Ep.85: Why Credit Suisse Is Not The Next Lehman Brothers & Elon Musk's U-Turn On Twitter

Hello and welcome back to episode 85 of The Market Maker. Good to be back. Um, I've returned from my lair. I've topped up my trading account P&L for the year. So, um, nice to see that, you know, there was a little, little shake-up in markets over Credit Suisse, um, at the beginning of the week, but it was okay. I'd already covered that trade from the prior week. So we're all good.

Basically, you got— because I'm just looking on the S&P chart, um, and of this sell-off we've had in the last few weeks, the low so far— I mean, you know, it's maybe there'll be another episode to the downside, but so far the low was at 1 AM on Monday morning. Okay, that's the low. And then just At 8 AM, which is when Anthony Cheung gets back to his desk—

which is why I looked a little bit bleary-eyed on Monday morning, by the way.

Yeah, then the S&P started rallying and has basically spent 2 days just sharply bouncing, and then it's kind of gone sideways since then.

But yeah, so I tend to do the Goldmans, you see. I come on the pod, I talk up equities. Yeah, shorted it aggressively last week, and then I closed my short on Monday, obviously, and then we bounced back for 2 days solid.

So I've got— so any listeners, I've got access to Anthony Cheung's holiday calendar, which I actually now see as incredibly valuable information. I'm sat on here, so if anybody wants access to that information, then I'm going to start selling it. So I'm selling access.

Yeah, if you want to do any pre-positioning, I might or might not be away from the desk on Wednesday next week.

Oh, there you go, someone said.

Um, but let's, let's talk about, um, this week, quick summary of what you can expect from the, the conversation coming up. And Credit Suisse, big talking point obviously at the beginning of the week, more so Um, is there a serious reason to be concerned? That's the main question that the markets had. Or was this just a pure case of scaremongering that was going around the market? So we'll discuss. Also, Elon Musk thrown in the towel, or has he? He has revived his commitment to buy Twitter at the original price of $54.50. Obviously a sharp premium. Their shares spiked more than 20% when that headline came out midweek. But why the turnaround, and why now, and who are the winners and losers of this ongoing saga? And we'll, we'll delve into that. And then our third topic we'll talk about is OPEC. OPEC+ cut production by the most since the onset of the pandemic, 2 million barrels per day, much to the frustration of Sleepy Joe, who's got 4 weeks until the midterms, if you can believe That is just around the corner and worst possible time. And we'll have a look at what does this mean for US, Saudi, and Russia relations, because I think we're at a really important juncture now in terms of what happens for the global powers who control the world's most important commodity, essentially. Um, and we'll have a look at that. But before we begin, I did notice while I was away Spotify reviews top 300 So, which was, um, a target for the community. So well done to everyone, Piers and Stephen as well, for, for covering, getting—

well, that's what happened, wasn't it? There was a big spike in, in ratings when you weren't on the, on the episode. That makes sense.

Yeah, but yeah, some, some might say, um, so yeah, super appreciate that. Um, it does only take literally a couple of seconds on Spotify just to hit hit the, the star rating. So if you do enjoy the episode, it'd be much appreciated. It really does help get it out to as many people as possible. And also this week we have also released the Finance Accelerator, a brand new one, an ESG simulation. So do check that out. Check the show notes if you're watching this on YouTube, on Spotify and Apple. I'll drop the link there. It's basically the Finance Accelerator on AmplifyMe.com. It's absolutely free. Encourage anyone and everyone, regardless of background, to just give it a go, see what it— see what it's like to really apply ESG in a practical sense. I mean, you hear about it all the time, but what does it mean to actually manage an ESG portfolio? And that's what that simulation is geared up to represent. So first thing then, Credit Suisse, is it the next Lehman Brothers? That was the big headline on Monday, and I was a little bit like, whoa, whoa, whoa, whoa, whoa, whoa. You know, you obviously weren't around during the Lehman episode by throwing that one out. Um, but is it an appropriate question to ask? Um, and I saw one good comment from this one guy who said, um, he says it is an appropriate question, but you'd also do well to remember that Bear Pawne is as addictive as junk food. I thought that was a great quote. And he's right. I think everyone loves a bit of bear porn, right?

