| One theme of this column is that public companies should do stupid stuff to make their stocks go up. Not exclusively! They should also do a good job of running a profitable business. It’s just, if the opportunity presents itself to non-fraudulently make your stock go up for stupid reasons, why not take it? I often write about this in the context of meme stocks. The paradigmatic example is that Adam Aron, the chief executive officer of AMC Entertainment Holdings Inc., did a YouTube interview in which he was apparently not wearing pants. Retail investors — well, some retail investors anyway — love this! “It is good for your stock if you do interviews with no pants” is, sometimes, approximately true. But AMC also bought a gold mine and gave shareholders popcorn. Its shareholders enjoy some good comedy, and AMC provides them with that comedy, with what I can only assume is a well-thought-out strategy of giving the shareholders what they want. Sometimes what they want is dumb. There are three main arguments for maximizing your stock price using stupid means: - As a matter of corporate finance, if your stock price is high, you can get cheap financing: You can sell stock at high prices, or use your stock as currency to do acquisitions or pay employees. Having a high stock price is good for your business.
- As a matter of your fiduciary responsibility to maximize returns for your shareholders, if your stock price is high, they are happy, because they are making money.
- As a matter of your fiduciary responsibility to make your shareholders happy more generally, the high stock price indicates that they are happy. One thing that shareholders stereotypically want is high and growing profits, but that is not always the only thing they want. If you are not particularly profitable, but the stock is trading at 1,000 times earnings because the shareholders are delighted with your antics, then, I mean, you are doing your job aren’t you? The antics are your job.
I don’t know how seriously I mean any of this. At least a little bit. But there is a counterargument. The counterargument is something like: “The important thing for a company is to do a good long-term job of running a profitable business. Doing stupid stuff to juice the stock price does not necessarily, in theory, prevent a company from also doing a good job on its business. But in practice executive attention is limited, company culture is important, and a CEO who wakes up thinking ‘what interviews can I do with no pants today’ is not one who is laser-focused on building a great business for the long term.” On the Money Stuff podcast last month, I tried to ask John Collison, the co-founder of Stripe, about initial public offering structure, and he shut me down: I find all the debates about IPO mechanics really uninteresting because it just doesn’t matter. If you have a great business that’s valuable for customers that millions of people use and makes money as a result, you can do whatever you want. … You can have the world’s best IPO plan. And if the business isn't good, it doesn't matter. ... Build a great business and you could write your prospectus on a cocktail napkin and it’d be fine.
You could take that view generally about all sorts of stock-price-management antics. The thing that matters is building a great business; any time spent thinking about the mechanics of managing the stock price — whether through traditional means like stock buybacks, or comedic means like AMC’s — is misspent. One possible synthesis of these views is something like: “If you can conveniently do dumb stuff to boost your stock price, go ahead, but don’t spend all your time thinking about it, and certainly don’t talk about it. Don’t go around saying ‘we’re doing stuff to boost our stock price’; go around talking about the great business that you are building for the long term. But, sure, occasionally do some stock-price stuff if it’s not too much trouble.” I don’t know if that is the right synthesis, but I get the sense it is a popular one. Nobody’s going to turn down a quick stock-price boost, but talking about it is viewed as unseemly. For instance, here is Luke Kawa at Sherwood on Friday: The decision by Palantir Technologies to move its share listing from the NYSE to the Nasdaq could spur another wave of buying from exchange-traded funds that track the Nasdaq 100. The X account of Alex Moore, a board member at the company, tweeted the quiet part out loud. Quite colorfully. Per screengrabs of the message: “We are moving @PalantirTech to Nasdaq because it will force billions in ETF buying and deliver ‘tendies’ to our retail investors. Player haters be aware that we’ve been hated for decades (plural). Everything we do is to reward and support our retail diamondhands following.” The tweet, and the account itself, no longer exist on X.
