Speaker 1: Bloomberg Audio Studios, Podcasts, Radio News. Hello and welcome to
Speaker 1: The Money Stuff Podcast. You're a weekly podcast where we
Speaker 1: talk about stuff related to money. I'm Matt Levian and
Speaker 1: I write The Money Stuff Colm for Bloomberg Opinion.
Speaker 2: And I'm Katie Greifeld, a reporter for Bloomberg News and
Speaker 2: an anchor for Bloomberg Television.
Speaker 1: Katie, you're you're off thanks week.
Speaker 2: I'm so excited. It's my birthday on Sunday, which is huge.
Speaker 2: It's my favorite day of the year. On Saturday, I'm
Speaker 2: riding in a horse show. And then immediately, how is
Speaker 2: that not your favorite day of You know, I'm not
Speaker 2: going to the Olympics. It's a fact that I accepted
Speaker 2: a couple of years ago. I'm doing this sour show
Speaker 2: on Saturday, and then Saturday night we're leaving the country
Speaker 2: for Ireland for my birthday. And I'm really excited. But
Speaker 2: that means practically speaking that we just recorded next week's episode,
Speaker 2: and now we're recording this week's episode, and we've already
Speaker 2: spent too much time.
Speaker 1: Together today, too much time together. But next week's episode
Speaker 1: of a special episode of Guests, Yes, our second and
Speaker 1: third guests huge talking about the subject deer to Katy's heart.
Speaker 2: Good lord, it's about puzzle hunts.
Speaker 1: It's about puzzles, which are cool, which are dear in
Speaker 1: my heart, and somewhat less dear to Katy's hard than horses.
Speaker 2: I was just happy for Matt listening to Matt having
Speaker 2: fun as someone who's never done a puzzle hunt probably
Speaker 2: never will.
Speaker 1: It's for the large subset of money stuff fans who
Speaker 1: are also a puzzle hunt fans, and.
Speaker 2: For them you want to learn about puzzle value and
Speaker 2: respect all those people that are like puzzle hunts.
Speaker 1: It's amazing, Katy. I saw you this afternoon checking your furrow,
Speaker 1: and k.
Speaker 2: I actually was. I was inspired to after reading about
Speaker 2: basic capital, which you wrote about in one of this
Speaker 2: week's Money Stuff basically four dollars of leverage. Yeah, for
Speaker 2: everyone dollar that you invest, what could go wrong?
Speaker 1: I didn't actually know this when I wrote this, but like,
Speaker 1: there's a fascinating history of this idea, right. So the
Speaker 1: idea is that when you are a young person, you
Speaker 1: invest a little bit of money in the stock market,
Speaker 1: and then as you get older, you move up in
Speaker 1: your career and you start investing more money, and so
Speaker 1: by the end of your career, you are investing more
Speaker 1: of your money is in stocks than at the beginning
Speaker 1: of your career. And if you think about this from
Speaker 1: a theoretical perspective, you will think you should have more
Speaker 1: money in the stock market early on and relatively less
Speaker 1: money later on, right that you should diversify your stock
Speaker 1: market risk by taking more of that risk early instead
Speaker 1: of taking like almost all of it at the end.
Speaker 1: And so people think about this theoretically, and there's a
Speaker 1: sort of well known two thousand and eight paper by
Speaker 1: Ian Ayres and Barry Nelbuff that Ianire's taught at the
Speaker 1: Lost cal I went to basically saying, like, what you
Speaker 1: should do is you should lever up your investments early
Speaker 1: on your retirement investments. Early on, you should take a
Speaker 1: margin loan from your brokerage or like buy long dated
Speaker 1: call options that kind of look like levered features. And
Speaker 1: you should have more than one hundred percent of your
Speaker 1: money in the stock market early on, and then have
Speaker 1: less than hundred percent of your unning the stock market
Speaker 1: later on. And that's going to like smoothier returns over
Speaker 1: time and give you better returns than if you just
Speaker 1: invested your cash as it came in over the course
Speaker 1: of your career and they wrote this paper. If you
Speaker 1: look at it on like SSRN, the date on the
Speaker 1: paper is like May two thousand and eight, which, yeah,
Speaker 1: after I wrote about like the basic capital idea, a
Speaker 1: couple of people email me. There's a famous post on
Speaker 1: the bogel Heads investing for him, where like this grad
Speaker 1: student did this starting like two thousand and seven, and
Speaker 1: he just ran into a buzz saw, like he lost
Speaker 1: all of his money and then like a little bit
Speaker 1: more than all of his money because he had borrowed
Speaker 1: to do it. Yeah, I think he got better over
Speaker 1: time because, like you know, the point of this is
Speaker 1: like you're sort of spreading your risk, and so he
Speaker 1: just unfortunately took a lot of risk going into a
Speaker 1: great financial crisis. But then he got better. But anyway,
Speaker 1: that's the idea. And for various reasons, including that this
Speaker 1: idea had to brief a vogue in two thousand and
Speaker 1: eight before beking a terrible idea. There's not like a
Speaker 1: ton of implementations of it, but basic Capital, which Susanne
Speaker 1: Willie at Plumberg wrote about this week, they are doing
Speaker 1: a sort of implementation of it where they will let
Speaker 1: you borrow money to lever up your furrow NK. And
Speaker 1: the pitch is that you're borrowing the money in like
Speaker 1: kind of a nicer way than broker margin loans, Like
Speaker 1: they give you a term loan, there's no margin calls.