Right.

When you get excited about seeing the world burn, that stuff goes like wildfire, doesn't it? And that's what it was like. I mean, on Monday it was crazy. Um, so to give people a bit of background. I mean, it's not a new thing. Credit Suisse has been—

we still talking about bear porn?

Credit Suisse, well, if you're a, if you're a short seller, yeah, Credit Suisse is like your number one show because for a long time they've been going down for all kinds of different reasons. But essentially there was an Australian Broadcasting Corporation, an ABC business reporter called David Taylor I'm sure he's had a pretty tough week, uh, dear David, because on Saturday he basically tweeted that, quote, a major international investment bank is on the brink. That was it, his only comment. That tweet went absolutely parabolic and it fired up the WallStreetBets mob and they ran with it. Even Dominic Cummings was running with it. Oh God, if you remember from Boris Johnson's days. But then the Wall Street Journal picked it up. They heard it on the Street column. It's a very, um, well-known, well-followed column in the Wall Street Journal, particularly in the— based in the US. That started playing the, the same kind of headline. What it led to was on, on Monday, their shares got hammered, obliterated. And it all came on the back of Friday's statement from the CEO, who reassured staff not to confuse day-to-day stock price performance from the Swiss firm's strong capital base and liquidity position. And what the Heard It on the Street guy did is he tweeted with an exact Lehman Brothers statement months before they went bankrupt, and then also the CEO from Credit Suisse's statement, and they were identical.

Oh God.

And he was like saying, uh-oh, I've seen this before. And the shares obviously tanked about 10% The credit default swaps just went a bit bonkers. I just wanted to talk about that. One thing I heard one person say was, again, to help fuel the fire, someone said, "The problem with CDSs is it has the word default in it," which I thought was a really good point because I'm not talking about professional market participants. I'm talking about like the mob.

Yeah.

And the fact that there's a default word in this and it just, just helps the cause, right? In terms of getting it, getting publicity over the movement. But just talk to me a little bit like what actually happened here in regards to the credit default swaps. What is a credit default swap? How do they work? And I know that there's, was a lot of focus about the CDS curve being inverted. So what are people talking about when they, when they mention that?

Yeah, so I mean, in simple terms, it's just insurance. So if you're an investor and you own Credit Suisse bonds, right? So that's— you own their debt. So you're a lender to Credit Suisse. Now, if you're worried, well, so you've got risk then. You have got default risk if you own any bond. You have default risk. That's because there is a chance that the borrower might go bankrupt. Right now, generally speaking, the— well, so we have a whole range of different kind of borrowers, of course, and they're rated and they have credit ratings, and we have super A, you know, AAA rated, and that just basically means that the chance of them defaulting is next to zero. But there's never a zero, right? You can never hit zero. But mostly the risk is very small. But you can still buy insurance, right? Because there is still a risk. So I want to buy some insurance. It's like owning a car, any insurance, house insurance, whatever. And what you do as an investor, you can buy insurance against default and you just pay a premium. And it's called a credit default swap. We were talking about swaps. Last week. This is just another type of swap where you, the bondholder, you find a counterparty, which is typically a bank, right? And you do a deal where you— so the bank writes this credit default swap, which you buy, and then you're paying a premium to the bank like an insurance premium. And then that premium gets paid paid and paid. And if there is a default, well, then the, the person who wrote that credit default swap for you, they're liable to refund you all the money. It's like if you crash your car, then the insurance company will pay out, right? And they'll give you the value of the asset that's now worth nothing. So that's what all this is. It's, it's a, it's a kind of default swap where you get paid out in the event that the borrower defaults. Now the cost of it, right, the premium paid, this varies. And of course you'll pay a higher premium if there's a greater risk of the borrower defaulting. Okay, like if you're a 20-year-old male, it's more expensive for you to insure your car. That's because the stats say there's a higher chance you're going to crash it. Compared to a 70-year-old lady. Okay, these are the, the stats, right? So the premiums change. Now, what happened on Monday with Credit Suisse's, uh, uh, CDS pricing— well, they just went through the roof. The premium cost of CDS just spiked and spiked because there was some perceived sort of idea that all of a sudden the risk of Credit Suisse defaulting had suddenly ramped higher. And actually, if you look at the— and then if you look at the curve, because when we talk about the CDS curve, this is like insuring against default over different time periods. And normally, the longer the time period, then the higher the premium, the more risk there is, because you just can't see that far into the future. So you can go to 5 years or 10 years out. And it's the, you know, the risks are greater because the visibility is less. Okay, so normally you'll have a curve that's rising, and the longer you want to hedge that default risk, the more it's going to cost in premium. But what happened on Monday is the curve inverted, which is an unusual event but always happens when you get a moment in time where all of a sudden the perceived risk of default of an entity suddenly ramps up. So the point is that the, the 12-month credit default swap, um, ramped up to— it got up above 500 basis points actually, which to put into kind of simple terms basically meant that the CDS was basically, in basic terms, was saying that there was about a 25% chance of a default in the next 12 months. Okay, now, so the, the 12-month CDS went above 500. At that moment in time, the 5-year CDS was trading more like 350. So right at that moment in time, it was cheaper to insure against a default in 5 years than it was to insure against the default in 12 months, which is entirely you know, not, not a normal scenario. Um, and yeah, it was just a reflection of the panic.

