Jack vs. Jack

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S1: This ad free podcast is part of your slate plus membership. Hell, no.

S2: Welcome to the Jack Jack edition of Slate. Money, your guide to the business and finance news of what has been a pretty exciting week. I’m Felix Salmon of axios. I’m here with Anna SHYMANSKY of Breakingviews. Hello. I’m here with Emily Peck of HuffPost Flow. And we’re going to talk about Jack. Jack. We’re going to talk about specifically we’re going to compare and contrast, shall we say, the jack of the moment. Mr. Dorsey of Twitter and Square vs. the Jack of the 80s and 90s. Mr. Welch of General Electric. We are going to talk about Lebanon because we promised that we would. And so I gets to talk about Lebanese Ponce’s, which are you know, they used to be called see, there’s no called funsies.


S3: And of course, we are going to talk about the Fed, the emergency rate cut that they did this week. What it has to do with Corona virus, what the right response to Corona virus is. All of this coming up on Slate Money.

S4: So when was the last time we had an emergency rate cut? I feel like that was financial crisis, correct?

S5: 2008 or 50 basis points.

S6: And so these things are rare and they’re meant to panic the world, I guess, or not meant to.

S2: If you want if you want to really try and send the signal, don’t worry, people, we have this under control and don’t panic. Then like a panicky rate cut in between meetings feels like the wrong message to send.


S7: I agree. I mean, it was weird because you basically had before the rate cut, you all of a sudden had this kind of you had a jump in stock prices because there was an anticipation of a rate cut. However, when there was then this emergency rate cut that was not communicated clearly, then the markets fell. It was just another example of this particular Fed’s poor communication skills.

S3: Well, this one market which isn’t falling, which is the bond market course, which is soaring and, well, new highs. But that’s not good news. That’s a sign of pessimism and flight to quality and scared a.. Yes.

S8: And so we should be up and we should say that the Fed did an emergency rate cut on Tuesday because it came off of this phone call with other leaders around the world. Right. Seven G-7 peeps. And it took action almost right away. It also was being pressured, of course, by Trump, who is tweeting about doing rate cuts. And then then they did it. And then the market went bonkers. But it’s been bonkers.


S2: The market, I think, looking at the market, what the market did in the 15 minutes after the rate cut or the day after the rate cut or the two days after the rate cut has limited utility because the market has just been bouncing around like a demented pogo stick for the past two weeks now.

S7: True. But if you’ve looked at it in the number of past years when we’ve had some type of issue and the market’s been scared and then the Fed has come in with a cut, the market has responded pretty well. And granted, this is still early. It’s possible that the markets will calm down. But I think the fact that it hasn’t is kind of telling. And it’s important because this rate cut doesn’t seem like it can do an enormous amount to stop the damage potentially of the coronavirus.


S5: Well, I mean, it’s like it’s the whole like wrong tool scenario, right? Except it’s a hammer, but it’s not a. Now, contain this virus. You need to do public health.

S9: So. Right. I had a big thing in my newsletter this week saying the crisis is the Corona virus. The crisis is an epidemiological public health crisis. We do not have a financial crisis. And there is no financial crisis anywhere on the horizon except for in Lebanon and forgot to talk about later. And so the tools that you use to fight the financial crisis, which are all the kind of tools that we used back in 2008 with coordinated rate cuts between central banks and fiscal policy and all of that kind of stuff have relatively limited utility. That said. The Corona virus is going to cause a macro economic slowdown. That is an obesity forecast for the first quarter of negative GDP growth since the crisis and like excluding the crisis since 1982. So this is a big deal. The Corona virus that the global economy and if global central banks, including the Fed, do everything they can to mitigate the off the economic effects of growth of Earth, that’s fine. We just need to be very clear that all of this is secondary to the number one big priority, which is medical.


S1: All right. The fiscal policy makes more sense. That’s what I was going to say. Exactly.

S2: Tell me whether 8 billion dollars is remotely fiscal policy. Is it?

S8: I mean, so. Right. So the Congress is in a pass is a billion dollar corona virus emergency spending bill. But it’s mostly focused on. Right. And rightly so. Medical spending, public health spending. But I think what a lot of economists are talking about this week was we sort of like hit the wall on monetary policy, like the rate cut rates are very low already. This rate cut hasn’t really isn’t really going to do much. What we need to finally do and recognize is that fiscal policy has to happen. We have to do stuff to inject money into in the U.S. We have to for example, we could do things like extend unemployment insurance and get it set up so that if people start losing their jobs, they have unemployment insurance. We can beef up food stamps we can send out. This is what I wrote about today. We can send out checks not maybe just to sick people for starters, but then maybe too.


S4: I know I have an idea. Why don’t we send reimbursement checks to anyone who has any kind of medical risk, great expense associated?

S5: Yes, you can absolutely control their everyone’s coronavirus related health care. You can assure people that if they’re sick and they stay home, they will be reimbursed. That was where the check idea came from, because you could do paid sick leave. But for like tipped workers, for example, if they’re paid, you know, if they’re reimbursed just for the tipped hourly wage, it’s like nothing. They’re still missing tips. So maybe it’s better to send to send the checks out.

S6: But if you if you want people to continue to eat out at restaurants, those people need to have some assurance that the kitchen workers aren’t sick. Right. And in order to have that assurance, those kitchen workers do need to be able to stay home if they are sick. And in order for them to be able to stay home, if they are sick, they need to somehow get paid if they’re staying Islamically. And we need a mechanism for doing that exact. Otherwise no one will.


S8: He tells a restaurant that’s when fiscal policy actually becomes public health policy, because it’s sort of bolstering it’s allowing people to stay home and rest up and making it so that sick people don’t go to work every day. It’s really important.

