Digital Banks are Doomed

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Felix Salmon: This Ad Free podcast is part of your Slate Plus membership.

Felix Salmon: Hello. Welcome to the Digital Banks episode of Slate Money, Your Guide to the Business and Finance News of the Week. I’m Felix Salmon of Axios. My colleague Emily Peck of Axios is off on vacation as normal though Elizabeth Spiers is here.

Host 2: Hello.

Felix Salmon: And much more excitingly apologies. Elizabeth Ed Lee is here. Edmund Lee. Welcome. Welcome back, I should say.

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Speaker 3: Thank you very much, as always. Fun to be here.

Felix Salmon: We love having you on this show. You can be Emily for today.

Speaker 3: I can do a pale imitation. Yeah, sure. Certainly.

Felix Salmon: You used to be a media reporter. You now have some highfalutin job at The New York Times, and no one understands.

Speaker 3: But yeah, but that’s how it works. You enter management and then you have sort of this very fuzzy, fungible, you know, job description.

Felix Salmon: So you have a fuzzy, fungible job in The New York Times. But you used to be a media reporter. I know you’re still a media reporter at heart. So we are going to talk about media deals. We’re going to talk about the way the media covers the inflation data and what we can learn from now, what it means politically and economically. And we’re going to talk about neobanks. We’re going to talk about Goldman Sachs, Marcus and all of the other digital banks. And we’re going to talk about my thesis that there really haven’t been any successful ones. It’s all coming up. And sleepless on Tesla on this week’s Slate Money.

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Felix Salmon: So let’s start with the news of the week, which is that inflation was zero, which is big news. Or maybe it’s the inflation went down from 9.6 to 8.5. Well, maybe it’s the inflation is high at 8.5. I don’t actually want to talk about inflation. What I want to do is I want to talk to Ed about numbers and literacy and communication. The one thing I definitely got from reading Twitter, from trying to follow the news cycle on this inflation report and generally from talking to people, is that. Communicating numbers is really hard and this number in particular seems to be incredibly difficult to communicate. So explain why that is.

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Speaker 3: And why you’re going to be for this. All right. You’re you’re bringing it up.

Felix Salmon: You’re the journalist ist.

Speaker 3: Oh, I am the journalist. It’s okay. All right. For those that don’t know the journalist ist, is that journalists or journalists?

Host 2: Yes. The most journalists.

Speaker 3: Yes. Well, the reason why this has come up for me, at least, it’s a number everyone’s been watching. Right? Inflation actually is a term of art, you know, CPI, all that kind of stuff. But everyday people have started to adopt this language, right? They’re speaking this language and oftentimes they’re using it incorrectly.

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Felix Salmon: Let’s just clarify here, because I’m a descriptive ist, prescriptive ist, the way that the term inflation is used in the general demotic day to day life of America is not the same way that economists use it. And economists have this habit when anyone uses the word inflation, to immediately pounce down their necks and say, You’re using that word wrong. It doesn’t mean what you think it means. But ultimately, if everyone is using inflation to mean a certain thing, then that’s what it means.

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Speaker 3: That’s what it means. Basically, stuff costs more, right? That’s how people use it. That’s the general realm in which economists are thinking about things.

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Speaker 3: The CPI numbers came out this week and the June number. This refers to the the July number. Sorry. Right. Is that what we’re looking at now, the July number?

Felix Salmon: Well, let’s be clear about this, because the July number is, again, one of these things which people think, well, there’s a number that came out in July, and I think the number that came out in July was like 229.46 or something. Right, right. And you’re like, but no one ever quotes that number.

Speaker 3: Yeah, it’s abstract. It’s like, what does that mean?

Felix Salmon: It’s a completely it’s basically they set the CPI at 100 and whenever it was 2012 or whatever as earlier than that. And then, you know, it’s been coming more or less up ever since. And this is like the nominal dollar price of a basket of goods adjusted for eight gazillion different things and that number is now 229, doesn’t tell you anything. So then journalists need to try and convert that number into something meaningful.

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Host 2: I think also you have to sort of contextualize things because people’s baseline expectations are always moving. And we’ve talked a lot on this podcast about the vibes based economy and a lot of the way people perceived inflation is a vibe. It’s not it doesn’t matter what the number is. It’s you know.

Speaker 3: I like that. The vibe.

Felix Salmon: Well, it is. It’s right. It’s a vibe. And as Ed said very correctly, the vibe is things cost more. And there is this feeling out there, which is a real feeling, and I don’t discount it at all. The inflation will only not be a thing when things no longer cost more, which is to say that in order for inflation to not be a thing, prices will need to go back down to where they were. Now there is not a single economist anywhere on the planet who thinks that is what inflation means. But there are a lot of human beings who think that that is what inflation means. Right?

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Speaker 3: How is paying whatever it is, $5 for a cup of coffee. I used to pay $3. I want $3 again. Of course, that’s very simplistic. I think the reason why the number is interesting is because whatever number of people pick. Right, because that’s the other thing about this number is that eight and a half percent is what they call the headline number. Right? You take the full gamut of stuff, including things like oil and commodities, like wheat and cereal, whatever it moderated from the previous month. Prices still went up, but they didn’t go up as much as the previous month did.

Felix Salmon: So wait, no. I mean, yes and no.

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Speaker 3: Yeah, right. Yeah. Right.

Felix Salmon: So depending on which news outlet you were consuming, the headline number was eight and a half percent or the headline number was zero when the number came out 8:30 a.m. on Wednesday morning. The thing that everyone jumped on, unlike finance, Twitter was not enough. The thing that everyone jumped on and finance sort of was zero.

Speaker 3: And that was the news outlet you’re referring to, I think is the Biden administration Twitter account. Right.

Felix Salmon: That’s also but also the the thing that I cared about as a financial journalist was what happened in July. What happened in July is the prices actually went down by like 0.02%. Right. They were flat. Prices did not go up. There was no inflation in July. The amount you paid in July was no more than it was in June. So inflation was zero in July. The headline number is Prices in July were still higher than they were in July 2021. Right in July 2021, Putin hadn’t invaded Ukraine. There’s a whole bunch of stuff that has happened since then that caused prices to go up. And now if the July thing continues, then prices have stopped going up. And if prices stop going up, then in my mind that means we don’t have inflation.

