We [Used to] Work [But Not Anymore]

I begin with a disclaimer.  I am neither a venture capital professional nor a real estate professional.  I do not pretend to be able to pick out the next new disruptive wave in business and I do not find real estate intrinsically interesting.  Nor have I done a deep dive into We Work’s financials.  And I did not really begin to follow the We Work story until last week.

But I have cleaned up dozens and dozens of corporate messes, and helped fix or restructure scores more, and the We Work and Adam Neumann drama immediately captured my attention. 

Because we’ve seen this movie before.

Theranos Rerun.

As I began to dig into the articles, I was immediately struck by the parallels between Adam Neumann and We Work and Elizabeth Holmes and Theranos. 

-        Holmes and Neumann both built a religious cult based on grandiose claims, a persona and signature “look.”  Holmes mimicked Steven Jobs, down to the black turtleneck.  Neumann had his high school stoner look, complete with shoulder length hair.  Theranos employees complained that they knew where Holmes was in Jobs’s biography by the quotes she was spewing out.  Even her voice was manufactured.  Neumann brashly wished to be the first trillionaire and bragged that he was “going to lease more space than they [JPMorgan] do.”

-        Holmes and Neumann had a significant other that was involved in the business.  Elizabeth Holmes had “Sonny” Balwani that was the enforcer, threatening employees with legal action if they divulged “confidential” information (whether it was confidential or not).  Neumann had his flaky wife Rebekah Paltrow Neumann, former actress and Adam’s “strategic thought partner” or, as I call her “Chief Proselytizing Officer” who put out vacuous mission statements for the company, like this treasure from the company’s S-1 “We are a community company committed to maximum global impact.  Our mission is to elevate the world’s consciousness.”  Take a cleansing breath and you could almost smell the incense burn.   Her startup WeGrow is being shuttered.

-        Most importantly, each gained the admiration of one or more respected individuals from the Establishment that lent credibility.  Holms had George Schulz; Neumann had Jamie Dimon as his personal banker.  Each got someone credible to “fall in love” with them that provided air cover for their mismanagement (and in Holmes’s case, outright fraud). 

-        Each was an ego maniac that retained tight control over the company.  Holmes did it through threats.  Neumann did it with his manipulation of stock ownership.

Neumann took the Theranos playbook, tweaked it a bit and managed to extort $1.7 billion from Softbank.  Holmes was not so fortunate.  She will go to trial next year on fraud charges and her law firm quit because they haven’t been paid.  Holmes committed fraud by manipulating data.  Neumann (thus far as it appears, manipulated only the desires of his lenders and investors.

 What went wrong at We Work?  

My conclusion is everything.  We Work was a MASSIVE failure in several areas.  In the dichotomy of Steven Kaplan at the Booth School of Business, was this a failure of the horse or the jockey?  I believe it was both on a massive scale.  It was a failure of diligence on the part of J.P. MorganChase.  It was a failure corporate governance (Neumann engaged in a myriad of suspect insider transactions).   It was a failure of balance sheet management—servicing long term obligations with short term cash flows was a built-in structural failure.  (See Sam Zell’s comments.   (https://www.youtube.com/watch?v=X-33_A_YsWg)).              

 Ironically,  in yesterday’s WSJ, SoftBank announced that it was going to examine the corporate governance in its portfolio companies.  Talk about locking the barn door after the horses got out.

Why the We Work  scares me.

-        Jamie Dimon has reputation of being one of the best risk managers in the country.   Dimon earned his reputation at Citi by sidestepping the Long Term Capital Management debacle.  He further cemented his legacy during the financial crisis of ’08 and talked about “fortress balance sheet.”  Yet J.P. Morgan jumped in on this one with both feet.  They were in the equity, debt and the investment banking portion.  Dimon “fell in love.”  This leads to two important questions.  If Dimon can get taken, who else?   If J.P. Morgan can do a pratfall, what else is out there in these financial institutions?

-        Worse, We Work gives legs to Elizabeth Warren’s view of the world.  Once of the basic premises is that successful risk taking is rewarded and that this rising tide lifts all boats.  Neumann managed to disrupt the lives of some 4,000 people (and in the end had to delay layoffs because he didn’t even have the cash to pay their severance) and dissipated billions of dollars in wealth and yet managed to pocket a cool billion, land a $200 million consulting agreement and had his personal debt refinanced.   This is a terrible sign that something in the capitalist system is amiss. Even capitalist purist Cliff Asness posted, “It [We Work] will pass.  But, this story, hopefully briefly, makes me see some of the appeal of socialism.”  Frankly, I am surprised that Elizabeth Warren hasn’t picked up on the We Work story.   It is a real black eye not just to the banking, real estate and venture capital markets, but, I think, lends legitimacy to the complaints of Warren, Sanders, AOC and people of their ilk.  If I were on Warren’s campaign committee, Neumann would be featured in our campaign ads.

