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Speaker 2: Yeah, it turns out, you know, if you google how
Speaker 2: to defrost a bagel and it tells you to run
Speaker 2: it under cold water for thirty seconds, that is an
Speaker 2: unnecessary step. Not only is it unnecessary, I would not
Speaker 2: recommend it, it produces a disgusting result.
Speaker 1: Yeah. No, your mistake was giggling instead of asking your
Speaker 1: local suburban jew who would tell you right answer.
Speaker 2: Or just ask you know that you could go that route,
Speaker 2: or just ask your podcast co host because everyone has
Speaker 2: one of.
Speaker 1: Those, and I'm facing important life decisions that my first
Speaker 1: thought is I should ask my podcast cast about those. Yes,
Speaker 1: at that's true.
Speaker 2: It's practical for most tests. So this actually isn't our
Speaker 2: first episode of the year.
Speaker 1: It's not our first episode to air this year. That's true.
Speaker 1: And we did pretend that we recorded the last episode
Speaker 1: this year, although we didn't keep up that pretence for
Speaker 1: very long.
Speaker 2: I think we tricked everyone. Actually, of course that worked
Speaker 2: really well.
Speaker 1: Hello and welcome to the second Money Stuff podcast of
Speaker 1: twenty twenty five, your weekly podcast where we talk about
Speaker 1: stuff related to money. I'm Matt Levin, and I write
Speaker 1: the Money Stuff column for Bloomberg Opinion, And.
Speaker 2: I'm Katie Greifeld, a reporter for Bloomberg News and an
Speaker 2: anchor for Bloomberg Television.
Speaker 1: What are you talking about today, Katie?
Speaker 2: Today we're going to talk about Fanny May, Freddie Mack,
Speaker 2: and friend of the show Bill Lackman. We're going to
Speaker 2: talk about MBA students and when case studies become real life.
Speaker 2: And then we're going to talk about cocoa liquidity, Fanny
Speaker 2: and Freddy. Fanny and Freddy. So this trade is once
Speaker 2: again being resurrected and has some legs again. There's a
Speaker 2: lot of optimism out there that maybe finally these two
Speaker 2: are going to end up in private hands again.
Speaker 1: Yeah. I used to write about this a lot and
Speaker 1: then everyone kind of forgot about it, and I wrote
Speaker 1: about it this weekend. I was like, I gotta start
Speaker 1: from scratch. I gotta be like, what is Fanny and Freddy.
Speaker 1: I'm not sure we'll do that on the podcast, but
Speaker 1: we could. Is what are Fanny and Freddy? Fanny and
Speaker 1: Freddy were the big mortgage guarantee companies that were technically
Speaker 1: regular publicly traded companies, but everyone kind of thought they
Speaker 1: were backed by the government up until two thousand and
Speaker 1: eight when they went busted on some bad mortgage bets
Speaker 1: and then the government took them over, and it turns
Speaker 1: out they were in fight back by the government, and
Speaker 1: so everyone who relied on Fanny guarantees to get their
Speaker 1: mortgages paid back got their mortgages paid back, and the
Speaker 1: government took over Fanny and Freddy, and shareholders of Fanny
Speaker 1: and Freddy the day after the government takeover looked like
Speaker 1: they had lost pretty much everything, but not literally everything.
Speaker 1: And then later in twenty twelve, the government said, you
Speaker 1: know what, they've lost everything. And so they've now been
Speaker 1: like fully owned by the government more or less for
Speaker 1: I say, twelve and a half years now, and in
Speaker 1: that time people have spent kind of that whole time
Speaker 1: being like, obviously this can't last, and Fanny and Freddy
Speaker 1: have to return to private hands anytime now, and a
Speaker 1: lot of people have made that bet in the form
Speaker 1: of buying the stock of Fanny and Freddie, which still
Speaker 1: trades over the counter, and saying when they returned to
Speaker 1: private hands, the stock is going to be really valuable.
Speaker 1: And they filed some lawsuits that didn't really work out
Speaker 1: a long time ago, but now you know Trump is
Speaker 1: coming back to office, and the same logic applies that
Speaker 1: they can't be publicly owned forever. Maybe, And so Bill
Speaker 1: Ackman is the latest. He brought up a lot of
Speaker 1: Fanny and Freddy common stock and has been tweeting about
Speaker 1: how Trump is going to return them to private hands
Speaker 1: and they're going to be worth a lot of money.
Speaker 1: And that's the news.
Speaker 2: I did see a snarky tweet. Yeah, well, this one
Speaker 2: still can't get over the name brand hedge fund manager
Speaker 2: pumping his decade hold thin. They traded GSC bags on
Speaker 2: the last trading day, which is kind of what happened.
Speaker 1: I mean, oh yeah, but like to be clear, like yes,
Speaker 1: like he is talking about this trade on Twitter on
Speaker 1: x and that has the effect that like retail traders
Speaker 1: see it and the stock goes up. Like the play
Speaker 1: here is not that he pumps it and the stock
Speaker 1: goes up and he sells into this retail demand. The
Speaker 1: play here is obviously that he wants this to happen.
Speaker 1: He's not writing these tweets to retail investors. He's writing
Speaker 1: these tweets to Donald Trump and Elon Musk and like
Speaker 1: the other Donald Trump advisors who will decide what happens
Speaker 1: to Fanny and Freddy, because like it is true that
Speaker 1: like something has to happen to Fanny and Freddy, and sorry,
Speaker 1: it's not true. They could do nothing. I have argued
Speaker 1: for twelve years now that it's fine. It's totally fine.
Speaker 1: The status quo is fine. These are policy arms of
Speaker 1: the government. They're like, essentially like the government's way of
Speaker 1: guaranteeing thirty year fixed rate refinanciable mortgages. There are a
Speaker 1: way that the government supports the house market. And they've
Speaker 1: you know, historically been implicitly backed by the guarantee of
Speaker 1: the US government, and now they're explicitly backed by like
Speaker 1: they're owned by the US government, and there is not
Speaker 1: really anything terrible happening from the fact that they're not
Speaker 1: in private hands. I've said this for years that people
Speaker 1: are like, oh, actually, this is a terrible thing. There
Speaker 1: are various problems that come from them being in government ownership.
