Nov 21, 2019

Axios Capital

By Felix Salmon
Felix Salmon

I'm going to give you a little financial literacy quiz in a minute, but first riddle me this: How much would Australian bank Westpac have to pay if it were fined $15 million for each of 23 million violations of anti-money-laundering laws?

  • The answer is $345 quadrillion, or about a thousand times the total amount of wealth in the world, so probably it'll end up paying less than that.

Two datapoints of note:

  • Charles Schwab is reportedly buying TD Ameritrade for $26 billion.
  • The fees on the Saudi Aramco IPO are going to be just 0.35%, almost certainly an all-time low. For comparison, other huge offerings like General Motors (0.75%), Facebook (1.1%), Alibaba (1.2%), Uber (1.3%) and Visa (2.8%) came in much higher, per Renaissance Capital.

In this week's issue: Taylor Swift, Kylie Jenner, financial literacy, WeWork bonds and much more. All in 1,823 words — just a 7-minute read.

1 big thing: The ballad of Taylor and Kylie

Photo illustration: Aaron J. Thornton/Getty; Angela Weiss/Getty; Aïda Amer/Axios

This was the week that Kylie Jenner ratified her billionaire status beyond any doubt, even as fellow 20-something Taylor Swift found herself continuing to battle The Man over rights to her own work.

The big picture: Jenner and her family have always had complete control over her image and her work product. As someone who made over $100 million by the age of 21, Jenner was under no pressure to sell the company that was generating all those profits, which meant that she could wait for a suitably desperate suitor to come along.

  • Swift, by contrast, signed a six-album deal with Big Machine when she was 15 years old. While her father was smart enough to buy some equity in Big Machine as part of that deal, he's no Kris Jenner, and Swift herself didn't have megastar sisters blazing a trail in front of her.
  • The result was that Swift had very little leverage earlier this year when she tried to regain control of her early music. In the end, Big Machine was sold to her arch-enemy Scooter Braun, who bought the label with the assistance of private-equity giant Carlyle Group.

Jenner was a trailblazer in her category, more or less inventing the concept of an asset-light, direct-to-consumer company making products sold primarily to her millions of Instagram followers.

  • While her older sisters largely monetized their celebrity the old-fashioned way — being paid by brands to endorse or model products — Jenner realized that she could make much more money by creating her own brand and owning it 100%.
  • Swift is more old-fashioned (and, arguably, talented). She was fighting Spotify, for instance, insisting on the primacy of album sales — long after almost all other artists had embraced streaming.

The capitalists on the other side of these deals also differ greatly.

  • Coty, the French cosmetics giant, has made a very public bet on Jenner's future. Its interests are aligned with hers, and Jenner continues to hold all the cards. After all, if she gets bored or annoyed with the direction of Kylie Cosmetics, she can stop publicizing it and move on to the next thing. Coty can't move on: It's already $600 million in the hole and needs Kylie Cosmetics to continue to grow if it's going to reap a return on its investment.
  • Carlyle made a bet on Swift's past, rather than her future — and did so by teaming up with her music industry enemy. That move ended up drawing the ire of Elizabeth Warren and also irked Swift so much that she now states that she wants to re-record all those old albums, thereby depriving Braun and Carlyle of much future income.

The bottom line: If you want to buy someone's entire life's work, it's best to do it with their consent.

2. Financial literacy is not the problem

Illustration: Aïda Amer/Axios

How does JPMorgan view extending credit to black entrepreneurs? Here's how a glowing recent "60 Minutes" segment began:

Jamie Dimon, the CEO of JPMorgan Chase, is testing out a new kind of business investment in the city of Detroit. The idea grew out of Dimon's interest in changing the way the bank was engaging in philanthropy.
Leslie Stahl, opening her "60 Minutes" segment

Apparently, the first thing that springs to mind when Dimon wants to lend money to black people in Detroit is "philanthropy." To that end, JPMorgan extended not only credit but also educational and informational resources for budding entrepreneurs.

  • A more germane concern for Dimon should be that if his bank wasn't lending to black Detroiters already, that might be a sign of biased assumptions embedded in JPMorgan's underwriting processes. After all, Dimon himself says racist assumptions still exist.
  • Stahl asked whether Dimon had observed "a racial bias" when it came to extending loans to African Americans, and Dimon responded yes, he had.

The big picture: There is a long history of racism in U.S. financial services, and that bias manifests itself in many ways, not least the notorious racial wealth gap.

Driving the news: The TIAA Institute quizzed African Americans on financial questions. The National Urban League's Cy Richardson, introducing the report while extolling his own financial literacy programs, told Axios that “financial illiteracy is particularly acute in communities of color," that it is "a dangerous epidemic," and that it is best addressed through what TIAA's report describes as "increasing efforts to promote financial education in school and the workplace."

  • Reality check: There's no evidence that financial education works and quite a lot of evidence that it doesn't.

My thought bubble: Insofar as financial illiteracy is real, it's a symptom of poverty much more than a cause of it. Besides, the questions in the TIAA survey do a dreadful job of measuring individuals' real-world ability to navigate a system that is stacked against them.

The bottom line: TIAA, JPMorgan and other giant financial institutions will happily commit high-profile philanthropic dollars on the premise that the poor stay poor because they don't have enough financial information or education. But as long as communities of color remain cut off from access to non-philanthropic capital, nothing will really change.

Bonus: How financially literate are you?

Illustration: Rebecca Zisser/Axios

Here's a representative question; see how you do. According to TIAA, "responses to the following question demonstrate the difficulty many individuals have in comprehending risk."

