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“Is jiu-jitsu securities fraud,” I asked in this column a few months ago, because that is kind of my schtick. Specifically, Mark Zuckerberg, the chief executive officer of Meta Platforms Inc., likes to do mixed martial arts, and he occasionally gets injured doing so. If he got badly injured, that might be bad for Meta’s stock price. If that were to happen, under the theory of “everything is securities fraud,” some Meta shareholders might sue the company, claiming that this risk was not sufficiently disclosed.
Again, this is my schtick, but I didn’t mean it all that seriously in this case. “I can’t really imagine Meta getting sued for this if Zuckerberg gets a concussion,” I wrote. But I went on:
Still, why hasn’t Meta added a risk factor for this? Not because it is legally required, I mean, but just because it would be fun for the lawyers? Add a sentence to the risk factors like “our CEO likes to go to gyms to get punched in the face, and if he gets punched really hard in the wrong part of his face then we may be unable to execute on our product roadmap”? Surely writing that sentence is more fun for Meta’s lawyers than whatever else they’ve got going on in their day, even if it is technically less important.
Well, Meta filed its 2023 annual report on Form 10-K last Friday and guess what:
We currently depend on the continued services and performance of our key personnel, including Mark Zuckerberg. Mr. Zuckerberg and certain other members of management participate in various high-risk activities, such as combat sports, extreme sports, and recreational aviation, which carry the risk of serious injury and death. If Mr. Zuckerberg were to become unavailable for any reason, there could be a material adverse impact on our operations.
I think my earlier analysis was correct and the lawyers would have added that, for fun, unprompted, but I would also like to think that some of them read Money Stuff and were like “oh, great idea.”
Another long-running schtick around here is “people are worried about stock buybacks.” There is widespread popular dislike of stock buybacks for a number of reasons. A big one is that people think that buybacks reduce innovation: Instead of spending money on research and development, on new factories and new products, companies just give the money back to shareholders.
The counterargument is that the money, in some loose sense, belongs to the shareholders, and the companies should be careful with it. If they have really good ideas for increasing profits, sure, go ahead and spend money on them. But the natural tendency of a corporate chief executive officer is to do more: CEOs like to run bigger companies that do more things, and they are always tempted to invest the company’s money in some trendy new idea, even if it is not good for the company. Stock buybacks are a way for CEOs to signal “I am a careful steward of shareholder money; sure, I will invest money in new ideas if I think they are good and will increase profits in the long run, but I have high standards and, if I cannot find enough projects that meet those standards, I will return money to shareholders so they can find something better to do with it.”
Obviously one can go too far with this — the shareholders are, in a sense, paying the CEO to find good investment opportunities for them, and if the CEO is always like “nah, I got nothing, here’s your money back” then that is a failing too — but it is probably healthy for CEOs to at least consider buybacks rather than spending every dollar of shareholder money on their own ideas.
People do not generally criticize Mark Zuckerberg for having too few ideas for what to do with shareholder money. I mean, he renamed his company from Facebook Inc. to Meta Platforms Inc. as part of his rather unloved and expensive pivot to the metaverse. And Meta has now pivoted expensively to artificial intelligence. But it also continues to operate Facebook and Instagram, and it produces a gusher of money, and it can use that money on the metaverse and AI and whatever else Zuckerberg has cooking and still hand back billions of dollars to shareholders.
And so last week Meta announced a $50 billion increase in planned stock buybacks, as well as a new 50 cent quarterly cash dividend. The point of these moves is to communicate to shareholders that Meta’s spending is rational, that there is some hurdle rate for long-term investments, and that some projects meet it and others don’t. Meta is not in the business of “take this gusher of money and find ways to spend every dollar that it generates”; its business is more selective than that. Bloomberg News reports:
After Meta fired about 21,000 people and narrowed its priorities, the stock almost tripled in 2023. The new dividend and an additional $50 billion in share buybacks may win more patience from investors with Zuckerberg’s long-term bets on artificial intelligence and the metaverse.
Ideally you have both: the buybacks and dividends, and the long-term bets on AI and the metaverse. You signal “I have ideas for what to do with shareholder money, but I have standards too; I give back the shareholder money I don’t need, but I spend what I need to on long-term investments.”
I mean, the other point is that Zuckerberg himself owns a lot of shares, and “stands to receive a payout of about $700 million a year” from the dividend. We talked last week about Elon Musk’s enormous and now judicially invalidated pay package at Tesla Inc., in which Tesla’s board of directors granted him billions of dollars of stock options contingent on enormous growth in Tesla’s market capitalization. It is worth contrasting Musk’s pay with Zuckerberg’s. Zuckerberg gets a $1 per year base salary at Meta, with no bonuses or stock options, though Meta counts about $27 million of spending on security and personal jet use as part of his compensation.