Right? Like someone came in and said to Palantir’s board “hey if you move from NYSE to Nasdaq you will be in the Nasdaq 100 index, and Nasdaq 100 ETFs will buy your stock, and your stock will go up without any changes in your business.” And Palantir’s board was like “well right sure why not, that seems easy enough, it’s good if the stock goes up and this won’t distract us much from our actual business.” And so Palantir decided to move, and put out a simple sober press release saying that, “upon transferring, Palantir anticipates meeting the eligibility requirements of the Nasdaq-100 Index,” but not gloating about it or anything. Certainly not saying “this will juice the stock price to make our retail shareholders happy.” Certainly not saying that in Reddit-speak, with “tendies” and “diamond hands.” Sure sure sure sure sure that’s what Palantir is doing, but it is embarrassing to say it. But then Moore said it! And then deleted it, because it’s embarrassing. “Everything we do is to reward and support our retail diamondhands following.” That is a plausible philosophy of public company management! I have kind of endorsed it! It is not the standard philosophy. The standard philosophy would be more like “everything we do is to provide value to our customers, so that we can build an enduring and profitable business and create value for all of our stakeholders in the long run.” The stock price is, traditionally, a simple indicator of success in that more complex and fundamental undertaking. But sometimes you do stuff for the stock price. Sometimes, though, you find a stock-price-management strategy that is so good that the only reasonable reaction is to chuck out your operating business and spend all your time issuing stock. MicroStrategy is having a great time: MicroStrategy Inc. bought a record $4.6 billion in Bitcoin, making good on plans announced last month to tap capital markets to accelerate purchases of the cryptocurrency. … MicroStrategy tapped its so-called at-the-market program to sell 13.6 million shares into the market over the week ending Nov. 17, the filing showed. ... Investors are on board with the strategy. The company’s stock price is up over 400% year-to-date, making it the second-best performer among major stocks followed by Bloomberg after Applovin Corp.
Here is MicroStrategy’s Form 8-K filing. We talked last month about MicroStrategy’s plan here, which is pretty straightforward. MicroStrategy is essentially a pot of Bitcoins: Currently it owns 331,200 Bitcoins, and Bitcoin is trading at around $91,000, making MicroStrategy’s pot worth about $30 billion. It also runs an enterprise software business but that hardly seems relevant. MicroStrategy’s market capitalization is about $84 billion, meaning that it trades at well over a 150% premium to the value of its Bitcoins. So it can sell $1 worth of stock, buy $1 worth of Bitcoin, and add $2.50 of market capitalization. It can create value out of nowhere. The natural response to discovering this magical phenomenon is to ask “well, okay, but how much of this can we do?” That was MicroStrategy’s response — it would absolutely be mine! — and it hasn’t found the limit yet. It did $4.6 billion of stock sales, and $4.6 billion of Bitcoin buying, last week. Its stock was up, Bitcoin was up, and its premium to Bitcoin also went up modestly. My usual assumption with stuff like this is “arbitrages close.” Like, if MicroStrategy is a pot of Bitcoin trading at a premium to the value of its Bitcoin, then the natural arbitrage is to (1) sell MicroStrategy stock and (2) buy Bitcoin. This is a bet that eventually the gap will close, and also it should help cause the gap to close, because selling MicroStrategy tends to push down its price and buying Bitcoin tends to push up its price. I am not recommending that you do that — that’s super risky! nothing here is investment advice! — I am just saying that MicroStrategy can do that, and should, and does. Except that it doesn’t reduce the premium! What if, the more stock MicroStrategy sells to buy Bitcoin, the more the premium goes up? A real perpetual motion machine. Anyway, if I found a way to magically create billions of dollars of value out of nowhere, I would absolutely (1) do that, (2) see how much of it I could do, and (3) possibly spend somewhat less time thinking about my enterprise software business? “We work hard to provide value to our customers and build a long-lasting business,” why, this is so much easier and better! I think a lot about how OpenAI, when it raises money from investors, tells them that “It would be wise to view any investment in OpenAI Global, LLC in the spirit of a donation, with the understanding that it may be difficult to know what role money will play in a post-AGI world.” OpenAI, these days, has real and growing revenue (from selling subscriptions to its consumer chatbot, etc.), much bigger expenses (from spending tons of money training models), and an enormous market valuation driven by the assumption that eventually that will flip. But OpenAI doesn’t encourage that assumption, at least, not officially. OpenAI’s marketing is like “sure eventually our expenses might come down, but if all goes well our revenue won’t go up in ways that you can understand; instead we will transcend money.” It’s honestly a great pitch, I love it. It is probably best to interpret this as mostly OpenAI doing very clever marketing. (“Business negging,” I have called it.) But there is plausibly something true about it. What if the move toward artificial general intelligence does reshape the economy in hard-to-predict ways that will unsettle the value of money? Like in some ways the possible paths for artificial intelligence are: - Extreme bull case: Transcend money, new abundance society, etc.