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Host 2: I also think people underestimate the extent to which when political narratives get traction, they determine how people think about this. I have a tendency to argue with conservatives on Twitter because I’m a masochist, and there was a guy that I was arguing with in Dereham’s and we had a very civil back and forth. But he was complaining about gas prices and was 100% convinced that gas prices are high because of Joe Biden’s pipeline cancellations. And I just thought this was absurd, but he was, you know, totally alienating this from, you know, some of my relatives, too. And it sort of doesn’t matter what’s happening in the reality based economy if people believe otherwise or they have a different understanding of how all this is working and it’s driving their spending behavior.

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Felix Salmon: Right. But that also assumes that there is like a reality based understanding that is true. And I think that is overoptimistic. And I’ve written about this that if you look at the economic data as a whole, that it is coming out between the GDP data, the productivity data, the inflation data, the jobs data. It doesn’t make any sense. There’s no coherent narrative that actually explains the whole thing. So you can absolutely attach any bit of that data to any particular causal thing that you want and make some kind of a colorable case that there’s a connection there because there’s really genuinely no consensus.

Felix Salmon: And I mean, a lot of people like myself just don’t have even the theory of the case, really. It’s just it’s very confusing right now to understand what’s going on. We just had this productivity data that came out that shows massively negative productivity growth. Americans have become much less productive in their work way more than in living memory. And does anyone have an explanation for that? Not really.

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Host 2: Well, it’s also so multifactorial that it’s hard to sort out, you know, where we might be. Some variables might be outlier situations right now and then develop a comprehensive theory of the case based on.

Felix Salmon: That in terms of the CPI data. As I say, we don’t really have a common understanding of what the word inflation means, but there is a case to be made that you could say inflation went down in July. It was 9.1%. In June it was 8.5% in July. That 8.5 is lower than 9.1. Therefore, it went down. And the problem here, I think one of the big underlying problems is the inflation as a concept is a first derivative. It’s a rate of change of something is how much prices have changed. And normal humans just don’t understand. First derivatives.

Speaker 3: Well, especially when you call it first traders, I think. Okay, I’m paying more for gas. Well, that’s interesting. Your point, Elizabeth, earlier about I think you’re right about sort of the perception of inflation affects inflation. Right. It becomes this weird Heisenberg blitz where people think they’re paying more, even if maybe they’re not. In some cases, I guess they just like gas prices went down, like a lot of fallen.

Felix Salmon: Every day for over 50 days now.

Speaker 3: Yeah.

Felix Salmon: They might not be low on some kind of an absolute level, but they have been falling steadily. And the reason why the CPI number came in at zero and no one thinks that we have completely conquered inflation at this point is because it was a huge part of that was disinflation and gas prices. The gas prices have come down and what the overall number down take out gas and you still have substantially positive inflation and that’s like much more entrenched in things like rents and house prices and housing costs. And that’s going to be harder to get rid of.

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Speaker 3: Well, that’s actually something that I’m curious what you guys think, because there’s a headline figure, of course, and then there’s core inflation, which economists and the Fed tend to look at, which strips out volatile things like oil, like commodities or certain commodities. And then there’s something that people are talking now about, like super core inflation, where they strip out like airlines because that’s also gas dependent and a few other things that they think that gets to an even better number, which I think economist have always looked at. But it’s not a number that people talk about openly and again, like none of the news reports really sort of narrow down on this. But that’s something that I think people have been looking at. And I’m just curious what you call.

Felix Salmon: People suddenly, suddenly, like the Federal Reserve has been looking at. Right. They’ve always been. Greenspan was famous for just consuming reams and reams of economic data and really trying to understand what’s going on. No one number can sum up everything, but there is this feeling in monetary policy circles that monetary policy can’t do a huge amount when it comes to commodity prices. Right. Oil.

Speaker 3: Yeah, you have no lever for that.

Felix Salmon: Oil prices then feed into gas prices. They feed into food prices, they feed into airline fares, they feed into a bunch of different things. And so if you want to see like what is the inflationary vibe to use in the economy, there is a case of stripping that out just in terms of working out where should we be setting interest rates and that kind of thing. But that’s the monetary policy geek thing. That’s not a how much are people paying thing because frankly, it’s precisely those volatile prices. It’s the food and energy prices that are stripped out of headline to get core that people care about the most.

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Host 2: Normies think this is political spin. They, like you just made that up super core. Everything’s more expensive for me. Yeah. They don’t care.

Speaker 3: Anymore. Right?

Felix Salmon: Right. But they. The Fed’s job is not a political job. Yeah, the Fed’s job is not to try and persuade people that inflation is low. The Fed’s job is to keep prices in check broadly and to control the things that they can control and to maybe care a little bit less about the stuff they can’t control.

Host 2: Yeah, I think it’s more when Democratic leadership gets up and says, actually, super core is low and people will go, you know, especially if you’re on the other side of the political fence, you think, oh, what’s this new explanation that they have for why everything feels so expensive to me? But it’s actually not right.

Speaker 3: They’re saying, I’m not paying more, but I am paying more. So what the hell is this? That is spin, right?

Felix Salmon: And the more again, like when we deal with first derivatives, things are hard. It’s more compared to when, right? Is it more compared to last month? Is it more compared to last year? Is it more compared to pre-pandemic? What is your baseline?

Host 2: Also, there’s a thing that I am also sort of picking out from right wing Twitter and my my family. That baseline expectations around what inflation is and how it’s supposed to occur have kind of shifted. And people think that the goal is zero inflation ever, which is not now.

Speaker 3: Which is not how it works.

Felix Salmon: Right. Well, I mean, it’s close enough is 2%, which is low enough that no one really notices it.

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Speaker 3: Remember, before the pandemic, four years, we could barely get to that number, right? That’s right.

Felix Salmon: So that was a long you know, I remember many, many, many Fed press conferences where there were a million different versions of the question asking Jay Powell, whoever the Fed chair was at the time, you know, how are you going to be able to reach your inflation target when you’re well away from your inflation target? What are you doing to hit your inflation target? And the problem was the inflation was too low. And in order to hit the target, he needed to increase inflation. That’s all a distant memory at this point. But, you know, it was really only the kind of journalists who go to Federal Reserve press conferences who were walking around with this conception that inflation was too low. Everyone else, like they didn’t worry about inflation. Prices were steady. They were like, okay, that seems fine to me.