Mark Zuckerberg essentially does not get paid for working at Meta. But he keeps working at Meta. Presumably that is because his wealth consists mostly of Meta shares, and he believes that working at Meta will increase the value of those shares. But also it is convenient for him to have more than $1 of cash per year to spend on things other than bodyguards and private jet travel, and so now his ownership of Meta will pay him $700 million a year in cash. One dollar for being the CEO, $700 million for being the biggest shareholder.
In striking down Musk’s pay package, Delaware Chancellor Kathaleen St. J. McCormick discussed the history of stock-based executive pay:
Professor Charles Elson submitted an amicus brief in this action persuasively arguing that “[e]quity compensation for corporate executives was designed to solve a specific problem at a specific time in American corporate history.” To summarize that lesson in broad strokes, the first half of the 1900s witnessed a transition from “era of the ‘robber barons’” to the era of the Berle-Means corporation, where corporations were run by “professional managers with little skin in the game.” The theory behind equity-linked compensation plans was that “[b]road-based equity ownership throughout the organization by management, directors, and employees” is “the most effective motivation for continuous vigilance throughout the organization.” For that reason and due to changes in federal tax law, by the 1980s, “pressure built on companies to . . . strengthen the link between pay and performance.” Corporations began “using much more equity-based compensation.”
Equity-based compensation continues to be a powerful way to reduce agency costs and align the interests of management with those of the stockholders, as Delaware law recognizes.But where an executive has a sizeable pre-existing equity stake, there is a good argument that the executive’s interests are already aligned with those of the stockholders. There are many examples of visionaries with large pre-existing equity holdings foregoing compensation entirely: Zuckerberg, Bezos, Gates, and others so familiar to the world that no first names are required. In each instance, the CEO’s board recognized that the executive’s preexisting ownership stake provided sufficient incentive to grow the companies that they had built.
So why not here?
There are two main ways to pay CEOs of modern large public companies:
- The CEO is the founder and major shareholder, you pay her $1 a year, and she gets rich off her share ownership. Her interests are aligned with those of shareholders, because she is the biggest shareholder.
- The CEO is a hired professional who comes in without much share ownership, and you load her up with stock options to make her feel like a founder/owner and align her interests with those of shareholders.
Zuckerberg is a classic of the first category, and the dividend is, among other things, a way to fund his lifestyle that is compatible with that approach. Musk, of course, tried to get paid both ways, which is what got him in trouble.
Tesla Inc. also filed its 10-K last week, and nobody at Tesla has the right combination of boldness and sense of humor to write a fun risk factor about what Elon Musk gets up to. But here’s a Wall Street Journal story about “The Money and Drugs That Tie Elon Musk to Some Tesla Directors”:
Several current or former directors at Tesla and SpaceX attend parties with him, go on exotic vacations and hang out at Burning Man, the Nevada arts and music festival. …
At the upscale Austin Proper Hotel, Musk has attended social gatherings in recent years with Tesla board member Joe Gebbia, the Airbnb co-founder and a friend of his, where Musk took ketamine recreationally through a nasal spray bottle multiple times, according to people familiar with the drug use and the parties.
Other directors, Gracias, Jurvetson and Kimbal Musk, have consumed drugs with him, according to people who have witnessed the drug use and others with knowledge of it. …
The volume of drug use by Musk and with board members has become concerning, some of these people said.
In the culture Musk has created around him, some friends, including directors, feel there is an expectation to consume drugs with him because they think refraining could upset the billionaire, who has made them a lot of money, some of the people said. More so, they don’t want to risk losing the social capital that comes from being close to Musk, which for some feels akin to having proximity to a king.
Look, I went to high school, and I am familiar with the feeling of being expected to consume drugs with people because you think refraining could upset them. But now I am a grown-up? And so are the directors of Musk’s various companies? They are quite rich successful grown-ups whose jobs in theory require them to exercise independent judgment and sometimes push back on Musk’s ideas? Man, if Tesla’s directors feel like it would be too awkward for them to decline to do drugs with Musk, imagine how awkward it would be for them to decline to pay him $50 billion!
We have talked a few times about assumable mortgages, the obvious solution to the main problem in the current US housing market. The problem is that everyone who owns a home has a 3% mortgage, but if you want to buy the home you will get a 7% mortgage. They can afford to stay in the home and pay 3%, but you can’t afford to buy the home and pay 7%. If you could buy the home and take over their 3% mortgage, you would. But you mostly can’t.
