May 16, 2025 • 34 mins
Matt and Katie discuss leveraging up your 401(k), everyone's love for putting private credit into retirement accounts, mortgages versus margin loans, college finance clubs, travel sports and how to get Elon Musk paid.
See omnystudio.com/listener for privacy information.
Mark as Played
Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:02):
Bloomberg Audio Studios, Podcasts, Radio News. Hello and welcome to
The Money Stuff Podcast. You're a weekly podcast where we
talk about stuff related to money. I'm Matt Levian and
I write The Money Stuff Colm for Bloomberg Opinion.
Speaker 2 (00:19):
And I'm Katie Greifeld, a reporter for Bloomberg News and
an anchor for Bloomberg Television.
Speaker 1 (00:24):
Katie, you're you're off thanks week.
Speaker 2 (00:27):
I'm so excited. It's my birthday on Sunday, which is huge.
It's my favorite day of the year. On Saturday, I'm
riding in a horse show. And then immediately, how is
that not your favorite day of You know, I'm not
going to the Olympics. It's a fact that I accepted
a couple of years ago. I'm doing this sour show
on Saturday, and then Saturday night we're leaving the country
(00:49):
for Ireland for my birthday. And I'm really excited. But
that means practically speaking that we just recorded next week's episode,
and now we're recording this week's episode, and we've already
spent too much time.
Speaker 1 (01:02):
Together today, too much time together. But next week's episode
of a special episode of Guests, Yes, our second and
third guests huge talking about the subject deer to Katy's heart.
Speaker 2 (01:12):
Good lord, it's about puzzle hunts.
Speaker 1 (01:15):
It's about puzzles, which are cool, which are dear in
my heart, and somewhat less dear to Katy's hard than horses.
Speaker 2 (01:21):
I was just happy for Matt listening to Matt having
fun as someone who's never done a puzzle hunt probably
never will.
Speaker 1 (01:29):
It's for the large subset of money stuff fans who
are also a puzzle hunt fans, and.
Speaker 2 (01:36):
For them you want to learn about puzzle value and
respect all those people that are like puzzle hunts.
Speaker 1 (01:40):
It's amazing, Katy. I saw you this afternoon checking your furrow,
and k.
Speaker 2 (01:48):
I actually was. I was inspired to after reading about
basic capital, which you wrote about in one of this
week's Money Stuff basically four dollars of leverage. Yeah, for
everyone dollar that you invest, what could go wrong?
Speaker 1 (02:03):
I didn't actually know this when I wrote this, but like,
there's a fascinating history of this idea, right. So the
idea is that when you are a young person, you
invest a little bit of money in the stock market,
and then as you get older, you move up in
your career and you start investing more money, and so
by the end of your career, you are investing more
of your money is in stocks than at the beginning
of your career. And if you think about this from
(02:26):
a theoretical perspective, you will think you should have more
money in the stock market early on and relatively less
money later on, right that you should diversify your stock
market risk by taking more of that risk early instead
of taking like almost all of it at the end.
And so people think about this theoretically, and there's a
sort of well known two thousand and eight paper by
Ian Ayres and Barry Nelbuff that Ianire's taught at the
(02:48):
Lost cal I went to basically saying, like, what you
should do is you should lever up your investments early
on your retirement investments. Early on, you should take a
margin loan from your brokerage or like buy long dated
call options that kind of look like levered features. And
you should have more than one hundred percent of your
money in the stock market early on, and then have
less than hundred percent of your unning the stock market
(03:08):
later on. And that's going to like smoothier returns over
time and give you better returns than if you just
invested your cash as it came in over the course
of your career and they wrote this paper. If you
look at it on like SSRN, the date on the
paper is like May two thousand and eight, which, yeah,
(03:30):
after I wrote about like the basic capital idea, a
couple of people email me. There's a famous post on
the bogel Heads investing for him, where like this grad
student did this starting like two thousand and seven, and
he just ran into a buzz saw, like he lost
all of his money and then like a little bit
more than all of his money because he had borrowed
to do it. Yeah, I think he got better over
(03:50):
time because, like you know, the point of this is
like you're sort of spreading your risk, and so he
just unfortunately took a lot of risk going into a
great financial crisis. But then he got better. But anyway,
that's the idea. And for various reasons, including that this
idea had to brief a vogue in two thousand and
eight before beking a terrible idea. There's not like a
ton of implementations of it, but basic Capital, which Susanne
(04:13):
Willie at Plumberg wrote about this week, they are doing
a sort of implementation of it where they will let
you borrow money to lever up your furrow NK. And
the pitch is that you're borrowing the money in like
kind of a nicer way than broker margin loans, Like
they give you a term loan, there's no margin calls.
(04:33):
If like your stocks go down, they're like, that's fine,
just wait five years, they'll come back. So it's an
interesting idea in that respect.
Speaker 2 (04:41):
It's interesting that friend of the show Bill Ackman is
an investor here only because it seems like we've been
talking about him for several weeks in a row and
I wanted to say his name again. The way this works, though,
is that most of your exposure is to credit. It's
not actually in stocks.
Speaker 1 (04:55):
Right, This is what I wrote about. Like it's like
you sort of like you like wake up in the
middle of and you're like, oh, people should be able
to get photo one levers on their four own case
and you'll come into the office not okay, how do
we do that? And you're like, wow, we'll just lend
them eighty percent of the money of their portfolio, and
like that's probably fine, right, because like even if stocks
go down, like if you have a long term loan,
like the stocks will come back up. The idea of
(05:17):
like losing money on a five year loan against like
an eighty percent ltview loan against stocks is like, yeah,
it's not that big risk. But then you realize the
real problem is interest. Right, So you're making this loan
and it's going to charge interest, and the interest is
you know, like six seven percent a year. It's like
so pur plus two percent. So it's like, you know,
(05:38):
meaningful interest, and how are these people going to pay
that interest? And it's really just optically difficult to make
them pay the interest, right, Like you have to either
make them make contributions to the retirement fund every year
to pay the interest, or you have to like sell
some of their stocks to pay the interest, or or
or you can put enough of the money into fixed
(06:01):
income that pays a yield to pay the interest. And
if the fixed income stuff that you buy has a
higher yield than the like SOFA plus two percent that
you charge, then it's fine. But it's like if it
has like a twenty five percent higher you have to
put eighty percent of the stuff into fixed income, and
so like, in fact, basics proposal is like you put
(06:22):
something like eighty five percent of your portfolio into fixed income,
fixed income being maybe a bond fund, maybe maybe some
private credit.
Speaker 2 (06:31):
Which I do want to talk about it.
Speaker 1 (06:32):
Yeah, I want to try about it too. Yeah, put
some private credit your thro own k. But so the
point is that like you're levering up your frown K
and then kind of like walking most of that back
by putting it into bonds rather than stocks. So like,
instead of putting two hundred percent of your like retirement
account into stocks, you're putting like seventy five percent of
your retirement fund into stocks and another four hundred and
twenty five percent into credit. So it's like a nice
(06:55):
effort to achieve this interesting theoretical idea, but doesn't quite
accomplish exactly what you'd like ideal they wanted to accomplish.
Speaker 2 (07:01):
Yeah, so you described this as cool in your school, which, by.
Speaker 1 (07:05):
The way, you know as like I will say, like
I used to be a derivative structure, and like, so
often you're like, oh, this is a great idea we
should do, and then you're like it doesn't work practically,
and then you're like, what is the like awkward compromise
that kind of like captures the spirit of it? But
isn't quite what you wanted. This feels like that. They're like, yeah, okay,
I like this awkward compromise, well.
Speaker 2 (07:23):
You calling it cool is already on the Basic Capital website.
It's attributed to Bloomberg. It's a great endorsement.
Speaker 1 (07:31):
It's a reasonable compromise to achieve an abstract damn.
Speaker 2 (07:35):
Yeah, so leverage to a lot of folks sound scary.
It kind of sounds scary to me. You're talking about I.
Speaker 1 (07:42):
Feel like everyone's first instinct is like, oh my god,
you're borrowing money to your taking margin loans in your
free tim Again it's like yeah, fine, but like so okay,
this is like not margin leverage. So it's like you
have like a five year term loan, right, Like the
chance that your portfolio will end up twenty percent below
where you started and therefore your entire retirement savings will
be wiped out. They're not that big, but you know what,
they exist, right, there's a risk. The story suggests that
(08:04):
like most people who do this, like you know, they
dabble in it. They put a little bit into the
weird leverage thing, and then they put a lot into
like regular stuff. But yeah, like it amplifies your risk,
it amplifies your returns. I think the case is that
right now, virtually everybody it makes a huge concentrated that
with eighty percent leverage in their financial list. Not virtually everybody,
(08:26):
but like a lot of people in America buy a
house within eighty percent mortgage or sometimes more than eighty
percent mortgage, and they are taking a very concentrated leverage risk,
and if house prices declined by more than twenty percent,
they will lose all of the money they invested in
their house. Now, there are differences. One of them is
that you get to live in the house, whereas you
don't get to live in your stocks. But another difference is,
(08:49):
like traditionally it's hard to get like non callable leverage
on stocks and so your mortgage, if your house price
goes down, you don't really notice necessarily because like you're
just paying the mortgage for thirty years. If your side
prices go down, then you'll notice and you'll be like, oh, no,
the equity in my account is zero or whatever. But
this sort of trick here is to think about it
(09:11):
more like a mortgage and not worry that your stocks
have gone down, because like in thirty years they'll probably recover.