Speaker 3: Well, so here’s the bigger picture, though, right? Like why or why do we care about this? Why are we even talk? Why do journalists even look at these figures? And why are we publishing these figures with the context of like, oh, people are paying more, they feel like they’re not paying more, etc.? You know, the Fed is trying to set interest rates. That does affect so much of how just the money supply is going to go out there, affects housing prices and affects just how businesses operate ultimately.

Felix Salmon: Well, I mean, ultimately, what it effects is there is this feeling which is perfectly natural and human that. What I earn is due to me. And then what I have to pay is due to the prices that are set by someone else. And so if I keep my consumption basket constant and the amount of money in nominal dollars that I need to spend on that consumption basket is going up. Then that’s bad for me because it’s costing me money. So inflation just broadly is a bad thing because it means I need to pay more for stuff.

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Speaker 3: Right, exactly. But that’s the thing, is that Jay Powell isn’t really thinking about that. Right. He’s thinking about what do we do with a 75 basis point increase or 50 like the market thought, oh 75 is baked into the market. The CPI numbers came out as like, oh, this moderated much more than people thought and so maybe it’s only going to be 50. So then the market went up. Right. And so that again, the market is not the economy, but it had so much effect on where the money flows are going. It based on this weird number that came out, that was just a one month snapshot that the jobs data also was utterly bizarre. The last jobs data was like half a million. I, I didn’t understand that.

Felix Salmon: The jobs report. Yeah.

Speaker 3: And so the Biden administration hailed that as a victory of sorts. Maybe it was.

Felix Salmon: I mean, look, I mean, a victory of sorts in that, like, honestly, they would have probably preferred it to be a bit lower. But yeah, I mean, more people getting jobs ultimately has to be a good thing, right?

Speaker 3: We saw that. But then the stock market went down. So people are like, Huh? And so it feels like a game of whack a mole. And every day people are like, Huh, I don’t get it. Like I. And then I look at this stuff and not saying an economist or an expert, I think I don’t get it either. So then the journalist, a financial crisis like, okay, how do we write about this? Right. What do we say here? And that’s it’s always an ongoing debate because the financial crisis, this was a good number of bad number. This is a good know that.

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Felix Salmon: Right. And one of one of my pet peeves is the way in which financial journalism is always written in such a way, especially if they’re talking about markets at all. If markets go up, that’s good. If markets go down, that’s bad. It’s like markets become this kind of normative thing, which they’re not at all. And the problem, one of the big problems here is that yet the people who are writing these articles are the business and finance journalists who most of the time are writing what we used to call the business section, which is the section that normal people would throw away because it didn’t have any relevance to them. And so they are writing for people who work on Wall Street, who care about their stock portfolio, who live in a very sort of financialized world, and who understand things like what is the federal funds rate and what is the Federal Reserve and all of this kind of stuff, right?

Felix Salmon: While at the same time, for a few times a year, whether it’s like a big CPI print or a GDP print or jobs report or something, that news breaks through to the general public and the general public doesn’t. And in fact, probably can’t and shouldn’t be expected to read those stories in the same way that the reader of a business section does. And so you kind of need two different versions of the same.

Speaker 3: Story, or you need a story to have that kind of valence right where it could do think two things at once.

Host 2: I think there’s also this goes back to the political narrative aspect of this. I think the general public is often educated about economic concepts via politics. And when you think about how many times Trump got up and said, look, the economy is doing well because look at where the Dow is, that became a defining variable for people to they overestimate the extent to which equity markets are reflective of the overall economy.

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Felix Salmon: Yeah, I think I think honestly, though, that’s like politics, Twitter slash cable news thing. I think that it just is the normal, sensible people don’t generally read business and finance coverage. Normal sensible people don’t generally read a huge amount in politics coverage either.

Host 2: But they get they get the headline version of it, especially when you have somebody like Trump who does the same thing over and over again, because you can only hold three thoughts in his head at one time.

Felix Salmon: Maybe. But I do think it’s possible to overstate the degree to which the confusion about CPI is a political thing, where the Democrats all want it to be zero and the Republicans all want it to be eight and a half percent, and they’re both using it as a political bludgeon to hit the other other side with. That is true. But I think mostly it’s the people who care a lot about politics, who who see it that way. And that’s not most Americans.

Speaker 3: I tend to agree with Elizabeth. I think what’s happening, at least in the past year or really at least in terms of business coverage, at least in terms of econ coverage, I can tell you that I know this firsthand. Like at the Times, our econ coverage is some of the most read stuff at the paper now, right on their site. So CPI numbers come out and like that’s the number one story, not just because you put at the top of the homepage, but people are actively reading it and responding and commenting and sending either angry notes to our reporters about why are you calling it this? And these are everyday people.

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Felix Salmon: Well, people who leave comments on New York Times are not everyday people become.

Speaker 3: Everyday people for us. Let’s put it that way. Right.

Felix Salmon: So let me segway here into the other thing that normal Americans don’t think about, but financial journalists think about a lot, which is checking accounts and banks. And there’s this meme that I don’t think has been actually held up by reliable data, but everyone kind of believes it anyway, which is that you’re more likely to get divorced than you are to change your bank.

Felix Salmon: And there is a thesis I have which I want to put to you too, which is that the number of successful banks that have launched in the digital era, basically since the Internet was invented, is zero. And I’m fascinated why a lot of people do their banking online now, and a lot of companies, a lot of fintechs have launched. And there are a million online banks now where you can do all of your banking through an app.

Felix Salmon: And the news hook here is a Business Insider piece about Marcus, which is Goldman Sachs, their attempt to try and launch a consumer facing digital bank, which seems to lost $1.2 billion or something last year. It’s not doing that great. But first of all, Elizabeth, I want to ask you, do you agree with my thesis that we it’s kind of weird in this world of like disruption and fintech and all of the rest of it that. We haven’t actually seen a successful digital banking entrant. Or do you think we have?

Host 2: I think yes and yes and no. I agree with you that it’s strange, given the potential of the sector, that nobody’s been able to find and sustain something that actually works. But on the other hand, there are so many barriers to entry for that kind of business, just regulatory. We have not an oligopoly, but we do have enough of a entrenched system where it would be very difficult for a new player to come in.

