Money Stuff: Robinhood Tokenized AMC

One theory is that nobody should be allowed to create a share of stock except the company whose stock it is. A company, say AMC Entertainment Holdings Inc., issues 892,604,638 shares of stock, registered on its own share ledger, maintained by a transfer agent. If you want to buy stock, you have to find someone who owns the stock (on the company’s share ledger) and get that person to sell you some stock. Selling you the stock means (1) you give them money and (2) they instruct the company’s transfer agent to cross their name off the company’s share ledger and write your name instead. The company has a direct relationship with each shareholder; all of the shareholders’ names and share counts appear on the company’s stock ledger. 

This is in some ways an intuitive theory. After all, a “share” of stock means an ownership interest in the company. Surely that implies some sort of direct relationship with the company; it would be weird to own 1/892,604,638th of a company without the company knowing about it. [1]

I don’t especially believe this theory, though. I’m pretty loosey-goosey about these things. To me, all of these things are fine:

1. Direct ownership through the company’s ledger, sure.
2. “Street name”: Actually, most shares of most US public companies are owned indirectly. One entity — Cede & Co., the nominee for the Depository Trust Co. — “owns” most of the shares, as a matter of book entry on the ledgers of the companies. And then there is a system for keeping track of the “beneficial owners” of the stock: If you own stock, what you own is an entry on the ledger of your brokerage, and what your brokerage owns is an entry on the ledger of DTC, and what DTC owns is the stock. And then if you want to sell me the stock, you tell your broker to transfer it on its books, and it tells DTC to transfer it on its books, and nobody tells the company anything. As far as the company is concerned, Cede & Co. owned the stock before you sold it to me, and Cede & Co. owns it after. The company has no direct record of your share ownership; that record is maintained elsewhere, without the company’s oversight.
3. SPVs: For various contractual and securities-law reasons, it might be hard for an ordinary person to go buy 10 shares of a big US private company. But someone who does own a bunch of shares of a big private company might plop those shares into an entity — called a “special purpose vehicle” — and issue shares of the entity. Instead of owning 10 shares of Anthropic, you might own 1% of an SPV that owns 1,000 shares of Anthropic. At a very high level this is not so unlike the DTC system for owning public shares, though much more fragmented and less reliable. Obviously if the SPV doesn’t own the underlying shares, that’s bad! But if it does, I’m fine with it.
4. Short selling: In real life, people own more than 892,604,638 shares of AMC. They own something like 935 million shares. [2] Those 935 million shares come (1) from the company (892.6 million of them) and (2) from short sellers (the other 42.4 million). A short seller sells stock without owning it: She borrows shares of stock from someone who does own it, and then sells it to someone else. Both her share lender and the person who buys stock from her now own the stock; both of them are now “long” AMC and expect to share in its stock price appreciation, dividends, mergers, whatever. But she is now short, so she expects to pay any stock price appreciation, dividends, merger consideration, whatever. The books balance: Net, people own 100% of AMC, but gross, some people own 104.8% of AMC and other people own negative 4.8% of AMC. [3]
5. Swaps, or forwards: [4] You come to me and say “hey, I’d like to bet against AMC stock. I don’t want to deal with the risk and headache of borrowing and shorting it. Let’s just do a bet. AMC closed at $2.65 per share on Friday. We’ll meet back here in a year, I’ll pay you $10,000 for every penny that AMC is above $2.65 that day, but you’ll pay me $10,000 for every penny that AMC is below $2.65.” [5]  This bet is sort of like you selling short 1 million shares of AMC and me buying 1 million shares of AMC. Notice, though, that there are no shares of AMC involved. I don’t own 1 million shares of AMC issued by AMC. I own the economic equivalent of 1 million shares of AMC, issued by you. My economic claim is on you, not AMC, but the value of that claim is tied to the value of AMC’s stock. This is basically fine, [6]  though it is probably a “security-based swap” and so can’t be offered broadly to individual investors in the US.

Fine! All completely fine. Many people object to one or more of these. Many private companies dislike SPVs, precisely because they want to have more control over their shareholder lists. Short selling is controversial, in part because it seems mean (you’re betting against the company!) and in part because people confuse regular short selling (you borrow stock that you don’t own, and sell it) with “naked” short selling (you don’t borrow the stock, and sell it anyway). Short selling creates “phantom shares,” people worry, and phantom shares would be bad. And “street name” ownership is controversial in part because it seems to facilitate short selling: If you own your shares on your broker’s ledger, your broker might lend them out, but if you own your shares on the company’s ledger that’s less likely. Meme-stock companies that hate short sellers sometimes try to get their shareholders to take their shares out of street name, to make life harder for short sellers.