Speaker 2 (09:17):
Yeah, I guess I have a hard time making my
brain work that way.
Speaker 1 (09:20):
I think most people do. I think like everyone's natural
reaction is like, oh, this is so risky, But it
is in some ways riskier to have everyone have two
hundred percent of their networth concentrator in houses, and having
two hundred percent of your net worth in a diversified
portfolio of stock and credit investments is maybe safer than
having it all in house, but maybe not. I'm not
(09:41):
investment advice here, but I don't mind the leverage that much.
I mind the fact that it's not thocks, But you know,
I can't win them all, I will say. I will say.
The only thing is like, if you told me you
can get eighty percent LTV leverage against the SMP and
hold it for thirty years and then retire, I'd be like, Yeah,
that's a good product. If you told me me same
thing against the broad bond index, I'd be like, well,
(10:03):
that's a less good product. But it's like you're probably
not gonna lose all your money. Yeah, against the private
credit portfolio. Is there some chance that private credit is
like in a bubble that is going to burst?
Speaker 2 (10:12):
Maybe you're definitely seeing more of those fears out there.
Speaker 1 (10:15):
Yeah, I'm not like super worried about that, but like
you're right saying I will take eighty percent leverage on
a portfolio of private credit. There's not a lot of
history to kind of point to there.
Speaker 2 (10:24):
It's interesting to read this article this week about basic
capital and you know how much exposures there's going to
be to private credit in this because you also had
Empower come out this week Bloomberg News reporting that Empower
is going to start offering private assets, working with firms
such as Apollo and Franklin Templeton.
Speaker 1 (10:41):
We talk about it every week. It's like there's a
gold rush to put private assets into frohen K's because
like there's a long running tradition in democratic administrations of
regulators being very skeptical of high fee products in FROH
and K, to the point that people kind of worry
(11:02):
that they have a fiduciary responsibility to only put index
ones in fur own case. Yeah, and now there is
this complete reversal where it's like, oh no, but people
want private assets in frow in case and obviously those
have high fees, and so now everyone's like let's put
high fee products into fur own case it's a real
gold rush. And that's the cynical take. Yeah, the sensible
(11:24):
take is like retirement savers do have thirty year time horizons,
and it's like really discouraged to take money out of
a four O NK before retirement. So it's like, if
you have a long time horizon, you should be taking
I liquidity, you should be taking some risk. It's truly
the case that Furro and k's are a good place
to put private assets.
Speaker 2 (11:41):
It's just like, if I have a thirty year time horizon,
why would you want to be anywhere but stocks? Like
sort of one of the pitches for private credit is
that it's diversified. It you know, is non correlated to
the S and P five hundred. But if I'm investing
over that time period and I'm going to get probably
low double digit returns in the sa P five hundred
on an annualized basis, and I'm investing for thirty years,
(12:03):
I'd probably still just want US stock exposure.
Speaker 1 (12:06):
You can't guarantee that you're getting the double visit returns
on US stock exposure, and diversifying credit is also also
there's this line that I quote all the time someone says,
if you can get like twelve to fourteen percent returns
and private credit, what else would you want to do
with your life? And if you can get twelve percent
(12:26):
from like pretty solid private credit products, like why would
you want twelve percent from the.
Speaker 2 (12:33):
SMP Because I feel like you're going to get it
for lower fees And that's that's a big reason why.
And I can see it every single day. I mean,
this was the first time I checked my four one
K in quite a long time. But I mean history
as a guide, you're probably going to get that in
public equities, so like why bother?
Speaker 1 (12:50):
But yeah, it was still shorts sentence. If you can
get twelve to fourteen percent returns in like senior secured
private credit, what else would you want to do with
your life? I explain a lot of things with fees.
I also feel like one of the main things that
is happening in the financial world right now is a
lot of people have that same thought of as you
can get twelve to fourteen percent in like first lean
(13:10):
private credit, what else would you want to do with
your life? That's why think it's hard to do private
equity because like if you're in private equity, you're paying
twelve to fourteen percent. If you're in private credit, you're
receiving it. It's a good deal.
Speaker 2 (13:21):
But I hear you, Yeah, it doesn't quite swimmy.
Speaker 1 (13:23):
I hear you. I think that, like if you ask
what should normal retirement savers be doing, I think there's
a decent case to be made that essentially zero costs
equity exposure to the US economy is a good product,
and very high cost exposure to leverage loans and other
(13:46):
weird structured stuff is a great product to sell to
you and possibly less good of a product for you
to buy. But that that's not obviously true. I do
want to say one other thing about private credit and
this basic capital structure. In basic capital, they lend you
eighty percent of the value of your portfolio. Where's that
many come from? I don't know. I think it might
come from their balance sheet, like early on, because they're
(14:07):
just ramping this up. But like in the long run,
they have to find a source of capital for that,
and I don't know who that source of capital is
going to be. I'd be surprised if it's like City Group.
I would not be surprised if it's private credit for
it or like you know, like private credit ish firms
like insurance companies or whatever. Like where I really want
this to go in the long run is like the robberos,
(14:29):
where private credit firms are lending it so for plus
two percent to retirement savers who then use those loans
to buy slightly spicier private credit stuff from the private
credit firms, like you know, the sover plus six percent. Yeah,
like that's a good financial product right there.
Speaker 2 (14:45):
I also just wanted to talk about the founder really quickly,
Abdul all aside. He's thirty years old, which is also
pretty cool.
Speaker 1 (14:53):
It's the right age to be thinking about these things.
Speaker 2 (14:55):
Definitely lover my retirement service. He went to Harvard Business School,
that where he was when he pitched Bill Ackman. He
also previously worked in leverage finance at Goldman Sachs. So
of course you were going to think this is cool.
Oh yeah, this is like, this is like resume is
I Betty loves puzzle hunts. You know who else probably
(15:33):
loves puzzles.
Speaker 1 (15:35):
The president of the private aquity club at every university.
Speaker 2 (15:39):
I was going to say, these poor kids being hazed
at these student finance clubs. This really bumms me out.
Speaker 1 (15:46):
It is not anything like what I experienced in college,
and it's like a sort of thing that I've been
noticing even for my time in banking. But yes, there's
a Business Insider article this week about college student finance clubs,
which are so insanely competitive. I think we've talked about
on this on the show. Like where it used to
be private equity firms would hire people after their two
(16:09):
year analyst program at a bank because they knew stuff,
and they'd like, you know, you'd work as an alis
at a bank, and then like you came to the
end of your two year program, you'd interview if your
new jobs, and private equity firms would interview and they'd
hire you. It was an advantage for a private equity
firm to interview two weeks earlier in the other firms.
And so I got pushed back to the point that
now people are interviewing before they start their banking jobs.
You graduate from college, you're about to start a banking job,
(16:31):
but first you interviewed a private equity firm where they
ask you like, so, how's your banking job, and you're like, wow,
I haven't been there yet. But so everything's getting pushed
back earlier. And like one symptom of that is that
being in these like exclusive elite finance clubs at universities
is like viewed as being important for your resume to
get the good finance jobs. And so you like interview
(16:52):
as a freshman and they like give you a bunch
of like difficult financial modeling questions, and like there's someone
in the story like cried during their interview in there.
If you make it through, then you're in the finance club.
And being in the finance club gives you the inside
track to getting the investment banging job that'll get you
the private equity job.
Speaker 2 (17:10):
Yeah, it did read suspiciously like getting into greek life
at a college or university. Not that the college I
want to had greek life, but it did sound a
lot like rushing of fraternity.
Speaker 1 (17:23):
Not a lot.
Speaker 2 (17:24):
Well, it's hyper competitive, you pass out? Well, no, but
there's other forms of hazing.
Speaker 1 (17:30):
Yeah, like DCF modeling.
Speaker 2 (17:32):
Yeah, which would you rather do?
Speaker 1 (17:34):
The story? It was like high school kids before they
arrive on campus are like, you know, you spend your
senior spring of high school studying up on finances that
you can get into the finance club your freshman year.
It seems insane.