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Felix Salmon: So I think, you know, it’s weird in terms of financial technology. It’s done a pretty good job of removing the barriers to entry. Right. You don’t actually even need to be a bank to be a bank anymore. Most of these neobanks, whether chime or aspiration or N26 or M one or a million of them, the overwhelming majority of them are not banks. They just they like these kind of skins sit on top of bank or some other bank that you never really see. And they behind the scenes, it’s just some old bank. But the Neobank brand is not a bank at all. The only the main exception to this are two exceptions to this that I can think of. The main one is Varo, which finally got its big national banking license and is very proud of that. But that didn’t stop it. Losing money hand over fist. And the other one is Sofi, which has like a state banking license. I think I.

Host 2: Wonder to some extent, it’s just that normies feel uncomfortable with digital only banks. It’s, you know, they want to be able to walk in their branch and talk to somebody.

Speaker 3: I think there’s like two things, right, which is I agree with that. But I also think like a digital bank would appeal to younger people in general, which are seeing a lot of the marketing. That’s how it’s designed. But a lot of younger people, especially these days, don’t have money. So it just even if they sign up for these accounts, I don’t think that they’re it’s creating enough of a deposit that the bank can actually sustain. Right. That becomes the bank.

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Felix Salmon: Well, I mean, so this is part of the business, but they all absolutely aim at younger people and they all claim to be doing God’s work by bringing the unbanked and the underbanked into the financial system and this kind of stuff, precisely because they’re not actually banks, most of them, precisely because they’re basically your deposits are actually held at bank or somewhere or Silicon Valley Bank or some other place that isn’t the brand. The brand aspiration or whoever doesn’t get any net interest income doesn’t do any lending out anyway. So in a weird way, having a large deposit base in and of itself doesn’t help them. They don’t make any money off deposits, they make money off transactions, they make money off interchange fees. When you use your debit card to pay for a cup of coffee, they make that 2% or whatever it is.

Host 2: Well, the interesting thing about The Insider article is that the author had a thesis that was, I think, repeated several times by some of the sources that Marcus in particular was failing, in part because there was a kind of deep pockets problem where it’s difficult to actually create a startup inside of a large company because people will throw good money after bad or decisions get made by committee too much and so on. But if that was true, it would seem to cut against what you are saying, which is that it’s very strange that there’s been no independent, successful neobank.

Felix Salmon: Yeah. I don’t buy the deep pockets thesis really in this case because my the corollary of my thesis that we haven’t had a single successful digital bank launch in the digital era is the successful digital banks are, you know, Chase Manhattan and Wells Fargo and like the big banks with really deep pockets who have enough money to be able to like spin up an app and send it out. And everyone just downloads their Chase app and they use it and they can do whatever they could do with the Neobank just as easily with their Chase apps. They don’t need to change.

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Felix Salmon: And that really this stuff, this kind of technology is not easy. It’s quite expensive. Engineers, as we all know, are incredibly expensive banks, as we all know. Well, we should all always remind ourselves that the financial sector employs more software engineers than the technology sector. So the banks have all of these engineers who can do all of these things. They have the budget to be able to do it. And if you’re trying to compete against those trillion dollar banks with a 10 million bucks of VC startup cash, God help you.

Speaker 3: So what about okay, proposition, right? Couldn’t a bank like ultimately you want attract more customers if you want entice people to move their deposits out of say chase into neobank x whatever it might be isn’t it’s not just about the technology and the ease of use and all that kind of stuff. If you offered me a better interest rate, I’ll move my money. There’s a good chance of that.

Felix Salmon: Right. And that’s actually the one area that Marcus seems to have been. To be successful. Right. Has a savings account. They can throw a large number on the savings account. They don’t need to. Park their money with some other bank because they are a bank. They have been since 28 and they have, according to this article, $100 billion in deposits, which is not a small number. But even with $100 billion in deposits, they’re still losing money and it doesn’t seem to be helping them very much. If you pay a lot of money on your deposits, on savings accounts, then that’s money you’re losing, that you’re paying out in interest. It doesn’t help you. On the bottom line basis.

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Speaker 3: Isn’t sort of the proposition around this kind of digital banking is that the costs would be lower, right. You don’t have tellers. You don’t have as many humans sort of having to interact on a 1 to 1 basis with all the different clients who serve them.

Felix Salmon: That’s definitely the proposition. And that’s why you saw a bunch of these banks get incredibly high valuations during like the last V.C. bubble. Right. Was precisely because they were saying, like, our unit costs are so much lower than our competitors. The checking account you have at Chase costs chase 300, $400 a year to service. We can service an account for $3 a year. So like we are just much more efficient. And so the VCs were like, Wow, you are so much more efficient. You are a disruptive force in the industry. And they threw a lot of money in, but they forgot the bit where they had to show profits.

Speaker 3: So here’s the thing isn’t in the case of Marcus, right, based on what I read in that this is an article, I mean, it seems to be more a failure of execution than of design. Right. Going back to that whole Startup Conundrum, is it like is it a bad business model or were you just a bad manager?

Felix Salmon: It does seem to be amazing, but that bank has been around for, what, five years now? I can’t remember. It’s been a while and they still haven’t been able to launch their checking account. You’d think the checking account would be a pretty basic part of being a bank, but apparently it’s not.

Speaker 3: The reason I bring this up is because I was at a crypto party several months ago. Yes, of course I was. Look, I was by far the oldest person in the room. It’s talking to someone for 10 minutes. I’m like, Oh, so she’s working at some startup. I was, Where? How long do you work there? Oh, I just started like a year ago. I was like, Oh, so when did you graduate college? I haven’t started college yet. And I’m like, What? So it’s like that. Like that’s what this world is like. The reason I bring it up to someone was talking to me about and I forget the term of how they, what you call it the best is like a crypto bank, right? Which is you put your money into basically a crypto managed fund that then lends out the money, right? You. However, as that depositor, he got something like 15% interest. Something insane. Yeah.

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Felix Salmon: No. And this is exactly why I think all of these neobanks are doomed, because everyone who did that lost their money, right? All of these places like Celsius, the offered those deals, they went massively bust and people lost all their money in there. I Yeah. And that was real money that people couldn’t afford to lose. Right. That wasn’t people who were speculating on crypto saying I’m going to buy a bunch of some shit coin in the hope that it goes up. This is people like putting their savings into something and saying like, I’m giving you my savings in U.S. dollars and you are paying me interest in U.S. dollars. And this is real money that I’m burning. And when that disappeared and people like I thought it was FDIC insured and like and no, it wasn’t that gave the entire sector a bad name. And so now even the places that genuinely are FDIC insured are going to find it hard to get the trust of the general public because the general public is now seeing people get really bad.