Speaker 1: If like your stocks go down, they're like, that's fine,
Speaker 1: just wait five years, they'll come back. So it's an
Speaker 1: interesting idea in that respect.
Speaker 2: It's interesting that friend of the show Bill Ackman is
Speaker 2: an investor here only because it seems like we've been
Speaker 2: talking about him for several weeks in a row and
Speaker 2: I wanted to say his name again. The way this works, though,
Speaker 2: is that most of your exposure is to credit. It's
Speaker 2: not actually in stocks.
Speaker 1: Right, This is what I wrote about. Like it's like
Speaker 1: you sort of like you like wake up in the
Speaker 1: middle of and you're like, oh, people should be able
Speaker 1: to get photo one levers on their four own case
Speaker 1: and you'll come into the office not okay, how do
Speaker 1: we do that? And you're like, wow, we'll just lend
Speaker 1: them eighty percent of the money of their portfolio, and
Speaker 1: like that's probably fine, right, because like even if stocks
Speaker 1: go down, like if you have a long term loan,
Speaker 1: like the stocks will come back up. The idea of
Speaker 1: like losing money on a five year loan against like
Speaker 1: an eighty percent ltview loan against stocks is like, yeah,
Speaker 1: it's not that big risk. But then you realize the
Speaker 1: real problem is interest. Right, So you're making this loan
Speaker 1: and it's going to charge interest, and the interest is
Speaker 1: you know, like six seven percent a year. It's like
Speaker 1: so pur plus two percent. So it's like, you know,
Speaker 1: meaningful interest, and how are these people going to pay
Speaker 1: that interest? And it's really just optically difficult to make
Speaker 1: them pay the interest, right, Like you have to either
Speaker 1: make them make contributions to the retirement fund every year
Speaker 1: to pay the interest, or you have to like sell
Speaker 1: some of their stocks to pay the interest, or or
Speaker 1: or you can put enough of the money into fixed
Speaker 1: income that pays a yield to pay the interest. And
Speaker 1: if the fixed income stuff that you buy has a
Speaker 1: higher yield than the like SOFA plus two percent that
Speaker 1: you charge, then it's fine. But it's like if it
Speaker 1: has like a twenty five percent higher you have to
Speaker 1: put eighty percent of the stuff into fixed income, and
Speaker 1: so like, in fact, basics proposal is like you put
Speaker 1: something like eighty five percent of your portfolio into fixed income,
Speaker 1: fixed income being maybe a bond fund, maybe maybe some
Speaker 1: private credit.
Speaker 2: Which I do want to talk about it.
Speaker 1: Yeah, I want to try about it too. Yeah, put
Speaker 1: some private credit your thro own k. But so the
Speaker 1: point is that like you're levering up your frown K
Speaker 1: and then kind of like walking most of that back
Speaker 1: by putting it into bonds rather than stocks. So like,
Speaker 1: instead of putting two hundred percent of your like retirement
Speaker 1: account into stocks, you're putting like seventy five percent of
Speaker 1: your retirement fund into stocks and another four hundred and
Speaker 1: twenty five percent into credit. So it's like a nice
Speaker 1: effort to achieve this interesting theoretical idea, but doesn't quite
Speaker 1: accomplish exactly what you'd like ideal they wanted to accomplish.
Speaker 2: Yeah, so you described this as cool in your school, which, by.
Speaker 1: The way, you know as like I will say, like
Speaker 1: I used to be a derivative structure, and like, so
Speaker 1: often you're like, oh, this is a great idea we
Speaker 1: should do, and then you're like it doesn't work practically,
Speaker 1: and then you're like, what is the like awkward compromise
Speaker 1: that kind of like captures the spirit of it? But
Speaker 1: isn't quite what you wanted. This feels like that. They're like, yeah, okay,
Speaker 1: I like this awkward compromise, well.
Speaker 2: You calling it cool is already on the Basic Capital website.
Speaker 2: It's attributed to Bloomberg. It's a great endorsement.
Speaker 1: It's a reasonable compromise to achieve an abstract damn.
Speaker 2: Yeah, so leverage to a lot of folks sound scary.
Speaker 2: It kind of sounds scary to me. You're talking about I.