S7: And also because even though right now this is would basically be a supply shock, there is the fear that there’s going to be a demand shock as well. And then.

S2: Okay, can you please just because I’m a bear, very little brain. Explain what the difference is between a supply shortage.

S7: Well, the question that you have so one of the big fears with the coronavirus is that because you had all of these factories shut down in China, that now all of these parts, all of these goods that are needed aren’t going to be available. The supply is lower. Shock. Right. So that’s that’s the shock. So what is more likely that we see happening here is that we have this, you know, clear supply issue. But then at the same time, the panic and the shutdowns and the quarantines is going to reduce demand. People are going to be using services. People are going to be shopping as much. So you’re having a little bit of both. And so that’s where what the Fed is doing in theory could make a little bit more sense with the idea of we want to continue to spur economic growth. Now, I just want to point this out, though, that there are downsides to what the Fed has done. Normally, when an economy is still doing relatively good and we thus far don’t have a lot of data for the United States to support the idea that things are falling apart.

S2: In fact, just on Friday, we had an amazingly strong jobs report showing 250000 people got new jobs. That employment is at 3.5 percent. Like this is all kind of before the Corona virus shook. But the fact is the economy is about as healthy as it’s ever been going into this show.

S7: Right. And so the fear is that if you do go into an actual recession, normally when you go into an actual recession, the Fed cuts a lot. You know, we don’t have that much room to cut. The Fed has already said they don’t want to go negative and they shouldn’t go negative because as we’ve seen in other countries, Japan and Europe, it’s not overly effective. And then you say, OK, what are the other tools? Well, they can do quantitative easing again, but OK. Again, when rates are already so low. OK, great. You’re going to lower rates a tiny bit more on the far end, like longer dated bonds.


S6: It’s not going to do much until then, but that’s not a reason not to cut rates. I feel like this is this argument that Larry Summers has been making and being broadly ridiculed, ridiculed about. He’s like it’s like the Fed only has two bullets left in its gun. Now it’s fired two of them and it doesn’t have any bullets left and you should save bullets.

S3: And in fact, that’s just like a really bizarre analogy, because if lower rates are going to be good in like a couple of months time when ever he wants to hypothetically fire those bullets, then if you lower rates now, the rates will be lower in a couple of rates time.


S6: You it will you will have what you want. And like it’s better to lower the rates now and have even more effect. He has this idea that it’s not the lower rate. I don’t see that. OK. So the number is low. It can only go so much. I know. Exactly. But the question the big question is when when you cut rates.

S3: What? Makes the difference. Is it the fact that interest rates are lower?

S9: In which case you want them to be as low as possible for as long as possible, then you cut rates now? Or is it the fact that you cut rates? Is it the actual like physical action of cutting rates that has some kind of salutary effect on the economy? And as we saw with this emergency rate cut, the physical action of cutting rates doesn’t do very well.

S7: No, but I think looking at what we just saw in using that to say to discount everything we’ve seen in the last few years, I’m not sure if I totally agree with that. I’m not saying I totally agree with Larry Summers. I’m not saying I 100 percent buy this argument. But what I am saying is that historically, I do think that in recessions the Fed has cut a lot and that has indicated that the Fed has the ability to control its happening. Now, if you’re getting to a point where the Fed basically can’t cut and you’re going into a recession, I do think that limits what the Fed can do. And on top of that, when you have rates extremely low, you’re putting pressure on your banks.


S1: Very, very low rates do not help banks. So I think there’s this idea last people I’m worried about right now at the bank. OK. Who makes loans? Who keeps the economy going? I mean, I think I don’t. But bank loans aren’t keeping the economy going. Well, then why are we cutting rates? Let’s side of you screen.

S5: I think really what this is is a good thing because monetary policy isn’t the only weapon in the arsenal we have to go by. Yes, I agree. And I think we learned in the last recession and the slow, agonizing, slow recovery was that there needs to be more fiscal stimulus. You need to help not just the banks, but the people. And that’ll work. That’s its own kind of stimulus. And like the past decade, there’s been this like push away from that. And this this this running towards austerity, that really hasn’t worked. So maybe the silver lining here is like and this a lot depends on. Right. The 2020 election. But like maybe the silver lining is we actually start doing more of that stuff and and we solve some inequality issues that people were sort of like unwilling to deal with, except except I feel that everything you’re saying on one level is right.

S2: But on another level, it’s doing this thing that I again talked about a a bit in my newsletter, which is fighting the last war that we’re looking at this problem through the lens of how we fought the financial crisis, whether we did it the right way, whether we should have spent more on fiscal. And there was this general consensus, you know, ex post that we should have spent more on fiscal in 2009.


S3: But the fact is the that was a major financial crisis and financial crises have financial solutions. But the epidemiological crisis has medical solutions. And while fiscal and monetary policy can be helpful at the margins, I think the one thing we can agree on is that honestly, the economic problems facing America, although they are potentially significant and it is possible that there could be a recession, pale in significance to the virus and medical problems. So let’s concentrate on those.

S5: Yeah, I agree with that 100 percent, but we need strong policies that help. Like I said before, Americans stay healthy. Like, yes, the fiscal cliff is tied to write, like looking behind and saying, oh, we should’ve done more in the recession. But it’s also looking at like the uninsured population, the underinsured population, the percent of people who again, like they have to go to work like these. So, yeah, I really important intersection.

S3: You’re absolutely right. And I just think that calling it fiscal stimulus is a little bit a weird way of framing, but it’s a policy.

S10: I mean, it’s like definition. It is. I’m not calling. I don’t get it is it is money you spend for other goods. Their identities are fiscal, but it’s not. It is. It is fiscal policy.