Speaker 1: But it keeps working, you know, it keeps being kind
Speaker 1: of fine, so they don't really need to do anything.
Speaker 1: But it's just it seems clear that like this Trump
Speaker 1: administration last time did want to get them into private hands,
Speaker 1: and they kind of ran out of time, and now
Speaker 1: they have four more years and like they're a little
Speaker 1: less constrained, and so they will probably do it. And
Speaker 1: so it behooves Bill Ackman to get on X not
Speaker 1: to tell retail investors to go buy the stock, but
Speaker 1: to tell the Trump administration, oh, don't forget to privatize
Speaker 1: Fanny Man and Freddie back and give them back to
Speaker 1: their existing shareholders, who include probably a lot of like
Speaker 1: retail investors maybe who've held them since two thousand and four,
Speaker 1: but maybe who bought them last week, but also clear Blackman,
Speaker 1: who would probably make a lot of money if they
Speaker 1: were handed back to shareholders.
Speaker 2: Yeah, he estimates he could make like a twelve hundred
Speaker 2: percent return on this. Sure, that's his math.
Speaker 1: Yeah, I mean like conceptually, if you look at the
Speaker 1: technical cash flow water flow of these companies, the stock
Speaker 1: is worth zero dollars, right, And it's like that exactly right,
Speaker 1: But it's like it's kind of right. It's basically like
Speaker 1: the way these companies work is that every dollar they
Speaker 1: make for the rest of time goes to the US government,
Speaker 1: and then after that the shareholders get something. Right, So
Speaker 1: like there's no cash flows to the shareholders and everyone
Speaker 1: just assumes that that deal will be changed for reasons,
Speaker 1: either reasons of like, oh, it's not fair to the shareholders,
Speaker 1: or reasons of like, we do need to get private
Speaker 1: capital back, and the only way to do that is
Speaker 1: to like give something back to the shareolders. But like
Speaker 1: right now, like the sort of like legal official value
Speaker 1: of the cash flows to Fanny and Freddie sholders is
Speaker 1: zero dollars, and so Bi Lackman is buying the stock
Speaker 1: at like, you know, a low price, not zero dollars,
Speaker 1: but like a low price reflecting the uncertainty about whether
Speaker 1: they'll ever get cashlows. His thesis is you should just
Speaker 1: stop that. You should forgive what is now something like
Speaker 1: three hundred and forty billion dollars of nominal debt to
Speaker 1: the government, and you just say, actually, all the profits
Speaker 1: from now and go to the shareholders instead of the government.
Speaker 1: Like yeah, that's a big difference. Giving them three hundred
Speaker 1: and forty billion dollars would make them much much, much,
Speaker 1: much much more valuable.
Speaker 2: Something that I was hoping that you could explain to
Speaker 2: me is like, let's say that the status quo persists
Speaker 2: that the assumption that you know they will be returned
Speaker 2: to private hands actually doesn't end up coming true. You
Speaker 2: wrote that as it is right now, they don't have
Speaker 2: to pay their income in cash to the government, but
Speaker 2: each increase in net worth adds to the amount that
Speaker 2: they owe to the government, so they still can't pay
Speaker 2: off the debt. If they never returned to private hands,
Speaker 2: could they ever get out of this hole? Like how
Speaker 2: does that work?
Speaker 1: There's no hole. They're just owned by the government. With
Speaker 1: the way it works now is that every increase in
Speaker 1: the net worth of Fanny and Freddy goes to the government,
Speaker 1: which is what happens when the government owns one hundred
Speaker 1: percent of Fanny and Freddy. There's no hole, like there's nominally,
Speaker 1: like there's a number that is like nominally the debt
Speaker 1: that they owe to the government. It's technically preferred stock,
Speaker 1: not debt. It's like junior to the actual debt, like
Speaker 1: you know, the mortgage guarantees. But the amount that they
Speaker 1: owned the government goes up every time their value goes up,
Speaker 1: which is a way to make sure that the government
Speaker 1: continues to own one hundred percent of their cash. Lists.
Speaker 1: But there's no like hole, like nothing bad happens to
Speaker 1: them if like the amount that they owner, the government
Speaker 1: goes up, and nothing good happens to them under the
Speaker 1: current legal structure if the amount of that they order
Speaker 1: the government goes down. But like everyone's assuming the amount
Speaker 1: they owned the government will at some point go down
Speaker 1: through some sort of decision by the government, and when
Speaker 1: that happens, the people who invest in the stock will
Speaker 1: make a lot of money. I assume Katie's gone. Now,
Speaker 1: this is the problem with Katie is recording this podcast
Speaker 1: live from atop a horse, and she fell off the horse,
Speaker 1: and so the connection was interrupted.
Speaker 2: For Yeah, I'm actually I've been loaded into the ambulance.
Speaker 2: I'm away to the hospital. But you know, I said,
Speaker 2: I gotta connect. I got into the listeners. Okay, So
Speaker 2: you were saying, there there's no hole that this is
Speaker 2: just the status quo. It's not like this.
Speaker 1: There are a lot of weird accounting conceits going on
Speaker 1: here for reasons having to do with like the history
Speaker 1: of the bailout and like literally the US government's debt ceiling.
Speaker 1: But there are all accounting fictions, and like the reality
Speaker 1: is that right now, legally the terms are the government
Speaker 1: just owns Fanny and Freddy, And so the adjustment of
Speaker 1: accounting numbers doesn't really matter, just all the income goes
Speaker 1: to the government. But Bill Ackman, but also a lot
Speaker 1: of people are betting, probably correctly, that that accounting treatment
Speaker 1: will change, and that status COO will change, and the
Speaker 1: beneficiaries of that change will be the people who own
Speaker 1: like twenty percent of the stock that is in public
Speaker 1: hans and that trades over the counter. And the assumption
Speaker 1: is like that stock will become valuable when the government
Speaker 1: figures out how to get Fanny and Freddie off of
Speaker 1: its books.
Speaker 2: I guess, And you address this in the column, like
Speaker 2: what is the incentive for the government to do this?
Speaker 2: And I guess it makes sense why Ackman posted what
Speaker 2: he did.