-        We Works also bolster’s one of  Peter Thiel’s assertions that innovation has slowed dramatically, that we innovate in bytes and not stuff.   There have been businesses that have married technology to an old line business--- Dominoes comes to mind.   Neumann tried to create an illusion that you could defy financial constraints by bolting space maximizing algorithms and a cultish corporate culture and failed spectacularly.  We Work also provided evidence to support Theil’s claim that there is just too much money around that funds don’t know what to do with.  And that leads them to “want to believe” instead of applying a healthy dose of skepticism.

After all is said and done, Neumann’s empire crumbled when his company’s story was scrutinized by the market rather than just the wise ones at Softbank and JPMorgan.

There is wisdom in crowds.

Lies and Deceits

I think I found one of the problems.  Along with not having a particular fondness for the 1^st, 2^nd, and 4^th Amendments to the Constitution (Kamala Harris last week wanted to take away Trump’s ability to Tweet and Beto wants to take away your AR-15), progressive politicians definitely have an aversion to the 10 Commandments, many of which still form the bedrock of our Judeo-Christian society.  I’m hardly an Evengelical Christian, but the 10 Commandments have pretty much stood the test of time and whatever your theological bend, you have to admit that they form a pretty good set of guidelines for human behavior.  Progressives seem to be bent on waging their campaigns and messages as if Commandments IX and X didn’t exist at all.  Remember those?  Thou shalt not bear false witness and Thou shalt not covet Thy Neighbor’s Goods.  Coveting thy neighbor’s goods is the platform for each and every Democratic presidential contender this year.  But what bothers me most among politicians and the media is the propensity to bear false witness….and bear no consequences for doing so.

·        ABC News- A week after using film from an artillery range in Kentucky claiming it was Turks shelling Kurds, ABC news still hasn’t explained how this happened, much less meted out any consequences.  In finance, putting out false financial statements may land you in jail.  In the law, similar behavior will lead to a malpractice suit (same as medicine) and you may lose your law license.  But in today’s world of journalism, false statements and patently misleading images are met with shoulder shrugs, even one as blatant as this one.

·        Similarly, earlier this year, several news outlets misleadingly framed the pictures of the kids from Covington to make it look like they were mocking an elderly Native American, when in fact it was the Native American that instigated the contact.  Nathan Phillips, a known rabble rouser, also lied about his Vietnam service.  The damage was immense, as the social media mob descended on these kids.  The kids have sued several media outlets and celebrities, who are all taking cover under the 1^st Amendment.  So far, no consequences.

·        Christine Blasey Ford most notoriously profited by her unsubstantiated claims against Brent Kavanaugh, as a GoFundMe account permitted her to take nearly a cool million for her efforts. 

And most recently, a guy named Max Stier claimed he was at a frat party with his pants down and his friends pushed his penis into the hand of a female student.  The “victim” has no memory of this ever taking place.  Yet the NYT reported it anyway.

·        It has been mostly the Left lobbing these charges at the Right, but now they have begun to turn on each other.  Hillary Clinton, with not a shred of evidence, claimed that Tulsi Gabbard is being groomed by Russia to be a third party candidate.  Tulsi, refusing to back down, fired off a flurry of tweets at Clinton, labeling her the “Queen of Warmongers.”

·        Former presidential candidate and Utah senator Mitt Romney engaged in a bit of sleight of hand himself, deploying a pseudonym on Twitter to broadcast his views and to criticize President Trump.  At least Gabbard doesn’t hide in the bunker of anonymity and is uninhibited about expressing her views.  She is pretty far left of my views but in a head to head contest with Romney or Kasich, I’d lean toward Gabbard.

We are accustomed to politicians spreading falsehoods and making misleading statements, but our democracy depends on journalists to tenaciously dig for the facts and to exercise quality control over what they publish.  And even politicians need to be called out for making such slanderous statements as Hillary did against Tulsi Gabbard.   And whatever disagreement you might have with Gabbard’s policies, at least she stands behind her positions and stands up to those that spread falsehoods.

Whose Team Are You On?

I stopped trying to maintain a separate sports blog some time ago.   Keeping a weekly blog on other topics was enough, I thought.  But over the last several weeks, I find myself drifting into the topic again, especially that sports has found itself at the intersection of politics and economics.

I’m talking about the N.B.A.