Speaker 3: I totally agree. But guess what? It’s still going to happen. There’s going to be more of these things popping up. But the Kelsey example is interesting because they had this weird algorithm devised. Kind of system where like they would lend out at a higher whatever the leverage was much higher than they had deposits for. Right. Based on what they knew, people would sort of redeem. And it was just like very fuzzy. What this guy was telling me at the party is like now, it’s much more straightforward. It’s the whole idea is that like, you know, there’s no one really managing it. So like, there’s no one to pay, you know, there’s no service fee really. Like it’s just it’s all the crypto. So we just get most of that dollar back, right? In terms of the lending, how banks make their margin, ultimately we become the bank. I’m like, Oh, that’s interesting. And that to me was sort of the why aren’t these neobanks doing essentially that right where you really shrink the cost?

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Felix Salmon: Well, because they’re not in crypto because they’re sensible.

Speaker 3: Exactly. But that’s what I’m saying, is that like there’s just going to be more iterations of this until someone wins.

Felix Salmon: Here’s the bigger picture, which is you make a very good point, which is that all of these crypto banks, which, by the way, do not touch any of them because they are very bad idea from a consumer perspective. But like all of these crypto banks, they really started with the lending product, right? And they were like, We’re going to lend out money at incredibly high interest rates. And they were always incredibly vague about who was borrowing the money and whether those people were creditworthy and all of this kind of stuff. And they were going, we going to lend out money at incredibly high interest rates. And then you get to keep all of those high interest.

Felix Salmon: If you look at the broad mass of actual neobanks the and 26 in chimes and aspirations and barrows and all of those basically none of them do much in the way of lending. There’s a few of them will lend you money for like one day or two days against your paycheck. You’re like, I know you have a job, your paycheck is coming in. I know your I trust your employer. So I’ll let you access your money like they’ll do before your paycheck comes in. But. Actual like real lending as in you. Can you lend me $5,000 to pay off my credit card bill? Something like that. Like none of them do that. And that’s the bread and butter of banking, right? You the deposits in the bank are your liabilities, your assets, your loans. If you don’t make any loans, you don’t have any assets. And somehow it’s been really hard even after really quite a lot of years. And I remember talking to all of these banks years ago saying, well, when are you going to start lending? And they’re like, Soon, it’s on the roadmap and they still haven’t done it. That turns out to be hard.

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Speaker 3: They’re very conservative. Strange that it’s strange to say that, right? Given after the banking crisis that happened. Like they’re still pretty conservative.

Felix Salmon: But also they just don’t have the balance sheet.

Felix Salmon: Talking of balance sheet and you’re the media deals person somewhere deep in your soul. I know you don’t actually write about media deals anymore, but you know you want to. So now you’re on Slate Money and you get to cosplay as a media deals. Reporter So what is the headline when it comes to media deals?

Speaker 3: Well, of course, there’s this media business called Axios. You may or may. Oh, wait.

Felix Salmon: Oh, I’ve heard of you. Yeah.

Speaker 3: Felix. Yeah, right. Was this a nice boon for you? This first of all, this is like Cox Enterprises. It’s the family owned investment firm that also owns a cable company based down in Atlanta. They also own newspapers have been around it for a while. They’re privately held and they paid $525 million or equivalent valuation that is for this little known or actually now very well known startup called Axios.

Felix Salmon: People know about it because a, I mentioned at the top of every episode the slate money. So that’s got to be worth something. And B, because all of the newspapers reported this deal.

Speaker 3: Every single one. Exactly. Including ours. Right. I thought this is a wonderful deal in the sense that I read Axios, I think is a great news source and the fact that it’s not lost too much money, in fact, I think it’s made money most for most of the years it’s been in operation and that it basically got a really nice exit. It was a success story there. So very few of them in digital media. So that to me was the standout element of this.

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Felix Salmon: Is definitely gratifying to see this young startup being valued more than not, just more than, say, BuzzFeed or something, you know, struggling with that, but more than like Gwinnett.

Speaker 3: Well, more than The Washington Post, I think, is twice as much of what Bezos paid for The Washington Post.

Felix Salmon: I would hazard to say that if Bezos put The Washington Post up for sale tomorrow, he could probably get more than 500.

Speaker 3: Oh, he definitely would. But yeah, Anderson, when he bought the Washington Post, it was a money losing. Will this newspaper survive situation? And Axios has been either money making or not too much money losing sort of the five plus years it’s been around. So that already was an interesting accomplishment. I think the move towards local is interesting. I’m still not entirely sold on it, but I do think it’s an interesting way to expand.

Felix Salmon: What are you not sold on when it comes to a version of local journalism?

Speaker 3: I like the idea that there’s different local needs and so therefore you need to serve that in a specific you can’t top down that you can’t have like a national sort of mandate or on how you do that. So every local will be slightly different, but it’s hard to scale them. You can’t sort of put one kind of format on how every local operation is going to operate. You might have one kind of financial format, but even then it’s not I don’t know that that would necessarily play. So I’m still skeptical it can happen, but who knows?

Felix Salmon: That was definitely the arm of the business that Cox seemed to be most excited about in their own press release and what they were saying.

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Speaker 3: Well, yeah, because they also know how like local, like advertising works. They also know that political advertising is huge for local media in general. It’s all goes to TV these days and still to Facebook, but there’s still a chance for local news outlets to to grab some of those dollars. So, yes, there’s potential upside. I think it’ll be incredibly hard. I think if anyone can do it, I think there’s a chance here with Axios and Cox. But I think it’s still a tough nut to crack.

Felix Salmon: But this wasn’t even the biggest deal of the week.

Speaker 3: My God. So I’m still stunned by this. And it sort of makes me think that like, we’ve all been in the wrong business. But anyway, you’re talking about Reorg, right?

Felix Salmon: Right.

Speaker 3: You have to tell the listeners what Reorg is exactly. I’m sure a lot of them know.

Felix Salmon: But I’m quite sure they don’t. I mean, Elizabeth, has you ever heard of Reorg before?