Speaker 2 (17:46):
Yeah, I did not do this. No, I was so
far from this. This just bummed me out. Like you said,
all of this is getting pushed forward, and I do wonder,
you know, what's the breaking point, Like when does it
turn in on itself? And I don't quite No, it
just feels like where does it go from here? There's
nowhere else to go if you have high school seniors
in their senior spring, you know, studying.
Speaker 1 (18:07):
Of course there's somewhere else.
Speaker 2 (18:09):
We're middle school.
Speaker 1 (18:10):
Yes, It's like someone who was like, this is like
travel sports, right, Like, yeah, this is another thing that
big people talk about all the time. Like it used
to be that like kids played little league and they
played for their high school sports teams and it was
like sports and fun. And now it's like when you're seven,
you try out for like the travel team and you
(18:30):
have to spend all this money to be on the
travel team, and like it's pitched to parents as like
your kid will never get into college if they're not
on like the elite seven year old soccer team or whatever.
And I don't know, man, that's like everything, right, Like
all of these markers of status have become so competitive,
and the people witness that competition and are like, well,
(18:52):
if I start a year earlier then everyone else, I'll
have an advantage. And everyone does that, and so I
just moves further and further back until like the seven
year olds are trying out for like the Travel Financial
Modeling Team.
Speaker 2 (19:02):
As a parent, does this stress you out?
Speaker 1 (19:04):
Yeah?
Speaker 2 (19:05):
Yeah, yeah I'm not a parent, but you know I'm thinking, well.
Speaker 1 (19:08):
This is why I'm working with my daughter on her
DCF model.
Speaker 2 (19:12):
Yeah. Yeah, I have a cat, so it doesn't quite
apply to me. But I think of little Xana do
in like I don't know, fifteen years and I worry.
Speaker 1 (19:21):
About like great callback, I hope anything I should just
like little Xanada, You're you're.
Speaker 2 (19:30):
Hypothetical named after the New Jersey American Dream Mall Medal.
That's kind of why I hope it turns in on itself,
because it just doesn't seem sustainable.
Speaker 1 (19:40):
Yeah, people said that for a long time, had a
lot of things like college admissions and stuff, and the
ratchet keeps turning. I will say that, like there are
like counter trends to this, where like I always think
of like the very prestigious financial firms, you know, I
think of like Renaissance and Bridgewater and like to something
Chain Straight is like this. There's a notion that they
(20:01):
don't hire people from traditional Wall Street training. They don't
like MBAs or people from the street. They like to
hire people who are not tainted by Yeah, like traditional
Wall Street thinking. And it's weird for people to channel
themselves so intensely into traditional the traditional paths. But maybe
it's not that weird. Maybe those firms are outliers, you know,
pre med.
Speaker 2 (20:21):
There's certain things you need to learn and know about
science to become a doctor. But I could see like
a Bridgewater thinking, you know, I want to make sure
I have an edge that I'm not I'm not just
hiring someone who has been programmed by someone other than myself.
Like I want the creative thinker.
Speaker 1 (20:38):
You want the kids doing polon, it's not the kids
doing finance club on.
Speaker 2 (20:42):
So maybe that will be a forcing action for turning
it on itself.
Speaker 1 (20:45):
I don't know. I mean, like the other thing is that,
like you know, and I wrote about this, like when
I was in college, there are a lot of like
aimless smart people who graduated from college and they're like, well,
I guess I'll do investment in banking recruiting, because as
they're there, and in some ways that's not good for
a bank, or you know, some ways, if you're running
a desk at a bank, and like you can choose
(21:08):
between the president of the Financial Modeling Club and like
the classics major who's like, well, I guess I'll do
investment banking. You'd rather have the president of the financial
modeling Club because they can do financial models and they'll
be useful to you. But I think, like taking a
step back, if you're like the CEO of a bank,
there's a real value to having a broad selection of ambitious,
(21:30):
smart people who don't necessarily care about banking, because some
of those people will be really good bankers because they're
a little bit broader minded and like less rigid than
the people who are just the financial modelers. But some
of them will not be good bankers and will be
politicians or media people or you know other things podcasters,
(21:53):
and their two years at a bank will reflect well
on you and sort of lead you to continued to
do well in recruiting. Like I just think that, like,
if you're an investment bank and you're only hiring people
who have been interested in investment banking since they were eighteen,
Like you're sort of like undermining your own prestige.
Speaker 2 (22:13):
Yeah.
Speaker 1 (22:14):
Wow, this is like my very selfish disclosure. I used
to work at Colban and do you see kind of
cool to be like, ah, I used to work at Colvin,
and like you'd like go around to like different places
in life and be like, oh, I also used to
work at Colvin.
Speaker 2 (22:25):
Right, because yeah, and presonably Goldman is proud of you.
Speaker 1 (22:29):
Oh I hope, so yeah, they'd better be.
Speaker 2 (22:32):
I don't know. It's kind of similar in journalism, like
you want to hire people not always, but like you
want to have some journalists who, such as yourself, that
came from outside the industry, right, and like.
Speaker 1 (22:43):
Both because like it is vaguely prestige enhancing, but also
because like having that diversity of experience probably does improve
the doing of the job. Whereas if everyone has the
same training since they were eighteen, like you're probably missing things.
Maybe the training is really good. Maybe these finance clubs
are like you know, they sound brutal, right, there's this
(23:06):
tension in the article where like these clubs are very selective. Yeah,
and it's like, well, you could just take more people
and you could probably teach them how to pick stocks,
and like maybe they wouldn't be great at it, but
like who cares, right, Like some of them are investing
like small portfolios of like the college's money. Some of
them are not, Okay, you didn't pick a good stock.
(23:26):
But I think like part of it is they want
to be selective, because the mean thing they're doing is
like saying we were selective, so that like they are
the place where the banks want to hire from.
Speaker 2 (23:39):
Yeah. I did love this line from the Business Insider article.
Some clubs conduct three to five rounds of interviews, students
told p I, which can involve a resume review, yes,
your high school resume, a social assessment, and multiple technical
rounds in which you'll be grilled on real world finance questions.
My high school resume was written in crayon, so I
(24:00):
would love to see some of these.
Speaker 1 (24:01):
I do love the phrase a social assessment, which does
that mean that you have to like drink until you
pass out once? Because like it's you know, it's still
a college club, like you still have parties, right, I hope,
So I hope.
Speaker 2 (24:14):
Yeah, I don't know, maybe some of these students will
write in and tell us about their investment club.
Speaker 1 (24:19):
You know, I wrote about it, and several people did
write it tell me about their investment club, including one
person who pointed out that, like the competition goes two ways,
and the banks like compete to get in front of
these clubs because like, you know, if you like have
the first meeting with like the club, then like that
club is more likely to send students to you, and
so you'll you'll be able to pick them off instead
(24:40):
of them going to other banks. And so there's like
a competition including like the banks like love to sponsor
stuff for the clubs or just like give them money
because like that helps with her recruiting, and so you know,
it goes both ways. But yeah, in general, I got
a number of emails from people who are in these clubs,
and none of them were like, no, it's great, that
article is all wrong there.
Speaker 2 (24:59):
I think so much fun.
Speaker 1 (25:01):
It's pretty bad. Yeah. I have a friend whose daughter
is in one of these competitive clubs, and they asked
me to speak and I talked at their club. But
I also found it. I was like, why are you
in this competitive fight club?
Speaker 2 (25:13):
Did they seem happy? Were their smiles? Was there any
mercy I was speaking?
Speaker 1 (25:17):
So it was great.
Speaker 2 (25:18):
Yeah, it was full of mercy and class.
Speaker 1 (25:21):
It was I mean, yeah, stamping cheering.
Speaker 2 (25:24):
Probably the highlight of their college experience.
Speaker 1 (25:26):
I definitely in fact in doing DF models, Well, this is.
Speaker 2 (25:44):
Really fun to talk about, but I'm really just in
knots over how Elon Musk is going to get more money,
specifically Tesla options.
Speaker 1 (25:53):
Yeah, this is not super easy, but like they have
to reported that Tesla is trying to figure out a
way to give him a giant bag of money. They
gave him some stock options in twenty eighteen.
Speaker 2 (26:03):
Going all the way back to twenty eighteen.
Speaker 1 (26:05):
When Tesla was a sixty billion dollar company. I mean,
it's not like a one point something trillion dollar company.
But like, the options all worked out and he did great.
They awarded him on the order of one hundred billion
dollars from these options, and then the shareholder sued in Delaware,
and the Delaware judge said, you know, this is a
conflicted transaction that was not fair to shareholders, and so
(26:27):
the options are gone and Elon Musk and Frankly Tesla's
board in Tesla's shareholders were all kind of mad about that.