And then there is “tokenization”: I sell you a “token,” on a crypto blockchain, representing AMC stock. What is that token? We are still in the early stages of tokenization, but conceptually it could be one of four things:

1. It could be, effectively, stock: AMC issues its own stock in tokenized form; its ledger is maintained on the blockchain, and someone buying an AMC stock token is just buying AMC stock directly (but on the blockchain).
2. It could be, effectively, an SPV: I buy 1,000 AMC shares, I put them in a pot, and I issue exactly 1,000 tokens against that pot. Each token represents an AMC share in the pot. 
3. It could be, effectively, a swap: I issue 1,000 tokens each representing one AMC share, and you buy them, and now I owe you the return on 1,000 AMC shares. How I hedge that obligation — whether I buy 1,000 AMC shares, or 2,000, or zero — is my problem. You just own the token, and I owe you the payout.
4. It could be, effectively, nothing: I issue 1,000 tokens each representing one AMC share, and you buy them, and I don’t owe you anything. They’re just, like, crypto tokens with the name “AMC” on them. This does not seem to be the approach anyone is taking with tokenization these days, though it is a very traditional approach in crypto generally and I kind of think someone should. [7]

Anyway Robinhood Markets Inc. is actually going around “tokenizing” a lot of stocks, including those of US public companies, including AMC. It is apparently taking a more-or-less SPV approach [8] : “Every single Stock Token in circulation is backed 1:1 by the corresponding underlying equity,” it says, and “the underlying shares are held securely by our US-based custody partner.” 

And AMC hates it. Bloomberg’s Sidhartha Shukla reports:

The craze for tokenizing shares on the blockchain has ignited a public spat between two men who were once hailed as heroes of the meme-stock era.

AMC Entertainment Holdings Inc. Chief Executive Officer Adam Aron traded barbs with his counterpart at Robinhood Markets Inc. on Thursday and Friday after discovering a token bearing the theater chain’s name was trading on the brokerage’s blockchain. AMC had no involvement in creating the product, he said, dubbing it “contemptible” and “outrageous” and demanding that Robinhood cease trading it. …

“This quasi-fake market you are creating on the island of Jersey sows distrust amongst the public about financial markets in general,” Aron said in a lengthy X post that included a legal disclosure from Robinhood’s website. “There already is distrust in financial institutions, you are potentially making it far worse.”

Robinhood Chief Executive Officer Vlad Tenev responded blithely: “What’s the concern?”

You can understand why Adam Aron would like to keep control over the creation and trading of AMC stock. And you can understand why Vlad Tenev would like to have control over the creation and trading of AMC stock! AMC and Robinhood are probably the two main competitors in the business of getting people to buy AMC stock, and they are both looking for an advantage.

See okay my question is: Is Apollo overpaying for some liability management optionality, or underpaying, or paying just the right amount? The Financial Times reports:

Companies owned by Apollo Global Management funds pay about one percentage point more than typical private equity firms to borrow in corporate loan markets, according to a new paper by two US academics.

Vince Buccola of the University of Chicago and Greg Nini of Drexel University wrote in a research paper titled The Sponsor Premium that Apollo-led borrowings face this “considerable” premium because of the group’s reputation for harshly treating creditors in balance sheet restructurings. ...

The results are in line with the views of many credit investors and investment bankers, who have long believed that a so-called “Apollo premium” has existed in capital markets over the past two decades.

Here is the paper: “We find that, under three measures of reputation, portfolio companies owned by the most aggressive sponsors pay considerably higher yields than those owned by more genial sponsors.” Pages 21 and 23 have the League Table of Sponsor Aggressiveness, with Apollo at the top and Madison Dearborn apparently the most genial. [9]  The three measures of reputation are (1) they asked some large language models what they thought (?!?), [10] (2) they compared sponsors who have done liability management exercises with sponsors who haven’t, and (3) they just assumed Apollo was the worst — “since Apollo is the sponsor most closely associated in market lore with aggressive treatment of lenders” — and compared Apollo to other sponsors. “Apollo loans carry a premium of about 100 basis points, which is considerable compared with a sample mean yield of 717 basis points,” though that is regression-based (“We include a large set of fixed effects to control for the credit risk of the borrower and the market-level pricing of risk”) and it’s not quite true that Apollo loans price 100 basis points wider than other loans. “As the paper’s own data shows,” says Apollo, “Apollo portfolio company borrowers carry lower leverage and tighter documentation than comparable borrowers, leading to strong outcomes for lenders and equity investors alike.”

Still, the point is that private equity sponsors with a reputation for aggressiveness pay a higher interest rate, for similar loans to similar portfolio companies, than sponsors with more genial reputations. But: Is it worth it? Like, if you’re Apollo, and you’re paying an extra 100 basis points on say $40 billion of portfolio-company debt, [11] then you’re paying an extra $400 million a year in interest, which is bad. But if once every three years you are able to do a dividend recap that stiffs your lenders and extracts $1.5 billion for your private equity investors, then paying $400 million a year for that optionality was a bargain. (I mean, unless you could have paid less and extracted more.) The paper estimates only the cost of Apollo’s aggressiveness, but not its payoff.