Speaker 1: Where a sail like the trade is very clear. It's like,
Speaker 1: they'll give you this multi hundred billion dollar company, right
Speaker 1: if you're the government. It's a good question. And part
Speaker 1: of the point of what I wrote the speaker was
Speaker 1: to just kind of press on that and be like,
Speaker 1: you know, the government has this valuable asset and the
Speaker 1: Lackman would prefer to own it, and Blackman is like,
Speaker 1: the government should give it to me. And I think
Speaker 1: there's a wide thread assumption that the government will be like, yes,
Speaker 1: we should give it to you and to be fair
Speaker 1: to like the thousands of retail shaholders that own most
Speaker 1: of it. That's probably right, but it's weird, right, it's weird,
Speaker 1: but the government would just give this thing up. The
Speaker 1: answer to that is that the government's stake in this
Speaker 1: is monetizable, right, It's like it's valuable and they could
Speaker 1: sell it for money. But they can't sell it for
Speaker 1: money unless it's like kind of restructured as a normal company,
Speaker 1: which probably does mean putting the common stock back in
Speaker 1: the money somehow. So the idea is that if the
Speaker 1: government sort of sets this up in a way where
Speaker 1: the common sholders get something, then the government can sell
Speaker 1: down its stake over time, and that steak is going
Speaker 1: to be worth hundreds of billions of dollars and the
Speaker 1: government will get a lot of cash, whereas if it
Speaker 1: doesn't do that, it will continue to own Fanny and Freddy,
Speaker 1: which will continue to have like cash flows that will
Speaker 1: kind of go to the government, and so the government
Speaker 1: will like get money over time. But you know, this way,
Speaker 1: it's like monetizing it possibly a high point and like
Speaker 1: getting cash now instead of like waiting over time to
Speaker 1: collect fees.
Speaker 2: One of the questions if this did happen, like if
Speaker 2: if privacization did happen, what the effect on mortgage rates
Speaker 2: might be. And I mean you talk about in your column,
Speaker 2: how if it was privatized, then that sort of wink wink,
Speaker 2: you know this is backed by the government, that would
Speaker 2: go away, Like they would be allowed to fail if
Speaker 2: they ended up in this situation again, but maybe.
Speaker 1: Why is that maybe allowed to fail? I don't know.
Speaker 1: I think it's hard to sort of game out what
Speaker 1: would happen, because I think what would happen is that
Speaker 1: in twenty twenty six or whenever they're released from government control,
Speaker 1: they will be well capitalized. They'll be like pretty well run,
Speaker 1: They'll be regulated. Everyone involved will have an incentive to
Speaker 1: make sure that they don't go bankrupt six weeks later,
Speaker 1: because like that would be really bad, right, So they're
Speaker 1: not going to do Yeah, they're going to be careful.
Speaker 1: And the question is in twenty years, how will Fanny
Speaker 1: and Freddie be run? And the historical precedent is like
Speaker 1: they started taking some risks and they started making some
Speaker 1: mistakes and like they weren't you know, great about everything,
Speaker 1: and their regulator is maybe a little asleep at the switch,
Speaker 1: and so they ended up going bankrupt, not literally going backrupt,
Speaker 1: but going into conservativeship and being on by the government.
Speaker 1: Would that happen again eventually, maybe, And if it did
Speaker 1: happen again eventually, the question is would they be too
Speaker 1: big to fail and would the government bail them out again?
Speaker 1: Because if so, then it's like it's kind of weird
Speaker 1: to release them, and like, you know, it's like the
Speaker 1: classic story of financial bailouts of like the private shareholders
Speaker 1: get all the upside and then the government takes the downside.
Speaker 1: Like here's the government took the downside. The government took
Speaker 1: them over when they were broke and got a lot
Speaker 1: of upside. But the status quo right now is kind
Speaker 1: of the government gets one hundred percent of the upside,
Speaker 1: and like the releasing them from conservativeship would mean private
Speaker 1: shareholders get the upside again. And then if in like
Speaker 1: twenty years they go bankrupt again, the government takes all
Speaker 1: the downside. It's like a little bit of a negative association.
Speaker 1: But I don't know what happened. I mean, I think
Speaker 1: they will be regulated. They'll have like a regulatory capital requirement.
Speaker 1: The regulator will be part of the Trump administration, Like,
Speaker 1: I'm sure they'll be careful for maybe the rest of
Speaker 1: my financial blocking career, but like eventually, who knows.
Speaker 2: It is kind of fun to imagine a universe where
Speaker 2: they are privatized and then sixteen years later or whatever,
Speaker 2: they end up in this kind of hot water. Again,
Speaker 2: the governments.
Speaker 1: Things are cyclical, like it wouldn't be that weird, you know,
Speaker 1: but we can.
Speaker 2: Just keep doing this until the heat death of the universe.
Speaker 1: And one way that people think about this problem is
Speaker 1: is to try to avoid having institutions that are too
Speaker 1: big to fail, right, Like you try to make it
Speaker 1: so that banks are first of all robust defilure, but
Speaker 1: secondly you try to say, like, you know, can we
Speaker 1: make it so that if they do fail, they can
Speaker 1: fail in a way that like, you know, private capital
Speaker 1: takes all the losses. And like that's definitely part of
Speaker 1: the thinking with Fanny and Freddy, where like instead of
Speaker 1: them backing every mortgage that's on their balance that they
Speaker 1: like are doing risk transfer securities where they're essentially selling
Speaker 1: the credit risk of their mortgages to other private investors,
Speaker 1: so that like it's not just Fanny and Freddy's capitalist
Speaker 1: standing behind the mortgage market. Over the years, as people
Speaker 1: have thought about privatizing Fanny and Freddy, there have been
Speaker 1: proposals of, sure, let's privatize them, but not two of them.
Speaker 1: Let's make them like sixteen of them, so that if
Speaker 1: one mortgage company fails, then fifteen more will be fine
Speaker 1: and it won't be a systemic risk and it won't
Speaker 1: require a government ballot. But you can sort of see
Speaker 1: why that's not the preferred proposal for the people who
Speaker 1: own the stock because who own the stock on the
Speaker 1: stock of like particular companies, and they want to, like,
Speaker 1: you know, have those companies be valuable, and those companies,
Speaker 1: frank they are more valuable if they're too bad to fail.
