Full of Mirth: 401(k), Clubs, TSLA

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Speaker 14 Hello, and welcome to the Money Stuff Podcast, your weekly podcast where we talk about stuff related to money.

Speaker 14 I'm Matt Levine, and I wrote the Money Stuff column for Bloomberg Opinion.

Speaker 17 And I'm Katie Greifeld, a reporter for Bloomberg News and an anchor for Bloomberg Television.

Speaker 14 Katie,

Speaker 14 you're off next week.

Speaker 17 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.

Speaker 14 How is that not your favorite day of the year?

Speaker 17 You know, I'm not going to the Olympics. It's a fact that I accepted a couple years ago.

Speaker 14 20 minutes ago.

Speaker 17 I'm doing this horse show on Saturday, and then Saturday night, we're leaving the country for Ireland for my birthday, and I'm really excited. But that means,

Speaker 17 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 together today.

Speaker 14 Too much time together. But next week's episode is a special episode of guests.
Yes. Our second and third guests.
Huge. Talking about the subject dear to Katie's heart.
Good lord.

Speaker 14 It's about puzzle hunts. It's about puzzle hunts.
Which are cool. Which are dear to my heart and somewhat less dear to Katie's heart than horses.

Speaker 17 I was just happy for Matt listening to Matt having fun. As someone who's never done a puzzle hunt, probably never will.

Speaker 14 It's for the large subset of Money Stuff fans who are also puzzle hunt fans. And I am a lot of people who are

Speaker 17 value and respect all those people that like puzzle hunts.

Speaker 14 It's amazing.

Speaker 14 Katie, I saw you this afternoon checking your 401k.

Speaker 17 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, $4

Speaker 17 of leverage for every week.

Speaker 14 $41.

Speaker 17 Yeah, for every $1 that you invest.

Speaker 14 What could go wrong?

Speaker 14 I didn't actually know this when I wrote this, but there's a fascinating history of this idea, right?

Speaker 14 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.

Speaker 14 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.

Speaker 14 And if you think about this from a theoretical perspective, you will think you should have more money in the stock market early on and relatively less money later on, right?

Speaker 14 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.

Speaker 14 And there's a sort of well-known 2008 paper by Ian Ayres and Barry Nelboff.

Speaker 14 Ian Ayers taught at the law school I went to, basically saying what you should do is you should lever up your investments early on, your retirement investments early on.

Speaker 14 You should take a margin loan from your brokerage or like buy long-dated call options that kind of look like levered futures.

Speaker 14 And you should have more than 100% of your money in the stock market early on and then have less than 100% of your money in the stock market later on.

Speaker 14 And that's going to smooth your 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.

Speaker 14 If you look at it on like SSRN, the date on the paper is like May 2008, which is the

Speaker 14 auspicious time. Yeah, after I wrote about like the basic capital idea, a couple of people emailed me.
There's a famous post on the Bogleheads Investing Forum. Yeah.

Speaker 14 We're like, this grad student did this starting in like 2007 and he just ran into a buzzsaw.

Speaker 14 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.

Speaker 14 I think he got better over time because like, you know, the point of this is like you're sort of spreading your risk.

Speaker 14 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.

Speaker 14 And for various reasons, including that this idea had a brief vogue in 2008 before it became a terrible idea, there's not like a ton of implementations of it, but Basic Capital, which Suzanne Willie at Bloomberg wrote about this week, they are doing a sort of implementation of it where they will let you borrow money to lever up your 401k.

Speaker 14 And the pitch is that you're borrowing the money in like kind of a nicer way than

Speaker 14 broker margin loans. Like they give you a term loan.
There's no margin calls. If your stocks go down, they're like, that's fine.
Just wait five years. They'll come back.

Speaker 14 So it's an interesting idea in that respect.

Speaker 17 Trevor Burrus, Jr.: 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.

Speaker 17 The way this works, though, is that most of your exposure is to credit. It's not actually in stocks.
Right.

Speaker 14 This is what I wrote about. It's like you sort of like, you like wake up in the middle of the night.
You're like, oh, people should be able to get 401 leverage on their 401k.

Speaker 14 And you come into the office and you're like, okay, how do we do that? And you're like, well, we'll just lend them 80% of the money of their portfolio. And like, that's probably fine, right?