Speaker 1: Feel like everyone's first instinct is like, oh my god,
Speaker 1: you're borrowing money to your taking margin loans in your
Speaker 1: free tim Again it's like yeah, fine, but like so okay,
Speaker 1: this is like not margin leverage. So it's like you
Speaker 1: have like a five year term loan, right, Like the
Speaker 1: chance that your portfolio will end up twenty percent below
Speaker 1: where you started and therefore your entire retirement savings will
Speaker 1: be wiped out. They're not that big, but you know what,
Speaker 1: they exist, right, there's a risk. The story suggests that
Speaker 1: like most people who do this, like you know, they
Speaker 1: dabble in it. They put a little bit into the
Speaker 1: weird leverage thing, and then they put a lot into
Speaker 1: like regular stuff. But yeah, like it amplifies your risk,
Speaker 1: it amplifies your returns. I think the case is that
Speaker 1: right now, virtually everybody it makes a huge concentrated that
Speaker 1: with eighty percent leverage in their financial list. Not virtually everybody,
Speaker 1: but like a lot of people in America buy a
Speaker 1: house within eighty percent mortgage or sometimes more than eighty
Speaker 1: percent mortgage, and they are taking a very concentrated leverage risk,
Speaker 1: and if house prices declined by more than twenty percent,
Speaker 1: they will lose all of the money they invested in
Speaker 1: their house. Now, there are differences. One of them is
Speaker 1: that you get to live in the house, whereas you
Speaker 1: don't get to live in your stocks. But another difference is,
Speaker 1: like traditionally it's hard to get like non callable leverage
Speaker 1: on stocks and so your mortgage, if your house price
Speaker 1: goes down, you don't really notice necessarily because like you're
Speaker 1: just paying the mortgage for thirty years. If your side
Speaker 1: prices go down, then you'll notice and you'll be like, oh, no,
Speaker 1: the equity in my account is zero or whatever. But
Speaker 1: this sort of trick here is to think about it
Speaker 1: more like a mortgage and not worry that your stocks
Speaker 1: have gone down, because like in thirty years they'll probably recover.
Speaker 2: Yeah, I guess I have a hard time making my
Speaker 2: brain work that way.
Speaker 1: I think most people do. I think like everyone's natural
Speaker 1: reaction is like, oh, this is so risky, But it
Speaker 1: is in some ways riskier to have everyone have two
Speaker 1: hundred percent of their networth concentrator in houses, and having
Speaker 1: two hundred percent of your net worth in a diversified
Speaker 1: portfolio of stock and credit investments is maybe safer than
Speaker 1: having it all in house, but maybe not. I'm not
Speaker 1: investment advice here, but I don't mind the leverage that much.
Speaker 1: I mind the fact that it's not thocks, But you know,
Speaker 1: I can't win them all, I will say. I will say.
Speaker 1: The only thing is like, if you told me you
Speaker 1: can get eighty percent LTV leverage against the SMP and
Speaker 1: hold it for thirty years and then retire, I'd be like, Yeah,
Speaker 1: that's a good product. If you told me me same
Speaker 1: thing against the broad bond index, I'd be like, well,
Speaker 1: that's a less good product. But it's like you're probably
Speaker 1: not gonna lose all your money. Yeah, against the private
Speaker 1: credit portfolio. Is there some chance that private credit is
Speaker 1: like in a bubble that is going to burst?
Speaker 2: Maybe you're definitely seeing more of those fears out there.
Speaker 1: Yeah, I'm not like super worried about that, but like
Speaker 1: you're right saying I will take eighty percent leverage on
Speaker 1: a portfolio of private credit. There's not a lot of
Speaker 1: history to kind of point to there.
Speaker 2: It's interesting to read this article this week about basic
Speaker 2: capital and you know how much exposures there's going to
Speaker 2: be to private credit in this because you also had
Speaker 2: Empower come out this week Bloomberg News reporting that Empower
Speaker 2: is going to start offering private assets, working with firms
Speaker 2: such as Apollo and Franklin Templeton.
Speaker 1: We talk about it every week. It's like there's a
Speaker 1: gold rush to put private assets into frohen K's because
Speaker 1: like there's a long running tradition in democratic administrations of
Speaker 1: regulators being very skeptical of high fee products in FROH
Speaker 1: and K, to the point that people kind of worry
Speaker 1: that they have a fiduciary responsibility to only put index
Speaker 1: ones in fur own case. Yeah, and now there is
Speaker 1: this complete reversal where it's like, oh no, but people
Speaker 1: want private assets in frow in case and obviously those
Speaker 1: have high fees, and so now everyone's like let's put
Speaker 1: high fee products into fur own case it's a real
Speaker 1: gold rush. And that's the cynical take. Yeah, the sensible
Speaker 1: take is like retirement savers do have thirty year time horizons,
Speaker 1: and it's like really discouraged to take money out of
Speaker 1: a four O NK before retirement. So it's like, if
Speaker 1: you have a long time horizon, you should be taking
Speaker 1: I liquidity, you should be taking some risk. It's truly
Speaker 1: the case that Furro and k's are a good place
Speaker 1: to put private assets.
Speaker 2: It's just like, if I have a thirty year time horizon,
Speaker 2: why would you want to be anywhere but stocks? Like
Speaker 2: sort of one of the pitches for private credit is
Speaker 2: that it's diversified. It you know, is non correlated to
Speaker 2: the S and P five hundred. But if I'm investing
Speaker 2: over that time period and I'm going to get probably
Speaker 2: low double digit returns in the sa P five hundred
Speaker 2: on an annualized basis, and I'm investing for thirty years,
Speaker 2: I'd probably still just want US stock exposure.
Speaker 1: You can't guarantee that you're getting the double visit returns
Speaker 1: on US stock exposure, and diversifying credit is also also
Speaker 1: there's this line that I quote all the time someone says,
Speaker 1: if you can get like twelve to fourteen percent returns
Speaker 1: and private credit, what else would you want to do
Speaker 1: with your life? And if you can get twelve percent
Speaker 1: from like pretty solid private credit products, like why would
Speaker 1: you want twelve percent from the.