We talked about it in the past. And one thing
they did was vote again to give him back the options,
and the judge said, no, that doesn't work. The options
are gone. Another thing they did was about to move
to Texas. So Tesla's now incorporated in Texas, so like,
(26:48):
the next time they give him stuff, you can only
sue in Texas. And this week the government Texas signed
a bill about limiting how much you can sue a
company in Texas. And the answer is, you really kind
of can't. Like it's it meant to be much more
protective of decisions like this than like, you know, the
equivalent law in Telware. So like, if they were to
(27:09):
give him another hundred million dollars today, like it would
be fine, like no one would no one would be
able to ject. But but if they were to give
him hundred million dollars today, they would have a huge
accounting hit and he would have a huge tax hit. Basically,
it would be a multi billion dollar expense to Tesla,
which would start its income, and it would be a
huge tax bill to him. He would pay like fifty
(27:31):
seven percent taxes on the value of the award, like
what's nice about what happened in twenty eighteen is that,
probably speaking, there were not a lot of tax consequences
or a lot of accounting consequences to giving him this
award because the options weren't worth very much in the theory,
because the stock was low and there were a lot
of ambitious targets that he had to hit in order
(27:53):
to get the options. And then like seven years later,
the options are worth a lot of money because he
hit the targets, Like that's how it's supposed to work.
Now they're gone, and like giving him new options would
be really bad for tax and accounting purpose. So Tesla's
trying to figure out what's the right way to solve
this in a way that gives him what he wants,
which is both like a giant pat on the head
(28:14):
for being so good and also like more control of Tesla. Yeah,
but in a way that doesn't like he created a
h tax bill or like an accounting this. Yeah.
Speaker 2 (28:23):
Specifically, the FT reported that they formed a special committee
to explore Elon Musk's pay. The committee comprises of just
the chair of the board, Robin Denholm, and Kathleen Wilson Thompson.
It's going to explore alternative ways to compensate him for
passwork should Tesla fail to reinstate that twenty eighteen pay deal.
You had kind of a suggestion for them.
Speaker 1 (28:44):
So I've had two suggestions this week. One is my
stupid suggestion and one is the readers. Both of them
are somewhat tongue in cheek suggestions. Okay, Essentially the problem
is that the stock price of Tesla is too high.
Right like in twenty eighteen, they're like, we'll give you
a huge pile of money if you tenax the stock price,
and then he did it, and then like now they
can't be like, well, we'll give you another huge pile
of money for tenexting the stock price previously because that
(29:06):
would have tax consequences. So the solution to the stock
price being too high is to make the stock price lower.
And so I don't think this is original for me.
I think, like you know, I've been writing about elin
Mus for years, and I've been getting somewhat conspiratorial emails
from readers for years, and I think somewhere a reader
email will be like if they want to give him
(29:28):
stock options again, And it's very important that the options
to be granted up the money, and he wants them
to be very valuable. The thing to do is to
make the stock very viatile. Tank the stock, give new
stock options at a low price, and then bring the
stock back up, and the stock options will not be
worth a lot.
Speaker 2 (29:46):
Turns out, is that what he's been doing.
Speaker 1 (29:47):
I mean, like, you know, the stock went down a lot. Yeah,
as he was doing doge antics, and he's like a
little bit retreated from the doge antics and said things
like I will spend more time at Tesla. And the
stock gone up, and it's like, well, you know, you
could like turn the dial all the way to doage.
Stock plummets, give him stock options, be like, oh, with
these options, I'm now motivated to spend more time in
(30:09):
the company. Turn the doll more to Tesla. Stock goes
up and everything's fine.
Speaker 2 (30:14):
Yeah, there you go.
Speaker 1 (30:15):
That's one solution. It's not a very good solution.
Speaker 2 (30:17):
That was your solution, So I'm not going to insult you.
Speaker 1 (30:20):
No, it's pretty stupid.
Speaker 2 (30:21):
But what was the reader's suggestion?
Speaker 1 (30:23):
The reader's suggestion is there are various ways for Tesla
to give elon musk stock. Let's say, the traditional way
to give a ceo stock is to do it as
incentive compensation, and that runs into the problems that we
have here, where like if you want to incentivize him
for work, he's already done, like you have a big
tax bill. Another thing that you could do is you
(30:45):
could acquire a company.
Speaker 2 (30:47):
That he owns, right, and maybe one that begins with.
Speaker 1 (30:52):
X not necessarily yes, So there's a business logic too,
I mean arguably business logic too. Tesla acquire xai because
Tesla's an AI company and as an AI company. But
you know, Tesla has in the past acquired solar City,
which was a company that was partially owned by Elon Musk,
(31:14):
and there were some allegations that Tesla was overpaying for
solar City because Elon Musk wanted it to and then
it was essentially a ballout of solar City to like
enrich the CEO and the shareholder sued and he lost,
and the Delaware Cord at the time said, nah, this
was good enough, but you know in Texas like you
(31:35):
could probably be even faster and loser. And so the
solution that my reader suggested was, like, look, you have
an Elon Musk company, you overpaid for it. In the
form of Tesla stock by ninety billion dollars, and you've
given Elon Musk ninety billion dollars of stock that is
(31:56):
not immediately taxable to him and does not reduced your earnings.
So it like kind of solves the problem of rewarding
him for his past work. And the objection to it
is that if a Delaware company was like, we're going
to just buy our CEO is like random small startup
for ninety billion dollars, they'd get sued and they'd go
(32:17):
to court, and a Delaware chancellor would review whether the
transaction was entirely fair to shareholders. And given both the
cynicism with which I'm describing this and Delaware's history with
Elon Musk, the chancellor would probably say, no, this is
not entirely fair to shaholders. You have to give back
the stock. But being in Texas, and I think the
(32:39):
thing about this is like I'm describing it in this
very cynical way, but like you could imagine Tesla's board
saying this CEO is very valuable to us. We owe
him for the good work he did increasing the stock
price in the past. That the Delaware chancellor took the
stock away from him, for shareholders are already voted to
give him that stock back, and the chancellor said, no,
that doesn't work. So what we're going to do is
(33:00):
we're going to give him the stock in this alternate
way where we're buying this company from him, you know,
and I know the company isn't worth ninety billion dollars,
but like he's our guy, we like him, Let's give
him the ninety billion dollars. You could imagine like disclosing
that clearly and the shelder saying sure, yeah, So we have.
Speaker 2 (33:17):
Two potential solutions on the board right here.
Speaker 1 (33:20):
No one would ever cite this podcast if they're implemented
either of these solutions, because you'd probably get in trouble
doing these things explicitly, like impleasantly.
Speaker 2 (33:32):
Well, this is a watch this space sort of moment.
Tesla Hid say in a filing that it's proxy Samen
will be delayed. That indicates that perhaps you'll learn how
to do it. Yeah, their annual meeting will be delayed.
Usually the annual meeting is in May or June, so
maybe sometime in the summer we'll want to come.
Speaker 1 (33:50):
To Shrelders with some thing that the Shelders can vote
on to giv Alan of his money.
Speaker 2 (33:54):
We're going to talk about it on this podcast, but
not next week. No, No, next week we have something
far more sinister.
Speaker 1 (34:04):
And that was The Money Stuff Podcast.
Speaker 2 (34:05):
I'm Matt Livian and I'm Katie Greifeld.
Speaker 1 (34:08):
You can find my work by subscribing to The Money
Stuff newsletter on Bloomberg.
Speaker 2 (34:11):
Dot com, and you can find me on Bloomberg TV
every day on Open Interest between nine to eleven am Eastern.
Speaker 1 (34:18):
We'd love to hear from you. You can send an
email to Moneypod at Bloomberg dot net, ask us a
question and we might answer it on air.
Speaker 2 (34:25):
You can also subscribe to our show wherever you're listening
right now and leave us a review. It helps more
people find the show.
Speaker 1 (34:30):
The Money Stuff Podcast. It is produced by Anna Maserakus
and Moses on On.
Speaker 2 (34:34):
Our theme music was composed by Blake Naples.
Speaker 1 (34:37):
Brandley, Francis nan Levens our executive.
Speaker 2 (34:39):
Producer, and Stage Bauman is Bloomberg's head of Podcasts.
Speaker 1 (34:42):
Thanks for listening to The Money Stuff Podcast. We'll be
back next week with more stuff
Bloomberg Audio Studios, Podcasts, Radio News. Hello and welcome to
The Money Stuff Podcast. You're a weekly podcast where we
talk about stuff related to money. I'm Matt Levian and
I write The Money Stuff Colm for Bloomberg Opinion.
Speaker 2 (00:19):
And I'm Katie Greifeld, a reporter for Bloomberg News and
an anchor for Bloomberg Television.
Speaker 1 (00:24):
Katie, you're you're off thanks week.
Speaker 2 (00:27):
I'm so excited. It's my birthday on Sunday, which is huge.