Last week, the general manager of the Houston Rockets, a favorite N.B.A. team in China tweeted out a fairly innocuous message, “Fight for Freedom.  Stand with Hong Kong.”

In an earlier era, had someone transmitted that message about the Hungarians in 1956, the Czechs in 1968, or any country of the former Eastern Bloc in 1989, the country would have closed ranks around him and similar messages would have cropped up all over.

But this is globalist, multicultural, progressive America 2019, and the social justice warriors have taught us that America is an evil an oppressive force in the world, or so Steve Kerr, Stephan Curry and Gregg Popovich tell us.

Houston Rockets GM Daryl Morley, quickly deleted his tweet, and offered an apology for having offending the Xi regime worth of any statement ever given by a hostage, “I did not intent my tweet to cause any offense to Rockets fans and friends of mine in China. I was merely voicing one thought, based on one interpretation, of one complicated event.  I have had a lot of opportunity since that tweet to hear and consider other perspectives.”

Daryl, it’s not complicated. It’s not complicated at all.

Our eyes have been opened.  They have been opened to the hypocrisy of all of you, that wore “Hands Up, Don’t Shoot” t-shirts protesting an incident in which those words were never uttered, and you blathered on about free speech in support of Colin Kaepernick.  But now, as Chinese police quell the breath of freedom in Hong Kong with truncheons and tear gas, suddenly you are mute and apologetic.

Kerr is perhaps the worst of the woke N.B.A., lashing out at Trump, muttering about AR-15s, and mumbling about human rights abuses in the U.S., while his Chinese puppeteers put people in re-education camps and beat and jail protesters.  None of that happens here.

The N.B.A.’s partner in this, Nike (famously ditching the Betsy Ross sneakers last summer) rushed to remove Houston Rockets gear from Chinese stores because they were “offensive” to the Chinese authorities.  The N.B.A. then complied and ordered their players to refrain from press conferences.

The face of the N.B.A., LeBron James claimed that the GM of the Rockets was “misinformed” on China.  I’ll bet the Chinese might even have a spot open for Daryl Morey in one of their re-education camps.  Did LeBron think Xi was kidding when he said that any attempt to divide China would result in “crushed bodies and shattered bones?”

I note with irony that Jamestown, the first colony in what would become the U.S., the colonists endured incredible risks, hardship and starvation to gain their liberty.    In the new James world of the LeBron type, liberty is deeply subordinated to personal profit.

I fixed my Nike golf shirt this summer by having a Betsy Ross flag sewn over the swoosh emblem.  I will not watch another N.B.A. on T.V. or attend one in person, even if the tickets are free. 

And I have a simple message for dolts like Lebron, Kerr, Curry and Popovich.  The most important thing you need to know about team sports is which team you play for. 

You’ve chosen.

I'm With California

Once a decade or so, California takes legislative initiative that I actually agree with.   99 percent of the time, California is busy banning plastic straws, de-criminalizing knowingly passing on HIV and criminalizing incorrect gender identification and other such woke legislation.  But this time, California got it right.

Last week, California signed into law the Fair Pay to Play Act, which permits college athletes to keep the earnings from their images, names, and likeness.  The law puts California in direct conflict with NCAA rules that prohibit student athletes from receiving such payments.  South Carolina is about to introduce a similar bill and word has it that Illinois may as well.

The NCAA has threatened to bar California schools (a completely empty threat), and has threatened to sue on the grounds that it interferes with interstate commerce, so the matter may be tied up in the court system for years.  Critics claim that it will taint amateurism of the sport and cause problems with Title IX.

I’m all for it.  I similarly supported the efforts of Northwestern University players to unionize.  That attempt was batted down by the NRLB ( https://www.nlrb.gov/news-outreach/news-story/board-unanimously-decides-decline-jurisdiction-northwestern-case) a couple of years ago, which ruled that the players were not statutory employees, and therefore, not entitled to NLRB protections.

Who is kidding whom here?

The N.F.L over the years has carved itself out sweetheart deals with the government.  It was granted exemption from anti-trust laws in 1914, which permitted the league to bargain it as a unit and obtain fat television and cable contracts.  Those dollars, in turn, led to the explosion in players’ salaries (in the 60’s, many players had jobs in the off-season and many went to work after their careers were over).   Teams also get tax advantaged financing and other goodies at the local level to build their stadiums.  Finally, the league has a tax subsidized minor league that IT DOESN’T HAVE TO PAY FOR—the university system.  How sweet.