Speaker 2: SMP Because I feel like you're going to get it
Speaker 2: for lower fees And that's that's a big reason why.
Speaker 2: And I can see it every single day. I mean,
Speaker 2: this was the first time I checked my four one
Speaker 2: K in quite a long time. But I mean history
Speaker 2: as a guide, you're probably going to get that in
Speaker 2: public equities, so like why bother?
Speaker 1: But yeah, it was still shorts sentence. If you can
Speaker 1: get twelve to fourteen percent returns in like senior secured
Speaker 1: private credit, what else would you want to do with
Speaker 1: your life? I explain a lot of things with fees.
Speaker 1: I also feel like one of the main things that
Speaker 1: is happening in the financial world right now is a
Speaker 1: lot of people have that same thought of as you
Speaker 1: can get twelve to fourteen percent in like first lean
Speaker 1: private credit, what else would you want to do with
Speaker 1: your life? That's why think it's hard to do private
Speaker 1: equity because like if you're in private equity, you're paying
Speaker 1: twelve to fourteen percent. If you're in private credit, you're
Speaker 1: receiving it. It's a good deal.
Speaker 2: But I hear you, Yeah, it doesn't quite swimmy.
Speaker 1: I hear you. I think that, like if you ask
Speaker 1: what should normal retirement savers be doing, I think there's
Speaker 1: a decent case to be made that essentially zero costs
Speaker 1: equity exposure to the US economy is a good product,
Speaker 1: and very high cost exposure to leverage loans and other
Speaker 1: weird structured stuff is a great product to sell to
Speaker 1: you and possibly less good of a product for you
Speaker 1: to buy. But that that's not obviously true. I do
Speaker 1: want to say one other thing about private credit and
Speaker 1: this basic capital structure. In basic capital, they lend you
Speaker 1: eighty percent of the value of your portfolio. Where's that
Speaker 1: many come from? I don't know. I think it might
Speaker 1: come from their balance sheet, like early on, because they're
Speaker 1: just ramping this up. But like in the long run,
Speaker 1: they have to find a source of capital for that,
Speaker 1: and I don't know who that source of capital is
Speaker 1: going to be. I'd be surprised if it's like City Group.
Speaker 1: I would not be surprised if it's private credit for
Speaker 1: it or like you know, like private credit ish firms
Speaker 1: like insurance companies or whatever. Like where I really want
Speaker 1: this to go in the long run is like the robberos,
Speaker 1: where private credit firms are lending it so for plus
Speaker 1: two percent to retirement savers who then use those loans
Speaker 1: to buy slightly spicier private credit stuff from the private
Speaker 1: credit firms, like you know, the sover plus six percent. Yeah,
Speaker 1: like that's a good financial product right there.
Speaker 2: I also just wanted to talk about the founder really quickly,
Speaker 2: Abdul all aside. He's thirty years old, which is also
Speaker 2: pretty cool.
Speaker 1: It's the right age to be thinking about these things.
Speaker 2: Definitely lover my retirement service. He went to Harvard Business School,
Speaker 2: that where he was when he pitched Bill Ackman. He
Speaker 2: also previously worked in leverage finance at Goldman Sachs. So
Speaker 2: of course you were going to think this is cool.
Speaker 2: Oh yeah, this is like, this is like resume is
Speaker 2: I Betty loves puzzle hunts. You know who else probably
Speaker 2: loves puzzles.
Speaker 1: The president of the private aquity club at every university.
Speaker 2: I was going to say, these poor kids being hazed
Speaker 2: at these student finance clubs. This really bumms me out.
Speaker 1: It is not anything like what I experienced in college,
Speaker 1: and it's like a sort of thing that I've been
Speaker 1: noticing even for my time in banking. But yes, there's
Speaker 1: a Business Insider article this week about college student finance clubs,
Speaker 1: which are so insanely competitive. I think we've talked about
Speaker 1: on this on the show. Like where it used to
Speaker 1: be private equity firms would hire people after their two
Speaker 1: year analyst program at a bank because they knew stuff,
Speaker 1: and they'd like, you know, you'd work as an alis
Speaker 1: at a bank, and then like you came to the
Speaker 1: end of your two year program, you'd interview if your
Speaker 1: new jobs, and private equity firms would interview and they'd
Speaker 1: hire you. It was an advantage for a private equity
Speaker 1: firm to interview two weeks earlier in the other firms.
Speaker 1: And so I got pushed back to the point that
Speaker 1: now people are interviewing before they start their banking jobs.
Speaker 1: You graduate from college, you're about to start a banking job,
Speaker 1: but first you interviewed a private equity firm where they
Speaker 1: ask you like, so, how's your banking job, and you're like, wow,
Speaker 1: I haven't been there yet. But so everything's getting pushed
Speaker 1: back earlier. And like one symptom of that is that
Speaker 1: being in these like exclusive elite finance clubs at universities
Speaker 1: is like viewed as being important for your resume to
Speaker 1: get the good finance jobs. And so you like interview
Speaker 1: as a freshman and they like give you a bunch
Speaker 1: of like difficult financial modeling questions, and like there's someone
Speaker 1: in the story like cried during their interview in there.