You mostly can’t because most mortgages in the US are not, by their terms, assumable. And this is for good reason. The normal US mortgage is a 30-year fixed-rate loan that is prepayable without penalty. If a bank lends you money at 5% and then rates go down to 3%, you will go refinance at 3% and pay back the original 5% loan: The bank won’t get to keep its original, now-above-market loan. But if instead rates go up to 7%, you don’t have to pay the bank back for 30 years: The bank is stuck with its original, now-below-market loan. You have an option to reprice when rates go down; the bank does not have an option to reprice when rates go up.
This is a bummer for the bank, but it is mitigated by the fact that you probably won’t wait 30 years to pay back the loan: You’ll probably sell your house, for some non-financial reason (you have kids and need a bigger house; your kids grow up and you don’t need such a big house), and then you’ll have to pay back the loan. The bank is stuck with its below-market loan, but not forever; even now, when mortgage rates are 7%, some people still go and pay off their 3% mortgages. If they didn’t, things would be rough for the bank.
If mortgages were always automatically assumable, then when you sold your house you’d let the buyer assume your mortgage, and that 3% mortgage would remain outstanding for 30 years, and the bank would be stuck with it, and that would be worse for the bank, so it would have to charge you more for your mortgage to begin with.
And so US mortgages usually aren’t automatically assumable. And if you call up your bank and say “hey, I know that I can’t technically transfer this mortgage to anyone else, but what if you made an exception for me,” they will say “absolutely not.”
Meanwhile, some US mortgages are, by their terms, assumable. But everything I just said is still true of those mortgages too. So if you call up your lender and say “hey, I looked, and it turns out that my mortgage is legally assumable, and I have a buyer, so I would like to transfer my mortgage to the buyer, can you help me with that,” they will say “yes, absolutely, we’d be happy to help, as is our legal obligation,” and then they’ll hang up on you. At the Wall Street Journal, Ben Eisen and Nicole Friedman report:
Millions of home buyers can avoid high interest rates by snapping up existing low-rate mortgages—in theory. Doing so in practice is filled with obstacles. …
With interest rates high, these “assumptions” have emerged as a buzzy way to make buying more affordable. But buyers and sellers, and people who advise them, say the servicers that process these assumptions are bogging down the process. It can be a lengthy wait just to have an application rejected.
That lack of urgency stands in contrast to new mortgages, which lenders typically scramble to close as quickly as possible. Mortgage companies make much less money handling an assumption than they would writing a new loan.
Yes a new loan is good for the lender, while an assumption is bad for the lender, so it’s slower.
I write about insider trading lot around here, enough that I have become familiar with this pattern:
- Guy gets hot insider tip about an upcoming merger.
- Guy goes to his broker and tries to buy as many short-dated out-of-the-money call options on the target as he can.
- The broker is like “you have never traded options before, please read this disclosure about options risk and answer these questions so we can be sure that you are sophisticated enough to trade options.”
- Guy is like “I NEED THE OPTIONS NOW!!!!”
Often he gets the options, though some number of insider traders settle for doing less, or less leveraged, trading than they want to do because their brokers slow them down.
But in my years of writing about insider trading, I don’t recall anyone saying to the broker “no, you don’t understand, I’m insider trading, this is a sure thing, I don’t need to read the options disclosure.” On the one hand, I suppose that that would satisfy the broker’s immediate concern (that she might be perceived as ripping off the customer by selling him options he doesn’t understand). On the other hand, it would raise several much bigger concerns, like (1) that the customer is ripping off the broker by buying options on inside information, or (2) that the broker probably has to report the customer to the authorities for insider trading.
Anyway in sports betting everything is weirder:
On April 28, 2023, prior to Alabama's baseball game against Louisiana State University (LSU), [Alabama coach Brad] Bohannon sent several electronic messages via the Signal encrypted messaging application to a bettor that Bohannon knew was involved in sports wagering activities. The electronic messages indicated that an Alabama baseball student-athlete (student-athlete 1), the scheduled starting pitcher for that evening's contest against LSU, would not start the contest due to an injury. …
Shortly after receiving the electronic messages from Bohannon, the bettor attempted to place a $100,000 wager on the LSU baseball team at the BetMGM sportsbook at the Great American Ballpark in Cincinnati but the sportsbook staff limited the bettor to a $15,000 wager. The bettor then attempted to place additional wagers involving the April 28 Alabama vs. LSU baseball game, but the sportsbook staff declined the wagers due to suspicious activity. This suspicious activity included the bettor's insistent demeanor to get the bet placed and statements to sportsbook staff that the bet was "for sure going to win" and "if only you guys knew what I knew." The suspicious activity also included the bettor showing sportsbook staff messages from Bohannon and explaining that the messages were Bohannon informing bettor that Alabama was scratching its starting pitcher before the game and before Bohannon alerted LSU.
I love that he thought that the sportsbook staff was worried about him, so he told them “no, see, I’m ripping you off.” Not helpful!
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