Spoiler alert: It’s WeWork.

Earlier this month, we saw how stock buybacks and “pump ’em and dump ’em” schemes not only distort market price action, but make executives unfairly rich at the expense of their shareholders.

Such practices, once deemed illegal by the SEC, have now become customary components of modern capitalism.

Today, sanctioned fraud has become a keystone of modern market action – from QE front-running to executive malfeasance.

Values in stocks may be going up for now, but ethical values have hit a new low, and they will eventually bring investors and markets down with them.

And nothing symbolizes this ethical black hole and market risk better than the IPO that almost was – WeWork…

WeWork Didn’t Work

WeWork is a profitless office space leasing company burning through billions of investor cash and bank debt to acquire premium office space primarily in the U.S. and Britain (including another 10 million square feet projected for this year).

WeWork’s business model is simple: It acquires real estate at overhyped prices and then leases or sub-leases the space back to part-time tenants with questionable viability.

Given that a recession is on everyone’s radar, including the bulls, those elusive sub-tenants are about to become vacancies at WeWork, a cash-burning company once (over) valued at a staggering $47 billion.

Today, WeWork is tanking, and it’s about to become either the laughing stock of bad due diligence or just another metaphor of capitalism off its rails.

In China, where growth is anything but ripping, WeWork’s empty office spaces have plenty of other empty buildings to compete with.

Who’d have guessed it? Apparently, not anyone at WeWork, SoftBank, or JPMorgan…

The IPO That (Thankfully) Never Was

Despite an utterly embarrassing balance sheet, WeWork (once lauded as the world’s most valuable start-up) and its founder, Adam Neumann, were only inches away this summer from an IPO that would have made him a billionaire many times over, and his investors’ paupers.

On the eve of this momentous IPO, Neumann was not doing an eleventh-hour review of his S-1. He wasn’t combing over numbers, ascertaining profit projections, and confirming the prowess of his management team with razor-like concern for shareholder value.

Nor was he nervously pacing the room, filled with the awesome responsibility (and even excitement) of stewarding the billions of dollars handed to him by eager banks and unicorn-loving IPO investors.

Nope. None of the above.

He was surfing in the Maldives. What a cool guy…

In the weeks prior to the much-hyped IPO, Neumann was flying WeWork underlings on private jets and helicopters back and forth between his various homes, burning holes in the ozone layer.

Meanwhile, his wife, Rebekah, the company’s chief brand officer, was primarily concerned that the IPO documents were printed on recycled paper.

Really. You can’t make this stuff up.

The hunt for recyclable paper and the perfect wave slowed the IPO down for days, which, in the end, was an ironic godsend for the rest of us – because WeWork just doesn’t work.

We already know how this sordid story came to a close… the IPO never happened.

A Profile in Hypocrisy and Greed – The New Capitalism

But the WeWork story gets worse, as does the profile of Adam Neumann, which recent Wall Street Journal and Bloomberg articles have thankfully shared with the rest of us.

Normally, I’m no fan of the mainstream media, but I have to hand it to a few good journalists for keeping WeWork off the public exchanges.

For example, before the IPO, Neumann was shopping for the right exchange to take his profitless company public.

He arrogantly dragged a bunch of competing bidders from the NASDAQ and NYSE to one of his various homes in the Hamptons to fight for his business.

Who would be the lucky winner of this absolute lemon of a money-losing company masquerading as a “tech miracle”?

Well, Neumann demanded that any exchange who wanted his IPO had to first ban all meat and single-use plastic products from its cafeterias.

Again, you really can’t make this stuff up.

Meanwhile, back at his WeWork HQ where money was leaking through the floors and ceilings, the young Mr. Neumann was having an ice bath and sauna installed in his private office tucked away from the other plebeians of his company, a kind of exclusionary decadence reminiscent of Dick Fuld and his private elevator at Lehman Brothers.

No, really, you can’t make this stuff up.

The Market Was Sending You a Lemon

But what’s even more astounding than the decadent symbolism of Adam Neumann and his ticking debt bomb, WeWork, are the market players who were willing to back him and his toxic balance sheet.

As I’ve said so many times – our “best and brightest” aren’t often that bright…

Take SoftBank, WeWork’s largest investor. It has been hailed in our modern, unicorn-chasing tech bacchanalia as the seed-capital messiah of young visionaries like Mr. Neumann.

Like fee-seeking JPMorgan, SoftBank had confused the money-losing disaster that is Neumann as an eccentric “tech” and “platform” Wunderkind.