Speaker 14 Because even if stocks go down, like, if you have a long-term loan, like, the stocks will come back up. The idea of like losing money on a five-year loan

Speaker 14 against like an 80% LTV loan against stocks is like, yeah, it's not that big of a risk. But then you realize the real problem is interest, right?

Speaker 14 So you're making this loan and it's going to charge interest. The interest is, you know, like six, seven percent a year.
It's like so for plus two percent. So it's like, you know, meaningful interest.

Speaker 14 And how are these people going to pay that interest?

Speaker 14 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,

Speaker 14 or you have to like sell some of their stocks to pay the interest,

Speaker 14 or

Speaker 14 you can put enough of the money into fixed 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 25 higher yield you have to put 80 of the stuff into fixed income and so like in fact basic's proposal is like you put something like 85 of your portfolio into fixed income fixed income being maybe a bond fund

Speaker 14 maybe some private credit.

Speaker 17 Which I do want to talk about.

Speaker 14 Yeah, I want to talk about it too. Put some private credit in your 401k.
But so the point is that you're levering up your 401k and then kind of like

Speaker 14 walking most of that back by putting it into bonds rather than stocks.

Speaker 14 So like instead of putting 200% of your retirement account into stocks, you're putting like 75% of your retirement fund into stocks and another 425% into credit.

Speaker 14 So it's like a nice effort to achieve this interesting theoretical idea, but it doesn't quite accomplish exactly what you'd like ideally want it to accomplish.

Speaker 17 Yeah. So you describe this as cool in your

Speaker 17 way,

Speaker 14 you know, as like, I will say, like, I used to be a derivative structure, and like so often you were like, oh, this is a great idea we should do. And then you're like, it doesn't work practically.

Speaker 14 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.

Speaker 14 It's like, yeah, okay, I like this awkward compromise.

Speaker 17 Well, you calling it cool is already on the basic capital website. It's attributed to Bloomberg.

Speaker 14 It's a ringing endorsement.

Speaker 14 It's a reasonable compromise to achieve an abstract aim. Yeah.

Speaker 17 So leverage to a lot of folks sounds scary. It kind of sounds scary to me if you're talking about yellow leverage.

Speaker 14 I feel like everyone's first instinct is like, oh my God, you're borrowing money to leverage. You're taking margin loans and you're retiring now.
It's like, yeah, fine.

Speaker 14 But like, so, okay, this is not margin leverage. So it's like you have like a five-year term loan, right?

Speaker 14 Like the chances that your portfolio will end up 20% below where you started and therefore your entire retirement savings will will be wiped out. They're not that big.

Speaker 14 But, you know, they exist, right? There's a risk. The story suggests that most people who do this, like, you know, they dabble in it.

Speaker 14 They put a little bit into the weird levered thing and then they put a lot into like regular stuff.

Speaker 14 But yeah, like it amplifies your risk. It amplifies your returns.
I think the case is that right now, virtually everybody makes a huge concentrated bet with 80% leverage in their financial list.

Speaker 14 Not virtually everybody, but like a lot of people in America buy a house with an 80% mortgage or sometimes more than 80% mortgage. And they are taking a very concentrated leveraged risk.

Speaker 14 And if house prices decline by more than 20%, they will lose all of the money they invested in their house. Now, there are differences.

Speaker 14 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 like traditionally, it's hard to get like non-callable leverage on stocks.

Speaker 14 And so your mortgage, if your house price goes down, you don't really notice necessarily because you're just paying the mortgage for 30 years.

Speaker 14 If your stock prices go down, then you'll notice and you'll be like, oh no, the equity in my account is zero or whatever.

Speaker 14 But the sort of trick here is to think about it more like a mortgage and not worry that your stocks have gone down because like in 30 years, they'll probably recover.

Speaker 17 Yeah. I guess I have a hard time making my brain work that way.

Speaker 14 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 200% of their net worth concentrated in houses.

Speaker 14 And having 200% 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.

Speaker 14 I'm not investment advice here, but I don't mind the leverage that much. I mind the fact that it's not stocks, but I can't win them all.
I will say, I will say.

Speaker 14 The only thing is, like, if you told me you can get 80% LTV leverage against the S ⁇ P and hold it for 30 years and then retire, I'd be like, yeah, it's a good product.

Speaker 14 If you told me same thing against the broad bond index, I'd be like, well, that's a less good product, but it's like, you're probably not going to lose all your money. Yeah.

