Sep 30, 2018

Elon Musk and the SEC both cave

Felix Salmon, author of Edge

Elon Musk is a chaos monkey who creates problems more quickly than he can resolve them.

Expand chart
Data: FactSet; Chart: Andrew Witherspoon/Axios

A perfect case in point: Hours before signing a settlement to pay the SEC $10 million and step down as chairman of Tesla for two years, Musk changed his mind, precipitating an SEC lawsuit and the destruction of more than $7 billion in wealth as Tesla stock promptly plunged on Friday. So then Musk unchanged his mind, agreeing to pay a $20 million fine and step down as chairman for three years.

  • The punishment is worse than it would have been if Musk had settled on Thursday, but it's still largely a slap on the wrist, and it indeed puts Musk and Tesla on a significantly stronger footing, governance-wise, than they were before Musk's fateful (and very expensive) tweet.
  • Musk still faces many legal threats, but the SEC lawsuit was the most salient for Tesla shareholders.
  • That's because Tesla is still burning through $1 billion a quarter. Investors don't love to lend money to a cashflow-negative company that has never made a profit, is at war with its regulator and already has more than $11 billion in debt.

Quick take: When companies die, it's nearly always because they can't raise money. That, ultimately, is why Musk swallowed his pride and settled with the SEC. He can't afford to be in a fight with the SEC when he inevitably returns to the debt markets to ask for more money.

  • The chart above shows that the Tesla debt window probably hadn't shut completely. Even with Tesla stock at its post-lawsuit low, there was still a huge equity cushion, and in a worst-case scenario, there are any number of companies that would be willing to buy Tesla for much more than the value of its debt.
  • If you lend Tesla money, you're lending against an asset, which is the company itself. And there's always going to be a buyer for Tesla at a price above $11 billion.
  • But stock-price chaos is always reflected in higher borrowing costs, and Musk will surely need to borrow more money in the next year or two, which is the amount of time that the SEC lawsuit would have been hanging over him had he not settled.

The most galling part of the settlement, for Musk: He has to hire an "experienced securities lawyer" who will vet his tweets and make sure they comply with independent board oversight of his Twitter activity.

The bottom line: Twitter itself never booted Musk off the platform, although there's an argument that it should have. But where Twitter balked, the SEC has now stepped in.

Go deeper

Protests for George Floyd continue for 10th day

Thousands of protesters march over the Brooklyn Bridge on June 4 in New York City. Photo: Angela Weiss/AFP via Getty Images

All four former Minneapolis police officers have been charged for George Floyd’s death and are in custody, including Thomas Lane, J. Alexander Kueng and Tou Thao, who were charged with aiding and abetting second-degree murder and aiding and abetting second-degree manslaughter.

The latest: Crowds gathered in Portsmouth, New Hampshire on Thursday evening and in Atlanta, Georgia, despite the rain. Atlanta Mayor Keisha Lance Bottoms joined demonstrators on Thursday. Demonstrators in Washington, D.C. dispersed following a thunderstorm and rain warning for the region.

Trump says he will campaign against Lisa Murkowski after her support for Mattis

Trump with Barr and Meadows outside St. John's Episcopal church in Washington, D.C. on June 1. Photo: Brendan Smialowski/AFP via Getty Images

President Trump tweeted on Thursday that he would endorse "any candidate" with a pulse who runs against Sen. Lisa Murkowski (R-Alaska).

Driving the news: Murkowski said on Thursday that she supported former defense secretary James Mattis' condemnation of Trump over his response to protests in the wake of George Floyd's killing. She described Mattis' statement as "true, honest, necessary and overdue," Politico's Andrew Desiderio reports.

2 hours ago - World

The president vs. the Pentagon

Trump visits Mattis and the Pentagon in 2018. Photo: Brendan Smialowski/AFP via Getty

Over the course of just a few hours, President Trump was rebuffed by the Secretary of Defense over his call for troops in the streets and accused by James Mattis, his former Pentagon chief, of trampling the Constitution for political gain.

Why it matters: Current and former leaders of the U.S. military are drawing a line over Trump's demand for a militarized response to the protests and unrest that have swept the country over the killing of George Floyd by police.