It's my favorite day of the year. On Saturday, I'm
riding in a horse show. And then immediately, how is
that not your favorite day of You know, I'm not
going to the Olympics. It's a fact that I accepted
a couple of years ago. I'm doing this sour show
on Saturday, and then Saturday night we're leaving the country
(00:49):
for Ireland for my birthday. And I'm really excited. But
that means practically speaking that we just recorded next week's episode,
and now we're recording this week's episode, and we've already
spent too much time.
Speaker 1 (01:02):
Together today, too much time together. But next week's episode
of a special episode of Guests, Yes, our second and
third guests huge talking about the subject deer to Katy's heart.
Speaker 2 (01:12):
Good lord, it's about puzzle hunts.
Speaker 1 (01:15):
It's about puzzles, which are cool, which are dear in
my heart, and somewhat less dear to Katy's hard than horses.
Speaker 2 (01:21):
I was just happy for Matt listening to Matt having
fun as someone who's never done a puzzle hunt probably
never will.
Speaker 1 (01:29):
It's for the large subset of money stuff fans who
are also a puzzle hunt fans, and.
Speaker 2 (01:36):
For them you want to learn about puzzle value and
respect all those people that are like puzzle hunts.
Speaker 1 (01:40):
It's amazing, Katy. I saw you this afternoon checking your furrow,
and k.
Speaker 2 (01:48):
I actually was. I was inspired to after reading about
basic capital, which you wrote about in one of this
week's Money Stuff basically four dollars of leverage. Yeah, for
everyone dollar that you invest, what could go wrong?
Speaker 1 (02:03):
I didn't actually know this when I wrote this, but like,
there's a fascinating history of this idea, right. So the
idea is that when you are a young person, you
invest a little bit of money in the stock market,
and then as you get older, you move up in
your career and you start investing more money, and so
by the end of your career, you are investing more
of your money is in stocks than at the beginning
of your career. And if you think about this from
(02:26):
a theoretical perspective, you will think you should have more
money in the stock market early on and relatively less
money later on, right that you should diversify your stock
market risk by taking more of that risk early instead
of taking like almost all of it at the end.
And so people think about this theoretically, and there's a
sort of well known two thousand and eight paper by
Ian Ayres and Barry Nelbuff that Ianire's taught at the
(02:48):
Lost cal I went to basically saying, like, what you
should do is you should lever up your investments early
on your retirement investments. Early on, you should take a
margin loan from your brokerage or like buy long dated
call options that kind of look like levered features. And
you should have more than one hundred percent of your
money in the stock market early on, and then have
less than hundred percent of your unning the stock market
(03:08):
later on. And that's going to like smoothier returns over
time and give you better returns than if you just
invested your cash as it came in over the course
of your career and they wrote this paper. If you
look at it on like SSRN, the date on the
paper is like May two thousand and eight, which, yeah,
(03:30):
after I wrote about like the basic capital idea, a
couple of people email me. There's a famous post on
the bogel Heads investing for him, where like this grad
student did this starting like two thousand and seven, and
he just ran into a buzz saw, like he lost
all of his money and then like a little bit
more than all of his money because he had borrowed
to do it. Yeah, I think he got better over
(03:50):
time because, like you know, the point of this is
like you're sort of spreading your risk, and so he
just unfortunately took a lot of risk going into a
great financial crisis. But then he got better. But anyway,
that's the idea. And for various reasons, including that this
idea had to brief a vogue in two thousand and
eight before beking a terrible idea. There's not like a
ton of implementations of it, but basic Capital, which Susanne
(04:13):
Willie at Plumberg wrote about this week, they are doing
a sort of implementation of it where they will let
you borrow money to lever up your furrow NK. And
the pitch is that you're borrowing the money in like
kind of a nicer way than broker margin loans, Like
they give you a term loan, there's no margin calls.
(04:33):
If like your stocks go down, they're like, that's fine,
just wait five years, they'll come back. So it's an
interesting idea in that respect.
Speaker 2 (04:41):
It's interesting that friend of the show Bill Ackman is
an investor here only because it seems like we've been
talking about him for several weeks in a row and
I wanted to say his name again. The way this works, though,
is that most of your exposure is to credit. It's
not actually in stocks.
Speaker 1 (04:55):
Right, This is what I wrote about. Like it's like
you sort of like you like wake up in the
middle of and you're like, oh, people should be able
to get photo one levers on their four own case
and you'll come into the office not okay, how do
we do that? And you're like, wow, we'll just lend
them eighty percent of the money of their portfolio, and
like that's probably fine, right, because like even if stocks
go down, like if you have a long term loan,
like the stocks will come back up. The idea of
(05:17):
like losing money on a five year loan against like
an eighty percent ltview loan against stocks is like, yeah,
it's not that big risk. But then you realize the
real problem is interest. Right, So you're making this loan
and it's going to charge interest, and the interest is
you know, like six seven percent a year. It's like
so pur plus two percent. So it's like, you know,
(05:38):
meaningful interest, and how are these people going to pay
that interest? And it's really just optically difficult to make
them pay the interest, right, Like you have to either
make them make contributions to the retirement fund every year
to pay the interest, or you have to like sell
some of their stocks to pay the interest, or or
or you can put enough of the money into fixed
(06:01):
income that pays a yield to pay the interest. And
if the fixed income stuff that you buy has a
higher yield than the like SOFA plus two percent that
you charge, then it's fine. But it's like if it
has like a twenty five percent higher you have to
put eighty percent of the stuff into fixed income, and
so like, in fact, basics proposal is like you put
(06:22):
something like eighty five percent of your portfolio into fixed income,
fixed income being maybe a bond fund, maybe maybe some
private credit.
Speaker 2 (06:31):
Which I do want to talk about it.
Speaker 1 (06:32):
Yeah, I want to try about it too. Yeah, put
some private credit your thro own k. But so the
point is that like you're levering up your frown K
and then kind of like walking most of that back
by putting it into bonds rather than stocks. So like,
instead of putting two hundred percent of your like retirement
account into stocks, you're putting like seventy five percent of
your retirement fund into stocks and another four hundred and
twenty five percent into credit. So it's like a nice
(06:55):
effort to achieve this interesting theoretical idea, but doesn't quite
accomplish exactly what you'd like ideal they wanted to accomplish.
Speaker 2 (07:01):
Yeah, so you described this as cool in your school, which, by.
Speaker 1 (07:05):
The way, you know as like I will say, like
I used to be a derivative structure, and like, so
often you're like, oh, this is a great idea we
should do, and then you're like it doesn't work practically,
and then you're like, what is the like awkward compromise
that kind of like captures the spirit of it? But
isn't quite what you wanted. This feels like that. They're like, yeah, okay,
I like this awkward compromise, well.
Speaker 2 (07:23):
You calling it cool is already on the Basic Capital website.
It's attributed to Bloomberg. It's a great endorsement.
Speaker 1 (07:31):
It's a reasonable compromise to achieve an abstract damn.
Speaker 2 (07:35):
Yeah, so leverage to a lot of folks sound scary.
It kind of sounds scary to me. You're talking about I.
Speaker 1 (07:42):
Feel like everyone's first instinct is like, oh my god,
you're borrowing money to your taking margin loans in your
free tim Again it's like yeah, fine, but like so okay,
this is like not margin leverage. So it's like you
have like a five year term loan, right, Like the
chance that your portfolio will end up twenty percent below
where you started and therefore your entire retirement savings will
be wiped out. They're not that big, but you know what,
they exist, right, there's a risk. The story suggests that
(08:04):
like most people who do this, like you know, they
dabble in it. They put a little bit into the
weird leverage thing, and then they put a lot into
like regular stuff. But yeah, like it amplifies your risk,
it amplifies your returns. I think the case is that
right now, virtually everybody it makes a huge concentrated that
with eighty percent leverage in their financial list. Not virtually everybody,
(08:26):
but like a lot of people in America buy a
house within eighty percent mortgage or sometimes more than eighty
percent mortgage, and they are taking a very concentrated leverage risk,
and if house prices declined by more than twenty percent,
they will lose all of the money they invested in
their house. Now, there are differences. One of them is
that you get to live in the house, whereas you
don't get to live in your stocks. But another difference is,
(08:49):
like traditionally it's hard to get like non callable leverage
on stocks and so your mortgage, if your house price
goes down, you don't really notice necessarily because like you're
just paying the mortgage for thirty years. If your side
prices go down, then you'll notice and you'll be like, oh, no,
the equity in my account is zero or whatever. But
this sort of trick here is to think about it
(09:11):
more like a mortgage and not worry that your stocks
have gone down, because like in thirty years they'll probably recover.
Speaker 2 (09:17):
Yeah, I guess I have a hard time making my
brain work that way.