Speaker 14 Against the private credit portfolio, is there some chance that private credit is like in a bubble that is going to burst?

Speaker 17 Maybe. You're definitely seeing more of those fears out there.

Speaker 14 Yeah. I'm not like super worried about that, but like, right.
Saying, oh, we'll take 80% leverage on a portfolio of private credit. There's not a lot of history to kind of point to there.

Speaker 17 It's interesting to read this article this week about basic capital and how much exposure there's going to be to private credit in this. Because you also had Empower come out this week.

Speaker 17 Bloomberg News reporting that Empower is going to start offering private assets, working with firms such as Apollo and Franklin Templeton.

Speaker 14 We talk about it every week. It's like there's this gold rush to put private assets into 401ks.

Speaker 14 Because

Speaker 14 there's a long-running tradition in democratic administrations of regulators being very skeptical of high-fee products in 401ks

Speaker 14 to the point that people kind of worry that they have a fiduciary responsibility to only put index funds in 401ks.

Speaker 14 And now there is this complete reversal where it's like, oh no, but people want private assets in 401ks. And obviously those have high fees.

Speaker 14 And so now everyone's like, let's put high fee products into 401ks. It's a real gold rush.
And that's the cynical take. Yeah.

Speaker 14 The sensible take is like retirement savers do have 30-year time horizons and it's like really discouraged to take money out of a 401k before retirement.

Speaker 14 So it's like, if you have a long time horizon, you should be taking illiquidity. You should be taking some risk.
It's truly the case that 401ks are a good place to put private assets.

Speaker 14 It's just like...

Speaker 17 But if I have this 30-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.

Speaker 17 It, you know, is non-correlated to the SP 500. But if I'm investing over that time period and I'm going to get probably low double-digit returns in the SP 500 on an annualized basis.

Speaker 17 And I'm investing for 30 years, I'd probably still just want U.S. stock exposure.

Speaker 14 You can't guarantee that you're getting low double-digit returns on U.S. stock exposure, and diversifying credit issues.

Speaker 14 There's this line that I quote all the time: someone says, if you can get like 12 to 14% returns in private credit, what else would you want to do with your life?

Speaker 14 And

Speaker 14 if you can get 12%

Speaker 14 from like pretty solid private credit products. Like, why would you want 12% from the SP?

Speaker 17 Because I feel like you're going to get it for lower fees, and

Speaker 14 that's a big reason why.

Speaker 17 And I can see it every single day. I mean, this was the first time I checked my 401k in quite a long time.
But I mean, history is a guide. You're probably going to get that in public equity.

Speaker 17 So, like, why bother?

Speaker 14 But yeah, it was shorts and sentence.

Speaker 14 If you can get 12 to 14% 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.

Speaker 14 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 if you can get 12 to 14%

Speaker 14 in like

Speaker 14 first-lean private credit. What else would you want to do with your life? That's why it's hard to do private equity because, like, if you're in private equity, you're paying 12 to 14 percent.

Speaker 14 If you're in private credit, you're receiving it. It's a good deal.
But I hear you.

Speaker 17 Yeah, it doesn't quite sway me.

Speaker 14 I hear you. I think that, like, if you ask

Speaker 14 what should normal retirement savers be doing, I think there's a decent case to be made that essentially zero-cost equity exposure to the U.S.

Speaker 14 economy is a good product, and very high-cost exposure to leverage loans and other weird structured stuff is a great product to sell to you and possibly less good of a product for you to buy.

Speaker 14 But that's not obviously true. I do want to say one other thing about private credit and this

Speaker 14 basic capital structure. In basic capital, they lend you 80% of the value of your portfolio.
Where does that money come from? I don't know.

Speaker 14 I think it might come from their balance sheet early on because they're just ramping this up. But in the long run, they have to find a source of capital for that.

Speaker 14 And I don't know who that source of capital is going to be. I'd be surprised if it's like Citigroup.

Speaker 14 I would not be surprised if it's private credit for like, you know, like private credit-ish firms, like insurance companies or whatever.

Speaker 14 Like, where I really want this to go in the long run is like the Uroboros where private credit firms are lending at sofra plus 2%

Speaker 14 to retirement savers who then use those loans to buy slightly spicier private credit stuff from the private credit firms at like, you know, sofra plus 6%. Yeah.

Speaker 14 Like that's a good financial product right there.