If some sponsors pay more for debt than others, it’s probably not because the market is making an aesthetic or moral judgment. It’s not like “ooh those guys hurt my feelings so they have to pay more.” It’s an economic judgment: “Ooh those guys are good at extracting money from creditors ex post, so we’re going to charge them for that ex ante.” In the long run, maybe the market will get it exactly right and charge Apollo the correct premium for its aggressiveness. In the medium run, though, maybe Apollo is being excessively penalized for one or two little bits of barely-worth-mentioning aggression in the distant past. (“While coverage of a single transaction from over a decade ago may influence an algorithm — and produce a flawed study — it does not change the facts,” it says.) Or maybe Apollo is still getting a good deal.

One of my little hipster theories around here is that the financial industry misses pension funds. In the olden days, US workers got their retirement income from big pension funds managed by professional managers. Those big funds could invest some of their money in pretty spicy stuff: They had a lot of money, so putting 1% of it in spicy stuff was a meaningful allocation, and they had a pretty predictable schedule of liabilities, so they could buy opaque illiquid stuff that wouldn’t pay off for years. The financial industry loves selling investors opaque illiquid stuff, and pension funds were great investors in private equity and other alternative assets. 

But the US has largely transitioned away from traditional pensions to individual retirement savings in 401(k) plans and individual retirement accounts. A 401(k) plan is in some technical sense a big pooled investment vehicle, but not really: Most 401(k) investors can pick their own investments, and they tend to have the normal desires of retail investors. They want daily prices, immediate liquidity and low fees. It is harder to put spicy stuff into 401(k) funds, though people try. And the spicy stuff that gets sold to retail investors has some bad characteristics, for the sellers: Private credit funds have gotten withdrawals and bad press this year in part because they allow withdrawals, which they do to appeal to individual investors. 

And so I wrote earlier this year: 

It would be interesting if the story of the next decade in retirement investing is a move back to something like pensions, an increasing emphasis on pooled guaranteed-income vehicles rather than atomistic individual self-managed lump-sum investment accounts, because those vehicles are better for private-market investing, and everyone is solving for private-market investing. 

I am not going to claim victory, exactly, but here’s a Wall Street Journal article titled “Pensions Were on the Brink of Extinction. Now Companies Are Bringing Them Back”:

Pensions were on their way to becoming a relic in corporate America. Now some companies are bringing them back.

The lost benefit is being revived by a small but growing number of companies to settle negotiations with labor unions or win over employees in fields where recruiting and retaining workers is especially competitive. 

Part of the explanation here is that “recent changes to some types of pensions have made them less of a financial risk for companies”: Companies are now less likely to offer fixed benefits and more likely to “give workers market-linked returns, similar to a 401(k).” Still, a market-linked annuity can probably take more illiquidity risk than an actual 401(k); perhaps the pension renaissance is starting.

Sure sure sure, sure, sure:

The son of former President Joe Biden is launching a meme coin that takes aim at his family’s nemesis, Donald Trump. And he’s naming it for the most-infamous personal computer in American political history. ...

Biden’s token will trade under the ticker, $LAPTOP, and launch Sept. 9 on Base, a digital ledger built by Coinbase Global, the largest U.S. crypto exchange, people familiar with the matter said. 

Sure! Whatever! There is some somewhat interesting financial engineering here:

The founders agreed to destroy as much 30% of the $LAPTOP coins should a series of 30 events have predetermined outcomes within the specified time frame. Among those outcomes that would reduce the supply, and therefore potentially boost the value of the coins: a Democrat wins the 2028 presidential election; bitcoin reaches another all-time high; and $LAPTOP’s fully diluted valuation exceeds $TRUMP’s. If the events don’t achieve their desired outcomes, a proportionate amount of tokens will be donated to charity, people familiar with the matter said. 

Is $LAPTOP a “bet” that the Democrats win the election, Bitcoin reaches a new all-time high, etc.? I mean. Let’s say I type the number “1,000,000,000” in a spreadsheet, and I publicly announce that, if the Democrats win the election, I will reduce the number in my spreadsheet to “700,000,000.” If the Democrats win, will the numbers in my spreadsheet become 43% more valuable because there are fewer of them? Two intuitive answers would be “lol obviously not” or “sure whatever maybe, but 143% of zero is zero.” If Democrats win the election, that will “reduce the supply” of $LAPTOP “and therefore potentially boost the value of the coins,” but, why? [12]  What value?

It is a fascinatingly persistent bit of crypto economics: If you create some tokens from nothing, they will trade at some positive price for reasons of comedy or boredom, and if you multiply the number of tokens by the last trading price you get a thing called a “market cap,” and arguably that represents the total value of the pool of tokens, and if you reduce the number of tokens then maybe the market cap will be preserved (why?), and so maybe the price per token will go up. Does this make sense? Not to me, but I’m not the target audience for any of it.

Also: “Another 20% of the supply will be sent, in two batches, to crypto wallets belonging to people who lost money on $TRUMP, the president’s meme coin, subscribers to Hunter Biden’s Substack and a mailing list curated by his friend Andrew Callaghan, a video journalist.” Whatever!

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