Speaker 1 (09:20):
I think most people do. I think like everyone's natural
reaction is like, oh, this is so risky, But it
is in some ways riskier to have everyone have two
hundred percent of their networth concentrator in houses, and having
two hundred percent of your net worth in a diversified
portfolio of stock and credit investments is maybe safer than
having it all in house, but maybe not. I'm not
(09:41):
investment advice here, but I don't mind the leverage that much.
I mind the fact that it's not thocks, But you know,
I can't win them all, I will say. I will say.
The only thing is like, if you told me you
can get eighty percent LTV leverage against the SMP and
hold it for thirty years and then retire, I'd be like, Yeah,
that's a good product. If you told me me same
thing against the broad bond index, I'd be like, well,
(10:03):
that's a less good product. But it's like you're probably
not gonna lose all your money. Yeah, against the private
credit portfolio. Is there some chance that private credit is
like in a bubble that is going to burst?
Speaker 2 (10:12):
Maybe you're definitely seeing more of those fears out there.
Speaker 1 (10:15):
Yeah, I'm not like super worried about that, but like
you're right saying I will take eighty percent leverage on
a portfolio of private credit. There's not a lot of
history to kind of point to there.
Speaker 2 (10:24):
It's interesting to read this article this week about basic
capital and you know how much exposures there's going to
be to private credit in this because you also had
Empower come out this week Bloomberg News reporting that Empower
is going to start offering private assets, working with firms
such as Apollo and Franklin Templeton.
Speaker 1 (10:41):
We talk about it every week. It's like there's a
gold rush to put private assets into frohen K's because
like there's a long running tradition in democratic administrations of
regulators being very skeptical of high fee products in FROH
and K, to the point that people kind of worry
(11:02):
that they have a fiduciary responsibility to only put index
ones in fur own case. Yeah, and now there is
this complete reversal where it's like, oh no, but people
want private assets in frow in case and obviously those
have high fees, and so now everyone's like let's put
high fee products into fur own case it's a real
gold rush. And that's the cynical take. Yeah, the sensible
(11:24):
take is like retirement savers do have thirty year time horizons,
and it's like really discouraged to take money out of
a four O NK before retirement. So it's like, if
you have a long time horizon, you should be taking
I liquidity, you should be taking some risk. It's truly
the case that Furro and k's are a good place
to put private assets.
Speaker 2 (11:41):
It's just like, if I have a thirty year time horizon,
why would you want to be anywhere but stocks? Like
sort of one of the pitches for private credit is
that it's diversified. It you know, is non correlated to
the S and P five hundred. But if I'm investing
over that time period and I'm going to get probably
low double digit returns in the sa P five hundred
on an annualized basis, and I'm investing for thirty years,
(12:03):
I'd probably still just want US stock exposure.
Speaker 1 (12:06):
You can't guarantee that you're getting the double visit returns
on US stock exposure, and diversifying credit is also also
there's this line that I quote all the time someone says,
if you can get like twelve to fourteen percent returns
and private credit, what else would you want to do
with your life? And if you can get twelve percent
(12:26):
from like pretty solid private credit products, like why would
you want twelve percent from the.
Speaker 2 (12:33):
SMP Because I feel like you're going to get it
for lower fees And that's that's a big reason why.
And I can see it every single day. I mean,
this was the first time I checked my four one
K in quite a long time. But I mean history
as a guide, you're probably going to get that in
public equities, so like why bother?
Speaker 1 (12:50):
But yeah, it was still shorts sentence. If you can
get twelve to fourteen percent returns in like senior secured
private credit, what else would you want to do with
your life? I explain a lot of things with fees.
I also feel like one of the main things that
is happening in the financial world right now is a
lot of people have that same thought of as you
can get twelve to fourteen percent in like first lean
(13:10):
private credit, what else would you want to do with
your life? That's why think it's hard to do private
equity because like if you're in private equity, you're paying
twelve to fourteen percent. If you're in private credit, you're
receiving it. It's a good deal.
Speaker 2 (13:21):
But I hear you, Yeah, it doesn't quite swimmy.
Speaker 1 (13:23):
I hear you. I think that, like if you ask
what should normal retirement savers be doing, I think there's
a decent case to be made that essentially zero costs
equity exposure to the US economy is a good product,
and very high cost exposure to leverage loans and other
(13:46):
weird structured stuff is a great product to sell to
you and possibly less good of a product for you
to buy. But that that's not obviously true. I do
want to say one other thing about private credit and
this basic capital structure. In basic capital, they lend you
eighty percent of the value of your portfolio. Where's that
many come from? I don't know. I think it might
come from their balance sheet, like early on, because they're
(14:07):
just ramping this up. But like in the long run,
they have to find a source of capital for that,
and I don't know who that source of capital is
going to be. I'd be surprised if it's like City Group.
I would not be surprised if it's private credit for
it or like you know, like private credit ish firms
like insurance companies or whatever. Like where I really want
this to go in the long run is like the robberos,
(14:29):
where private credit firms are lending it so for plus
two percent to retirement savers who then use those loans
to buy slightly spicier private credit stuff from the private
credit firms, like you know, the sover plus six percent. Yeah,
like that's a good financial product right there.
Speaker 2 (14:45):
I also just wanted to talk about the founder really quickly,
Abdul all aside. He's thirty years old, which is also
pretty cool.
Speaker 1 (14:53):
It's the right age to be thinking about these things.
Speaker 2 (14:55):
Definitely lover my retirement service. He went to Harvard Business School,
that where he was when he pitched Bill Ackman. He
also previously worked in leverage finance at Goldman Sachs. So
of course you were going to think this is cool.
Oh yeah, this is like, this is like resume is
I Betty loves puzzle hunts. You know who else probably
(15:33):
loves puzzles.
Speaker 1 (15:35):
The president of the private aquity club at every university.
Speaker 2 (15:39):
I was going to say, these poor kids being hazed
at these student finance clubs. This really bumms me out.
Speaker 1 (15:46):
It is not anything like what I experienced in college,
and it's like a sort of thing that I've been
noticing even for my time in banking. But yes, there's
a Business Insider article this week about college student finance clubs,
which are so insanely competitive. I think we've talked about
on this on the show. Like where it used to
be private equity firms would hire people after their two
(16:09):
year analyst program at a bank because they knew stuff,
and they'd like, you know, you'd work as an alis
at a bank, and then like you came to the
end of your two year program, you'd interview if your
new jobs, and private equity firms would interview and they'd
hire you. It was an advantage for a private equity
firm to interview two weeks earlier in the other firms.
And so I got pushed back to the point that
now people are interviewing before they start their banking jobs.
You graduate from college, you're about to start a banking job,
(16:31):
but first you interviewed a private equity firm where they
ask you like, so, how's your banking job, and you're like, wow,
I haven't been there yet. But so everything's getting pushed
back earlier. And like one symptom of that is that
being in these like exclusive elite finance clubs at universities
is like viewed as being important for your resume to
get the good finance jobs. And so you like interview
(16:52):
as a freshman and they like give you a bunch
of like difficult financial modeling questions, and like there's someone
in the story like cried during their interview in there.
If you make it through, then you're in the finance club.
And being in the finance club gives you the inside
track to getting the investment banging job that'll get you
the private equity job.
Speaker 2 (17:10):
Yeah, it did read suspiciously like getting into greek life
at a college or university. Not that the college I
want to had greek life, but it did sound a
lot like rushing of fraternity.
Speaker 1 (17:23):
Not a lot.
Speaker 2 (17:24):
Well, it's hyper competitive, you pass out? Well, no, but
there's other forms of hazing.
Speaker 1 (17:30):
Yeah, like DCF modeling.
Speaker 2 (17:32):
Yeah, which would you rather do?
Speaker 1 (17:34):
The story? It was like high school kids before they
arrive on campus are like, you know, you spend your
senior spring of high school studying up on finances that
you can get into the finance club your freshman year.
It seems insane.
Speaker 2 (17:46):
Yeah, I did not do this. No, I was so
far from this. This just bummed me out. Like you said,
all of this is getting pushed forward, and I do wonder,
you know, what's the breaking point, Like when does it
turn in on itself? And I don't quite No, it
just feels like where does it go from here? There's
nowhere else to go if you have high school seniors
in their senior spring, you know, studying.
Speaker 1 (18:07):
Of course there's somewhere else.
Speaker 2 (18:09):
We're middle school.
Speaker 1 (18:10):
Yes, It's like someone who was like, this is like
travel sports, right, Like, yeah, this is another thing that
big people talk about all the time. Like it used
to be that like kids played little league and they
played for their high school sports teams and it was
like sports and fun. And now it's like when you're seven,
you try out for like the travel team and you
(18:30):
have to spend all this money to be on the
travel team, and like it's pitched to parents as like
your kid will never get into college if they're not
on like the elite seven year old soccer team or whatever.