Speaker 17 I also just wanted to talk about the founder really quickly, Abdul Al-Assad. He's 30 years old, which is also pretty cool.

Speaker 14 It's the right age to be thinking about these things. Definitely.
How can I leverage my retirement savings?

Speaker 17 He went to Harvard Business School. That's where he was when he pitched Bill Ackman.
He also previously worked in leveraged finance at Goldman Sachs. So of course you were going to think this is cool.

Speaker 14 Oh, yeah. Yeah.
This is cool. This is like, this is like

Speaker 14 after your own heart. Yeah.
This is like.

Speaker 17 I bet he loves puzzle hunts.

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Speaker 17 You know who else probably loves puzzles?

Speaker 14 The president of the private equity club. At every university.

Speaker 17 I was going to say, these poor kids being hazed at these student finance clubs, this really bums me out.

Speaker 14 It is not anything like what I experienced in college. And it's like a sort of thing that I've been noticing.
Yeah. Even from my time in banking.

Speaker 14 But yes, there's a Business Insider article this week about college student finance clubs, which are so insanely competitive.

Speaker 14 I think we've talked about this on the show, like where it used to be private equity firms would hire people after their two-year analyst program at a bank because they knew stuff.

Speaker 14 And they'd like, you know, you'd work as an analyst at a bank.

Speaker 14 And then like as you came to the end of your two-year program, you'd interview for new jobs, and private equity firms would interview and they'd hire you.

Speaker 14 It was an advantage for a private equity firm to interview two weeks earlier than the other firms.

Speaker 14 And so it got pushed back to the point that now people are interviewing before they start their banking jobs. Yeah.

Speaker 14 You graduate from college, you're about to start a banking job, but first you interviewed a private equity firm where they ask you, like, so how's your banking job?

Speaker 14 And you're like, oh, I haven't been there yet.

Speaker 14 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

Speaker 14 viewed as being important for your resume to get the good finance jobs.

Speaker 14 And so you interview as a freshman and they

Speaker 14 give you a bunch of difficult financial modeling questions. And there's someone in the story cried during their interview.

Speaker 14 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 banking job that'll get you the private equity job.

Speaker 17 Yeah, it did read suspiciously like getting into Greek life at at a college or university. Not that the college I went to had Greek life, but it did sound a lot like rushing a fraternity.

Speaker 14 Not a lot. Well, you know, like it's hyper-competitive.

Speaker 17 Well, no, but there's other forms of hazing.

Speaker 14 Yeah, like TCF modeling. Yeah.

Speaker 14 Which would you rather do? I don't know. There's someone in the story who is like...

Speaker 14 High school kids before they arrive on campus are like, you know, you spend your senior spring of high school studying up on finance so that you can get into the finance club your freshman year.

Speaker 14 Seems insane. Yeah.

Speaker 14 I did not do this.

Speaker 14 No.

Speaker 17 I was so far from this. This just spummed 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?

Speaker 17 And I don't quite know. 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 14 Of course, there's somewhere else to go.

Speaker 17 Where? Middle school? Yes.

Speaker 14 It's horrible. It's like someone who's like, this is like travel sports, right? Like, this is another thing that big people talk about all the time.
Like, it used to be that

Speaker 14 kids played little league and they played for their high school sports teams. And it was like sports and fun.

Speaker 14 And now it's like, when you're seven, you try out for like the travel team and you have to spend all this money to be on the travel team.

Speaker 14 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.

Speaker 14 And I don't know, man, that's like everything, right? Like all of these markers of status have become so competitive.

Speaker 14 And people witness that competition and are like, well, if I start a year earlier than everyone else, I'll have an advantage. And everyone does that.

Speaker 14 And so it just moves further and further back until like the seven-year-olds are trying out for like the travel financial modeling team.

Speaker 17 As a parent, does this stress you out?

Speaker 14 Yeah. Yeah.
Yeah.

Speaker 17 I'm not a parent, but you know, I'm thinking.

Speaker 14 Well, this is why I'm working with my daughter on her DCF modeling. Very good.
Very good. Yeah.

Speaker 17 Yeah. I have a cat, so it doesn't quite apply to me, but I think of little Xanadu in like, I don't know, 15 years, and I worry about my call.