- Moderate bull case: Very valuable chatbots, more efficient professional services firms, easy to code up a new product for your startup, huge new economic possibilities unleashed by widely available outsourced brainpower, etc.
- Moderate bear case: Mostly hype, AI progress stalls at current levels, hundreds of billions of dollars of investment are wasted, etc.
- Extreme bear case: Skynet, The Matrix, extinction of humanity, etc.
I don’t know, it’s just an interesting story to try to finance. Normally you’re like “we plan to build a widget factory that will make a million widgets a month, which we think we can sell for $20 each,” and you sort of figure out the cash flows and go out to raise debt and equity capital against them. Banks will lend you some of the money to build the factory, figuring that (1) some of those cash flows are reasonably certain and/or (2) even if you go bust as a widget manufacturer, the building and machines will be worth something to someone else. And equity investors will give you the rest of the money, hoping that you’ll be good at making widgets and you’ll make money. But for the AI buildout the pitch is pretty much “we need several trillion dollars to build stuff that nobody can entirely conceive of right now, and we don’t really have an economic model of how it will make money, but it is so cool that the money will probably take care of itself, unless we transcend money, which would be cool too.” And you can do it! Bloomberg’s Neil Callanan, Gillian Tan, Tasos Vossos, Carmen Arroyo and Immanual John Milton report: While much of the speculative hype around AI has played out in the stock market so far, as seen in chipmaker Nvidia Corp.’s share price, the giddiness is spreading to the sober suits of debt finance and private equity. Analysis by Bloomberg News estimates at least $1 trillion of spending is needed for the data centers, electricity supplies and communications networks that will power the attempt to deliver on AI’s promise to transform everything from medicine to customer service. Others reckon the total cost could be double that. Even Wall Street skeptics on AI’s ultimate money-making potential, such as Goldman Sachs Group Inc.’s head of equity research Jim Covello, have said it’s worth staying invested in those who provide the plumbing. The wealth of Silicon Valley’s and Seattle’s tech giants, who want some of this capacity anyway for cloud storage and the like, offers a degree of comfort.
I suppose the explanation is some combination of (1) AI is pretty cool so everyone wants to be involved, and if you’re a lender that means lending to AI stuff, (2) “lending to AI stuff” tends to mean financing power plants and data centers that have pretty general uses, so you’re not reliant on any particular AI company or thesis succeeding, and (3) the economic model is, in the short term, something like “large highly rated companies like Microsoft and Alphabet and Meta will pay billions of dollars for chips and power, so the cash flows are actually pretty certain”: Financiers are eager to back these grand projects because future occupants have usually pre-signed long leases, making them safer bets. Some banks are offering to lend as much as 70% or 80% of the cost and occasionally more when a lease is already signed, according to a person with knowledge of the matter. … Lenders are more twitchy, however, about data centers explicitly earmarked for AI rather than more general purposes, according to a banker who works in the sector. Such deals can carry costlier debt and less leverage, he says, because the technology still has to prove its worth. Separately, a senior partner at a leading private equity firm says he’s troubled by the emergence of speculative development, meaning construction takes place before a tenant has been found, as it’s hard to be sure of final demand. Some lawyers talk of “zombie projects” that may never be finished.