Speaker 1: If you make it through, then you're in the finance club.
Speaker 1: And being in the finance club gives you the inside
Speaker 1: track to getting the investment banging job that'll get you
Speaker 1: the private equity job.
Speaker 2: Yeah, it did read suspiciously like getting into greek life
Speaker 2: at a college or university. Not that the college I
Speaker 2: want to had greek life, but it did sound a
Speaker 2: lot like rushing of fraternity.
Speaker 1: Not a lot.
Speaker 2: Well, it's hyper competitive, you pass out? Well, no, but
Speaker 2: there's other forms of hazing.
Speaker 1: Yeah, like DCF modeling.
Speaker 2: Yeah, which would you rather do?
Speaker 1: The story? It was like high school kids before they
Speaker 1: arrive on campus are like, you know, you spend your
Speaker 1: senior spring of high school studying up on finances that
Speaker 1: you can get into the finance club your freshman year.
Speaker 1: It seems insane.
Speaker 2: Yeah, I did not do this. No, I was so
Speaker 2: far from this. This just bummed me out. Like you said,
Speaker 2: all of this is getting pushed forward, and I do wonder,
Speaker 2: you know, what's the breaking point, Like when does it
Speaker 2: turn in on itself? And I don't quite No, it
Speaker 2: just feels like where does it go from here? There's
Speaker 2: nowhere else to go if you have high school seniors
Speaker 2: in their senior spring, you know, studying.
Speaker 1: Of course there's somewhere else.
Speaker 2: We're middle school.
Speaker 1: Yes, It's like someone who was like, this is like
Speaker 1: travel sports, right, Like, yeah, this is another thing that
Speaker 1: big people talk about all the time. Like it used
Speaker 1: to be that like kids played little league and they
Speaker 1: played for their high school sports teams and it was
Speaker 1: like sports and fun. And now it's like when you're seven,
Speaker 1: you try out for like the travel team and you
Speaker 1: have to spend all this money to be on the
Speaker 1: travel team, and like it's pitched to parents as like
Speaker 1: your kid will never get into college if they're not
Speaker 1: on like the elite seven year old soccer team or whatever.
Speaker 1: And I don't know, man, that's like everything, right, Like
Speaker 1: all of these markers of status have become so competitive,
Speaker 1: and the people witness that competition and are like, well,
Speaker 1: if I start a year earlier then everyone else, I'll
Speaker 1: have an advantage. And everyone does that, and so I
Speaker 1: just moves further and further back until like the seven
Speaker 1: year olds are trying out for like the Travel Financial
Speaker 1: Modeling Team.
Speaker 2: As a parent, does this stress you out?
Speaker 1: Yeah?
Speaker 2: Yeah, yeah I'm not a parent, but you know I'm thinking, well.
Speaker 1: This is why I'm working with my daughter on her
Speaker 1: DCF model.
Speaker 2: Yeah. Yeah, I have a cat, so it doesn't quite
Speaker 2: apply to me. But I think of little Xana do
Speaker 2: in like I don't know, fifteen years and I worry.
Speaker 1: About like great callback, I hope anything I should just
Speaker 1: like little Xanada, You're you're.
Speaker 2: Hypothetical named after the New Jersey American Dream Mall Medal.
Speaker 2: That's kind of why I hope it turns in on itself,
Speaker 2: because it just doesn't seem sustainable.
Speaker 1: Yeah, people said that for a long time, had a
Speaker 1: lot of things like college admissions and stuff, and the
Speaker 1: ratchet keeps turning. I will say that, like there are
Speaker 1: like counter trends to this, where like I always think
Speaker 1: of like the very prestigious financial firms, you know, I
Speaker 1: think of like Renaissance and Bridgewater and like to something
Speaker 1: Chain Straight is like this. There's a notion that they
Speaker 1: don't hire people from traditional Wall Street training. They don't
Speaker 1: like MBAs or people from the street. They like to
Speaker 1: hire people who are not tainted by Yeah, like traditional
Speaker 1: Wall Street thinking. And it's weird for people to channel
Speaker 1: themselves so intensely into traditional the traditional paths. But maybe
Speaker 1: it's not that weird. Maybe those firms are outliers, you know,
Speaker 1: pre med.
Speaker 2: There's certain things you need to learn and know about
Speaker 2: science to become a doctor. But I could see like
Speaker 2: a Bridgewater thinking, you know, I want to make sure
Speaker 2: I have an edge that I'm not I'm not just
Speaker 2: hiring someone who has been programmed by someone other than myself.
Speaker 2: Like I want the creative thinker.
Speaker 1: You want the kids doing polon, it's not the kids
Speaker 1: doing finance club on.
Speaker 2: So maybe that will be a forcing action for turning
Speaker 2: it on itself.