Morgan was ready to backstop $5 billion of WeWork bonds if no one else would buy them (for $50 million in fees).

SoftBank then went on to lose billions when enough noise was generated to prevent this lemon from getting an IPO, despite every effort of our so-called “best and brightest” on Wall Street to feed this lemon to you – the retail suckers – as a viable public company and IPO.

Wasted Money, Wasted Opportunities

But as Bloomberg‘s Matt Levine accurately pointed out, perhaps the worst part of WeWork’s fall from grace (and the billions wasted on it) is the fact that many otherwise deserving, five-man start-ups (Google started with less) will not be able to secure funding while groups like SoftBank’s “Vision Fund” lick their wounds over the WeWork disaster.

Just imagine what billions of dollars earmarked toward good start-ups and humble founders could do?

Been There, Done That, Seen It

Coming of age as a 20-something lottery winner in the IPO-crazy and tech-driven fantasy of overvalued unicorns during the dot.com bubble, I thought I’d seen it all.

Big parties in the Hamptons, cheesy cars, metal credit cards, and greedy punks otherwise described by the Street as “mercurial whiz kids” and “financial iconoclasts” were as common as Montauk rent-a-mansions.

Admittedly, I made some undeserved money then on companies going public that never made a dime before disappearing into the fog of the reverse merger graveyard of 2001-2004.

From L.A. to the Upper East Side, I saw fast money, fast friends, and fast losses of both – like everyone else.

And then I grew up.

Old School Capitalism, Old School Values

I cleansed myself of the hype and invested alongside old school mentors and clients who run companies, portfolios, and relationships with ethics rather than recycled paper or private saunas.

Many of them live in single-level homes and drive pick-up trucks rather than Italian two-seaters.

Without naming names, these executives make fortunes running enterprises that serve railroads, construction companies, and even prime brokerage firms.

They genuinely care about their employees and shareholders and run companies with no debt while setting vast percentages of their profits aside to share with their labor pool.

Imagine that?

Weekly, we are on the phones brainstorming on how to best protect employees and retirement plans and manage shareholder and worker expectations with realism rather than spin.

These extremely successful executives legitimately care about preparing for and managing their future and the future of their businesses and country.

Like me and you, they are not against making money, even lots of it.

But they want to do this the old school way – you know, by earning it and caring for those who helped them get there.

Profiles like Adam Neumann represent the very opposite of this old school minority.

Neumann was already worrying about setting up his own family office before he’d even made a single dime for a single investor – happy enough to have suckered the Street to hand him billions.

As someone who ran family offices, let me tell you that the families I worked with earned every penny of their wealth before they started counting it.

Pitchforks?

When I think of the numerous tech unicorns that are losing money (Uber, Lyft, et al) and their jet-setting, profitless founders who have more dinners than appetites and more homes than wisdom points, I can’t help but think of the ironies and risks that surround us today.

I mean just consider the contrasts.

Today, while punks like Neumann are dropping a $100K in private jet fuel to surf the Maldives, 40% of Americans who drive to work each day can’t afford a $400 emergency or even a few pairs of jeans without having to sell something.

If more folks catch on, we may not be seeing guillotines or pitchforks, but if you think populism and frustration within D.C. or Wall Street is bad now, you ain’t seen nothing yet…

Half of the American workforce earns less than $33,000 per year, which is likely what Neumann spends to vegan-cater his private jet.

More than half the children growing up in the States today live in welfare-assisted homes, whereas Neumann already has more homes than anyone could need.

Millennials are drowning in education debt, and more Americans are defaulting on car loans than at any other time in our history.

Meanwhile, as the Fed forces interest rates to the floor to keep Wall Street’s debt-soaked companies alive, everyday Americans are paying 18% on their credit card debts, levels that have never been higher.

Furthermore, wealth disparity in America has never been greater, which should be a concern to those of you/us with greater wealth as well as those with no wealth.

A country that ignores its dying middle class is never a country that lasts – even for the wealthy.

Meanwhile, the Fed is now dropping hundreds of billions in what was once a “temporary” repo bailout of big banks like JPMorgan that has now morphed into a full-time repo bailout.

So much for “temporary.”

Remember when Bernanke said the QE1 bailout was “temporary” and to be completed by no later than 2010?

Pure lies. Pure panic.

And now, with another $60 billion per month in more Treasury buying, the Fed is telling us this is not QE?

Even more lies. Even more panic.