Speaker 14 That's a great callback. That was great.
Thank you. I was hoping that.
I hope that I don't know. I shouldn't have even said anything.
I should have just like

Speaker 14 let it hang out in the air. But Little Xanadu, your hypothetical

Speaker 14 child.

Speaker 17 The New Jersey American Dream Mall.

Speaker 17 That's kind of why I hope it turns in on itself, because it just doesn't seem sustainable.

Speaker 14 Yeah, people have said that for a long time about a lot of things, like college admissions and stuff, and the ratchet keeps turning. I will say that like

Speaker 14 there are like counter trends to this where like, I always think of like

Speaker 14 the very prestigious financial firms,

Speaker 14 you know, I think of like Renaissance and Bridgewater and like to some extent Chain Street is like this. There's a notion that they don't hire people from traditional Wall Street training.

Speaker 14 They don't hire like MBAs or people from the street. They like to hire people who are not tainted by like traditional Wall Street thinking.

Speaker 14 And it's weird for people to channel themselves so intensely into traditional traditional paths.

Speaker 14 But maybe it's not that weird. Maybe those firms are outliers.

Speaker 17 Pre-med, there's certain things you need to learn and know about science to become a doctor.

Speaker 17 But I could see 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.

Speaker 17 Like I want the creative thinker.

Speaker 14 You want the kids doing Polemons, not the kids doing finance club.

Speaker 17 So maybe that will be a forcing action for for turning it on itself. I don't know.

Speaker 14 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 are like, well, I guess I'll do investment banking recruiting because they're there.

Speaker 14 And in some ways, that's not good for a bank.

Speaker 14 Or, you know, some ways if you're running a desk at a bank and like you can choose between the president of the financial modeling club and like the classics major who's like, well, I guess I'll do investment banking.

Speaker 14 You'd rather have the president of the financial modeling club because they can do financial models and they'll be useful to you.

Speaker 14 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

Speaker 14 selection of ambitious, 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 like just the financial modelers.

Speaker 14 But some of them will not be good bankers and will be politicians or media people or

Speaker 17 other things. Podcasters.

Speaker 14 Podcasters. And their two years at a bank will reflect well on you and sort of lead you to continue to do well in recruiting.

Speaker 14 Like I just think that if you're an investment bank and you're only hiring people who have been interested in investment banking since they were 18, like you're sort of like

Speaker 14 undermining your own prestige. Yeah.

Speaker 14 Wow. This is like my very selfish disclosure.
I used to work at Coleman. And it used to be kind of cool to be like, I used to work at Coleman.

Speaker 14 And like you'd go around to like different places in life and be like, oh, I also used to work at Coleman, right? Yeah.

Speaker 17 And probably Goldman is proud of you.

Speaker 14 Oh, I hope so. Yeah.
I hope so. They'd better be.

Speaker 17 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.

Speaker 14 Right. And like both because it is vaguely prestige enhancing, but also because like having that diversity of experience probably does improve the doing of the job.

Speaker 14 Whereas if everyone has the same training since they were 18, like you're probably missing things.

Speaker 14 Maybe the training is really good. Maybe these finance clubs are like, you know.

Speaker 17 They sound brutal.

Speaker 14 Right. There's this tension in the article where like these clubs are very selective.
Yeah. And it's like, well,

Speaker 14 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?

Speaker 14 Like, some of them are investing like small portfolios of like the college's money. Some of them are not.

Speaker 14 Okay. You didn't pick a good stock.

Speaker 14 But I think like part of it is they want to be selective because the main thing they're doing is like saying we were selective so that like they are the place where the banks want to hire from. Yeah.

Speaker 17 I did love this line from the Business Insider article. Some clubs conduct three to five rounds of interviews, students told BI, which can involve a resume review.

Speaker 17 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.

Speaker 17 So I would love to see some of these.

Speaker 14 I do love the phrase a social assessment. Which does that mean that you have to like drink until you pass out once? Because

Speaker 14 it's still a college club. They probably still have parties, right?

Speaker 17 I hope so. I hope so, too.

Speaker 14 Yeah.

Speaker 17 I don't know. Maybe some of these students will write in and tell us about their investment club.

Speaker 14 You know, I wrote about it and several people did write in to tell me about their investment club, including one person who pointed out that like...

Speaker 14 The competition goes two ways and the banks like compete to get in front of these clubs. Yeah.

Speaker 14 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.

Speaker 14 And so you'll be able to pick them off instead of them going to other banks.