Speaker 2: I hope that if it is privatized, we are back
Speaker 2: in a low interest rate environment, because the potential effect
Speaker 2: on mortgage rates is somewhat interesting. Like if it doesn't
Speaker 2: have that sort of wink wink government backing.
Speaker 1: I don't know what the effect on mortgage rates would be.
Speaker 1: I think that, like my impression is that Fanny and
Speaker 1: Freddy are sort of run now on a basis that
Speaker 1: is meant to be kind of close to what they'd
Speaker 1: look like as regular public companies, and so like they
Speaker 1: wouldn't like double their guarantee fees tomorrow because they want
Speaker 1: to be more profitable, right, or they would like have
Speaker 1: them because they wanted to be more competitive, right. Like
Speaker 1: their fees are kind of like roughly what you'd expect
Speaker 1: them to continue charging. Would their bonds trade wider if
Speaker 1: they were not backed by the US government? I don't know.
Speaker 1: That's like, you know, the bet that Bilackman is making
Speaker 1: is know that by the time they are released, they
Speaker 1: will have such a fortress balance sheet, they'll be so
Speaker 1: well capitalized that they will be essentially equivalent to the
Speaker 1: credit of the US government and they won't need the
Speaker 1: government backing. But I don't know, it's not totally clear
Speaker 1: that that's true. And it depends also on like what
Speaker 1: actually happens with their capitalization, right, I mean, like you
Speaker 1: can argue over how much capital they should be required
Speaker 1: to hold, and you know, if you're the shareholders, you
Speaker 1: kind of want them to hold relatively little capital because then,
Speaker 1: among other things, that means like you don't have to
Speaker 1: dilute your own shares to make them viable standalone companies.
Speaker 1: If you're a nervous regulator who remembers two thousand and eight,
Speaker 1: you want them to hold a lot of capital, But
Speaker 1: you know, there'll be a debate about how much capital
Speaker 1: they need. You know, Bill Lackman is arguing for a
Speaker 1: two point five percent capital ratio, which is like kind
Speaker 1: of low on the scale of what people argue that,
Speaker 1: but he says it's like it would be seven times
Speaker 1: as much as their losses in two thousand and eight,
Speaker 1: their losses on their guarantee portfolio, which I think is
Speaker 1: you know, suggests that that would be pretty robust. So
Speaker 1: there's gonna be a lot of argument about how much
Speaker 1: capital they need.
Speaker 2: Well, we'll see. I don't know where this possibly ranks
Speaker 2: on the Trump administration's priority list. And I mean there's
Speaker 2: analysts from Bluebern Intelligence who expect that this is like
Speaker 2: a twenty six twenty seven conversation.
Speaker 1: So I think it's a twenty six twenty seven like
Speaker 1: events in part because of like every quarter that goes
Speaker 1: by that they're profitable, they build up more capital, and
Speaker 1: it's just easier to do this trade. So like, even
Speaker 1: if it was the top priority, releasing them tomorrow would
Speaker 1: make less sense than releasing them in twenty twenty seven.
Speaker 1: I don't know it ranks on the list of priorities either,
Speaker 1: but you know, it's like there's a.
Speaker 2: Reason it means to buy Greenland first, right.
Speaker 1: But also tweeting it and you know, like there's like
Speaker 1: your hedge fund buddies come to you, like, hey, you
Speaker 1: could really have about your hedgehund buddies. Then maybe it
Speaker 1: works out right, And like the other thing is like,
Speaker 1: so he's tweeting this in part for like the officials
Speaker 1: to read it, but he's also you know, other people
Speaker 1: will see this idea and maybe they'll buy the stock.
Speaker 1: Some of those people are retail people who have you know,
Speaker 1: have no influence with the administration, but who knows who
Speaker 1: else will buy it?
Speaker 2: Right?
Speaker 1: Yeah, what if Elon Musk's these two's like, oh, that's
Speaker 1: a good trade and then Elon Musk buys like, you know,
Speaker 1: a million shares of Fanny made. Now it's igh on
Speaker 1: the priority list.
Speaker 2: Yeah, And I mean didn't the shows rise like forty
Speaker 2: five percent of the day that he tweeted it. I
Speaker 2: think it was December thirtieth, So it's not like there
Speaker 2: was a ton of volume going on, but the backs
Speaker 2: were pumped.
Speaker 1: Yeah, it's very binary, right, Like this is either a
Speaker 1: very valuable company or it's worth zero, and like it's
Speaker 1: just like some day someone's gonna flip the switch and
Speaker 1: make it very valuable. Probably almost certainly, And like Bill
Speaker 1: Lackman putting it on Twitter, like moves up the day
Speaker 1: when they flip the switch, and that makes it a
Speaker 1: lot more life.
Speaker 2: One of those wacky kids getting up to over in Indiana.
Speaker 1: I love these kids.
Speaker 2: So are they still students or no?
Speaker 1: No, no, I've looked up a couple of them on LinkedIn.
Speaker 1: They they have real jobs.
Speaker 2: They're not did you add them?
Speaker 1: No, But they're not like running this golf resort as
Speaker 1: far as anyway. So Indiana University, the Kelly School of Business,
Speaker 1: they have an MBA class like an integrative case experience.
Speaker 1: So it's like their capstone project for their MBA and
Speaker 1: it's on the business of sport. And the class project
Speaker 1: that's like sixty percent of your grade is to create
Speaker 1: an executive level recommendation to an entity facing real world challenges.
Speaker 1: And so the professor that goes out and sources like
Speaker 1: actual like ongoing sports business situations and then like you know,
Speaker 1: packages them in a case and says to the class,
Speaker 1: what would you do about this? And this group of
Speaker 1: students took this challenge case situation involving the development of
Speaker 1: a golfer in Puerto Rico. Basically like this Puerto Rican
Speaker 1: like land development authority own some acreage in Puerto Rico
Speaker 1: and they brought in a developer to develop into a
Speaker 1: golf resort. And these students were like, given the project
Speaker 1: of look at this situation, build a financial model, build
Speaker 1: some plans for how you would do it. Make a
Speaker 1: good presentation about how you would develop those golf resort.