Host 2: This week I had not. And I feel like I was sort of in the financial trade business at least ten years ago.

Felix Salmon: Well, I mean, the first thing you need to know about Reorg is it didn’t exist ten years ago. It’s a very young company and Reorg sold for, what is it, 1.1 billion. Something about.

Host 2: 1.3..

Felix Salmon: 3 billion.

Speaker 3: One point. So this is for all you listeners, basically media company, right? It produces news, produces news and data, $1.3 billion. I mean, we’re applauding the Axios deal, which is a half a billion plus. Right. But this is like this little known, like relatively small news startup or news and data startup, rather, over $1,000,000,000. I was stunned.

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Host 2: I think the number is insane, but I think one of the one of the things that is relevant here is that, you know, trade businesses don’t operate the same way that consumer facing media does. On the whole, they tend to be more stable because industry news is always going to be valued by people in the industry. And if you can get your company to pay thousands of dollars for a trade subscription, that’s going to be more stable than something that’s consumer facing, which especially in an inflationary environment will drive. Whether consumers are going to spend money but won’t necessarily drive, whether companies are going to spend on trade publications.

Felix Salmon: The question is how do you get to a $1.3 billion valuation by selling subscription? Hands to what is basically a news service giving information about distressed debt and debt restructuring deals. You know.

Host 2: My gut is that valuation is driven by something to do with the data side of their business, which could be used for all sorts of things. But I don’t I will confess, I don’t understand don’t understand economics. So.

Speaker 3: Elizabeth, you’re probably right. You would seem to me sort of it’s more of a Bloomberg terminal type of value, right. That there’s data here. And as financial journalist, we all know, this is when there’s certain kind of data that’s hard to get. You’re like, oh, man, I really need this data. And if someone starts to hoard that and they collect it and organize it in a way that’s useful, which is what Bloomberg really is, that terminal or any kind of financial data services that’s designed around people pay a lot of money for that.

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Felix Salmon: But yes and no, Ed, like Bloomberg, is the rare and almost unique case of that actually working like Mike Bloomberg. Give him real credit for making that incredibly profitable and successful. I can rattle off a long list of data providers that are much less lucrative than that. I used to work for one called Bridge News. You probably don’t remember it. There was Tillery. There was Knight Ridder. You know, even Dow Jones Newswires, which is part of News Corp, is journalistically speaking and even financially speaking, kind of an afterthought to The Wall Street Journal.

Speaker 3: That is true. And I think the other thing about the big asterisk on Bloomberg, and I use that as an example of what the valuation but the real value of Bloomberg isn’t really so much a data anymore and hasn’t been for years as much. It is the messaging system that all the bond traders and all the currency traders use to actually conduct trades like they’ll use a little Bloomberg Messenger to actually sell stuff.

Felix Salmon: Right. Bloomberg Messenger is amazing because every single person you want to communicate with in finance is on Bloomberg Messenger. Name the biggest, most famous people in finance. They’re all there on Bloomberg Messenger. You don’t need to go through any kind of gatekeepers to reach them.

Speaker 3: Once I was in the elevator, Goldman and I was so someone standing next to an elevator, she had this dream of papers just in her hand like this. And I’m like, What is that? I kind of peeked over and they’re all printouts of Bloomberg messages.

Speaker 4: Because.

Host 2: Why.

Felix Salmon: Do I want to say she works in compliance?

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Speaker 3: So anyway, I think the larger point they hear in terms of Reorg and the valuation and everything, I mean, I see this a lot in the comments of The New York Times. I mean, it’s clear that media organizations and I don’t know if you see this at actions necessarily, but media organizations are really about these days congregating certain parts of the electorate. Right. Certain types of people. I remember years ago, like I used to be a regular economist reader. This is before the Internet really became like a place for all kinds of economists type content. And seeing someone on the subway reading The Economist, I’m like, Who is that person? I want to know who that person is. I want to meet them. And I think these days, media entities have become that much more of a guidepost for certain types of people to congregate. And the media company that’s going to really figure that out could make a lot of money. You know, I don’t know how you create that platform. I exploit that platform.

Felix Salmon: But the one thing that we can learn from these studios is that no matter how good you do it, that like the good old fashioned, you know, recurring subscription revenue is how you really get the valuations.

Speaker 3: Absolutely. Absolutely. Well, I mean, we’re learning about the times and it’s actually so far been working fairly well.

Felix Salmon: So I. I need to ask you one times question.

Speaker 3: Okay. Here we.

Felix Salmon: Go. You don’t need to answer it, but I’m going to ask it. Why is the athletic being thrown in for free with the rest of the New York Times when much cheaper parts of the Times to buy or operate like cooking and games extra or wirecutter? Yeah.

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Speaker 3: No, that’s a good question. I don’t I don’t have the answer in terms of I’m not in that meeting. Right. I can tell you this. I mean, I can tell you like what the company has said publicly. Right. Which is it’s really trying to promote the bundle. What’s the bundle? In our case, it’s like what they call all access. You buy the times and games and wirecutter and the athletic cooking all in one bundle, and you get one subscription price that covers the whole gamut and you get everything. So I think I would then imagine that I don’t know this firsthand, that throwing in the athletic right now, which we paid a pretty penny.

Felix Salmon: For the next year, is.

Speaker 3: Very similar to the price that Cox paid for for Axios is a way to entice readers subscribers from one subset into the larger subset. Right. You’re kind of what their appetite. So at least that’s what I guess I don’t know this firsthand.

Host 2: But there was a story yesterday that an activist investor has accumulated 7% of time stock.

Felix Salmon: Value act. They like more bundle more bets a can you drive into the bundle and leverage the platform with a deeper moat? The mixed metaphors were amazing.

Host 2: I think they’re right that the bundles are under marketed. I think a lot of people don’t know that you could get all these things packaged together. But I also just can’t imagine accumulating 7% of the stock and going to the mat just to say that.

Felix Salmon: I don’t know how much of a mat they’re going to. I think the vision is broadly aligned with what The New York Times has been doing anyway. They reckon if the New York Times succeeds at what it’s doing, then the stock will go up. I don’t think that they’re an activist investor, but I don’t think that this is particularly adversarial.