S3: I’m just saying that like everything, the government spends money on its fiscal policy. But what we’re really talking about here is public health policy.

S5: Yeah. And it’s it’s like it’s a huge sign that like we need to return to the era of big government, like we need a strong government with good sound policies that can help us maneuver through public health crisis.


S3: And we need an effective government out of SBA. But yeah, no, it needs to be effective and it needs to be spending money in smart ways.

S2: And I guess the reason why I recoil at calling this fiscal policy is because when people talk about fiscal stimulus, like what’s the size of the stimulus we need? And then they work out where to spend it. It’s like, should we do tax cuts, we do more spending, that kind of thing. Like here, it’s not like that. It’s not like let’s start with the size of the stimulus and then work out where to do it. It’s like let’s start with where do we need to spend money in order to keep Americans healthy and then spend that money?

S11: I feel we all agree. OK. Do unto Jack, Jack. Let’s do Jack, Jack after Bob. Lassie was Bob this week. Jack, Jack is Jack.

S4: Jack. The name of the baby in the incredible.

S5: Yes, the amazing baby in The Incredibles. So hours and everything.

S4: The amazing baby in The Incredibles is like an impossible human being. And I feel like Jack Jack is another impossible human being. Is that a good Segway?

S5: That’s pretty good. But we should tell people what Jack’s we’re talking about. Which Jags are we talking about?

S8: We’re talking about Jack Welch, who died this week. He was the legendary CEO of General Electric. He was 84, I think. And Jack Dorsey, who is also somewhat legendary CEO of not only Twitter but also Square and Jack Dorsey is in trouble.

S9: And Jack Dorsey is has doubled the number of CEO ships that Jack Welch had. So obviously, he’s twice as CEO. He’s much richer and is much richer.


S3: Jack Welch again. But this is my news. I’m plugging my newsletter a lot this week. I don’t know why. Jack Welch got a severance package of 417 million dollars.

S2: And then he got a divorce. And then in the divorce, it turned out he was getting like even more stuff that no one ever knew about. Like two and a half million dollars worth a year of just random perks for being retired. And everyone was like, oh, my God, this guy is so rich and paid so ridiculously lavishly. And this is capitalism gone by his own kids. And in comparison to Jack Dorsey, the guy was a pauper.

S8: Yeah, I feel sorry for him now that respect.

S7: Well, it’s interesting because I I think that Jack Welch and a lot of ways started this kind of cult of the CEO. Not entirely. But I think he was a big player.

S2: And he was he he definitely was part of it. And there’s a few others, I think, like Lee Iacocca. But he what he did was he was the guy who started the cult of the CEO and really made it the same as the cult of the rising stock price and shareholder value.

S7: Yeah. Because if you look at what the G.E. shareprice did when he was in office, you’d be like, great. Of course, you look at what it’s done since then. And it’s not just that you’ve had 9/11 in the financial crisis. It was also that a lot of the things that Wells did in terms of G.E. capital, you know, and just expanding the footprint of G.E. into areas where it did not have a competitive advantage was shown to not actually be very smart.


S2: So what Welch did was financial engineering, lots and lots and lots of financial engineering. There was the obvious financial engineering, which everyone knows about, which was that he would engineer the profits every quarter, said they would they would beat expectations every quarter. And that price would of the stock would go up every quarter because everyone go, oh, my God, you made even more money this quarter than we thought you would. And so it was very good about that.

S3: Expectations management and earnings management. The. Other piece of financial engineering he did, though, was the way he did that and the way that he got the growth in the way that he got the earnings was by turning around and realizing that General Electric is this huge industrial company with massive cash flows, had this incredibly valuable thing, which was a triple-A credit rating.

S9: And he’s like, shouldn’t let that triple-A credit rating go to waste. And so he became a bank, basically. He became a lender and he started lending out and borrowing huge amounts of money. Using his triple-A credit rating meant that he could borrow at cheaper rates than even like JP Morgan or Goldman Sachs or anyone like that. So he had a comparative advantage in that sense in his funding costs with super low to borrow money. And then he would turn around and lend that money just like banks do. And so he wound up massively leveraging General Electric. And that leverage and those liabilities that he took on by borrowing so much money and really whacked the company over the head with a two-by-four in the financial crisis when it lost its triple-A credit rating and it couldn’t roll over its debts and it needed a bailout from the federal government.


S5: Yeah. And the reason I find Jack Welch interesting is less the financial engineering and more his like management style might go, which he was celebrated for. But he Dylans, they had lots of people rank and yank right where he would rank and rate all of the workers in the company and then call the bottom 10 percent, literally fire them, literally fire them even when the company was growing, like he got this neutron jack nickname from like firing hundred thousand people when that came in where like the buildings were still standing, but all of the people were like vaporized.

S6: Yes. But even after that, every single year in good years and in better years, he would still fire 10 percent of the end.

S5: And this method was lauded. People thought this was really smart and other companies followed suit. And I think it was invoked for a really long time. And he hasn’t read only way. A lot more companies now, I think, recognize that you don’t want to have a cultural fear.

S4: And I just I just got sent in the mail. The upcoming book by Reed Hastings, the CEO of Netflix, who basically those.

S5: Oh, yeah. This is bad. No. That they have this whole like they’ll fire low performers, but they think they do it really nicely. So it’s OK. And it’s good for everybody because if you’re not fitting in, then you’ve got to go.

S6: But yeah, well, like I was thinking also. Ray Dalio and the whole bridge was the thing. Yeah. I was like people old.

S5: I don’t I don’t really recognize now that this is not a good strategy. I think a lot more companies and we can talk about Twitter. Yes. I think Twitter is very much the opposite.