Despite drawing millions for their schools, through the collusive rules of NCAA eligibility, players “salaries” are capped at tuition, room and board and a small stipend, say, the total cost is $60,000 per year (less than a good legal secretary).  And only about 1.5% of these players make it into the N.F.L.  The schools piously argue that they “get a free college education.”  But if you look at what actually happens at most places, playing football is their full time job.  While the NCAA boasts that graduation rates have improved, they are 17.8 lower than the general student population and athletes are often steered into worthless majors (https://www.sbnation.com/college-football/2014/7/9/5885433/ncaa-trial-student-athletes-education).  

Furthermore, coaches are the highest paid state employee in 37 states; the four coaches in the football playoff system made more than all 50 governors combined.  These coaches will make more than the vast majority of DI players.

I was incensed that the NCAA sanctioned Ohio State when some player sold their championship rings, autographs and other memorabilia.  It was THEIR property.  There is no property interest more intimate than one’s own name, likeness and image.  It’s high time we call it like it is—a collusive labor arrangement that fixes labor costs, forcing the players to be amateurs but the schools, coaches and the N.F.L. are free to rake in the dollars.  

This time, California got it right.

Wake Up, N.F.L.

I attended the Green Bay Packer game against the Philadelphia Eagles last week at storied Lambeau Field last week.  It was a pleasant evening and the tailgating was fun and festive.  Lambeau is like a shrine with the twin statues of Curley Lambeau and Vince Lombardi standing like sentinals out front.  Perhaps the only other sports venue so steeped in tradition and legend as Lambeau is Fenway Park.

The Packers lost a close game that wasn’t decided until the last drive.  As a lifelong football fan, the entire experience should have been a memorable one.  But it left me uneasy about the future of the game and fed into the current narrative, that N.F.L. football is on the way out.

On the first play of the game, Packer running back Jamaal Williams was hit with a vicious head to head tackle by Eagle defensive end Derek Barnett and left the game strapped to a stretcher.  The Eagles got a penalty but a decision to toss Barnett from the game was reversed.  The game was held up for quite awhile while the medical team examined him and lifted him carefully onto the stretcher.  Eagle cornerback Avonte Williams left the game on a stretcher as well, although not because of an illegal hit.  And later in the game, Packer punt returner Darrius Shepard failed to make a fair catch and was “earholed” by an Eagle player in helmet to helmet contact after which the Eagle player danced and strutted around.   The hit was so loud that it made me cringe in the stands, and was totally unnecessary.

Some of the fans joined in the blood lust.  After one Eagle player went down, the guy behind me yelled, “I hope he ripped his ACL (anterior cruciate ligament).”  I turned and glared at him and it took every bit of self-control not to say, “Why would you say that, you fat slob?”

A few weeks ago, Gregg Easterbrook wrote an opinion piece in the New York Times entitled, Football is Here to Stay (https://www.nytimes.com/2019/09/07/opinion/sunday/nfl-football.html?searchResultPosition=3).  I’m not entirely sure I agree. 

Head trauma haunts the game.  Numbers are already dropping in high schools across the country.  Even in football crazed places like New Jersey and Texas, coaches are beginning to have problems filling out rosters.  As much as I love the game, the brutal (and some illegal hits) I saw last week made me uneasy.  The vicious and illegal hit by Oakland Raider Vontaze Burfict on Sunday (https://www.youtube.com/watch?v=tqacb2fF_eY) seemed to cap off the weekend.

Physics is also at work.  While some rule changes have been implemented to protect players, the players of today are so much bigger, faster, stronger and well trained than a few decades ago.  Recently, I saw an old photo of Dick Butkus in a t-shirt.  In his day, he was the most feared player in the league.  He looks nothing like the bulked up, chiseled players of  today.  Force equals mass times acceleration.  Today’s trained players are hitting with tremendous kinetic energy.

This weekend convinced me that if the N.F.L. does not move more aggressively to clean up the unnecessary brutality, the game will be in trouble.  Already, it is rippling through at lower levels.  Participation rates are down.   Some grade school programs have ceased.  In the Chicago Public School system, some teams are down to 15-16 players and that will dry up soon.

The suicides of Dave Duerson, Andre Waters  Junior Seau and others loom as large as the heroes of yesteryear like Walter Payton, Bart Starr and Joe Montana in the annals of the sport.

The game is a tough, physical game and will always be.  But the N.F.L. must get much tougher and aggressive in policing and penalizing gratuitously vicious hits with long suspensions like Vontaze Burfict’s, and should consider banning repeat offenders like Burfict from the league.  Without tough action, football will become a small, niche sport like boxing, and perhaps worse, since it requires so many participants to make it fun.

Later, I mentioned this all to a friend and said I was deeply concerned about the survival of the game.  He simply responded, “They got rid of the gladiators, didn’t they?”