WeWork and Counterfeit Capitalism


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Welcome to BIG, a newsletter about the politics of monopoly. If you’d like to sign up, you can do so here. Or just read on…

I’m back! One of the themes of this newsletter has turned out to be the breakdown of integrity in American business, and the consequences in terms of our increasingly inability to produce the vital systems we need to sustain our civilization. I’ve written about Con Edison and New York City’s vulnerabilities, how monopolies have undermined the Federal Reserve, why private equity is not business but a form of corrupted governance, and how Boeing is falling apart. It has been a pleasure to write about these problems, because I’ve gotten help and feedback from my audience on pretty much every issue. So keep it coming.

WeWork and Counterfeit Capitalism

Today I’m going to continue on this theme, and discuss the increasingly common tendency of capital markets to finance loss-making companies, which is an important trend I call “Counterfeit Capitalism.” The most hilarious example is WeWork, because it’s just such an obvious example of self-dealing couched in New Age management consulting speak. Its CEO, Adam Neumann, was just forced to step down. Both Neumann’s rise, and his fall, have important lessons if we want to correct serious errors in our political economy philosophy as a society.

Here’s Neumann.

The Stupidity of WeWork

WeWork describes itself as offering the ‘“space-as-a-service” membership model that offers the benefits of a collaborative culture, the flexibility to scale workspace up and down as needed and the power of a worldwide community, all for a lower cost.” In other words, the company sublets office space.

I glanced over the company’s S-1. Here’s the graphic of the company’s business model.

The old business model, in case it’s not obvious from this McKinsey-ified chart, had been to make stupid graphics to show investors in hopes that they give ex-CEO Adam Neumann more money. The new business model will be to beg investors to give money to the new co-CEOs, who will radically change the company by wearing suits to investor presentations instead of ill-fitting t-shirts.

This isn’t to say WeWork is a total waste. As Kara Swisher and Scott Galloway note, the spaces themselves are nicely done, and there is probably a small market opportunity in serving smaller enterprises that need office space. But there’s no justification for WeWork as it currently exists. The company is losing an enormous amount of money and has no path to profitability at scale.

The Narcissism of Modern Financiers

There are a few key players in this saga. The first is ex-CEO Adam Neumann, who according to the S-1 was pivotal to the company.

Our future success depends in large part on the continued service of Adam Neumann, our Co-Founder and Chief Executive Officer, which cannot be ensured or guaranteed.

Neumann was an untested CEO with an unlimited line of credit. As I read more stories about him, I noticed reporters dance around his personality. They call him ‘quirky,’ ‘charismatic,’ ‘unorthodox,’ and so forth. These are code words for something else.

Consider a few descriptions of how he and his family behaved. His wife, a New Age guru who was the chief impact officer, would fire employees because she ‘didn’t like their energy.’ They banned employee expensing of meals with meat (employees later saw Neumann eating meat). And then there’s this episode, which I found particularly revealing:

A few weeks after Mr. Neumann fired 7% of the staff in 2016, he somberly addressed the issue at an evening all-hands meeting at headquarters, telling attendees the move was tough but necessary to cut costs, and the company would be better because of it.

Then employees carrying trays of plastic shot glasses filled with tequila came into the room, followed by toasts and drinks.

Soon after, Darryl McDaniels of hip-hop group Run-DMC entered the room, embraced Mr. Neumann and played a set for the staff. Workers danced to the 1980s hit “It’s Tricky” as the tequila trays made more rounds; some others, still focused on the firings, say they were stunned and confused.

Mass layoffs followed by an expensive alcohol fueled party hosted by a celebrity reflects a problematic leadership style, to put it mildly. Neumann paired poor judgment with self-dealing. By now the story of Neumann’s corruption is well-known; he has pulled roughly $700 million from the company, owns buildings personally he leases to WeWork, and flies around on private jets. But the self-dealing is camouflaged with something else. Take this passage from the S-1.

To evidence their commitment to charitable causes and to ensure this commitment is meaningful, if Adam and Rebekah have not contributed at least $1 billion to charitable causes as of the ten-year anniversary of the closing date of this offering, holders of all of the Company’s high-vote stock will only be entitled to ten votes per share instead of twenty votes per share.