S7: It helps you feel what? Yeah. I mean, I will say that there there have been a number of studies that have now shown that that type of like competition within a company really decreases productivity. I mean, yes. The one thing, though, I might like to say one thing, though, that like in Jack Welch’s defense a little bit, what you saw with a lot of these 80s CEOs was that they were responding to some genuine big problems that you had in the 70s, that there was a reason that the U.S. economy kind of tanked as it did. And some of those were external, but some of those were because a lot of companies had become very uncompetitive. CEOs were only thinking in their own interests, not the interests of shareholders. And so I do think that there are parts of what he was thinking to do that weren’t a bad idea. It was just, I would argue, how he did it and the excesses of what that were the product.

S2: The problem of if we look back at the 70s were like, oh, my God, there were all of these huge inefficient conglomerates. And then what does Jack Welch do?

S7: He creates a he he buys like NBC. He’ll make sure it wasn’t just inefficient in commerce. I mean, it was part of the reason that we don’t have to go into too much. It’s the last thing I say. A part of the reason that the US economy was not as competitive in the 70s was because you had companies in other countries, particularly Germany and Japan, that their companies were leaner and the U.S. companies could not compete. That was a problem. That was why things didn’t need to change.


S5: Isn’t that the whole. I mean, the auto industry, that was the shining example. Right.

S4: Right. So in any case, what we now have in this enlightened, passive meditation, goopy, you know, 21st century era is Jack Dorsey, who, you know, walks 15 miles a day and is very thin because you never eats anything. And he manages to run two companies essentially in his spare time while trying to become, you know, achieve some kind of nirvana.

S1: And he’s going to understand Africa.

S9: Well, he’s not anymore. He has now come out because he’s in the middle of a. Shareholder proxy war with good friends. Elliott Associates. He has now announced that he is no longer going to spend six months of the year in Africa. He is in fact going to stay put in California, still running two companies. We will see whether Elliott manages to oust him from Twitter or not.

S3: But the thing that a lot of people haven’t really picked up on, I think, is that Elliott is trying to oust him as CEO of Twitter.

S2: They don’t care about him as CEO of Square, where he is by definition, just justice stretched and doing just as little work as he is at Twitter because the square shareprice is doing just fine and so long as the share price is doing just fine. You can be a touchy feely absentee CEO and no one cares.

S5: I’ve been thinking a lot about this and like Elliott Management, definitely. They have a point, right? Like Twitter is finally turning a profit now. But like compared to Facebook, it’s just not as big. It’s not growing as fast. It’s not as innovative like it’s still the same old Twitter, more or less belike.


S12: That’s kind of fine. No, it’s not. I’m sorry. I’m on Team Eliot on this one. That money is not being run.

S1: Well, like if you look at how the share price has performed in relation to other companies and I know will say, well, the share price doesn’t matter. No, it does, because it represents the fact that like as Emily, you’re even just admitting this company is not innovating. If a company companies. There is no status. You either grow or you decline. This company is not getting better. Jay, OK, so now I’m going. Twitter is growing at the rate of growth is not increase. Well, it is.

S13: Twitter is growing actually very healthy. It is its profits and its revenues have been going up strongly. Under Dorsey, much more than they were under previous CEOs. The only thing isn’t going up is the share price. Everything else is up to the right.

S5: And honestly, like, why do we want a really high growth social network like for you? Haven’t we learned that faults and all the takeover by bots and 16 like you cannot argue with say that Facebook Wes’s Facebook was way worse. Like let’s just let Twitter kind of like be Twitter. Like we don’t need some like and we don’t need another monster social network doing crazy stuff to grow and get more.

S1: Exactly. And like what one of the arguments that it’ll die, but it won’t. Well, wait. Hang on.

S14: Say that, Anna. We have had this conversation many times on on slate money and we’re just going to have it. Very briefly, one more time.

S13: Twitter is profitable. It is making good, healthy amounts of money. Let’s assume that it remains at current levels of profitability and has no growth at all and it is growing. But let’s assume worst case scenario, that it has no growth at all. It will retain those healthy levels of profitability in perpetuity.


S3: That isn’t the same as dying.

S13: Now, so itself it might it doesn’t need to fund itself because it’s making money off of it.

S7: It’s just going to be using its cash that it’s generating. And let’s just say it has not historically been very profitable, but it is now.

S13: Let’s say look, I’m saying I’m saying it is profitable now. Let’s assume that it remains profitable at current levels, which is a good amount of profitability in perpetuity. It no longer needs to fund itself. It can send those profits out to shareholders if it wants its dividends. It can keep on going just fine.

S7: It does not die. No, I’m I’m sorry. I just I disagree with this. I think that, like, it is a. So, number one, this is a growth company.

S13: OK. Number one, I don’t even know what that means, but I’m just saying, let’s assume that it isn’t. Let’s assume that it stops growing fine. Why is that bad? Well, it’s equity valuable then declines. Yes. It’s also we are let’s assume that the stock price goes down. Why is that bad?

S7: OK. So then if it needs to, I don’t know, acquire another company, how’s it gonna do that? It doesn’t need to.

S13: That’s why I’m saying it’s just going to make lots of money in perpetuity. Why is that so?

S1: All of its competitors are going to be able to keep innovating. They’re going to be able to acquire. They’re gonna be able to get better talent. And then you’re gonna have this company that apparently, like its equity value, is going to decline. Its ability to raise debt is going to be lower. So it yet it apparently is going to still get the same amount of profits, which I’m not exactly sure how that’s going to happen. All its other competitors are going to be able to do all the things that normal companies that are growing quickly do. And yet it’s gonna do just fine and dandy.


S5: I would say history suggest that that is not going to I think it’ll be fine and dandy and you just need to let Twitter be Twitter. It’s sort of it’s my favorite social network.