Speaker 1: And you know they're NBA students, they have connections, and
Speaker 1: some of them were apparently relatives of people who work
Speaker 1: at a golf resort development company, which is like a
Speaker 1: natural fit. So they were like they called their family
Speaker 1: or friends or whatever and were like, hey, you developed
Speaker 1: golf courses, what do you think about this golf project?
Speaker 1: And somehow what happened is, first of all, they did
Speaker 1: apparently a good presentation that was like, this is how
Speaker 1: we would develop this golf project. But secondly, the people
Speaker 1: they called were like, hey, this is such a good deal,
Speaker 1: we should do develop it. Not the people who are
Speaker 1: already developing it, we should take over this deal. And
Speaker 1: so the people they called like apparently took over. They
Speaker 1: called the Puerto Rican Land Development Authority and said, hey,
Speaker 1: we have a better plan, and they ended up jumping
Speaker 1: the original deal, and the people who had the original
Speaker 1: development project, who are now out in the COLT sued
Speaker 1: the new development company and the NBA students and the professor,
Speaker 1: saying basically, like, the way the professor got this case
Speaker 1: is that the guy who was developing the project originally
Speaker 1: was a proud alumnus of the Kelly School of Business,
Speaker 1: and he was like, of course you can create a
Speaker 1: case about my masterpiece golf development. You should definitely ask
Speaker 1: your students to advise me. Maybe because he wanted the advice,
Speaker 1: or maybe because he was just proud of it, But
Speaker 1: in any case, he's now suing the professor and the students, saying,
Speaker 1: you stole my idea.
Speaker 2: That is so wild and so good. When I first
Speaker 2: read it, I thought that like they went out and
Speaker 2: shopped it around after the course. But no, their presentation
Speaker 2: was based on the fact that they made this partnership
Speaker 2: with Discovery.
Speaker 1: No. No, no, the presidation didn't say they made a
Speaker 1: partnership the presentation said that they consulted with Discovery to
Speaker 1: to basically sort of like get business ideas for how
Speaker 1: to develop this course. But it's interesting, like because yes,
Speaker 1: the lawsuit cites their presentation. It says, the student defendants
Speaker 1: made the following admissions and their recorded presentation, we explored
Speaker 1: a union with Discovery Land Companies. So I think, you know,
Speaker 1: as you're pretending to develop a golf course, you're like, oh,
Speaker 1: we could do a merger, right, But except that it
Speaker 1: happened in real life. What was interesting to me is,
Speaker 1: I don't know if that's like they brought this lawsuit
Speaker 1: and in Discovery they they got to watch the student's
Speaker 1: presentation that was recorded for class and they said, aha,
Speaker 1: they admitted it. Or if like the original developer of
Speaker 1: the project watched the presentation as part of the class, right,
Speaker 1: because like he was the one who said to the
Speaker 1: to the professor, hey should teach a course about my
Speaker 1: golf resort, and so you know, like probably he went
Speaker 1: to the final presentations, like the professor's like, hey, you
Speaker 1: should come see the students like what they think about,
Speaker 1: you know, how you should do the golf course, and
Speaker 1: he like shows up like all proud saying, yeah, I
Speaker 1: want to I want to hear what you think of
Speaker 1: my golf resort. And they're like, we've had another bidder.
Speaker 1: And he's like, ah, so I hope that's what happened.
Speaker 2: I don't actually so wait, So they sued the professor,
Speaker 2: they sued the students. Did they sue the school itself?
Speaker 2: Who beyond the students could be founded fault here?
Speaker 1: Well, the main one is discovery of the company that
Speaker 1: apparently jumped the deal.
Speaker 2: Yeah, that they seem like the baddies.
Speaker 1: Well, I don't know if they seem like the batties,
Speaker 1: but they're the people have money, right, The best word
Speaker 1: is they're suing for one to two billion dollars. Why
Speaker 1: one to two billion dollars? Well, as part of their
Speaker 1: class project, the students calculated how much profit they expected
Speaker 1: this golf resort to bring in, and so they wrote down,
Speaker 1: this is worth one to two billion dollars, and so
Speaker 1: that's what they're suering for. I don't think the students
Speaker 1: have one to two billion dollars Sothough that's possible.
Speaker 2: That's really funny. I mean, I guess it makes the
Speaker 2: plaintiff's lawyer's job really easy.
Speaker 1: I wouldn't go that far. But yes, they get to
Speaker 1: put in their press dam It is rare for it
Speaker 1: defendant to calculate the damages, but here they did, right.
Speaker 1: It's like it's a good line. I will say that
Speaker 1: I got emails from readers being like I did a
Speaker 1: class project presentation saying that so and so should buy
Speaker 1: sow and so, and I got a b and then
Speaker 1: six months later they did it and I didn't get
Speaker 1: to do the deal. What I wrote is that business
Speaker 1: school is a lot of like pretending to do business deals,
Speaker 1: and like this is the rare case where it like
Speaker 1: somehow transformed into our reality. But most of the time
Speaker 1: you stick to pretending.
Speaker 2: And do you know when this actually happens, like when.
Speaker 1: The twenty twenty one course.
Speaker 2: Oh so I wonder, like for these students who have
Speaker 2: now graduated and are in their professional lives, I wonder
Speaker 2: what this feels like.
Speaker 1: Yeah, it must be stressful. I will say, like I wrote,
Speaker 1: you know, you get an A plus in my course,
Speaker 1: Like I don't know, like if I heard their professor
Speaker 1: or like their current and floor, I'd be proud of them,
Speaker 1: like they they went out and did it, you know,
Speaker 1: like this is this is this shows some hustle, shows
Speaker 1: some enginuity, shows a commitment to business. I don't know.
Speaker 1: It's good. I like it. The thing that's happening here
Speaker 1: is like the lawsuit is like we had an NDA
Speaker 1: where people agreed not to like disclose anything, but like
Speaker 1: it's not clear who they had an NDA with, Like
Speaker 1: I think they thought the students were signing ndias, but
Speaker 1: the students maybe weren't signing indias. It's a little unclear.