I don’t think there’s a better example than this passage of using philanthropy as moral cleanser. It is something Anand Giridharadas has written about as a pivotal element of modern capitalism.

All of this, the faux philanthropy, the strange management choices, the personal behavior, and so forth indicates something very simple. I am going to be blunt, because it’s time to stop using euphemisms just because someone is rich and a business leader. Adam Neumann is not “quirky,” he is not “charismatic,” and he does not have “an unorthodox leadership style.” He is an untalented and abusive monster who lies to get what he wants. And he was given an unlimited credit line from which he could legally steal.

Now, Neumann himself isn’t very important, foolish charlatans are common in society. The question is why he became so powerful despite being so obviously unfit for a role stewarding billions in capital and managing thousands of people. And that’s where we get to the real power centers behind this fiasco, the financiers who lent WeWork large sums of money. This includes Jamie Dimon of JP Morgan and Masayoshi Son of Softbank.

Dimon’s role is prosaic; his bank essentially financed WeWork after Dimon was tricked by Neumann into thinking the real estate money losing enterprise represented the future. Dimon wanted JP Morgan serve as Neumann’s personal banker, to serve as the commercial banker to WeWork, to take the company public, and to offer credit services as well.

If you know Dimon’s actual reputation, him getting suckered isn’t surprising. From what I heard back in 2009, Dimon is a mediocrity who essentially got lucky his bank was too slow to get in on the subprime scam in 2006; he then used his bank’s incompetence at getting into the bubble as justification for how prudent he was. In this case, however, Dimon didn’t miss the fraud boat. JP Morgan managed to just make it into WeWork, the last round of the money losing fake tech bubble. Dimon will now portray himself as the adult cleaning up the mess, but of course, he’s more of an arsonist pretending to be a firefighter.

Son is a more interesting character. He’s a venture capitalist/empire builder who had been able to raise hundreds of billions of dollars to restructure industries globally. Son built his reputation in the first dot com boom with a lucky investment in Yahoo! and Alibaba. He has since restructured ride-sharing with large investments in Uber and its foreign counterparts. Like most major financiers, Son is a powerful and connected political operator. For instance, he’s an owner of Sprint, and he’s currently trying to force an illegal merger of Sprint with T-Mobile, hoping his political connections to Donald Trump can get it through merger review.

Generally speaking, Softbank’s model is to manipulate private capital markets as a way of drowning out competitors with cash. For instance, there were several ‘rounds’ of WeWork investment where Softbank was buying more shares at higher valuations. WeWork ostensibly became more valuable because Son said it was more valuable, and bought shares for higher prices. And since there was no public market for these shares, the pricing of the shares was totally arbitrary. WeWork then used this cash to underprice competitors in the co-working space market, hoping to be able to profit later once it had a strong market position in real estate subletting or ancillary businesses.

Counterfeit Capitalism

This is of course Amazon’s model, which underpriced competitors in retail and eventually came to control the whole market. And Amazon has spawned a host of imitators, including WeWork. It has also reshaped venture investing. The goal of Son, and increasingly most large financiers in private equity and venture capital, is to find big markets and then dump capital into one player in such a market who can underprice until he becomes the dominant remaining actor. In this manner, financiers can help kill all competition, with the idea of profiting later on via the surviving monopoly.

Engaging in such a strategy used to be illegal, and was known as predatory pricing. There are laws, like Robinson-Patman and the Clayton Act, which, if read properly and enforced, prohibit such conduct. The reason is very basic to capitalism. Capitalism works because companies that thrive take a bunch of inputs and create a product that is more valuable than the sum of its parts. That creates additional value, and in such a model companies have to compete by making better goods and services.

What predatory pricing does is to enable competition purely based on access to capital. Someone like Neumann, and Son’s entire model with his Vision Fund, is to take inputs, combine them into products worth less than their cost, and plug up the deficit through the capital markets in hopes of acquiring market power later or of just self-dealing so the losses are placed onto someone else. This model has spread. Bird, the scooter company, is not making money. Uber and Lyft are similarly and systemically unprofitable. This model is catastrophic not just for individual companies, but for their competitors who have to *make* money. I’ve written about this problem before. Amazon has created a much less competitive and brittle retail sector. Netflix’s money-losing business is ruining Hollywood.