S6: And don’t miss our next thing. We’re going to be around for a long time. You millennials wouldn’t understand.

S5: We don’t need Twitter to be that much better because then it becomes like Big Brother, it becomes Facebook. And no one wants that. We need Twitter to be a little more like kind of like low rent and like maybe being the CEO who does this passive entity.

S11: I think all CEOs should work part time, honestly, like we don’t need them obsessing about growth that much. That is what I think.

S2: All right, so we promised this to you last week. And for those of you who are ready for the UNASUR Matzke, no doubt about Lebanon. I can tell you the earlier this week and when I spent two hours listening to a lecture by the one and only Lee Buchheit, who was a previous guest on Slate Money, and he was addressing a bunch of very sophisticated law students about sovereign debt things. And so I’m just going to remind Anahad that she is not talking to the very sophisticated students. And you’re going to have to pitch this about four notches below where Lee was.

S7: OK, I was going to interrupt you whenever I stop a fight and I fight. OK. So right now, what you have in Lebanon is a banking crisis and a general economic crisis. Now, this has been going on for a while. It really started to kind of come to a head last fall. This was around the same time when you started to see a lot of protests. Right. OK. This is all related because Lebanon is the third most indebted country in the world. Their debt to GDP is between 140 hundred fifty percent of GDP. OK. Why did they have such a big debt burden? Well, the reason they do is because they have massive what we call twin deficits, which means they have big fiscal deficit. So they’re not bringing in as much revenue as they’re spending. They’ve a big current account deficit, which means that they are importing a lot more than they’re exporting. So consequently, they need to raise money to keep all these things funded. Right. So how would they be doing that on the debt markets? OK. So who’s them buying all this debt? Well, a lot of this debt has actually been bought by the Central Bank of Lebanon and private banks in Lebanon and then some foreign creditors. OK. Make sense of it right now. OK. Now, the way that the both the central bank and the specially the private banks were able to keep buying all this debt, to keep this economy going was because they had deposit inflows. Now, where were the deposit inflows coming from? Well, you have a large Lebanese kind of diaspora that also was often wealthy that were sending money. And then on top of that, you also had money coming in from Gulf countries around because the Lebanese bank, you could get higher rates of interest. There’s a lot of bank secrecy. People wanted to put their money there.


S5: So the question actually that for the people’s the diaspora sending the money. What does that mean?

S6: Again, they’re bringing money in Lebanese banks. What this means is that let’s say that I’m a very rich Lebanese person.

S15: Let’s say I’m Carlos Ghosn or Nassim Taleb or someone like that. And I feel a sense of loyalty to my homeland. And the Lebanese bank comes along to me and says, I will offer you a U.S. dollar bank account paying interest of 7 percent.

S6: And I’m like, oh, God. Now I now I get to kill two birds with one stone. Number one, I get to support my homeland.

S15: And number two, I get way higher interest than I do, putting it in like JP Morgan and more bank secrecy. And also, no one will ever find out that my I have all of this money that because the Lebanese central bank won’t force the banks to tell the IRS.

S3: So this is where you start using the word Ponzi.

S7: Yes. This is why I described it as a Ponzi scheme, because so much of Lebanon’s economy is their banking sector and just like ginning up growth through loans for their construction and real estate. And so the whole thing only works from the government to the economy. It only works because you have these dollar inflows coming in. Now, what it started to happen honestly a while ago was these started declining.

S2: Now, a bigger mean dollar inflows can’t just go up indefinitely. Forever.

S1: No, no. Well, OK. Well, well, here’s the problem, because if they don’t, everything falls apart. You see, this is why I think that you think that Twitter is like Lebanon. I do not think Twitter is like Lebanon. So, OK. So basically, one of the things you’d have been happening is that Hezbollah, which is kind of a proxy of Iran having gaining more and more power in Lebanon and consequently, a lot of Gulf countries aren’t super excited to send their money to a country that is increasingly being run by Lebanon about being run by Hezbollah. Right. So that was one thing that started to kind of reduce this this flow of dollars in. So then what happened was. And I won’t go into all the details here because Felix won’t let me, but I’m very mean. There was another form of what is actually called financial engineering, which if you go on to Lebanon Central Bank Web site, they will somewhat show you what they’re doing. But they did all of these various swaps. And the reason they did all of these various swaps was basically to make it appear that the central bank had a larger stash of dollars. And that’s important because the Leb Lebanon has a pegged currency. So their currency is kept at a certain rate in relation to the dollar. The only way you can do that is if you have dollars to support that in the currency.


S15: So it’s called the Lebanese pound. And I’m old enough to remember when the pound was a pegged currency in the U.K. We pegged the pound to the ACU as it was then. The. Precursor to the euro. And then famously, George Soros made a big bet against the pound and the Bank of England had all of these foreign currency reserves and was trying to support the pound until eventually he it they gave up and the pound crashed because peg currencies have a tendency to crash when a lot of people are betting against them. And this is basically exactly the same thing as me. Instead of the British pound, we’re not talking about the Lebanese pound. It is pegged against the US dollar. And if there’s two things that seem inevitable at this point. One is that Lebanon is going to default on a bunch of its debts. And another one is that the pound is going to get devalued against the dollar. It all feels a lot in some way like Greece back in 2011. People like will they devalue, will they default? In the end, Greece did default, but they didn’t devalue Lebanon. I’m going to come out and say, who’s going to do both?

S7: Probably it is super complicated. I mean, this is even I would I would argue this is one of the most complicated kind of default restructurings that we’ve seen since probably something like Iraq for a number of reasons. One, because because of all of this financial engineering, one of the big results of that is that a lot of the dollar deposits from the private banking sector are at the central bank. And so what this means is that. And also sorry. And also the private banking sector owns a lot of the debt that was issued by the central governments.