Yeah. And the context for numbers there, when you said the 5-year CDS was like 350 basis points, we were around 57 at the beginning of the year, right? Yeah. So that's not to say we jumped from 57 to 355 or 360, but just to give you a bit of idea about where we've come over the last several months for Credit Suisse has just been hit by multiple issues, uh, in that sense. So, so what makes Credit Suisse different then to Lehman's?

Well, there's a couple of key points here, and like the question at the top of the show, is Credit Suisse the next Lehman's? And the answer to that is very simple. And the answer is no. And there's a number of factors. For example, I think I was talking about this a few weeks ago, but Credit Suisse has deposits, right? It's a bank and it has deposits. And this is on their kind of balance sheet. Lehman Brothers didn't. Lehman Brothers was one of those kind of old school broker dealers where they didn't have depositors. That kind of all got— and I was talking about how Lehman Brothers went bankrupt, and prior to that you had Bear Stearns and Merrill Lynch. And then the other, the other two of the big five, um, dealer, you know, brokers were Morgan Stanley and Goldman Sachs. And the only reason those two survived is because in 2008 the US government basically forced them to take on a commercial banking license. That then meant that they're privy to much greater regulatory oversight. But in doing— in taking on that license, they then had access to the Fed's overnight emergency lending window. So the point is that Credit Suisse is different. And look, I've mentioned regulatory oversight. I mean, what's happened in the fallout from the financial crisis? Banks have been forced to address their capitalization issues. And banks these days are way, way, way better sort of capitalized than they were back in the crisis in 2008. The liquidity of that capital they have on their balance sheet is much greater, meaning— and look, they get stress tested all the time, right? Literally every year they're stress tested where the regulator puts each bank through a fictitious disaster scenario and measures whether or not their current capitalized position is strong enough to survive it. And every year they're stress tested. And if they fail the stress test, then they're forced to address their lack of capital. And so—

And just to put that in perspective, because I'm conscious of the fact that many students listen to this. This didn't happen as a practice prior to 2008. It just didn't.

Yeah.

So there's much more of a safeguarding measure in place now in order to offset the risk, the systemic risk nature of, you know, the uncertainties that was you know, at the core of the issue during the financial crisis.

And you've said systemic risk there because the final point, I guess, on this is that Credit Suisse are too big to fail.

Love that.

So this, you know, Lehman's apparently weren't too big to fail because, well, they failed, um, uh, obviously then triggered a monster crisis. But I guess The lesson from that was that, right, we can't let these massive financial institutions, we can't let them fail because they're too much of a systemic risk, meaning that if they failed, then the economic fallout from that would be massive and cause way more damage than it would cost to bail them out. And this is where depositors and average people on the street would get hurt if the bank fails, and the economic fallout would be a disaster. So it's actually cheaper for the government to bail them out. You could say there's like a moral hazard with that, but it's the lesser of the two evils. So that's always the route that would take. And there's about— I was having a look actually. There's something called the Financial Stability Board. And they have a list. They update it. I can't see the frequency, but I think it's annually. They update the list. And on that list, there are 32 banks. And what they do, their job is basically to say every year, who are the banks— this is globally— who are the banks that are systemically important financial institutions? And yeah, I mean, Credit Suisse are on the list, um, as you'd expect.