Investment A will deliver a return of either 10% or 6%, with each outcome equally likely. Investment B will deliver a return of either 12% or 4%, with each outcome equally likely. You can expect to earn more by investing in which?

  • Investment A
  • Investment B
  • It does not matter—expected return is the same with each

Spoiler alert: Just about any answer is reasonable.

  • A pessimist would answer Investment A. Assuming the downside outcome, Investment A returns 6%, while Investment B returns 4%. If you get lucky, then investment A returns even more, which is great, but the base-case expectation is higher with A.
  • An optimist would answer Investment B. Looking on the bright side, Investment B will return as much as 12%, while Investment A tops out at just 10%. In the worst-case scenario, you still earn 4%, which is not bad as a consolation prize.
  • A statistician would choose "It does not matter," and say that the expected return is 8% in both cases — even though it is actually impossible to get an 8% return with either investment.
  • A realist would choose "none of the above," and ask some pointed questions, like which bank thought that structuring this deal was a good idea, how are they calculating the probabilities, and what is their counterparty risk.

According to TIAA, the only correct answer is "it does not matter." Every other answer, they say, is simply false.

The bottom line: These theoretical questions mostly just measure your ability to turn English-language questions into abstract mathematical models. That kind of skill won’t get you very far when you’re trying to prioritize your credit card, auto loan and mortgage payments to minimize real-world consequences.

3. China's invisible brands

Illustration: Sarah Grillo/Axios

American consumers are quite familiar with many of the big-name foreign products — Toyota, Samsung, to name a couple — but brands from China are virtually invisible, writes Axios' Erica Pandey.

The big picture: Chinese companies doing business in the U.S. are doing their best to hide where they come from. If they're not actively masking their home country, they're certainly not leading with it.

Driving the news: The first very publicly Chinese-owned company to make its way into the minds and hearts of American consumers is TikTok. And it’s dealing with headache after headache due to its China ties.

  • The viral social video-sharing app has been downloaded about 80 million times in the U.S., and its skyrocketing popularity has made it the target of a federal probe.
  • TikTok, which is based in the U.S., is desperately trying to distance itself from Bytedance, its Chinese owner. CEO Alex Zhu told the New York Times he'd go as far as to reject a user data request from Chinese President Xi Jinping himself.

Chinese brands have been trying to fly under the radar for years.

  • Take Volvo, one of the most prominent Chinese-owned brands to crack the U.S. market. Volvo is a Swedish subsidiary of Chinese automaker Geely. But how many Americans who buy a Volvo think they're buying a Chinese car?
  • Other Chinese brands hiding in plain sight include TCL, the hardware giant that sells in the U.S. under the names of Alcatel and Blackberry, and Lenovo, notes Axios' Ina Fried.
4. WePlunge
Expand chart
Data: FactSet; Chart: Axios Visuals

What happened between mid-August, when the yield on WeWork's 2025 junk bond was 6.8%, and this week, when it hit 16.1%?

  • WeWork's IPO was pulled at the end of September, depriving the company of billions of dollars in IPO proceeds as well as even more liquidity in the form of an attached loan commitment. That news drove the yield on WeWork's bonds up to 11.6%.
  • Since then, WeWork has revealed a stunning $1.25 billion quarterly loss; it is also now embroiled in an SEC investigation, as well as legal fights with disgruntled shareholders.

By the numbers: The bond traded this week at a price of $709, to yield 16.1%. It has 11 coupon payments left of $39.375 each, which means that if you hold it to maturity — and if it doesn't default — then you'll receive a total of $1,433.125 in principal and interest payments by the time the bond matures in May 2025. That's more than double the current price.

The bottom line: Before the IPO was pulled, WeWork had multiple funding sources, both in debt and equity. Now, however, Softbank seems to be the only institution willing to invest. If the Japanese tech giant ever tires of throwing good money after bad, then the chances of the 2025 bonds getting repaid in full look slim indeed.

5. Coming up: Lagarde to unveil her monetary policy

Illustration: Sarah Grillo/Axios

Christine Lagarde will give her first policy speech as European Central Bank president in Frankfurt tomorrow, writes Axios’ Courtenay Brown.

Why it matters: Lagarde hasn't yet offered any hints on her policy stance since officially taking the helm of the ECB.

  • In his final weeks on the job, Lagarde's predecessor Mario Draghi pushed through a stimulus program that sharply divided members of the Governing Council.
  • Eight central bank governors representing the bigger economies in the E.U. — including the heads of the central banks of France, Germany, Netherlands and Austria — opposed re-starting QE. Some preferred a deeper interest rate cut over bond purchases. Others wanted the ECB to stay put.
  • Lagarde so far has taken up the task to heal "the most dramatic public schism in the ECB'S history" — as Reuters puts it — by hosting an "informal" retreat.
6. Building of the week: Palazzo Ducale, Venice

Photo by Marco Serena/NurPhoto via Getty Images

The 14th Century Doge's palace (Palazzo Ducale) in St Mark's Square, Venice, was constructed when sea levels were much lower than they are now.

The city has been hit by a series of devastating floods over the past week, one of which, at 187cm (74 inches), was the worst in half a century. It doesn't help that Venice is simultaneously sinking into the sea, at a rate of a couple millimeters per year.

  • The salt water is incredibly harmful to priceless Byzantine churches, and an elaborate plan to prevent such flooding in the future "is obsolete and philosophically wrong, conceptually wrong," even were it to work, which it probably won't.

The bottom line: I'd urge you to see Venice before it's too late — were it not for the fact that overtourism is itself a significant problem.

Felix Salmon