Speaker 14 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 their recruiting.

Speaker 14 And so, you know, it goes both ways.

Speaker 14 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.

Speaker 17 They're all having so much fun.

Speaker 14 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.

Speaker 14 I was like, why are you in this competitive finance club?

Speaker 17 Did they seem happy? Were there smiles? Was there any mirth in that?

Speaker 14 Well, I was speaking, so it was great. So everybody was a little bit more.
It was full of mirth. And claps.

Speaker 14 It was, I mean,

Speaker 14 stamping, cheering.

Speaker 17 It was probably the highlight of their college experience.

Speaker 14 That's only went back to doing DCF models.

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Speaker 17 Well, this is 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 14 Yeah, this is not super newsy, but like the FT 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 2018.

Speaker 17 Going all the way back to 2018.

Speaker 14 When Tesla was a $60 billion company. I mean, it's now like a $1.00 trillion company, but the options all worked out.
He did great. They awarded him on the order of $100 billion from these options.

Speaker 14 And then the shareholder sued in Delaware, and the Delaware judge said,

Speaker 14 you know, this is a conflicted transaction that was not fair to shareholders. And so the options are gone.

Speaker 14 and

Speaker 14 elon musk and frankly tesla's board and tesla's shareholders are all kind of mad about that we've 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 and another thing they did was vote to move to texas so tesla's now incorporated in texas so like the next time they give him stuff

Speaker 14 you can only sue in texas and this week the governor of texas signed a bill

Speaker 14 about limiting how much you can sue a company in Texas. And the answer is you really kind of can't.

Speaker 14 Like it's meant to be much more protective of decisions like this than like, you know, the equivalent law in Delaware.

Speaker 14 So like if they were to give him another $100 billion today, like it would be fine. Like no one would.
No one would be able to detect. But

Speaker 14 if they were to give him $100 billion today,

Speaker 14 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 hurt its income.

Speaker 14 And it would be a huge tax bill to him. He would pay like 57% taxes on the value of the award.

Speaker 14 Like what's nice about what happened in 2018 is that, broadly speaking, there were not a lot of tax consequences or a lot of accounting consequences to giving him this award because

Speaker 14 the options weren't worth very much in theory because the stock was low and there were a lot of ambitious targets that he had to hit in order to get the options.

Speaker 14 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.

Speaker 14 And like giving him new options would be really bad for tax and accounting purposes.

Speaker 14 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 for being so good and also like more control of Tesla.

Speaker 14 Yeah. But in a way that doesn't like create a huge tax bill or like an accounting mess.
Yeah.

Speaker 17 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.

Speaker 17 It's going to explore alternative ways to compensate him for past work should Tesla fail to reinstate that 2018 pay deal. You had kind of a suggestion for them.

Speaker 14 So I've had two suggestions this week. One is my stupid suggestion and one is a reader's.

Speaker 14 Both of them are somewhat tongue-in-cheek suggestions. Okay.
Essentially, the problem is that the stock price of Tesla is too high, right?

Speaker 14 Like in 2018, they were like, we'll give you a huge pile of money if you 10x the stock price. And then he did it.

Speaker 14 And then like, now they can't be like, well, we'll give you another huge pile of money for 10xing the stock price previously because that would have tax consequences.

Speaker 17 So

Speaker 14 the solution to the stock price being too high is to make the stock price lower.

Speaker 14 And so I don't think this is original to me. I think like, you know, I've been writing about Elon Musk for years and I've been getting...

Speaker 14 somewhat conspiratorial emails from readers for years.

Speaker 14 And I think somewhere a reader emailed me like, if they want to give him stock options again, and it's very important that the options be granted at the money, and he wants them to be very valuable, the thing to do is to make the stock very volatile, tank the stock, give new stock options at a low price, and then bring the stock back up, and the stock options will now be worth a lot.

Speaker 14 Turns out is that what he's been doing? I mean, like, you know, the stock went down a lot

Speaker 14 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 has gone up.

Speaker 14 And it's like, well, you know, you could like turn the dial all the way to Doge, stock plummets, give them stock options, be like, oh, with these options, I'm now motivated to spend more time in the company.

Speaker 14 Turn the dial more to Tesla, stock goes up, and everything's fine. Yeah, there you go.
That's one solution. It's not a very good solution.