Speaker 1: I don't know. I mean, like the other thing is that,
Speaker 1: like you know, and I wrote about this, like when
Speaker 1: I was in college, there are a lot of like
Speaker 1: aimless smart people who graduated from college and they're like, well,
Speaker 1: I guess I'll do investment in banking recruiting, because as
Speaker 1: they're there, and in some ways that's not good for
Speaker 1: a bank, or you know, some ways, if you're running
Speaker 1: a desk at a bank, and like you can choose
Speaker 1: between the president of the Financial Modeling Club and like
Speaker 1: the classics major who's like, well, I guess I'll do
Speaker 1: investment banking. You'd rather have the president of the financial
Speaker 1: modeling Club because they can do financial models and they'll
Speaker 1: be useful to you. But I think, like taking a
Speaker 1: step back, if you're like the CEO of a bank,
Speaker 1: there's a real value to having a broad selection of ambitious,
Speaker 1: smart people who don't necessarily care about banking, because some
Speaker 1: of those people will be really good bankers because they're
Speaker 1: a little bit broader minded and like less rigid than
Speaker 1: the people who are just the financial modelers. But some
Speaker 1: of them will not be good bankers and will be
Speaker 1: politicians or media people or you know other things podcasters,
Speaker 1: and their two years at a bank will reflect well
Speaker 1: on you and sort of lead you to continued to
Speaker 1: do well in recruiting. Like I just think that, like,
Speaker 1: if you're an investment bank and you're only hiring people
Speaker 1: who have been interested in investment banking since they were eighteen,
Speaker 1: Like you're sort of like undermining your own prestige.
Speaker 2: Yeah.
Speaker 1: Wow, this is like my very selfish disclosure. I used
Speaker 1: to work at Colban and do you see kind of
Speaker 1: cool to be like, ah, I used to work at Colvin,
Speaker 1: and like you'd like go around to like different places
Speaker 1: in life and be like, oh, I also used to
Speaker 1: work at Colvin.
Speaker 2: Right, because yeah, and presonably Goldman is proud of you.
Speaker 1: Oh I hope, so yeah, they'd better be.
Speaker 2: I don't know. It's kind of similar in journalism, like
Speaker 2: you want to hire people not always, but like you
Speaker 2: want to have some journalists who, such as yourself, that
Speaker 2: came from outside the industry, right, and like.
Speaker 1: Both because like it is vaguely prestige enhancing, but also
Speaker 1: because like having that diversity of experience probably does improve
Speaker 1: the doing of the job. Whereas if everyone has the
Speaker 1: same training since they were eighteen, like you're probably missing things.
Speaker 1: Maybe the training is really good. Maybe these finance clubs
Speaker 1: are like you know, they sound brutal, right, there's this
Speaker 1: tension in the article where like these clubs are very selective. Yeah,
Speaker 1: and it's like, well, you could just take more people
Speaker 1: and you could probably teach them how to pick stocks,
Speaker 1: and like maybe they wouldn't be great at it, but
Speaker 1: like who cares, right, Like some of them are investing
Speaker 1: like small portfolios of like the college's money. Some of
Speaker 1: them are not, Okay, you didn't pick a good stock.
Speaker 1: But I think like part of it is they want
Speaker 1: to be selective, because the mean thing they're doing is
Speaker 1: like saying we were selective, so that like they are
Speaker 1: the place where the banks want to hire from.
Speaker 2: Yeah. I did love this line from the Business Insider article.
Speaker 2: Some clubs conduct three to five rounds of interviews, students
Speaker 2: told p I, which can involve a resume review, yes,
Speaker 2: your high school resume, a social assessment, and multiple technical
Speaker 2: rounds in which you'll be grilled on real world finance questions.
Speaker 2: My high school resume was written in crayon, so I
Speaker 2: would love to see some of these.
Speaker 1: I do love the phrase a social assessment, which does
Speaker 1: that mean that you have to like drink until you
Speaker 1: pass out once? Because like it's you know, it's still
Speaker 1: a college club, like you still have parties, right, I hope,
Speaker 1: So I hope.
Speaker 2: Yeah, I don't know, maybe some of these students will
Speaker 2: write in and tell us about their investment club.
Speaker 1: You know, I wrote about it, and several people did
Speaker 1: write it tell me about their investment club, including one
Speaker 1: person who pointed out that, like the competition goes two ways,
Speaker 1: and the banks like compete to get in front of
Speaker 1: these clubs because like, you know, if you like have
Speaker 1: the first meeting with like the club, then like that
Speaker 1: club is more likely to send students to you, and
Speaker 1: so you'll you'll be able to pick them off instead
Speaker 1: of them going to other banks. And so there's like
Speaker 1: a competition including like the banks like love to sponsor
Speaker 1: stuff for the clubs or just like give them money
Speaker 1: because like that helps with her recruiting, and so you know,
Speaker 1: it goes both ways. But yeah, in general, I got
Speaker 1: a number of emails from people who are in these clubs,
Speaker 1: and none of them were like, no, it's great, that
Speaker 1: article is all wrong there.
Speaker 2: I think so much fun.
Speaker 1: It's pretty bad. Yeah. I have a friend whose daughter
Speaker 1: is in one of these competitive clubs, and they asked
Speaker 1: me to speak and I talked at their club. But
Speaker 1: I also found it. I was like, why are you
Speaker 1: in this competitive fight club?
Speaker 2: Did they seem happy? Were their smiles? Was there any
Speaker 2: mercy I was speaking?
Speaker 1: So it was great.
Speaker 2: Yeah, it was full of mercy and class.