Endless money-losing is a variant of counterfeiting, and counterfeiting has dangerous economic consequences. The subprime fiasco was one example. Another example was the Worldcom fraud in the late 1990s, which forced the rest of the U.S. telecom sector to over-invest into broadband. Competitors have to copy their fraudulent competitors. It’s a variant of Gresham’s Law, which says that "bad money drives out good.” If you can counterfeit something for cheap, the counterfeit will eventually take over the entire market and drive out the real commodity. That is what is happening in our economy writ large, a kind of counterfeit capitalism as ‘leaders’ like Neumann are celebrated and actual leaders who can make things and manage are treated like dogshit.

This kind of counterfeit capitalism is terrible for society as a whole. At first, with companies like Walmart and Amazon, predatory pricing can seem smart. The entire retail sector might be decimated and communities across America might be harmed, but two day shipping is convenient and Walmart and Amazon do have positive cash flow. But increasingly with cheap capital and a narrow slice of financiers who want to copy the winners, there is a second or third generation of companies asking Wall Street to just ‘trust me.’

As euphoria in capital markets takes hold, predatory pricing scheme come to entirely wastes capital on money losing enterprises, and eventually these companies become Soviet-style generators of white elephants and self-dealing. The men and women who run them have to be charlatans, because they are storytellers justifying losses. Powerful men like Dimon are sucked in, consultants start explaining to old-line economy companies how they too can become like WeWork, and eventually more and more of the economy just adopts counterfeit capitalism.

(I’ll note that there’s an additional policy conflict here, which is Glass-Steagall. If JP Morgan had to pick either investment banking or commercial banking, Dimon wouldn’t have been so eager to jump into WeWork. He would have had to look at the company purely as an investment banker or as a commercial banker, and not as a conflicted operator with centralized control of the whole capital raising process.)

The Good News: FDR Stops Neumann from Beyond the Grave

Here’s the good news. Neumann stepped down! Why? It happened when WeWork had to go public to access money from ordinary investors. That meant that the private valuation games Softbank and WeWork were playing came into conflict with basic disclosure of investing information required by the Securities and Exchange Commission. In 1933, Ferdinand Pecora, backed by Franklin Delano Roosevelt, exposed a whole host of self-dealing and fraud among bankers and utility magnates, the tech titans of the time. (This is in my upcoming book.)

One of the results was the establishment of the Securities and Exchange Commission, which was designed to stop monopolization and fraud enabled by stock manipulation. As it turned out, it worked quite well. And as corrupt as the SEC has become, these principles even work now, in 2019, under the Donald Trump administration. Pure disclosure and public markets managed to stop Jamie Dimon, Masayoshi Son, and Adam Neumann.

It turns out good public policy can stop counterfeit capitalism.

Time to Restore Honest Capitalism

Part of what’s going on with WeWork is that monopolies and private equity have eliminated profitable opportunities for investment, which is why the Federal Reserve is increasingly powerless. Republicans like Mitt Romney are noticing that excess capital is harmful. Capitalism itself is breaking down in the face of business models that are simply organized around loss-making and endless access to the small number of (largely) men who can enable unlimited access to the capital markets.

Across the West, the basic problem of a corrupted productive process is becoming a quiet crisis. The reason is simple. The people that do the work in organizations are increasingly excluded from the decision-making about the work. That is why Boeing is losing its ability to build planes, why we can’t build infrastructure, and why New York City is on the verge of disaster. And the cherry on top is investors pouring money into enterprises that aren’t even speculative, but are purely loss-making, because they find a destructive personality like Adam Neumann compelling.

That’s why Neumann was given an unlimited charge card and a license to abuse his employees. As it turns out, the S-1 was correct; he was pivotal to WeWork, because WeWork only exists due to his ability to get money from investors.

It’s a good thing Neumann’s stepped down. And if we restore laws against predatory pricing and centralized financial control, the entire counterfeit capitalism model will go away. We can then get back to the business of making and selling things to each other without engaging in celebrated cases of fraud and abuse under the guise of ‘quirkiness.’

Thanks for reading. And if you liked this essay, you can sign up here for more issues of Big, a newsletter on how to restore fair commerce, innovation and democracy. If you want to really understand the secret history of monopoly power, buy my upcoming book, Goliath: The 100-Year War Between Monopoly Power and Democracy.

cheers,

Matt Stoller