S15: So if then we’ve seen this multiple times with sovereign defaults, it it means that if the government defaults and if it doesn’t pay its debts, the main bondholders who get hurt, the domestic banks, and then that just makes the domestic banks insolvent. So the government needs to bail out the banks, but it doesn’t have any money to bail out the banks. And so you have this combination banking crisis and sovereign debt crisis. They often go together, but they’ve never done that even closer than they normally are.

S7: And it’s even 200 percent correct. And it’s but it’s almost a little bit worse because you you’ve all of these dollar deposits that were being held at the central bank to make it appear basically that they had more reserves. But that means if you actually look at the numbers, the country doesn’t have enough dollars to fund all of those deposits so they can have a bank run. And they actually they have right now de facto capital controls to stop that from happening because they just simply don’t have enough dollars. That is their problem more than honestly their debt itself. It’s the fact that they do not have enough dollars. So what they’ll probably going to do, I would argue, is that they’re going to do some type of swaps with the local banks or they’ll say, OK, we’re gonna take your debt.

S16: That’s kind of going to mature soon and we’re gonna swap that with that. That’s gonna mature further along in the future. We’re gonna lower the coupon, the interest rate, and that can buy them a little bit of they’re going to kick the can down the road because this is the first thing that countries always do.


S2: But I want to get back to where you started, which was the demonstrations on the street. What what are people telling straight thing about?

S1: So what kind of sparked it was actually. Oh, what’s that tax? So because as I mentioned, Lebanon has it’s not a tweet. Now it’s better than that. Turkey, it would be like Turkey.

S6: Turkey, it’s all about with Lebanon. It’s all about. What’s that?

S7: Yeah. So because Lebanon has this massive fiscal deficit, they’re trying to find ways to close that. And instead of, like, I don’t know, cutting down the massive corruption of the government, they’re like, let’s tax people for WhatsApp messages. And so, unsurprisingly, this really angered people. But I think it’s important that it wasn’t just the WhatsApp messages. This is decades and decades of misrule, of lack of social services being given to the population while you have this governing elite that is just wasting all of this money and living lavishly while most people are suffering, especially the bankers.

S3: If you thought there was a bunch of anger in America at bankers circa Occupy like multiply that by a hundred, the bankers in Lebanon have just been you know, basically what they’ve been doing is they’ve been borrowing money from the government at 2 percent, lending it out at 9 percent. It’s been the easiest cash generating game in the world and they’ve been paying themselves hundreds of millions of dollars in dividends. These this is like personal income, these the big bankers in in Lebanon. As I said, Lebanon is basically a offshore banking center. Morton isn’t anything else, have made billions of dollars and they’ve done nothing really to improve the health of the.


S7: And this is all by design from the government. All of that activity that we’re talking about, the banking sector is directly what the central government wanted. So now we’re in a situation right now where unfortunately, no matter what happens, the population is going to end up screwed, because if you would almost certainly going to happen is that the pound is gonna be devalued. It’s already on a parallel exchange rate trading at like 40 percent less than where it technically is. So people who are regularly just holding Lebanese pounds all of a sudden now they have a lot less. And then on top of that, this is an unsustainable system. At some point this has to collapse. You’re going to need to have reforms. And unfortunately, part of those are going to be like cutting the massive electricity subsidies that they can’t afford, which are like 3 percent of GDP. I mean, this has been another problem is that Lebanon has had the opportunity to get money in. I think France actually put together this like big pot of money from a different bunch of different countries that technically Lebanon could have used. But in order to use it, they would have had to put the reforms. They didn’t want to do it.

S5: And then now this issue of Hezbollah.

S1: So trust in the IMF or something, this is important, too, because normally in this situation, too, you’d say like, well, this sounds like a job for you. But the problem here is that, again, right now, you also recently had another election where the governing coalition is now run by Hezbollah and its allies. And so the idea that the IMF is going to give a massive loan to a government with a governing coalition is run by Hezbollah. That seems somewhat unlikely. And then on top of that, you have representatives from Hezbollah saying, we don’t want the IMF to tell us what to do. And if you think about it, this government, when you already have people on the street protesting, doesn’t especially want to start going through and putting through austerity measures, which they would have to do at least somewhat. And so there are simply no good options. What will probably happen is this delay, which will only make things worse. It’s even possible that they will pay out some of their foreign creditors because they technically have the liquidity if they really wanted to. They could muddle through for like another year, but they shouldn’t do that. That’s just a waste of money. But they they may very well do that. In the longer they do it, just the worse the situation is going to get. Because if you think about it like what incentive like this system only runs if you have dollar inflows. Sending their dollars to Lebanon now. Right, like so. I mean, Kelly’s going he’s going to read it. Can Carlos Goan save Lebanon? It’s actually addressing his people.


S15: There’s a there’s a whole like popular movement in Beirut right now saying, Carlos going for finance minister. And he’s like, no.

S12: I mean, he rescued some car companies. Why not a country?

S3: I think it’s time for numbers round. When I start this week, because I have one right here, which is 1.4 million pounds, not Lebanese, this is British pounds, not Lebanese pounds.