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Speaker 3: They’re not Carl Icahn. They’re not Elliott Management. You know, I will also say this. I mean, I think it’s a fair point. I think just from a putting my media reporter hat on, like, yeah, looking at the Times business, it’s like, I think, Elizabeth, you’re right, a lot of people don’t know that this bundle exists. Right? I think the marketing efforts are still evolving. And so, yeah, maybe they could amp it up. It could be much more clear and much more highlighted.

Speaker 3: The other thing to note, though, for any activist and I’m sure they’ve done their homework in The New York Times is in sort of classic media fashion, a controlled company, which is to say that the Sulzberger family, what my ultimate bosses here, they control a set of shares called the Class B shares that always get to elect 70% of the board. So you can buy up every available public share there is and still not control the company. And the conceit around this kind of dual structure of News Corp has the same thing is to maintain editorial independence that you don’t beholden to activists or to investors seeking immediate financial returns. So that is the caveat to any kind of activist play. At the same time, yeah, it’s an interesting argument that these people are making. But, you know, anyone who owns Time stock, I don’t think or who wonders about the future of the times, it’s not they’re not going to tip over the boat.

Felix Salmon: Certainly, I think this was really just a value play. The New York Times stock has come off its highs and they’re like, it’s looking cheap, will come out. And maybe if we put out a press release that will light some kind of a fire under them. But, you know, whatever. So let’s have a numbers round. I’ll kick off. Why not?

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Felix Salmon: With 23.4 billion, which is the number of dollars that SoftBank contrived to lose in a single quarter in the second quarter. That’s amazing. How do you manage to lose $23 billion in a single quarter? What’s even more amazing is the massive sun when he was announcing these earnings was actually contrite about it. Right. Normally he’s like, you guys are all idiots and you’re selling off these folks. And I have a vision and I have faith in my vision. And the unicorn will jump through the chasm and grow wings or whatever it is. This time he’s like, Yeah, I kind of fucked up. This is bad.

Host 2: As an investor, does that make you feel better or worse? You’re an LP.

Felix Salmon: If you’re an investor in SoftBank, which is a publicly listed company and buys shares and it very anyone can buy shares in it. Yeah, I think it makes you feel worse because now it doesn’t seem to have a thesis at all anymore.

Speaker 3: I agree with that. But I also like, you know, what was it a week or so later, a few weeks later, that SoftBank announced we’re going to sell part of their stake in Alibaba, which would then net them something like 30 billion plus. Right. It’s sort of like it felt. So something about it just sort of felt cartoonish in terms of, yeah, we lost 24 billion, but don’t worry, we’re going to gain 30 billion in the sale that we’re I just decided we’re going to do. So you don’t buy into SoftBank because they’re conservative, that’s for sure. You know, you buy into Amazon. That’s your whole that’s their thesis. Right. And the fact that he said he fucked up is not great. But it’s also like, okay, like I bought into volatility ultimately.

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Felix Salmon: Well, you certainly got that edge. What’s your number?

Speaker 3: My number is €74, which is when I was traveling in Italy two weeks ago, had rented a car which was not cheap, of course, to begin with, and had to drive it around as family. Vacation was very nice to me. Wrong thinking, you know, it’s a small car too, right? It’s European. Small. It was a Renault something or they’re afraid exactly what drove around, how to fill it up, went to the gas station. And I don’t exactly remember how many leaders I put in there, but when I was done it was €74. And I was thinking, wait a minute, I rented this for about $600. So I was like, Well, I’m actually now paying $700 to rent this car. And of course, gas prices were are up. Gas prices are generally higher in the EU, but I was just floored by what it cost.

Felix Salmon: But just be thankful for the strong dollar because.

Speaker 3: Well, there you go. I was I was calculating like it was something like point nine or one, you know, whatever it was at the time. So I was like, okay, maybe I made a buck or two that.

Felix Salmon: I will say that if you want to convert euros per liter into dollars per gallon, like asking Siri to do that for you is a very good way to.

Speaker 3: Oh, yeah, that’s good. I didn’t know that it’s a good tip.

Felix Salmon: But yeah, when I go to Europe, I’m like, Wow, that looks expensive. At the normal price. If you convert it back into dollars per gallon is in the sort of $7 range. Gasoline is just a lot more expensive in Europe.

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Speaker 3: Yeah, energy in general is much more expensive, you know.

Felix Salmon: And especially now.

Felix Salmon: Elizabeth, how about you? What’s your number?

Host 2: My number is $27.95. Which one of our listeners has repeatedly pointed out is not a number, but it’s not.

Felix Salmon: Your number is 27.95, which is the number of dollars. Yes. I’m telling you, we have to stick to this conceit.

Host 2: Yes. So that is what I paid last night for a Lobster. All at Clementine is in Sheepshead Bay, Brooklyn. And so this is a continuation of our plus segment. Last week on lobster all prices. Felix previously purchased a lobster all in midtown at Luke’s lobster for $44.

Felix Salmon: But that was included tax and tip.

Host 2: Okay well you also didn’t you say your benchmark was a main place?

Felix Salmon: The Clam Shack in Maine is 29. And so you’re 29 as well, right? I think the benchmark lobster all is $29 these days. Yeah.

Speaker 3: Yeah. I was going to say that was actually not a bad price with for long.

Host 2: Yeah. And it’s a it was an excellent lobster all it had a it was called an angry lobster roll. And how did you put your room alert?

Speaker 3: Wow, it was in Sheepshead Bay. All right. That’s another good tip. I’ll have to go check this place out.

Felix Salmon: I think Nick’s lobster was in the news this week because it was where the Democratic Party, the grand poobahs, got together to work out who was going to be the nominees for judges in Brooklyn. And it turned into a huge fight. And yes, I’m like septuagenarian. It’s like I’m a Sicilian, I’m going to rip your head off and, you know, good old fashioned New York politics. But about the guy, the lobster is running like 22 bucks. So, you know, there are still places where you can get a sub $30 lobster roll. They’re just becoming rarer.

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Felix Salmon: I did get some response from my Axios article on lobster rolls because this is obviously the only thing we care about in August from a guy running a lobster place in Maine and he basically confirmed everything I was saying that what you’re paying for, lobster, all is labor, like the cost of cracking open lobsters and extracting all of that lobster meat is. Just very expensive. And he gets a bunch of J-1 temporary immigrants to do it all for. He says they earn like $13 an hour, but then it goes up to like 19 with overtime and they’re working like 70 or 80 hours a week and like whatever, however much they can work, he’s like, just keep on working because the demand for lobster rolls is huge and that’s where all the money is going.