Speaker 17 That was your solution. So I'm not going to insult you.

Speaker 14 No, it's pretty stupid.

Speaker 17 What was the reader's suggestion?

Speaker 14 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.

Speaker 14 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.

Speaker 14 Another thing you could do is you could acquire a company that he owns.

Speaker 14 Right.

Speaker 17 And maybe one that begins with X.

Speaker 14 Not necessarily. Yes.

Speaker 14 So there's a business logic to, I mean, there's arguably a business logic to Tesla acquiring XAI because Tesla's an AI company and XAI is an AI company.

Speaker 14 But, you know, Tesla has in the past acquired Solar City, which was a company that was partially owned by Elon Musk. And there were some allegations that Tesla was overpaying for Solar City.

Speaker 14 because Elon Musk wanted it to and that it was essentially a bailout of Solar City to like enrich the CEO. And the shareholder sued and he lost.

Speaker 14 And the Delaware court at the time said, nah, this was good enough.

Speaker 14 But, you know, in taxes, like,

Speaker 14 you could probably be even faster and loser. And so the solution that my reader suggested was like, look,

Speaker 14 you have an Elon Musk company. You overpay for it in the form of Tesla stock by $90 billion.

Speaker 14 And you've given Elon Musk $90 billion of stock that is not immediately taxable to him and does not reduce your earnings. So it kind of solves the problem of rewarding him for his past work.

Speaker 14 And the objection to it is

Speaker 14 that

Speaker 14 if a Delaware company was like, we're going to just buy our CEO's like random small startup for $90 billion, they'd get sued and they'd go to court and a Delaware chancellor would review whether the transaction was entirely fair to shareholders.

Speaker 14 And given both the cynicism with which I'm describing this and Delaware's history with with Elon Musk, the chancellor would probably say, no, this is not entirely fair to shareholders.

Speaker 14 You have to give back the stock.

Speaker 14 But

Speaker 14 being in Texas,

Speaker 14 anything goes.

Speaker 14 And the 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.

Speaker 14 increasing the stock price in the past that the Delaware chancellor took the stock away from him for.

Speaker 14 Shareholders have already voted to give him that stock back, and the chancellor said, no, that doesn't work.

Speaker 14 So, what we're going to do is we're going to give him this stock in this alternate way where we're buying this company from him.

Speaker 14 You know, and I know the company isn't worth $90 billion, but like, he's our guy. We like him.
Let's give him the $90 billion.

Speaker 14 You could imagine, like, disclosing that clearly, and the shareholders saying, Sure.

Speaker 17 Yeah. So, we have two potential solutions on the board right here.

Speaker 14 No one would ever cite this podcast if they implemented either of these solutions because

Speaker 14 you'd probably get in trouble doing these things explicitly, but like implicitly.

Speaker 17 Well, this is a watch this space sort of moment. Tesla did say in a filing that its proxy statement will be delayed.
That indicates that proxy.

Speaker 14 Yeah, they're working on how to do it.

Speaker 17 Yeah, their annual meeting will be delayed. Usually the annual meeting is in May or June, so maybe sometime in the summer.

Speaker 14 We want to come to shareholders with something that the shareholders can vote on to give Yolanda's money.

Speaker 17 We're going to talk about it on this podcast.

Speaker 14 But not next week.

Speaker 17 No, no. Next week.
Next week we have something far more sinister.

Speaker 14 And that is the Money Stuff Podcast. I'm Matt Livian.

Speaker 17 And I'm Katie Greifeld.

Speaker 14 You can find my work by subscribing to the Money Stuff newsletter on Bloomberg.com.

Speaker 17 And you can find me on Bloomberg TV every day on Open Interest between 9 to 11 a.m. Eastern.

Speaker 14 We'd love to hear from you. You can send an email to moneypot at bloomberg.net.
Ask us a question and we might answer it on air.

Speaker 17 You can also subscribe to our show wherever you're listening right now and leave us a review. It helps helps more people find the show.

Speaker 14 The Money Stuff Podcast is produced by Anna Mazarakis and Moses Andam.

Speaker 17 Our theme music was composed by Blake Naples.

Speaker 14 Brendan Francis Neonam is our executive producer.

Speaker 17 And Sage Falman is Bloomberg's head of podcasts.

Speaker 14 Thanks for listening to the Money Stuff Podcast. We'll be back next week with more stuff.

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