S4: As we know, the British government is trying very hard to start building relationships with countries and rich people around the world because it’s now cut itself off from the European Union. And it needs to try and get a bunch of investment and it needs to try and get a bunch of relationships going and reinvent itself somehow. No one really thinks this is going to be very easy or even possible, but they’re trying at least a little bit. And so one of the things they do is they are setting up meetings with rich people around the world and saying, hey, you should come and invest in Britain if you’re a government. How do you think you would set up those meetings? You mean you would get some people call you? Have people call some people and then you would have for me to show you. And they know if you are the British government, what you do is you pay this company called quintessentially 1.4 million pounds to set up the meetings quintessence for much less quintessentially being this company that was founded by some toff who went to Eton and knows a bunch of rich people. And if I can introduce you to rich people and like he’s I I’ve had dinner at Buckingham Palace and I’m related to Camilla Parker Bowles. And they were like, oh, wow, you’re very special here. Have 1.4 million pounds and you can set up the meetings for us. That’s that’s an incredible scam written for you. Yeah. Wow. This is all in an amazing F.T. article about quintessentially which everyone should read. If they have any belief that Britain isn’t actually functioning country.


S10: It’s better than Lebanon. It is. That isn’t what I’m here.

S5: My number is nine. That’s the number of states that have passed measures to stay on daylight savings time because Sunday morning, very early, we all have to spring ahead. As we know, there was a very nice piece in The Wall Street Journal detailing all the problems that occur when you set your clocks ahead. And I personally really dislike it.

S6: I feel it is horrible. Everyone I know hates it.

S5: I just got a notification from my Fitbit congratulating me on sticking to the same bedtime every night. And my circadian rhythm is like really on fine tuned. Yes. And now along comes as daylight savings time, which no one wants. And it’s going to mess me up. And apparently, I mean, it’s kind of slow. I mean, Anna wouldn’t like the studies, but I’m gonna bring them up with some studies say that there’s more heart attacks and strokes right after the clocks spring ahead.

S6: Some people say, what’s your solution when they go? Let’s just be clear about this.

S10: The let’s just say it takes all the time.

S3: The daylight the daylight savings time is the problem. Yes. We should never have fallen back in the first place. We should be on summer time all year.

S5: Right. I think we should be on standard time all year round. And the health experts. Felix, according to the article in The Wall Street Journal, they agree with me.

S14: The health experts agree with me. I really push back hard on this one.

S13: The the health experts are saying the one thing you shouldn’t do is vacillate backwards and forwards.


S6: Don’t vacillate. Correct. Changing the clocks is bad. Yes. So don’t change the clocks. Right. But if you’re not going to change the clocks, can we please have daylight at 4:00 PM in the winter?

S5: Come on. I mean, no, we could stay on Standard Time. And like what?

S9: What is the reason why Standard Time is better than having daylight at 4:00 p.m.?

S12: Because if you have daylight at 4:00 p.m., then it’s like really dark in the morning and all the kids walking to school get hit by bus. This is this is like the razorblades and the, you know, Halloween candy. It’s such an umbrella no one gets hit by.

S5: I think we should never spring ahead again. We should never lose that hour again. And we should just stick to the way it is. It’s darker in the winter. Deal with it. Get a lamp.

S1: And if there’s more daylight in the summer, it’s fine. So I’ll be depressed, get hit by a bus and I will see. You know, my neighbors actually also nine. It’s nine inches. So that is the size of Joe Burrows hand. So is this a sport? Is. Yes. He is a LSU quarterback who’s almost certainly going to go number one in the draft. What am I measuring from fingertip to thumbs? I think so. Like so it’s. What’s that in octave? That’s so great. Well, no, it’s not. No, that’s the problem. So apparently there is more. Well, so tell us there. There was this controversy at the at the combine, which is this thing where the players that are going to go in the draft, like do they get measured and they run basically track and field events to impress NFL scouts. It’s stupid. But so they measured his hand, people like, oh, my God, it’s only nine inches because there’s become this like weird idea that for it to be a good quarterback, your hand needs to be closer to 10 inches. This makes absolutely no sense. The theory behind it is that like you will fumble the ball more, which like it, it’s completely.


S5: Quarterbacks have enormous hands, though. This is like one of those things I fixate on when we watch football because the rest is kind of boring to me. But like the announcers always are talking and gesturing with their hands and their hands are like these just weathered large men as paddles.

S7: I mean, it is it is true that like they’re big and so their hands are big as well. But this idea that it needs to be closer to 10 inches and that somehow if it’s nine inches because Patrick Mahomes, who was the Super Bowl MVP. His hand is like nine in a quarter. So this idea is silly. And can I just say X I just this is my favorite part was the tweet from Joe Berra, which was considering retirement after I was informed the football will be slipping out of my tiny hands. Keep me in your thoughts.

S12: See, that was on Twitter. Again, a valuable of information.

S9: And this. No explains everything that explains. Why Donald Trump is so the unsporting is so small, the ball is falling out of his tiny hands onwhich bizarre.

S14: We’re just going to wrap this one up.

S2: Thank you very much for sticking with this episode of Slate Money. Thank you. It just mean, Molly, for producing. Thank you for keeping the e-mails coming on Slate money and Slate dot com. And thanks especially to Aunt Millie, who’s been giving me all manner of smiles and enjoyment throughout this entire episode. She’s in the studio today.

S17: My Aunt Millie and my cousin Esther are both here. They live in Brooklyn and have been promising to come for a while.

S18: On which note, we will wrap this up and come back with more Slate money next week.


S3: So for Slate Plus this week, we’re going to talk about Elliott Management and especially what they do in terms of when they’re known as an activist investor. What does that activism really mean in practice, Diane? Emily, you’ve just been reading a New Yorker piece from a couple of years ago.

S2: Yes. By Sheila Collapse. Good. Thank you. Who has been sleeping with money? She’s wonderful. And she explains, like some of the very, very aggressive moves that Eliot does when it’s fighting a company.

S3: And now they’re fighting with it. So imagine how scared I mean.

