Woodford, WeWork and the perfectly legal but morally outrageous “bezzle”
Neil Woodford and Adam Neumann have pulled off spectacular examples of the “bezzle”, says Merryn Somerset Webb. Hoodwinking investors and walking off with vast, unearned fortunes.
Two corporate disasters are looming large in markets at the moment. In the US it is the abandoned initial public offering and humiliating bail out of WeWork by its biggest backer SoftBank. In the UK it is the closure of Woodford Asset Management and the suspension of the funds it ran.
These are very different businesses. But they have an awful lot in common. In both cases the disaster can be seen as a direct result of arrogance-driven overexpansion. And in both cases the influence of pushy personalities seems to have replaced good governance. In both cases, the founders have been able to jump ship as very rich men.
Neil Woodford has paid himself something in the region of £60m in dividends since he launched his business in 2014. The holders of his Woodford Income Fund will be lucky to get back 50p in the pound from their investment. Adam Neumann, WeWork's co-founder, gets to leave with huge amounts of money (up to $1.7bn, an obscene number that includes a $185m consulting fee). Four thousand of his employees will lose their jobs instead. And shareholders in SoftBank will have to swallow losses of 30% on their shares in the past six months the share price has fallen as the obvious idiocy of the WeWork investment became clear.
Even an awful lot of small shareholders who think the only thing they need to do about WeWork is be a little amused will find, if they look a little closer, that they have been hit too. The Baillie Gifford Japan Trust, usually a top performing fund, and one that is very popular with retail investors in the UK, has 5% of its assets invested in SoftBank, for example.
These miserable stories have at least one more thing in common: they are a new twist on what economist John Kenneth Galbraith called the "bezzle". In his 1955 book on the 1929 Wall Street crash, Galbraith suggested that "embezzlement is the most interesting of crimes". It is, he said, the only one of the various forms of theft that comes with a time lag. So "weeks, months, or years may elapse between the commission of the crime and its discovery".
During that period things are good. The person who will eventually end up with the money knows he will have and keep it. Those who will lose it don't yet know they will. They think it is permanent wealth even if it is really what Galbraith referred to as "psychic wealth". This happy period is the bezzle. All booms have it the more relaxed and trusting everyone is and the more freely money is available, the more bezzle you get.
The Woodford and WeWork scandals, while fitting the mould pretty well, are not of course exactly this kind of bezzle (there is, as far as we know, no fraud involved, no crime and no actual intention to impoverish others). Instead they are examples of the way our distorting easy-money environment can work to transfer large amounts of cash from ordinary savers to ridiculously overconfident individuals a modern type of bezzle, the defining feature of which seems to be not so much theft from but lack of concern for the financial futures of those who support you.
Set up a company, do amazing PR at a time when more money than sense is looking for a home (thank you loose monetary policy), expand in such a way that no one is much bothered by the impossibility of profitability, make the game last at least until you are rich, and you have a modern bezzle.
Look at the recent listings in the US. There's been Spotify, Uber, Lyft, Beyond Meat and Snapchat, to name a few. They're all loss making. They mostly justify this on the basis that the way to success these days is not to chase profits but to chase market share while producing significant amounts of technobabble about how much the data you will collect as you pay to dominate your market will one day be worth.
Shareholders don't receive any income from them now; they just get to pay ultra-high valuations and imagine that they might one day. Or not. Uber's own IPO prospectus, while looking for a $100bn valuation, noted that it "may not achieve profitability".
Are these malinvestments driven by the endless upward price momentum provided by super-low interest rates? Absolutely. And given that not only may they never make money, but also that their founders and managers know they may never make money, are we in the middle of a modern bezzle? Absolutely.
These companies are only part of the bezzle, of course cheap money creates psychic profits anywhere. You can argue that the bezzle dynamic exists throughout the tech sector in the US, where valuations have risen without increases in the earnings meant to underpin them.
The good news is that we are also seeing examples of the end of modern bezzles (or the end of illusions, at least). WeWork is the obvious one, but in the UK, Metro Bank is a neat example too. It had a big personality at the top; aggressively over expanded; listed at rather too high a valuation and will now make losses for the foreseeable future. The share price has fallen 90% from its highs.
Things change as economies slow as the global economy is now. Then, said Galbraith, audits become "penetrating and meticulous" and those to whom we give our money are "assumed to be dishonest" until proven otherwise. That bit of the cycle might be nearly upon us.
This article was first published in the Financial Times