YOUGHAL, IRELAND – Today, we return to the scene of the crime.
We’re talking about where WeWork founder Adam Neumann and Japanese conglomerate SoftBank ripped off investors for billions of dollars.
And we begin by turning to Nobel Prize winner Esther Duflo.
As we wrote yesterday, she urges economists to think like plumbers. So, we will have a go at it. For there were clearly some leaks in the WeWork model in need of repair…
Get in Line
In the news this morning is word that Mr. Neumann has been let go. The poor man is on his own, after SoftBank took control of his company. He will have to get in line for unemployment compensation.
The Wall Street Journal:
SoftBank Group Corp. won approval from WeWork’s board to take control of the troubled co-working startup in a deal that would hand co-founder Adam Neumann nearly $1.7 billion and sever most of his ties with the company.
One billion was for his shares in the business. Another half a billion was to resolve outstanding loans.
Mr. Neumann had tapped into the company’s capital intake lines, borrowing money from the company to buy property that he then leased back to WeWork.
And there was an additional $185 million… million!… for “consulting services.”
But what kind of plumber gets a bonus for making a mess of things, connecting fresh water lines… to gas lines… to sewer lines? And what kind of a consultant gets a $185 million bonus for blowing up his own company?
WeWork now has over 40 properties on long-term leases. Its business model calls for paying the leases with money from month-to-month tenants.
Here, too, it looks as though there was not enough thought given to how the pipes came together. The expense line is rigid, substantial, and almost permanent. But the flow of revenues comes from little, very flexible hoses that can detach at any moment.
In Mr. Neumann’s fertile imagination, his properties would be filled up by thousands of “startup” entrepreneurs.
The pipe dream of our age is that every mother’s son has in him an Uber or a Snapchat that will make him a billionaire before his 30th birthday… that new technology will bring us a never-ending flow of profitable new ventures… and that the feds will keep us supplied with liquidity until kingdom come.
As to the first two, we have our doubts. But the third is confirmed every day. Here’s yesterday’s Wall Street Journal:
The Federal Reserve Bank of New York injected $99.9 billion in temporary liquidity and $7.5 billion in permanent reserves into financial markets Tuesday.
The short-term intervention came via $64.90 billion in overnight repurchase agreements with eligible banks, and with a $35 billion repo operation that will run through Nov. 5.
Why the need for so much cash? WeWork, for one, was desperate for it. The company raised $17 billion from investors, but the money leaked out day after day… with nearly $2 billion in losses for 2017-2018 alone.
And now there’s almost nothing left. Before Tuesday’s bailout, the company had only a few days’ worth of operating cash… and couldn’t even afford to pay the legal and separation costs of laying off employees.
And WeWork is not alone. Throughout the Unicorn Zoo, there are many more freakish companies, all similarly consuming – not earning – cash.
This could be regarded as a plumbing defect too; it appears that the feds – egged on by prize-winning economists – are supplying much more cheap credit than the markets can sensibly employ.
Main Street… Wall Street… Washington – the big players borrow below the rate of consumer price inflation. What can they do with what they borrow? Finance foolish fighter planes and open-ended giveaways… buy back their own stocks… and fund cockamamie, capital-destroying businesses – like WeWork.
But the simpleminded Nobel plumbers – such as Duflo and her husband, Abhijit Banerjee… and practically the whole gaggle of modern economists, from Paul Krugman to Larry Summers – can’t imagine that their theories, their fixes, and their wrenches could cause problems instead of solve them.
And if more liquidity doesn’t bring the results they want, they will simply open up the valves further.
A few months ago, investors thought they saw in WeWork another Amazon or Google. What the former had done to brick-and-mortar retailing and the latter had done to the Yellow Pages, WeWork would do for office space.
Rather than bother with leases and maintenance, forward-looking entrepreneurs would have a single solution to their business lodging needs – WeWork.
Thus it was that the company was groomed for an IPO at $47 billion (as much as $60 billion had been discussed). But then, in a moment of uncharacteristic caution, the chumps took a look at the plumbing.
WeWork had the same hard costs of buying/leasing/outfitting/maintaining commercial real estate as every other property company. But it lacked the one thing that made those companies profitable – reliable long-term leases with healthy tenants.
It was losing money – by the billions. And try as much as investors could to unclog the drains and open up the fresh water lines… they just couldn’t make the flows even up. However they added them up, there was always more going out than coming in.
Investors wondered if WeWork was really such a revolutionary new concept after all. They balked at $47 billion… and at $37 billion… and then, finally, its patron, SoftBank, took over at a value of $8 billion.
And now, the plumbing inspectors are beginning to look more carefully at SoftBank itself.
“What is the value of the fund that nurtures these losers?” they ask. “We see the billions of ‘liquidity’ going down the drain. But where are the revenues?”
In short, how long before SoftBank blows up too?