Speaker 1: It was I mean, yeah, stamping cheering.
Speaker 2: Probably the highlight of their college experience.
Speaker 1: I definitely in fact in doing DF models, Well, this is.
Speaker 2: Really fun to talk about, but I'm really just in
Speaker 2: knots over how Elon Musk is going to get more money,
Speaker 2: specifically Tesla options.
Speaker 1: Yeah, this is not super easy, but like they have
Speaker 1: to reported that Tesla is trying to figure out a
Speaker 1: way to give him a giant bag of money. They
Speaker 1: gave him some stock options in twenty eighteen.
Speaker 2: Going all the way back to twenty eighteen.
Speaker 1: When Tesla was a sixty billion dollar company. I mean,
Speaker 1: it's not like a one point something trillion dollar company.
Speaker 1: But like, the options all worked out and he did great.
Speaker 1: They awarded him on the order of one hundred billion
Speaker 1: dollars from these options, and then the shareholder sued in Delaware,
Speaker 1: and the Delaware judge said, you know, this is a
Speaker 1: conflicted transaction that was not fair to shareholders, and so
Speaker 1: the options are gone and Elon Musk and Frankly Tesla's
Speaker 1: board in Tesla's shareholders were all kind of mad about that.
Speaker 1: We talked about it in the past. And one thing
Speaker 1: they did was vote again to give him back the options,
Speaker 1: and the judge said, no, that doesn't work. The options
Speaker 1: are gone. Another thing they did was about to move
Speaker 1: to Texas. So Tesla's now incorporated in Texas, so like,
Speaker 1: the next time they give him stuff, you can only
Speaker 1: sue in Texas. And this week the government Texas signed
Speaker 1: a bill about limiting how much you can sue a
Speaker 1: company in Texas. And the answer is, you really kind
Speaker 1: of can't. Like it's it meant to be much more
Speaker 1: protective of decisions like this than like, you know, the
Speaker 1: equivalent law in Telware. So like, if they were to
Speaker 1: give him another hundred million dollars today, like it would
Speaker 1: be fine, like no one would no one would be
Speaker 1: able to ject. But but if they were to give
Speaker 1: him hundred million dollars today, they would have a huge
Speaker 1: accounting hit and he would have a huge tax hit. Basically,
Speaker 1: it would be a multi billion dollar expense to Tesla,
Speaker 1: which would start its income, and it would be a
Speaker 1: huge tax bill to him. He would pay like fifty
Speaker 1: seven percent taxes on the value of the award, like
Speaker 1: what's nice about what happened in twenty eighteen is that,
Speaker 1: probably speaking, there were not a lot of tax consequences
Speaker 1: or a lot of accounting consequences to giving him this
Speaker 1: award because the options weren't worth very much in the theory,
Speaker 1: because the stock was low and there were a lot
Speaker 1: of ambitious targets that he had to hit in order
Speaker 1: to get the options. And then like seven years later,
Speaker 1: the options are worth a lot of money because he
Speaker 1: hit the targets, Like that's how it's supposed to work.
Speaker 1: Now they're gone, and like giving him new options would
Speaker 1: be really bad for tax and accounting purpose. So Tesla's
Speaker 1: trying to figure out what's the right way to solve
Speaker 1: this in a way that gives him what he wants,
Speaker 1: which is both like a giant pat on the head
Speaker 1: for being so good and also like more control of Tesla. Yeah,
Speaker 1: but in a way that doesn't like he created a
Speaker 1: h tax bill or like an accounting this. Yeah.
Speaker 2: Specifically, the FT reported that they formed a special committee
Speaker 2: to explore Elon Musk's pay. The committee comprises of just
Speaker 2: the chair of the board, Robin Denholm, and Kathleen Wilson Thompson.
Speaker 2: It's going to explore alternative ways to compensate him for
Speaker 2: passwork should Tesla fail to reinstate that twenty eighteen pay deal.
Speaker 2: You had kind of a suggestion for them.
Speaker 1: So I've had two suggestions this week. One is my
Speaker 1: stupid suggestion and one is the readers. Both of them
Speaker 1: are somewhat tongue in cheek suggestions. Okay, Essentially the problem
Speaker 1: is that the stock price of Tesla is too high.
Speaker 1: Right like in twenty eighteen, they're like, we'll give you
Speaker 1: a huge pile of money if you tenax the stock price,
Speaker 1: and then he did it, and then like now they
Speaker 1: can't be like, well, we'll give you another huge pile
Speaker 1: of money for tenexting the stock price previously because that
Speaker 1: would have tax consequences. So the solution to the stock
Speaker 1: price being too high is to make the stock price lower.
Speaker 1: And so I don't think this is original for me.
Speaker 1: I think, like you know, I've been writing about elin
Speaker 1: Mus for years, and I've been getting somewhat conspiratorial emails
Speaker 1: from readers for years, and I think somewhere a reader
Speaker 1: email will be like if they want to give him
Speaker 1: stock options again, And it's very important that the options
Speaker 1: to be granted up the money, and he wants them
Speaker 1: to be very valuable. The thing to do is to
Speaker 1: make the stock very viatile. Tank the stock, give new
Speaker 1: stock options at a low price, and then bring the
Speaker 1: stock back up, and the stock options will not be
Speaker 1: worth a lot.
