals for the 3rd Circuit.
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