So yeah, I mean, so between now and then— well, I say then, then being the announcement of the new strategic plan that the CEO of CS had said would be coming in 20 days' time from today, so 27th. So can we expect more fluctuation in the CDSs between now and then, or is this kind of the worst is over, the dust will settle now, and the market's interest in this will move on?

It's a good question. I think Monday was the peak, peak fear, where I think it was a media-driven storm where, you know, right, what, you know, when this— when these things suddenly explode, um, most of the world, or certainly the retail investment community aren't educated enough on the kind of finer nuances and details and the complicated kind of technical side of all of this. And so they see the headlines and they panic and they react, right? That's what happened on Monday. Then it's like, all right, all of a sudden now there's now a huge wave of analysis into this situation and it's headline news and it's front page news. And then you can start to read into it and it's like, well, okay, when you kind of delve into it a bit more, you know, it becomes quite clear that they're not Lehman Brothers, you know, they're not going to go bankrupt. And then people are more better educated about the situation and things calm down. Now, I'm not— by the way, I'm not saying necessarily that this is Credit Suisse's— this is the bottom for them, you know, they've still got a long way ahead in terms of their restructuring. But I'd say from a market point of view, certainly on the CDS side at least, um, I would, I would be very confident that that was the peak, um, episode.

Yeah, share price-wise is maybe different, but yeah, I mean, my job for, for many years, as you all know, was just to do market surveillance. So basically like monitoring the news, and, you know, I remember doing some rough back-of-napkin maths, and I think I've watched markets literally minute to minute for over 30,000 hours in, in the role of aggregating information. And there's definitely something— it's hard to teach or hard to nail down in terms of the structure of it, but I, I always think to myself, when is the market most susceptible to rumors? Because my job was to always think several chess moves ahead, and it was kind of like okay, so when I hear these murmurings on the street, how validated do I think that they are? And what's the context at that point in time to how susceptible market conditions would be to accepting perhaps an illegitimate overplay of a certain, you know, rumor, for example? And definitely I felt that on Monday. Yeah, it was getting really hammed up, and it was dropped right in the point where people are talking about a monster housing market crash and mortgage rates hitting 6%, the cost of living, and then the energy stuff and inflation and rates going up. And it was just like the prime time to just drop in a massive bombshell if it were true.

Yeah.

And the market kind of fell for it in that sense.

Yeah.

Um, but yeah, it's interesting.

From a share— let's just quickly on the share price front, because obviously we're talking about credit default swaps and premiums and stuff there, but from a share price point of view, I mean, the Credit Suisse share price has had a shocker of a year. And, and indeed it's had a shocking few years, to be honest. But it's trading down right now at €4— not, not euros, sorry, 4 Swiss francs, 4.51 Swiss francs. Okay. Um, but at the— if you go back a couple of years, well, 18 months, start of 2021, it was trading at 13. You then go back 2018, it was trading up at 17 Swiss francs. Go back to kind of 2013, '14, it was up at 26. Swiss franc. So we're talking about a multi, multi, multi-year downtrend here, kind of quite reminiscent to Deutsche Bank. I think if you're going to compare Credit Suisse to a bank, don't pick Lehman's. That's quite an ignorant kind of comparison, I'd say. Pick Deutsche Bank. I mean, that kind of went through this sort of very long-term painful, you know, restructuring. And, you know, Credit Suisse are in— are on that journey. So like, from a share price point of view, on Monday it kind of obviously dropped super sharply, and it dropped down to 365, let's call it. Um, it's now bounced back up to 450, so we're actually quite a long way off the bottom. But I'd say, you know, whilst I'm confident that that CDS premium reached its zenith on Monday and it will never get back to that point. With the share price, um, I'm definitely— I'm not prepared to say that Monday's low is the low for the Credit Suisse share price. I'm not sure that's necessarily true. I think we're on a multi-year downtrend. Did Monday mark the bottom of that like 8-year downtrend? I think it's too early to say, and, and, and that will depend on how well executed the ongoing restructuring plan will be.

