I’m Not Done Yet!March 19, 2021
Q: How do you know when Prof G is on Bill Maher?
A: He tells you.
We took this (whatever “this” is) on the road last week, visiting my hometown for an appearance on Real Time with Bill Maher. There was a 50/50 chance I would throw up and pass out, but I kept my lunch down and earned the branded hand sanitizer and T-shirt in my dressing room. It felt great to be in front of a live audience again — one of the things I will not take for granted, post-corona.
This segment in particular, on crony capitalism, inspired a bunch of heat on Twitter, and garnered follows from @janemarielynch and @DorisKGoodwin. I am now considering running, as an Independent, for the 2022 U.S. Senate election in Florida (see above: @DorisKGoodwin followed me). Anyways, I wrote at greater length about how we’ve lost the script on capitalism in April of 2020, so we are re-running that post again.
Lenin said nothing can happen for decades, and then decades can happen in weeks. Yes, a pandemic pulls the future forward, and there’s a lot to learn. Another phenomenon that forms rain clouds of perspective is, wait for it … death. Or, specifically, being close to it.
My father is approaching 90, recently divorced (for the fourth time), and spends his days watching replays of Maple Leafs games and abusing Xanax. His affinity for Xanies is a feature, not a bug, since at the end of your life, “long-term effects” loses its meaning. He’s near the end, exceptionally intelligent, and high. In sum, he’s my Yoda.
Our calls are mostly me yelling short questions (“HOW ARE THE LEAFS LOOKING FOR NEXT YEAR?”) and waiting for something profound in return. Occasionally, he delivers.
“You must unlearn what you have learned!”
Just kidding, Yoda did actually say that. But when I asked my dad what he thinks makes America different, he said:
“America is a terrible place to be stupid.”
That’s why he immigrated here. A pillar of capitalism is that you can’t reward the winners without punishing the losers. I worry our government has been co-opted by the wealthy and is focused on protecting the previous generation of winners, even if it means reducing future generations’ ability to win. Aren’t we borrowing against our children’s prosperity to protect the wealth of the top ten — if not one — percent?
In Depression-era Scotland, my dad was physically abused by his father. His mother spent the money he sent home from the Royal Navy on whiskey and cigarettes. He took a huge risk and came to America. My mom took a similar risk, leaving her two youngest siblings in an orphanage (her mom and dad had both died in their early fifties), and bought a ticket on a steamship. She had a small suitcase and 110 quid that she hid in both socks. Why? Because they wanted to work their asses off and be rewarded for the risks they were willing to take. This is capitalism: A beacon of hope for people who are smart, hard working, and comfortable with risk, and the promise of a correspondingly greater share of the spoils.
However, this is no more. Modern-day “capitalism” in America means flattening the risk curve for people who already have money by borrowing from future generations with debt-fueled bailouts for companies. We have consciously decided to reduce the downside for the wealthy, thereby limiting the upside for future generations.
CNBC guest: Equity holders deserve to get wiped out.
CNBC host: Why does anybody deserve to get wiped out in a crisis like this? This is a natural disaster, why does anybody deserve to get wiped out? Wouldn’t that be immoral in and of itself?
“Immoral,” here we go. Morality for CNBC, and the current administration, is not capitalism but the worst type of socialism: Cronyism. Rugged individualism and capitalism on the way up, privatizing the gains, then “we’re all in this together” on the way down, as we socialize the losses with bailouts.
In 1999, the firm I co-founded, Red Envelope, was drafting an S-1 in anticipation of an IPO. At 31, I stood to register $30-60 million on the IPO. Then the dot-com bubble burst, and that damaged us, but the injuries weren’t fatal, and we were the only retail IPO of 2002. In 2008, a longshoreman strike left all our holiday merchandise hostage on a cargo ship eight miles off the shores of the port of Long Beach. With the credit crisis taking hold, a prescient analyst at Wells Fargo decided to pull our credit facility. Within 90 days, we were Chapter 11. That event, combined with my divorce, reduced my net worth by 97 percent.
I didn’t deserve to lose near-everything. What happened wasn’t my fault — ok, maybe the divorce was. Regardless, was this fair or (im)moral? Just as there’s no crying in baseball, there’s no fairness in shareholder accretion or destruction. Looking at jets at 31 wasn’t moral or fair either. So, what happened? Exactly what’s supposed to happen in a market economy: downside registered against commensurate upside.
Red Envelope went through something also uniquely American — and productive — bankruptcy. The equity holders (e.g., Yours Truly) were wiped out (#bummer). However, we did our duty as board members and found a buyer, Liberty Media, who paid our vendors and kept the employees. No jobs lost, all debtors paid. When a 31 year-old is shopping for jets in November, part of the agreement with the Invisible Hand is that he may lose most/all of it by March. There’s a word for that … capitalism.