And I don't know, man, that's like everything, right, Like
all of these markers of status have become so competitive,
and the people witness that competition and are like, well,
(18:52):
if I start a year earlier then everyone else, I'll
have an advantage. And everyone does that, and so I
just moves further and further back until like the seven
year olds are trying out for like the Travel Financial
Modeling Team.
Speaker 2 (19:02):
As a parent, does this stress you out?
Speaker 1 (19:04):
Yeah?
Speaker 2 (19:05):
Yeah, yeah I'm not a parent, but you know I'm thinking, well.
Speaker 1 (19:08):
This is why I'm working with my daughter on her
DCF model.
Speaker 2 (19:12):
Yeah. Yeah, I have a cat, so it doesn't quite
apply to me. But I think of little Xana do
in like I don't know, fifteen years and I worry.
Speaker 1 (19:21):
About like great callback, I hope anything I should just
like little Xanada, You're you're.
Speaker 2 (19:30):
Hypothetical named after the New Jersey American Dream Mall Medal.
That's kind of why I hope it turns in on itself,
because it just doesn't seem sustainable.
Speaker 1 (19:40):
Yeah, people said that for a long time, had a
lot of things like college admissions and stuff, and the
ratchet keeps turning. I will say that, like there are
like counter trends to this, where like I always think
of like the very prestigious financial firms, you know, I
think of like Renaissance and Bridgewater and like to something
Chain Straight is like this. There's a notion that they
(20:01):
don't hire people from traditional Wall Street training. They don't
like MBAs or people from the street. They like to
hire people who are not tainted by Yeah, like traditional
Wall Street thinking. And it's weird for people to channel
themselves so intensely into traditional the traditional paths. But maybe
it's not that weird. Maybe those firms are outliers, you know,
pre med.
Speaker 2 (20:21):
There's certain things you need to learn and know about
science to become a doctor. But I could see like
a Bridgewater thinking, you know, I want to make sure
I have an edge that I'm not I'm not just
hiring someone who has been programmed by someone other than myself.
Like I want the creative thinker.
Speaker 1 (20:38):
You want the kids doing polon, it's not the kids
doing finance club on.
Speaker 2 (20:42):
So maybe that will be a forcing action for turning
it on itself.
Speaker 1 (20:45):
I don't know. I mean, like the other thing is that,
like you know, and I wrote about this, like when
I was in college, there are a lot of like
aimless smart people who graduated from college and they're like, well,
I guess I'll do investment in banking recruiting, because as
they're there, and in some ways that's not good for
a bank, or you know, some ways, if you're running
a desk at a bank, and like you can choose
(21:08):
between the president of the Financial Modeling Club and like
the classics major who's like, well, I guess I'll do
investment banking. You'd rather have the president of the financial
modeling Club because they can do financial models and they'll
be useful to you. But I think, like taking a
step back, if you're like the CEO of a bank,
there's a real value to having a broad selection of ambitious,
(21:30):
smart people who don't necessarily care about banking, because some
of those people will be really good bankers because they're
a little bit broader minded and like less rigid than
the people who are just the financial modelers. But some
of them will not be good bankers and will be
politicians or media people or you know other things podcasters,
(21:53):
and their two years at a bank will reflect well
on you and sort of lead you to continued to
do well in recruiting. Like I just think that, like,
if you're an investment bank and you're only hiring people
who have been interested in investment banking since they were eighteen,
Like you're sort of like undermining your own prestige.
Speaker 2 (22:13):
Yeah.
Speaker 1 (22:14):
Wow, this is like my very selfish disclosure. I used
to work at Colban and do you see kind of
cool to be like, ah, I used to work at Colvin,
and like you'd like go around to like different places
in life and be like, oh, I also used to
work at Colvin.
Speaker 2 (22:25):
Right, because yeah, and presonably Goldman is proud of you.
Speaker 1 (22:29):
Oh I hope, so yeah, they'd better be.
Speaker 2 (22:32):
I don't know. It's kind of similar in journalism, like
you want to hire people not always, but like you
want to have some journalists who, such as yourself, that
came from outside the industry, right, and like.
Speaker 1 (22:43):
Both because like it is vaguely prestige enhancing, but also
because like having that diversity of experience probably does improve
the doing of the job. Whereas if everyone has the
same training since they were eighteen, like you're probably missing things.
Maybe the training is really good. Maybe these finance clubs
are like you know, they sound brutal, right, there's this
(23:06):
tension in the article where like these clubs are very selective. Yeah,
and it's like, well, you could just take more people
and you could probably teach them how to pick stocks,
and like maybe they wouldn't be great at it, but
like who cares, right, Like some of them are investing
like small portfolios of like the college's money. Some of
them are not, Okay, you didn't pick a good stock.
(23:26):
But I think like part of it is they want
to be selective, because the mean thing they're doing is
like saying we were selective, so that like they are
the place where the banks want to hire from.
Speaker 2 (23:39):
Yeah. I did love this line from the Business Insider article.
Some clubs conduct three to five rounds of interviews, students
told p I, which can involve a resume review, yes,
your high school resume, a social assessment, and multiple technical
rounds in which you'll be grilled on real world finance questions.
My high school resume was written in crayon, so I
(24:00):
would love to see some of these.
Speaker 1 (24:01):
I do love the phrase a social assessment, which does
that mean that you have to like drink until you
pass out once? Because like it's you know, it's still
a college club, like you still have parties, right, I hope,
So I hope.
Speaker 2 (24:14):
Yeah, I don't know, maybe some of these students will
write in and tell us about their investment club.
Speaker 1 (24:19):
You know, I wrote about it, and several people did
write it tell me about their investment club, including one
person who pointed out that, like the competition goes two ways,
and the banks like compete to get in front of
these clubs because like, you know, if you like have
the first meeting with like the club, then like that
club is more likely to send students to you, and
so you'll you'll be able to pick them off instead
(24:40):
of them going to other banks. And so there's like
a competition including like the banks like love to sponsor
stuff for the clubs or just like give them money
because like that helps with her recruiting, and so you know,
it goes both ways. But yeah, in general, I got
a number of emails from people who are in these clubs,
and none of them were like, no, it's great, that
article is all wrong there.
Speaker 2 (24:59):
I think so much fun.
Speaker 1 (25:01):
It's pretty bad. Yeah. I have a friend whose daughter
is in one of these competitive clubs, and they asked
me to speak and I talked at their club. But
I also found it. I was like, why are you
in this competitive fight club?
Speaker 2 (25:13):
Did they seem happy? Were their smiles? Was there any
mercy I was speaking?
Speaker 1 (25:17):
So it was great.
Speaker 2 (25:18):
Yeah, it was full of mercy and class.
Speaker 1 (25:21):
It was I mean, yeah, stamping cheering.
Speaker 2 (25:24):
Probably the highlight of their college experience.
Speaker 1 (25:26):
I definitely in fact in doing DF models, Well, this is.
Speaker 2 (25:44):
Really fun to talk about, but I'm really just in
knots over how Elon Musk is going to get more money,
specifically Tesla options.
Speaker 1 (25:53):
Yeah, this is not super easy, but like they have
to reported that Tesla is trying to figure out a
way to give him a giant bag of money. They
gave him some stock options in twenty eighteen.
Speaker 2 (26:03):
Going all the way back to twenty eighteen.
Speaker 1 (26:05):
When Tesla was a sixty billion dollar company. I mean,
it's not like a one point something trillion dollar company.
But like, the options all worked out and he did great.
They awarded him on the order of one hundred billion
dollars from these options, and then the shareholder sued in Delaware,
and the Delaware judge said, you know, this is a
conflicted transaction that was not fair to shareholders, and so
(26:27):
the options are gone and Elon Musk and Frankly Tesla's
board in Tesla's shareholders were all kind of mad about that.
We talked about it in the past. And one thing
they did was vote again to give him back the options,
and the judge said, no, that doesn't work. The options
are gone. Another thing they did was about to move
to Texas. So Tesla's now incorporated in Texas, so like,
(26:48):
the next time they give him stuff, you can only
sue in Texas. And this week the government Texas signed
a bill about limiting how much you can sue a
company in Texas. And the answer is, you really kind
of can't. Like it's it meant to be much more
protective of decisions like this than like, you know, the
equivalent law in Telware. So like, if they were to
(27:09):
give him another hundred million dollars today, like it would
be fine, like no one would no one would be
able to ject. But but if they were to give
him hundred million dollars today, they would have a huge
accounting hit and he would have a huge tax hit. Basically,
it would be a multi billion dollar expense to Tesla,
which would start its income, and it would be a
huge tax bill to him. He would pay like fifty
(27:31):
seven percent taxes on the value of the award, like
what's nice about what happened in twenty eighteen is that,
probably speaking, there were not a lot of tax consequences
or a lot of accounting consequences to giving him this
award because the options weren't worth very much in the theory,
because the stock was low and there were a lot
of ambitious targets that he had to hit in order
(27:53):
to get the options. And then like seven years later,
the options are worth a lot of money because he
hit the targets, Like that's how it's supposed to work.