S5: Everyone should go back and read Sheila’s article because. OK. So a few years ago, before I started appearing on Slate Money and didn’t really give much thought to activist investors, when I hear the word activists, I think of like, yeah, like people fighting for the environment and like equal rights. But activist investors are like be complete polar opposite of any kind of like no is of any kind of social justice warrior you could possibly imagine. So in the New Yorker piece, Elliott Management decides that this health care company run by a Bush cousin has to do better. And they basically kind of don’t they don’t ruin his life cause super rich guy who’s like hanging on on yachts all the time. But it looks like they hire to make him look bad and kind of like destroy his reputation. They basically hire private investigators to dig into his life. They go and find his like the papers from his divorce a decade earlier and, you know, leak those apparently to The Daily Mail, which they deny doing. And they just they say, like he’s been inappropriate with women at the company, which it’s not really clear that he actually has beyond being like just a blundering CEO. And they force him out of his own company. And that’s not even the worst story in this piece, which also involves Elliott management commandeering an Argentinean ship off the gate.


S14: So he did. He’s in Argentina. And I’ve actually been on the receiving end of Elliott oppo research myself.

S3: There was there was a very boring case where they had a bunch of sovereign debt and they wanted, you know, standard thing to get paid out to par felt fund. Yeah. Yeah. And I started writing about this and he would stop feeding me all manner of stuff they got from my private investigators and stuff about what these like African oil ministers had been getting up to with their dollars and this kind of thing. And it was all I mean, in that case, it was nearly all true. They just didn’t seem very relevant. The fact is, though, that the thing that I see over and over and over again. Elliott especially that much more than other shops is the they really genuinely believe that they are fighting for truth and justice and they are on the side of the angels and that, you know, they have like God behind them in some weird way, in a way that most other hedge fund managers are like. Yeah, I’m I’m trying to make money here. When I wrote my article about this, you know, African oil fiasco thing, I had a line in there saying like, you know, Elliott is a hedge fund and they want to make money. And that line annoyed them so much they refused to talk to me for like five years after that.

S1: See, that’s weird. And it’s like it’s that they do. It’s true way that you would deal with.

S5: And you could explain this in the way they deal with sovereign debt and how they push these companies to these countries. Rather’s like ailing countries like Lebanon to pay them back before everyone else. Also seems kind of like it seems legal, I guess, but also dodgy and and not really great.


S7: I mean, I I would say that a lot of activist investors kind of have this true believer thing that you’re talking about. Felix, I think you’re you’re right about that. I mean, look, I would say that just like with anything, it depends on which case we’re talking about, because I think there have been times when Elliot’s going after a company where, frankly, they deserve it, like Twitter, where, you know, it’s do I agree with necessarily all of their tactics? Not necessarily. But at the same time, like they these are the U.S. companies that are not being run. Well, these companies I know you don’t agree with me about this, but that are actually owned by their shareholders. That are not owned by them. They are. But we know that no end to that. So I think that there is a very real role for activists to do like a decent you’d like this week you had colony capital there. They have an activist fight because they’re run by a horrible person who’s like connected with the Trump administration who.

S3: But we’re not talking about activist shareholders. We’re talking about. ELLIOTT OK.

S16: But I’m just saying that Elliott is an activist investor. And I think that they I don’t think every campaign that they have gone on has been wrong.

S3: I mean, given how many campaigns that Eliot has gone on, statistically speaking, it’s got to be possible to find one or two where they were probably on some of their more extreme ones.

S1: I mean, I’ll agree with you, I certainly don’t agree.

S2: But the way they prosecute those campaigns and their they’re kind of like scorched earth tax in pretty sad.


S1: Awful. Yeah. I mean, and and when it comes to the sovereign debt. Yeah. Like I. So. Huh.

S7: If someone held the sovereign debt I have a lot more like if they had bought it early. They didn’t buy it like once it was already trading at a massive discount. You know, or even if they were it was trading at somewhat of a discount or whatever like if they had the intent of going through with the restructuring. I respect that. Like that’s all sovereign debt works. Like if countries want money to be lent to them, then they have to pay people like that’s how it works. However, I do think that when you’re talking about buying up debt, that’s trading on a massive discount solely because, you know you’re going to litigate that hell out of this thing for a decade, which is their strategy. Granted, like mainly in Argentina. But yes, also in Peru. Yeah. Okay. Fair. That’s true. To me, it’s a trend. So, yeah, I don’t agree with that. I do question like also in Nicaragua. Okay. Okay. Also in Angola.

S5: Yeah. So they come in just as when the country’s kind of floundering around and they buy.

S1: But it’s not just that they buy when its founder. Look, look, if you’re distressed debt investor. Hey man, it’s trading at a discount. You think that indeed has a higher recovery value in the restructuring. You buy that, but then you go into the restructuring.

S7: I agree with you that that’s my point, is that it’s not that they’re buying something in like the poor, sad countries floundering when it’s confined because it’s a government’s horrible. So like. But if you buy that with the intent of then like making it so the restructuring doesn’t work. Right. That I disagree with.


S5: Yeah, it seems bad. And we should also mention it’s pulsing. All right. Yeah. He is a big Republican donor and has been compared to Sheldon Adelson, which hopefully Anna would not know then Sheldon Adelson.

S10: He is. He is. I mean, he is a big Republican donor.

S3: Not quite as big as Sheldon Adelson. And B, he has. Yeah, he has no sense of humor.

S4: He wasn’t Trumper Eliot. People like in general have no sense of humor. It’s kind of interesting. Not everyone. They don’t trust people without sense. But the one thing he did do is he funded and successfully funded the gay marriage fight.

S5: Right. That’s like the one thing that happens.

S4: But he’s not bad because he did this one good thing one time because he has a gay son who runs the operations in London.

S5: So to see people say identity politics isn’t important, but it is it’s important who you who you mix with.

S4: Paul Singer and Dick Cheney and the ones with the gay kids who are getting religion on this.