The capital structure of private firms is meant to balance upside and downside. CNBC/Trump want to protect current equity holders at the expense of future generations with rescue packages that explode the deficit. They also want to protect airlines, who spent $45 billion on buybacks and now want a $54 billion bailout, disincentivizing other firms (e.g., Berkshire Hathaway) that have built huge cash piles foregoing current returns. [Ed. note: Airlines ultimately received approximately $50 billion.]
The rescue package should protect people, not businesses. From 2017 to 2019, the CEOs of Delta, American, United, and Carnival Cruises earned over $150 million in compensation. But, now … “We’re in this together” (i.e., “bail our asses out”).
And what happens if they (gasp!), go bankrupt? Simple: The equity holders and unsecured debt holders get wiped out. These are the cohorts who, despite the recent meltdown, have registered a 3.3x increase in the Dow since the lows of 2008.
But so long as we keep making more old people, and younger people want to take their kids to Disney’s Galaxy’s Edge, there will be cruise lines and airlines. Since 2000, U.S. airlines have declared bankruptcy 66 times. Despite the obvious vulnerability of the sector, boards/CEOs of the six largest airlines have spent 96 percent of their free cash flow on share buybacks, bolstering the share price and compensation of management … who now want a bailout. They should be allowed to fail. Bondholders will own the firms. Ships and planes will continue to float and fly, and there will still be a steel tube with recirculated air waiting for you post-molestation by Roy from TSA.
Trump/CNBC have adopted a narrative that this is about protecting the most vulnerable. No, it’s about buttressing the most wealthy. Pandemics typically result in higher wages over the next several decades as society recognizes that essential workers (the gal/guy delivering your Greek yogurt and placing your Indian food in the backseat of your car) should be paid more. This is a good thing.
Letting firms fail, and share prices fall to their market level, also provides younger generations with the same opportunities that we, Gen X and boomers, were given: a chance to buy Amazon at 50x (vs. 100x) earnings and Brooklyn real estate at $300 (vs. $1,000) per square foot. Just as we pretend our service men and women are heroes, and then treat them like chumps, CNBC advertisers and Peter Navarro want to pretend they give a sh*t about younger generations so they can protect the wealth of old people and management/advertisers. Enough already.
Earlier this week, I was on MSNBC with an early Uber employee, who reminded us that “We’re all in this together.” What bullsh*t. My guess is that this executive registered $10-100 million in equity crafting software that figured out an elegant way to pay the company’s 3.9 million “driver partners” less than minimum wage, ensure Uber isn’t obligated to provide them with health insurance, and avoid paying payroll taxes to adequately fund the CDC. But Dara Khosrowshahi and his several hundred-strong comms department wrote a compelling letter to the government urging them to help his driver partners.
Dara, pay your “partners” before picking up the pen again.
Walking the Walk — PPP
We recently founded Section4, a firm attempting to disrupt graduate business education. We offer online business/strategy sprints that aim to provide 30-50 percent of my classes at NYU Stern for seven percent of the price. We are eligible for some of the $350 billion federal PPP program. With a modest amount of paperwork, in seven days or less, we’d receive a loan for approximately $250,000. If we don’t lay off any employees, most of the loan would likely be forgiven. This is meaningful cabbage for us.
We are not going to apply for the program.
Our backers are wealthy, and if we can’t make this work — pandemic or not — then we don’t deserve to be in business. Yeah, our demise wouldn’t be our fault, as is the case with most success. Like steroids for the body, the moral hazard of government assistance only leaves the economy less healthy in the long run.
Just as death is a key part of life, so is the demise and reinvention of firms that can’t endure tropes. Covid-19 is no more historic than an 11 year-long bull market. With dangerous disregard for future generations, we’ve decided that hundreds of thousands of people dying is meaningful, but the NASDAQ going down would be worse. The rescue package is $2.2 trillion. The annual CDC budget — $6.6 billion.
We. Have. Lost. The. Script.
To be clear, socialism may be a better way to go, as evidenced by the study showing that four of the five happiest nations are socialist democracies. However, unless we’re going to provide universal healthcare and universal pre-K, let’s not embrace The Hunger Games for the working class on the way up, and the Hallmark Channel for the shareholder class on the way down. The current administration, the wealthy, and the media have embraced policies that bless the caching of power and wealth, creating a nation of brittle companies and government agencies.
The terrible thing about crises is that they always happen. The wonderful thing is that they always end. As we fight to bring this crisis to an end, let’s re-embrace capitalism and foster a future generation of leaders and firms that are soldiers, not hoarders. Yes, America is a terrible place to be stupid. It will be a worse place if we replace capitalism with cronyism.
Life is so rich,
P.S. Registration is now open for Section4’s Product Strategy Sprint with my renowned (and dashingly handsome) NYU Stern colleague, Adam Alter. Companies today live and die by product strategy, and Adam is someone I trust immensely in this area. Learn more about the sprint experience.
P.P.S. Achievement is in pencil until people you love set it in ink. Here’s my Dad’s reaction to seeing me on his favorite television show…