Andy Kessler

WSJ: The Company Implosion Pageant

https://www.wsj.com/articles/the-company-implosion-pageant-1537724159

Minimal sales, an unproven business model, huge losses—and a multibillion-dollar valuation amid a booming stock market. Sound familiar? Dozens of companies could fit this description today. But I’m thinking about Webvan, the online grocery company that went public in November 1999. Its leaders scaled a flawed business until it failed, blowing through $830 million and declaring bankruptcy less than two years after its initial public offering.

Webvan wasn’t alone. Who can forget Naveen Jain, CEO of directory company Infospace? He declared in 2000: “The nonbelievers will be converted when we become a trillion-dollar company.” The stock peaked at around $1,300 a share in March 2000. It then fell to about $3 two years later as investors soured on the company amid accounting irregularities.

There are plenty of great companies being created today, but it’s late in the cycle. Venture capitalists are funding questionable businesses they pray will scale. It’s hard to call the absolute peak, but the brew is frothy. As Groucho Marx in “The Cocoanuts” said of Florida real estate: “You can have any kind of a home you want. You can even get stucco. Oh, how you can get stuck-oh!” Who will be this cycle’s Webvan, eToys, Pets.com?

Honorable mention: Tesla. Forget Elon Musk’s $420-a-share buyout tweet. Unlike Google or Facebook —which deliver virtually zero-marginal-cost services—Mr. Musk actually has to make cars. Many Teslas still appear to be made by hand. Tesla lost $718 million last quarter and had negative $1.8 billion in cash flow through June, with debt due soon. Cash is available, but at what cost?

Harry Lange, who ran Fidelity’s Magellan Fund, once told me his rule of thumb for valuation: Divide a company’s market value by 10 and see if it eventually can make that in annual net income. Tesla is worth around $50 billion. To make $5 billion, it has to produce and sell a million cars a year with a $5,000 after-tax profit. That’s a stretch, especially with hundreds of competing electric-car models already announced.

First runner up: WeWork. 

WSJ: Lehman: Political and Personal

https://www.wsj.com/articles/lehman-political-and-personal-1536524375

Lehman Brothers filed for bankruptcy on Sept. 15, 2008—left to twist in the wind by Treasury Secretary Hank Paulson. Ten years after, is Wall Street safe from another financial meltdown? Banks, pulling in record profits, appear to be in pretty good shape. But something seems wrong, as if the lessons of the financial crisis already have faded.

That’s only an intuition, so I called someone who would know—the former CEO of Lehman Brothers. No, not Dick Fuld, one of the public faces of Wall Street’s collapse. Instead, I talked last month with Bryan Marsal, of Alvarez & Marsal, who led Lehman for the three years after its bankruptcy. 

I asked Mr. Marsal why Lehman was allowed to fail and what lessons were learned. He responded with two words: political and personal. What made business or economic sense wasn’t considered. Mr. Marsal explained that Mr. Paulson “had no standing in the Lehman bailout decision but seemed to dominate the entire process.” The Bush administration already had bailed out Bear Stearns five months earlier, and Fannie Mae and Freddie Mac the week before. Using taxpayer money to bail out perceived Wall Street fat cats had become very unpopular.

Why was Mr. Paulson channeling Ralph Kramden? The Treasury secretary, Mr. Marsal thought, “should have taken a back seat and let the pros from the Federal Reserve drive the bus.” Plus, as a formerGoldman Sachs CEO, “Paulson simply didn’t like Dick Fuld, and he had run out of patience.” It didn’t help that in 1998, when Long-Term Capital Management needed bailing out, Wall Street got together and everyone kicked in, except Mr. Fuld’s Lehman.

On Sept. 9, Mr. Paulson told a group of CEOs about Lehman, “There’s no government money here.” Shortly thereafter, taxpayer money went into Goldman Sachs, Morgan Stanley , Citigroup and others. It seems Fed Chairman Ben Bernanke grabbed control of the bus from Mr. Paulson after the almost instant contagion and carnage from the Lehman bankruptcy. Withholding a bailout was a mistake. A subsidized merger or an orderly bankruptcy would have made more sense. 

Why is this so important? Today there is nothing stopping the political and the personal from trumping rational economic decision-making in the next crisis.