Speaker 3: That’s where all the money is going. But getting paid like $19 an hour or so with overtime, I mean, does it take an hour to crack a lobster to create a sandwich? I don’t know. I’m not. I’m just doing some quick math, man.

Felix Salmon: Yeah. How much time in terms of labor does it take to extract five ounces of lobster meat?

Speaker 3: I mean, it’s not easy, that’s for sure.

Felix Salmon: Or maybe if I’m putting my economist hat on here, it’s not so much that the labor is expensive and more that the labor is just not available. And so you need to raise the price in order to reduce the demand to the point at which you can meet the demand.

Speaker 3: Which then describes so much of the labor market right now in terms of hiring, in terms of where prices are going ultimately. I mean, I know we again, CPI, Labor all over the economy, people keep talking about why are prices still high, why it’s hard to hire people. One thing I’d point out is that we lost a million people to COVID in the states. Right. So it’s not an infinite number. A lot of people are also debilitated or can’t work.

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Felix Salmon: As well on Curb. It is big. And then simultaneously we had two years of basically zero immigration.

Speaker 3: Exactly. So there are just fewer people in this country to begin with.

Felix Salmon: I think that’s where we’re going to wrap this up. We do have a sleepless segment on Rivian and Tesla, but for the rest of us, that’s the Slate money this week. Thanks so much for listening. Thanks so much, Edmund Lee, for coming on. It’s been fabulous having you on the show. Thanks to Jessamine Molli Seaplane Armada for producing and we’ll be back next week with even more sleep money.

Felix Salmon: Okay. So Rivian lost how many billions of dollars in one quarter? It was like more than one anyway. Which seems bad if you’re a company trying to make a profit.

Speaker 3: Tesla billion.

Felix Salmon: How much?

Speaker 3: 1.7 billion.

Felix Salmon: $1.7 billion lost.

Speaker 3: Triple the losses. Triple 2 to 1.7 billion.

Felix Salmon: Tesla didn’t lose that much money, but they the CEO one, Elon Musk, did sell $6.9 billion of Tesla stock because he reckons he might lose this court case and have to buy Twitter. I mean, assuming that’s why he’s all there, right?

Speaker 3: Well, according to Twitter, it’s probably not. But just in case. To paraphrase.

Felix Salmon: I don’t have to buy Twitter. I’ll buy it back. But like you do the math and it’s still not remotely enough. He needs to come up with $33 billion, like, you’re not going to do that by not selling any more Tesla stock.

Host 2: I like the conspiracy theory that he is. He just wanted an excuse to sell it off.

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Speaker 3: So like he he made the overture by Twitter knowing that he’d have to sell off a bunch of Tesla.

Host 2: And I think it’s where he’s being opportunistic now that he sees the writing on the wall with Twitter.

Felix Salmon: And so what’s the writing on the wall that he’s going to have to buy Twitter or.

Host 2: I mean.

Felix Salmon: Billions to get out of buying Twitter?

Host 2: Yes. He said something like in the unlikely event that they forced me to close the sale. But I don’t think that he’s being honest there. I think he is smart enough to sort of understand the likelihood that he will have to pay something. He’s not getting out of this entirely.

Speaker 3: So that’s interesting. You think that. I don’t think he’s got a good case, period. But you think the outcome is not that he will be forced to buy Twitter outright, but that he’ll have to pay out.

Host 2: To pay something, right? Yeah.

Speaker 3: Even beyond the kill fee. Beyond that.

Felix Salmon: The way it works legally, I’ve been talking to a few lawyers about this is the the court will hand down the judgment saying that he needs to buy Twitter like that’s what he agreed to do. That’s what he’s legally obliged to do. And then what the judgment does is it creates the facts on the ground. Where both sides, Ellen and Wes, agree that he has to buy Twitter. And then given the fact that he has to buy Twitter, he can then negotiate on, well, how much do I need to pay you in order to not have to buy Twitter? And then he can say, Well, I just sold the 6.9 billion of Tesla stock, so how about 7 billion? And they’ll be like, That’s not enough. Make it 20. And then, you know, they’ll buy at least as common ground on which to negotiate.

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Felix Salmon: Right. Whereas right now he’s saying, like, I don’t need to pay anything, you know, you’re fraudulent, blah, blah, blah. And they’re saying you need to pay everything. And so it’s much harder to do that negotiation. And I think ultimately that’s why the judge will grant specific performance, not because she really wants Musk to buy Twitter or even necessarily thinks that he would. But just so that the two sides can come to an agreement.

Speaker 3: I think that makes sense. I guess the other X factor, though, is like, what if he just says no, like judge grants specific performance and he says, no, I’m not doing it. And there’s no not just for performance sake, not just for Twitter sake, but like in private, he says no and tells Twitter no and there’s no negotiation. I’m just not doing it. And then all of sudden, like Delaware, chance to record is like, hold on. Like we told you, you have to do it. He’s like, No, I disagree with you. Is there an appeal? I don’t get it.

Felix Salmon: Like I am a nation state unto myself. I have.

Host 2: And this seems like a totally plausible scenario with him.

Felix Salmon: I did a flowchart of all of the possible outcomes a few months ago.

Speaker 3: Lovely flowchart. I saw that.

Felix Salmon: And that was the point in the flowchart where it just was like three question marks and like no one knows what happens if he does that. No one ethically.

Speaker 3: I wouldn’t put it past him to like challenge the very authority. Right. Of, you know, sort of one of the foundations of American business and and American jurisprudence. It’s just like, you know, it’s like.

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Felix Salmon: Who are you to tell me what to do? But I’m a judge. Well, who are you?

Host 2: I’m the richest person in the world, touching whatever the legal version of shit posting is. That’s. That’s where I think we end up.

Speaker 3: Yeah. So I think you’re right, Felix. I think that is probably how that scenario does play out, whether it’s 7 billion or 20 billion or something in between. I mean, it’ll be a nice boon for Twitter. The thing is, if it comes to that, though, I do wonder if shareholders are going to be like, I want that money. I want a special dividend.

Felix Salmon: Oh, they will, definitely. Yeah. Yeah. They reckon Twitter can run at a profit they don’t trust doesn’t need that cash on the balance sheet.