Now they're gone, and like giving him new options would
be really bad for tax and accounting purpose. So Tesla's
trying to figure out what's the right way to solve
this in a way that gives him what he wants,
which is both like a giant pat on the head
(28:14):
for being so good and also like more control of Tesla. Yeah,
but in a way that doesn't like he created a
h tax bill or like an accounting this. Yeah.
Speaker 2 (28:23):
Specifically, the FT reported that they formed a special committee
to explore Elon Musk's pay. The committee comprises of just
the chair of the board, Robin Denholm, and Kathleen Wilson Thompson.
It's going to explore alternative ways to compensate him for
passwork should Tesla fail to reinstate that twenty eighteen pay deal.
You had kind of a suggestion for them.
Speaker 1 (28:44):
So I've had two suggestions this week. One is my
stupid suggestion and one is the readers. Both of them
are somewhat tongue in cheek suggestions. Okay, Essentially the problem
is that the stock price of Tesla is too high.
Right like in twenty eighteen, they're like, we'll give you
a huge pile of money if you tenax the stock price,
and then he did it, and then like now they
can't be like, well, we'll give you another huge pile
of money for tenexting the stock price previously because that
(29:06):
would have tax consequences. So the solution to the stock
price being too high is to make the stock price lower.
And so I don't think this is original for me.
I think, like you know, I've been writing about elin
Mus for years, and I've been getting somewhat conspiratorial emails
from readers for years, and I think somewhere a reader
email will be like if they want to give him
(29:28):
stock options again, And it's very important that the options
to be granted up the money, and he wants them
to be very valuable. The thing to do is to
make the stock very viatile. Tank the stock, give new
stock options at a low price, and then bring the
stock back up, and the stock options will not be
worth a lot.
Speaker 2 (29:46):
Turns out, is that what he's been doing.
Speaker 1 (29:47):
I mean, like, you know, the stock went down a lot. Yeah,
as he was doing doge antics, and he's like a
little bit retreated from the doge antics and said things
like I will spend more time at Tesla. And the
stock gone up, and it's like, well, you know, you
could like turn the dial all the way to doage.
Stock plummets, give him stock options, be like, oh, with
these options, I'm now motivated to spend more time in
(30:09):
the company. Turn the doll more to Tesla. Stock goes
up and everything's fine.
Speaker 2 (30:14):
Yeah, there you go.
Speaker 1 (30:15):
That's one solution. It's not a very good solution.
Speaker 2 (30:17):
That was your solution, So I'm not going to insult you.
Speaker 1 (30:20):
No, it's pretty stupid.
Speaker 2 (30:21):
But what was the reader's suggestion?
Speaker 1 (30:23):
The reader's suggestion is there are various ways for Tesla
to give elon musk stock. Let's say, the traditional way
to give a ceo stock is to do it as
incentive compensation, and that runs into the problems that we
have here, where like if you want to incentivize him
for work, he's already done, like you have a big
tax bill. Another thing that you could do is you
(30:45):
could acquire a company.
Speaker 2 (30:47):
That he owns, right, and maybe one that begins with.
Speaker 1 (30:52):
X not necessarily yes, So there's a business logic too,
I mean arguably business logic too. Tesla acquire xai because
Tesla's an AI company and as an AI company. But
you know, Tesla has in the past acquired solar City,
which was a company that was partially owned by Elon Musk,
(31:14):
and there were some allegations that Tesla was overpaying for
solar City because Elon Musk wanted it to and then
it was essentially a ballout of solar City to like
enrich the CEO and the shareholder sued and he lost,
and the Delaware Cord at the time said, nah, this
was good enough, but you know in Texas like you
(31:35):
could probably be even faster and loser. And so the
solution that my reader suggested was, like, look, you have
an Elon Musk company, you overpaid for it. In the
form of Tesla stock by ninety billion dollars, and you've
given Elon Musk ninety billion dollars of stock that is
(31:56):
not immediately taxable to him and does not reduced your earnings.
So it like kind of solves the problem of rewarding
him for his past work. And the objection to it
is that if a Delaware company was like, we're going
to just buy our CEO is like random small startup
for ninety billion dollars, they'd get sued and they'd go
(32:17):
to court, and a Delaware chancellor would review whether the
transaction was entirely fair to shareholders. And given both the
cynicism with which I'm describing this and Delaware's history with
Elon Musk, the chancellor would probably say, no, this is
not entirely fair to shaholders. You have to give back
the stock. But being in Texas, and I think the
(32:39):
thing about this is like I'm describing it in this
very cynical way, but like you could imagine Tesla's board
saying this CEO is very valuable to us. We owe
him for the good work he did increasing the stock
price in the past. That the Delaware chancellor took the
stock away from him, for shareholders are already voted to
give him that stock back, and the chancellor said, no,
that doesn't work. So what we're going to do is
(33:00):
we're going to give him the stock in this alternate
way where we're buying this company from him, you know,
and I know the company isn't worth ninety billion dollars,
but like he's our guy, we like him, Let's give
him the ninety billion dollars. You could imagine like disclosing
that clearly and the shelder saying sure, yeah, So we have.
Speaker 2 (33:17):
Two potential solutions on the board right here.
Speaker 1 (33:20):
No one would ever cite this podcast if they're implemented
either of these solutions, because you'd probably get in trouble
doing these things explicitly, like impleasantly.
Speaker 2 (33:32):
Well, this is a watch this space sort of moment.
Tesla Hid say in a filing that it's proxy Samen
will be delayed. That indicates that perhaps you'll learn how
to do it. Yeah, their annual meeting will be delayed.
Usually the annual meeting is in May or June, so
maybe sometime in the summer we'll want to come.
Speaker 1 (33:50):
To Shrelders with some thing that the Shelders can vote
on to giv Alan of his money.
Speaker 2 (33:54):
We're going to talk about it on this podcast, but
not next week. No, No, next week we have something
far more sinister.
Speaker 1 (34:04):
And that was The Money Stuff Podcast.
Speaker 2 (34:05):
I'm Matt Livian and I'm Katie Greifeld.
Speaker 1 (34:08):
You can find my work by subscribing to The Money
Stuff newsletter on Bloomberg.
Speaker 2 (34:11):
Dot com, and you can find me on Bloomberg TV
every day on Open Interest between nine to eleven am Eastern.
Speaker 1 (34:18):
We'd love to hear from you. You can send an
email to Moneypod at Bloomberg dot net, ask us a
question and we might answer it on air.
Speaker 2 (34:25):
You can also subscribe to our show wherever you're listening
right now and leave us a review. It helps more
people find the show.
Speaker 1 (34:30):
The Money Stuff Podcast. It is produced by Anna Maserakus
and Moses on On.
Speaker 2 (34:34):
Our theme music was composed by Blake Naples.
Speaker 1 (34:37):
Brandley, Francis nan Levens our executive.
Speaker 2 (34:39):
Producer, and Stage Bauman is Bloomberg's head of Podcasts.
Speaker 1 (34:42):
Thanks for listening to The Money Stuff Podcast. We'll be
back next week with more stuff
Popular Podcasts
Las Culturistas with Matt Rogers and Bowen Yang
Ding dong! Join your culture consultants, Matt Rogers and Bowen Yang, on an unforgettable journey into the beating heart of CULTURE. Alongside sizzling special guests, they GET INTO the hottest pop-culture moments of the day and the formative cultural experiences that turned them into Culturistas. Produced by the Big Money Players Network and iHeartRadio.
On Purpose with Jay Shetty
I’m Jay Shetty host of On Purpose the worlds #1 Mental Health podcast and I’m so grateful you found us. I started this podcast 5 years ago to invite you into conversations and workshops that are designed to help make you happier, healthier and more healed. I believe that when you (yes you) feel seen, heard and understood you’re able to deal with relationship struggles, work challenges and life’s ups and downs with more ease and grace. I interview experts, celebrities, thought leaders and athletes so that we can grow our mindset, build better habits and uncover a side of them we’ve never seen before. New episodes every Monday and Friday. Your support means the world to me and I don’t take it for granted — click the follow button and leave a review to help us spread the love with On Purpose. I can’t wait for you to listen to your first or 500th episode!
Dateline NBC
Current and classic episodes, featuring compelling true-crime mysteries, powerful documentaries and in-depth investigations. Follow now to get the latest episodes of Dateline NBC completely free, or subscribe to Dateline Premium for ad-free listening and exclusive bonus content: DatelinePremium.com