Speaker 2: Turns out, is that what he's been doing.
Speaker 1: I mean, like, you know, the stock went down a lot. Yeah,
Speaker 1: as he was doing doge antics, and he's like a
Speaker 1: little bit retreated from the doge antics and said things
Speaker 1: like I will spend more time at Tesla. And the
Speaker 1: stock gone up, and it's like, well, you know, you
Speaker 1: could like turn the dial all the way to doage.
Speaker 1: Stock plummets, give him stock options, be like, oh, with
Speaker 1: these options, I'm now motivated to spend more time in
Speaker 1: the company. Turn the doll more to Tesla. Stock goes
Speaker 1: up and everything's fine.
Speaker 2: Yeah, there you go.
Speaker 1: That's one solution. It's not a very good solution.
Speaker 2: That was your solution, So I'm not going to insult you.
Speaker 1: No, it's pretty stupid.
Speaker 2: But what was the reader's suggestion?
Speaker 1: The reader's suggestion is there are various ways for Tesla
Speaker 1: to give elon musk stock. Let's say, the traditional way
Speaker 1: to give a ceo stock is to do it as
Speaker 1: incentive compensation, and that runs into the problems that we
Speaker 1: have here, where like if you want to incentivize him
Speaker 1: for work, he's already done, like you have a big
Speaker 1: tax bill. Another thing that you could do is you
Speaker 1: could acquire a company.
Speaker 2: That he owns, right, and maybe one that begins with.
Speaker 1: X not necessarily yes, So there's a business logic too,
Speaker 1: I mean arguably business logic too. Tesla acquire xai because
Speaker 1: Tesla's an AI company and as an AI company. But
Speaker 1: you know, Tesla has in the past acquired solar City,
Speaker 1: which was a company that was partially owned by Elon Musk,
Speaker 1: and there were some allegations that Tesla was overpaying for
Speaker 1: solar City because Elon Musk wanted it to and then
Speaker 1: it was essentially a ballout of solar City to like
Speaker 1: enrich the CEO and the shareholder sued and he lost,
Speaker 1: and the Delaware Cord at the time said, nah, this
Speaker 1: was good enough, but you know in Texas like you
Speaker 1: could probably be even faster and loser. And so the
Speaker 1: solution that my reader suggested was, like, look, you have
Speaker 1: an Elon Musk company, you overpaid for it. In the
Speaker 1: form of Tesla stock by ninety billion dollars, and you've
Speaker 1: given Elon Musk ninety billion dollars of stock that is
Speaker 1: not immediately taxable to him and does not reduced your earnings.
Speaker 1: So it like kind of solves the problem of rewarding
Speaker 1: him for his past work. And the objection to it
Speaker 1: is that if a Delaware company was like, we're going
Speaker 1: to just buy our CEO is like random small startup
Speaker 1: for ninety billion dollars, they'd get sued and they'd go
Speaker 1: to court, and a Delaware chancellor would review whether the
Speaker 1: transaction was entirely fair to shareholders. And given both the
Speaker 1: cynicism with which I'm describing this and Delaware's history with
Speaker 1: Elon Musk, the chancellor would probably say, no, this is
Speaker 1: not entirely fair to shaholders. You have to give back
Speaker 1: the stock. But being in Texas, and I think the
Speaker 1: thing about this is like I'm describing it in this
Speaker 1: very cynical way, but like you could imagine Tesla's board
Speaker 1: saying this CEO is very valuable to us. We owe
Speaker 1: him for the good work he did increasing the stock
Speaker 1: price in the past. That the Delaware chancellor took the
Speaker 1: stock away from him, for shareholders are already voted to
Speaker 1: give him that stock back, and the chancellor said, no,
Speaker 1: that doesn't work. So what we're going to do is
Speaker 1: we're going to give him the stock in this alternate
Speaker 1: way where we're buying this company from him, you know,
Speaker 1: and I know the company isn't worth ninety billion dollars,
Speaker 1: but like he's our guy, we like him, Let's give
Speaker 1: him the ninety billion dollars. You could imagine like disclosing
Speaker 1: that clearly and the shelder saying sure, yeah, So we have.
Speaker 2: Two potential solutions on the board right here.
Speaker 1: No one would ever cite this podcast if they're implemented
Speaker 1: either of these solutions, because you'd probably get in trouble
Speaker 1: doing these things explicitly, like impleasantly.
Speaker 2: Well, this is a watch this space sort of moment.
Speaker 2: Tesla Hid say in a filing that it's proxy Samen
Speaker 2: will be delayed. That indicates that perhaps you'll learn how
Speaker 2: to do it. Yeah, their annual meeting will be delayed.
Speaker 2: Usually the annual meeting is in May or June, so
Speaker 2: maybe sometime in the summer we'll want to come.
Speaker 1: To Shrelders with some thing that the Shelders can vote
Speaker 1: on to giv Alan of his money.
Speaker 2: We're going to talk about it on this podcast, but
Speaker 2: not next week. No, No, next week we have something
Speaker 2: far more sinister.
Speaker 1: And that was The Money Stuff Podcast.
Speaker 2: I'm Matt Livian and I'm Katie Greifeld.
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