Every so often I get emailed press releases to the effect of “99% of nonfungible tokens are now worthless,” or initial coin offerings, or other crypto things. And I am like “sure yes that sounds right.” I guess I am used to booms that are essentially abstract and online. The experience of recent startup and crypto booms has been “a handful of people in a room can code up an app that will be worth billions of dollars, so you might as well put some money into their startup because the downside is low and the upside is high.” And much of the world has developed to make this all easier, with cloud hosting and software tools and outsourced supply chains making it more feasible for a few people with not much capital to start useful companies. And then the AI boom is like “let’s build dozens of nuclear power plants.” It’s nice to have a boom that the infrastructure lenders can get in on. Another theme of this column is that banks don’t have any money. Oh, not literally; I’m partly kidding about this one too. But I have argued that, between stricter bank capital regulation and the rise of giant alternative asset managers with huge pots of money to put to work, banks are just less likely to make and hold loans than they used to be. In the olden days, a fairly standard model was “you go to a bank for a loan, and the bank gives you the loan, and if you don’t pay it back then the bank loses money.” In modern banking, it is becoming more common for the model to be “you go to a bank for a loan, and the bank goes to an investor to get the money, and the bank lends you the money, and if you don’t pay it back then the investor loses the money.” The bank, in this model, is increasingly a sales network; it is in the business of having a lot of bankers who cover a lot of companies and can originate loans, but its balance sheet is precious, and it will try to find someone else to actually put up the money. In some ways this model is obviously safer than the traditional model: Banks are largely funded with short-term leverage from depositors, so they are at risk of bank runs. Private credit firms and other new alternative lenders are largely funded with long-term locked-up equity capital from big investors (insurance companies, endowments) with long time horizons, so they can more safely bear the credit risk of the banks’ loans. It is a move toward narrower banking. On the other hand, there is an obvious problem with this model, one that you might remember from 2008. It is moral hazard. If a bank (1) makes loans and then (2) loses money if they don’t get paid back, it will try very hard to make loans that will get paid back. If a bank (1) makes loans and then (2) sells them to someone else, who will lose money if they don’t get paid back, it will try less hard. It will still try! It is good for the bank’s long-term business to make good loans, so it can keep selling them to willing buyers. It’s just less important for the loans to all be good, if the buyers take the losses. Here are Bloomberg’s Carmen Arroyo, Laura Noonan and Sridhar Natarajan on SRTs: A campaign by US watchdogs to strengthen banks’ balance sheets is spurring lenders to explore creative ways to reduce risks on their books. Increasingly, they’re turning to significant risk transfers — a bit of Wall Street alchemy that shifts the first losses on loans for things like cars, commercial properties and corporate operations — to investors such as [EJF Capital co-founder Neal] Wilson. If the loans perform well, he can reap a tidy profit.
SRTs in the US are relatively new and very hot: That’s creating a combination of eager investors, too few deals to satiate their demand and participants on both sides who are new to SRTs — stoking concerns about the possibility that the budding market may soon be polluted with deals in which buyers accepted loose terms. Veterans say it’s important, for example, to scrutinize the fine print, such as replenishment clauses that could allow a bank to jam in lower-quality loans. … Ideally, buyers and sellers engage in a back-and-forth over which loans to include in pools, especially in corporate debt and commercial real estate portfolios. That can help set up deals that may be renewed again and again, even if the economy shifts, until the debts are repaid. But the influx of new investors has also meant more are willing to take a “quantitative approach” to SRTs and focus their efforts on blind pools, said Diameter co-founder Scott Goodwin. That’s not something Diameter wants to do. It’s still sweating over the quality of the underlying collateral before getting the transaction over the finish line, he said.
If your model is roughly “banks have the sales force to make loans, and investors have the money to take the risk,” who is in charge of underwriting the loans? Who gets to decide which loans are a good credit risk? One obvious answer is “the banks, since they are the ones dealing with the borrowers”; the other obvious answer is “the investors, since they are the ones on the hook for bad credit decisions.” A reasonable answer — Diameter’s answer — is “both of them,” but a plausible, “quantitative” answer is “neither of them.” Spirit Air Files Bankruptcy, Bondholders Set to Take Control. SpaceX Share Sale Values Company Around a55 Billion. HSBC Managers Are Competing to Keep Their Jobs in CEO’s Revamp. ECB split over report showing big EU banks’ capital requirements lower than US rivals. Wall Street Banks Team With BlackRock to Provide Bond Price Data. Vanguard says shareholders can vote for profits over ESG issues. Goldman Readies Plans to Spin Out Its Digital Assets Platform. Trump Treasury Cabinet Pick in Flux as Jockeying Slows Selection. Bain Capital Raises $5.7 Billion for Global Special Situations. Singapore oil trader sentenced to 17 years for ‘cheating’ HSBC over $112mn. Stealth sackings: why do employers fire staff for minor misdemeanours? $500,000 Pay, Easy Hours: How Dermatology Became the ‘It’ Job in Medicine. Ken Griffin and the Big Miami Real-Estate Mystery. Hacker’s Wife ‘Razzlekhan’ Gets 18 Months for Money Laundering. Human in Bear Suit Was Used to Defraud Insurance Companies, Officials Say. If you'd like to get Money Stuff in handy email form, right in your inbox, please subscribe at this link. Or you can subscribe to Money Stuff and other great Bloomberg newsletters here. Thanks! | 