Speaker 1: So like it's not clear the students did anything wrong, right,
Speaker 1: Like it wasn't like they were like, ah, let's break
Speaker 1: up this deal. It was like they were like, oh,
Speaker 1: we need to do a good presentation, so let's contact
Speaker 1: people on the field and sort of get their input.
Speaker 2: I don't know, I feel like exploring a union goes
Speaker 2: beyond just you know, doing.
Speaker 1: It's all pretend, Like how would we do this deal?
Speaker 1: How are we'd explore a union? I don't know. It's fine.
Speaker 2: At some point it crossed over into real life, Yeah you're.
Speaker 1: Sure, but like they didn't do anything wrong, Like yeah,
Speaker 1: it cross never to real life because it was a
Speaker 1: good idea, but I don't know, like like it would
Speaker 1: be a failing on their part as pretend business advisors
Speaker 1: to not explore a union with some with another golf developer,
Speaker 1: and they did became.
Speaker 2: I do feel bad for the professor. I have sympathy
Speaker 2: for the professor here, and I hope that this I
Speaker 2: hope this course is still taught because it sounds fun.
Speaker 2: A sports business integrative case experience. That sounds like a
Speaker 2: valuable course to teach at the Kelly School of Business.
Speaker 2: So thought val thoughts and vibes being sent to the
Speaker 2: professor right now, and maybe it's let me pull this up.
Speaker 2: I am never doing.
Speaker 1: He is riching into her saddle bags.
Speaker 2: I'm so smart.
Speaker 1: Some oats assault lick up here.
Speaker 2: It is okay. So I take pains to avoid the
Speaker 2: commodity markets because there's just there's so many different nuances.
Speaker 2: But occasionally commodities become really fun. And I think that
Speaker 2: the cocoa markets have been really interesting for a while.
Speaker 2: There's been some extreme weather and some sick and aging
Speaker 2: trees on the other side of the world, and that
Speaker 2: severely impacted the price of cocoa because there's a lot
Speaker 2: less crop being harvested, and that has been really painful
Speaker 2: for a lot of chocolate makers. Including for Hershe's, And
Speaker 2: there was an incredible Blue news story out this week that,
Speaker 2: according to people familiar with the matter, Hershey's wants to
Speaker 2: take a position that will allow it to purchase more
Speaker 2: than ninety thousand metric tons of coco on ice futures
Speaker 2: us according to people familiar and the request of the CFTC,
Speaker 2: if they take physical delivery accounts to about five twenty
Speaker 2: foot containers, and it's more than nine times the amount
Speaker 2: that the exchange currently allows. There are a lot of
Speaker 2: supply concerns right now, and it sounds like, according to
Speaker 2: these people, that Hershey's is at the point where they
Speaker 2: don't want to mess around anymore. They want to purchase
Speaker 2: all these futures which would allow them to take delivery
Speaker 2: of this coco versus trying to buy it in the
Speaker 2: physical market right now, where prices are just super high.
Speaker 1: Right the way I understand it is like commodities exchanges
Speaker 1: largely have warehouses that contain some amount of the commodity,
Speaker 1: and the way you trade futures is like you trade
Speaker 1: futures back and forth which are like for future delivery
Speaker 1: of the commodity and when they expire. Most of the
Speaker 1: time you roll them, so you don't take delivery. But
Speaker 1: sometimes you take delivery and then you get a certificate
Speaker 1: entitling you to some of the commodity in the warehouse.
Speaker 1: And usually you don't mean to do that until you
Speaker 1: go and like sell some more futures backed by the certificate.
Speaker 1: But every so often, if you're like a big user
Speaker 1: of the commodities, you actually want to take the commodities
Speaker 1: out of the warehouse because like there's some stuff in
Speaker 1: the warehouse that the exchange runs, and you can't find
Speaker 1: enough of your commodity elsewhere, and so you're like, yeah,
Speaker 1: get the stuff out of the exchange warehouse. And Hershey's
Speaker 1: is like, we cannot find chocolate anywhere. Where's their chocolate. Oh,
Speaker 1: there's a lot in the ice warehouse. So we'll just
Speaker 1: take all of that. So I think, like I understanding
Speaker 1: that they want to buy, like, you know, the enormous
Speaker 1: percentage of the cocoa at these ice warehouses.
Speaker 2: Yes, actually so much that if they did take delivery,
Speaker 2: it would basically equate to all the beans that are
Speaker 2: currently stop sewer than.
Speaker 1: All of the beans, right, get all the beans.
Speaker 2: They're not messing around anymore.
Speaker 1: I will say, I assume candy makers, including Hershees, have
Speaker 1: like contracts with people who produce cocoa. And I assume,
Speaker 1: and maybe this's not as true of Hershees as it
Speaker 1: is of like your favorite artisanal chocolate maker, but I
Speaker 1: assume that they want, like, you know, fresh cocoa, right,
Speaker 1: They're like, oh, you know, bring us your best and
Speaker 1: freshest cocoa so we can make chocolate bars out of it.
Speaker 1: I also assume, and I could be way off base here,
Speaker 1: but I assume that the cocoa sitting in the exchange
Speaker 1: warehouse is not the best and freshest cocoa, because like
Speaker 1: there's a lot of physical demand for cocoa, and if
Speaker 1: you have some cocoa fresh off the tree or whatever,
Speaker 1: then like people will buy it from you and you
Speaker 1: don't need to deliver it into the ice warehouse to
Speaker 1: support futures. There's an FT story in September about similar
Speaker 1: things were going on in London, where like chocolate makers
Speaker 1: were taking cocoa out of like the London exchange warehouses. Yeah,
Speaker 1: and people were like, with left in London is a
Speaker 1: poisoned pill, because it's like, yeah, it's like stale cocoa.
Speaker 1: It's like been there for it's been sitting around for
Speaker 1: a while, like all the good stuff has already been used,
Speaker 1: and like they're kind of getting the dregs out of
Speaker 1: the commodities. I don't know if that's what's happening here,
Speaker 1: but I don't I don't know, Like chocolate bar made
Speaker 1: of exchange warehouse.
Speaker 2: Chocolate, very extremely stale cocoa beans. I guess we'll find out.