The Rest of the World

And as for outside our borders, the world (drowning in over $250 trillion in debt) is seeing something it has never seen before: over $15 trillion (!) in negative-yielding debt (where investors holding bonds to maturity are paying to lose money).

Again, you can’t make this stuff up. It’s insanity.

Solution?

More debt, and more interest rate cuts and more money printing, as we are seeing from Germany to Australia, just two more of countless other countries on the cliffs of a recession.

More insanity.

Hitting a Wall

But such rate-cutting and money-printing “stimulus” is just a fancy term for can-kicking.

Unfortunately, however, those cans are beginning to hit a wall, as the “stimulus” is now just barely keeping global markets temporarily afloat rather than surging forward.

Dollar shortage risk is everywhere, and other central bankers are recommending a new reserve currency.

At some point, the central bank steroids won’t have any buzz left – and then it’s game over.

For now, markets are up again, which is no surprise at all, thanks to more QE.

And yet with all this reality staring the world straight in the face, we still see guys like Adam Neumann trotting around the globe like entitled princes, hypocritically worrying about the environment, while burning through jet fuel and soaking in a private ice bath as investors get slaughtered.

That’s not my father’s capitalism, nor my grandfather’s.

That’s something far worse.

In fact, it’s not capitalism at all.

Rather, it’s a symptom of decadence – the kind of decadence I’ve seen firsthand and the kind of decadence that precedes every fall.

In short, if you’re looking for a leading indicator, look no further than WeWork…

Sincerely,

Matt Piepenburg


Comments

13 responses to “The One Company That Tells You Capitalism Has Left the Building”

  1. Nice article, thank you. Like many people, I am nervous about stocks and other assets, but usually when enough people are nervous, they hold up at least for a while. So, perhaps not time to panic yet?

  2. FANTASTIC ! Way to much common sense for the average investor and non-informed brokers, most of whom act like Adam Neumann, rather than worry about making money for their “clients.” As you said, it is not going to end well.

  3. I had guessed that WeWork was the company that you were hinting would be profiled in this column- I think that it was rather easy to guess. I currently don’t see a way out of the government, business and personal debt morass; excessive government spending; non-QE, which really is QE; low interest rates, ZIRP and Sub-ZIRP. Both political parties in the U.S., and nearly every government in the world spend more than revenues garnered and finances debts in large quantities. Changing the trajectory of these policies seems impossible. There won’t be accountability until there is a crisis. The world is good at ignoring the problems, then over-reacting. I don’t want to see government redistributing wealth to address wealth disparity. Of course, it is a noble goal to want everyone to succeed, but at what price and with what policies?

  4. Great insight and understanding for the undisclosed misadventures under acknowledged and the misery that entails. Thank you, for the information.
    Hopefully, the Charades will be revealed and properly adjudicated.

  5. There is a solution, America’s Big Solution, the FAIRtax bill HR 25 now in the Ways & Means Committee. HR 25 ends the present income/payroll tax system and the repeal of the 16th Amendment (direct taxation) that supports and enables socialism while undermining and discouraging capitalism. Without capitalism there is no freedom. Learn about and join the cause for real/true replacement federal tax reform at fairtax.org

  6. Matt,

    This is some of the best reading in a long time. Thank you for writing. Thank you for calling BS and with a slice of humor to ease the “pure insanity.’

    -JB

  7. Neither democracy nor capitalism is possible without a fair, functioning, respected, dedicated and ENFORCEABLE legal system.
    In all of history the only alternative – what we are now facing – is political dictatorships and central commanded and directed economies. In other words, various forms of what is really nothing more than age-old tribalisms of various types. If you want to see what lies ahead just take a gander at the beauties in the Middle East.

  8. Pure insanity and decadence. Pretty well sums it up. If history is a guide, it is not likely that we will reverse these trends anymore than our predecessors over the last 6000 years or so. At some point there will be a re-awakening to the principals which built our former prosperity without the illusion resulting from debt on debt.

  9. Matt:
    I wonder and worry about my fellow Americans that do not know and will not be prepared for the swell of toxic seas set to flood our land. Your work is so important. Is it worth connecting people in the same geographic areas (that are willing) to make contact, compare notes, strategize, and provide support? There may be no interest, but we all have different levels of knowledge, ideas and concern so some might want to share. The best benefit might be we make some solid new friends.

  10. Too bad more people don’t see the Pink Elephant in the room and the few that do are feeding it peanuts out of delusional greed, profit, and unearned/unethical gain!

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