Speaker 2: I mean, reading through some of like the Commodity analyst
Speaker 2: reports on the state of the cocoa industry, it seems
Speaker 2: like these supplied demand dynamics are a long way from
Speaker 2: being worked out, So I don't know. Maybe we'll see,
Speaker 2: of course, if her Shee's actually gets this permission. This
Speaker 2: is according to people familiar with the matter. Hershey itself
Speaker 2: does not confirmed this, and we'll see the guests at
Speaker 2: that point where we are all eating still chocolate. But
Speaker 2: Hershey is interesting because they made a similar trade in
Speaker 2: twenty twenty when there were all these pandemic related weirdnesses
Speaker 2: in the cocoa industry. But anyway, this isn't the first
Speaker 2: time that Hershey has just cornered the market, so to speak.
Speaker 2: This time it feels more idiosyncratic like in twenty twenty,
Speaker 2: every commodity market, it felt like, was just going through it.
Speaker 1: I will say, like the cocoa market. You know, it
Speaker 1: exists for chocolate manufacturers to heads their price of cocoa.
Speaker 1: And like, I don't know, I'm not up on the
Speaker 1: biggest chocolate manufacturers, but Hers she seems really big, right,
Speaker 1: It's not that surprising that every so often the biggest
Speaker 1: chocolate manufacturer would say, okay, we want all the beans now.
Speaker 2: Right, Yeah, there's a few of them out there. I mean,
Speaker 2: you think about Mandley's, you have Mars. I know this
Speaker 2: because a few months ago we were trying to book
Speaker 2: a lot of chocolate makers because we wanted to talk
Speaker 2: about coco on television. There's more than you would think.
Speaker 1: I'm going to talk about. My favorite commodity story, maybe
Speaker 1: of all time, is that a while back in the
Speaker 1: like in one of the exchange warehouses for nickel, someone
Speaker 1: was like walking along and they noticed that like a
Speaker 1: bag of nickel that belonged to JP Morgan, right, like
Speaker 1: JP Morgan owned the entitlement to that nickel in the warehouse.
Speaker 1: It was actually rocks like someone at some point either
Speaker 1: before it went into the wear so while I was
Speaker 1: sitting in the wareus, which was doing for years without moving.
Speaker 1: At some point they had stolen the nickel and replaced
Speaker 1: it with rocks, which is such a wonderful story about
Speaker 1: how these commodity trades work because like, you didn't need
Speaker 1: it to be nickel, like you're just trading back and
Speaker 1: forth like abstract entitlements of the nickel. It didn't matter
Speaker 1: that you weren't doing anything with the nickel. You weren't
Speaker 1: making anything with the nickel, so it was totally fine
Speaker 1: that it was rocks for a while until someone discovered it,
Speaker 1: and then it was embarrassing. I also thought that story
Speaker 1: because it then led to I think the warehouses like
Speaker 1: had people go around and check all the other bags
Speaker 1: of nickel to make sure they weren't rocks, which required
Speaker 1: them to wear steel toad boots because you can you
Speaker 1: really hurt yourself checking the bags of nickel. But anyway,
Speaker 1: like these warehouses, because they're mostly used for futures, because
Speaker 1: it is like a somewhat unusual event for someone to
Speaker 1: come in and say, okay, we want all the cocoa
Speaker 1: beans in the warehouse because we need to make chocolate
Speaker 1: with them. Like what if the beans are all pebbles, right, what.
Speaker 2: If they're all I don't know, coffee beans. Obviously those
Speaker 2: look different. But I hope that someone is crawling around
Speaker 2: in the warehouses right now making sure that they have
Speaker 2: all the cocoa beans.
Speaker 1: Awkward if, like all the chocolate bars are made of
Speaker 1: pebbles because the warehouse cocoa was not real coca.
Speaker 2: Well, a conversation I had with one of these chocolate
Speaker 2: makers that we finally got to go on TV was
Speaker 2: are you still using chocolate? And a lot of them
Speaker 2: have had to start using, you know, more filler in
Speaker 2: the form of like nuts and various things because they
Speaker 2: just can't source enough chocolate to make enough chocolate bars.
Speaker 1: If they're bugs in the ware sawdust in the word.
Speaker 2: Put it oudre, I grind them up, put them in
Speaker 2: it's fine.
Speaker 1: Chemicals and any beans.
Speaker 2: Pretty much, we'll see. I don't know. They don't have
Speaker 2: permission yet. A larger position limit is likely to send
Speaker 2: the price of earlier dated futures to a significant premium
Speaker 2: about the later dated ones. Apparently, the future's curve for
Speaker 2: cocoa I was speaking to an analysis this morning is
Speaker 2: has been backwardated for a long time. At this point.
Speaker 2: So I don't know.
Speaker 1: Yeah, that's like fitting with the notion that like the
Speaker 1: physical market is incredibly tight and her Shoes is trying
Speaker 1: to get beans out of the futures. Right, Like, you
Speaker 1: wouldn't buy cocoa beans in the form of commodities futures
Speaker 1: unless it was more expensive to buy them than the
Speaker 1: form of cocoa beans, right, Like the curve is the
Speaker 1: curve is obviously backwardated, which I guess implies that there
Speaker 1: will be some easing of cocoat conditions, but not yet.
Speaker 2: Yeah, their explanation for like the extreme backwardation is just
Speaker 2: it's it's so dramatic at this point. It can't stay
Speaker 2: at these levels forever, surely, Right, So that's.
Speaker 1: What that gradation means, I know, Like it means that
Speaker 1: Hershe's is going to pay a huge freom to get
Speaker 1: all of the beans out of the warehouse and then
Speaker 1: they'll start over and then they'll be fun. Yeah, I
Speaker 1: will say, why shouldn't they ge permission? You know, like
Speaker 1: the point of this market is to you know, smooth
Speaker 1: the prices of agricultural commodities, right, and like if an
Speaker 1: actual producer of chocolate is like the only way for
Speaker 1: us to make our chocolate bar quota is to take
Speaker 1: the beans out like like they're not like a weird speculator,
Speaker 1: like doing a weird corner, like they're just gonna make
Speaker 1: chocolate bars with it.
Speaker 2: Seems like the what the market, Well, they got permission
Speaker 2: in twenty twenty, so I don't know history would suggest
Speaker 2: it'll be okay, But man, it just feels like every
Speaker 2: couple of months, some whether it's lumber or sugar or
Speaker 2: coffee or cocoa, something pops off and then there's a
Speaker 2: bunch of curious stories such as this one.
Speaker 1: I'm a tourist in the commodity of space, but I
Speaker 1: always find it very fun. Yeah, I think we have
Speaker 1: to talk about two notes. We got about the mailbag episode.
Speaker 2: Yes, our official first episode of the year.
Speaker 1: So we had a mailbag episode let's say last week
Speaker 1: recorded let's say three weeks. Yeah, but last week we
Speaker 1: had a mailbag episode. It was great, you should listen.
Speaker 1: But in it we said two things that people complain
Speaker 1: about with various degrees of fairness. Someone asked like, why
Speaker 1: can't you buy, like on the Stock Exchange, single family homes,
Speaker 1: and I said, well you can. You should be able
Speaker 1: to buy like single family rental homes. That's like an
Speaker 1: investable asset class, and like probably they'll be eventually, there
Speaker 1: will eventually be reats that allow you to do that
Speaker 1: on the exchange. In fact, there have been reads that
Speaker 1: allow you to do that for years, and someone emailed
Speaker 1: me to point out that there's like three that trade
Speaker 1: on the exchange now. So yes, you can go buy
Speaker 1: single family homes in the form of shares of stock
Speaker 1: and reads, but you can't buy, as I said, single
Speaker 1: family owner occupied homes because those are run by their occupants,
Speaker 1: not by a red but you can either read. And
Speaker 1: the other one is that you said, and I questioned this,
Speaker 1: and you were stuck to your guns. You said that
Speaker 1: in the US ticker symbols on the Stock Exchange max
Speaker 1: ad at four letters, and we got complaints. One set
Speaker 1: of complaints was like, actually, mutual funds have five letter tickers,
Speaker 1: which I think is not a fair complaint because those
Speaker 1: are not stocks on the stock exchange. That's a different thing.
Speaker 1: They're like in the universe of identifiers. They have five
Speaker 1: letter tickers, but they're not stock exchange tickers. The other
Speaker 1: complaint is that nas like actually like caps at at
Speaker 1: four letters, but then there's like they have like special
Speaker 1: codes you can add that are a fifth letter, so
Speaker 1: like preferred stock can have a fifth letter, or like
Speaker 1: you know, Google has multiple shares of stock, and like
Speaker 1: some of them are Alphabet has multiple shares of stock
Speaker 1: and some of them are like you know, goog A
Speaker 1: or whatever, and you know, and as they used to
Speaker 1: have the Q code, which apparently I learned from this
Speaker 1: reader response. The Q code, which famously represents companies that
Speaker 1: are in bankruptcy, like, is no longer part of the
Speaker 1: NASDAK nomenclasure, but like still some venues put Q on
Speaker 1: the end of a ticker when it's in bankruptcy.
Speaker 2: Yeah.
Speaker 1: So back in the day when like Tesla was not
Speaker 1: the juggernaut it is now, and like people were shorting Tesla,
Speaker 1: Like there's like a whole Twitter community who's like, you know,
Speaker 1: banner was TSLAQ Yeah, because it's like, oh, Tesla's bankrut, right,
Speaker 1: So the Q code is no longer a part of NASDAK,
Speaker 1: but it's still bason in our hearts. So to clarify,
Speaker 1: Katy has a response because Katie Katy knows for tickers.
Speaker 2: Yeah, the mutual fun thing. Yeah, they're not. They don't
Speaker 2: trade on the exchange, hence ETFs or exchange traded funds.
Speaker 2: So there's a four character limit. Generally, this is literature
Speaker 2: from Nasdaq that for common stock insuances, NASAK assigns symbols
Speaker 2: between one and four characters in length. There are some circumstances,
Speaker 2: and I should have known that by saying that there's
Speaker 2: a four character limit that that would invite people to
Speaker 2: like find the asterisks. But there's a fifth symbol that
Speaker 2: can be added to the original ticker in special cases
Speaker 2: such as you know, different share classes, et cetera. But
Speaker 2: if you are going with an ETF or in I
Speaker 2: PO and you say I would like to list this
Speaker 2: on your exchange, can I reserve this five letter ticker,
Speaker 2: you would be told no, is my understanding. And I've
Speaker 2: spoken with both Nazak and NISI about this at length
Speaker 2: because I would love if they expanded the limit, just
Speaker 2: because that would be fun to write about. And it's
Speaker 2: a four character limit except in special circumstances, like you.
Speaker 1: Know, you're a little iconder like every three months, like
Speaker 1: have they expanded the ticker symbols yet, because like that's
Speaker 1: that's that's that story. You know that story all drafted
Speaker 1: and ready go.
Speaker 2: Huh, I'm ready to go. Because and we also do
Speaker 2: we have on folks from NISI and from Nasdaq on
Speaker 2: you know, either Open Interest, which I anchored daily, or
Speaker 2: on etf IQ. And every time we have anyone who
Speaker 2: touches the listings business, I asked them about the ticker
Speaker 2: limit and if they're considering five five, and every time
Speaker 2: they politely tell me that no, they don't have any
Speaker 2: plans to expand beyond four characters.
Speaker 1: So yeah, this is in the context of a question
Speaker 1: about ETFs that was like, eventually there'll be like ten
Speaker 1: zillion ETFs and there's only so many four letters.
Speaker 2: Yeah, and there's going to be ten zillion specifically single
Speaker 2: stock ETFs which already have real estate taken up in
Speaker 2: the ticker, and then you could see a supply crunch
Speaker 2: there similar to what we're seeing in the cocoa market
Speaker 2: right now.
Speaker 1: It's true, they'll have to get the tickers out of
Speaker 1: the warehouses and.
Speaker 2: You better hope that you know they're good quality.
Speaker 1: And that was the Money Stuff podcast.
Speaker 2: And I'm Katie Greifeld.
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Speaker 1: The Money Stuff Podcast is produced by Anamasarakus and Moses Onen.
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