Um, yeah, I'm just thinking from an investment perspective, I agree on the too big to fail, and that was evident with Deutsche at the time, which felt as precarious as now. And I remember that crossing €10, I think, at the time, and, and it was like, oh, quite tasty to maybe, maybe pick up, hoover up some. But then it's about the payoff over time. It's just, I can't see it in terms of a long-term— I mean, watch Deutsche as a reference point. I guess Deutsche— what was the low in Deutsche, like 6 or 7?

So let me have a look at that. Yeah.

And then where is Deutsche trading today? And that was 2016, was it, when all that was going on? So we're several years down the line.

Well, it reached, uh, well, yeah, it dropped below 10, didn't it? It's now trading at €17. Let me see if I can get my chart.

So it's definitely doubled from the low.

Oh yeah. Oh yeah, more and more.

Yeah, yeah.

Um, so let me just see, the low was at €7.80.

Yeah.

Um, and that was in— well, that's 2009, sorry, actually. And then, uh, again in 2012 it hit back, yeah, around the €8 mark. So, so yeah, it's doubled off its bottom. Yeah.

Okay, so doubling over a decade.

Yeah, yeah.

All right, well, look, let's move, move the show on and let's talk about, about your favorite person.

Well, if you want to double your money in like 8 weeks instead of a decade, then, uh, Carl Icahn has almost done that.

Well, yeah, we'll get, we'll get to Icahn in a moment because he is Yeah, he's pulled off a nice little trade for himself during all this debacle. But Elon Musk revived his bid to buy Twitter, um, at the original price, $54.20 a share. Um, a little bit suspect on the timing, which we'll talk about because it came before his trial date. Um, so shares shot higher, um, on the back of this. I was just looking this morning, Twitter are now trading just under $50, I think, at the close yesterday. I think they popped. Yeah, to, to toward the, the offer price. Um, on the actual day this news came out, Musk's legal team was getting the sense that the case was not going very well. Um, the actual court's location and the judge, uh, Kathleen McCormick, sided repeatedly with Twitter in pre-trial rulings, according to people familiar with the matter. Um, some of the most personal discovery stuff was still yet to come. Musk was set to be deposed on Thursday and Friday next week by some of the country's top lawyers on behalf of Twitter. So kind of gives you a bit of an overview about why now. But what I wanted to delve into, and feel free to chip in as I go, Piers, is like the legal strategy, the trial in itself, the financing of the deal, because there's definitely some investment banks on the hook here, and then also who are the other unknown winners, or, or very well-known winners, as you've just mentioned one, the activist investor Carl Icahn, and how he's involved in this. So the legal strategy, I think Musk and his lawyers seemed in a fairly straightforward defensive strategy, and that being let's just make this litigation as messy, unwieldy, as protracted as possible by creating the appearance of as many factual disputes about the bots, the core business practices. They had that whistleblower come out just a few weeks ago. They were throwing everything at it. All of that seemed like a settlement strategy with really two components from some legal writing that I was, I was reading the other day. They said one, obviously, to try and increase Musk's relatively low odds of success at trial. So the more you can throw at it, As he's done, the worse it looks for Twitter, and it would just might notch up his probability of, of going his way. The second thing though was to increase the— and this is what I think the much more strategy he was going down is to increase the business and reputational cost to Twitter that a trial loss would have for the company and what it would entail. Therefore forcing Twitter to settle the case at a lower sale price rather than cause more damage to themselves. So you're basically playing this legal system in order for them to go, okay, okay, enough. It's really hurting us. And it has their share price. And not just the share price, internally their workforce is in total disarray as a business. And so force them to swallow the pill. I'm not gonna say the pill because that brings up poison pills and we get all stuck in that again, that forced them to basically compromise. The problem with this strategy though is that you essentially need both point 1 and point 2 to happen. So your odds to rise and also Twitter to believe the reputational cost becomes too great. But the judge in the case has maintained, pretty impressive control over parties in the litigation, mostly by not indulging a lot of Musk's quite absurd broad discovery requests. Uh, otherwise, the problem you have here if you're Elon is if you can't make headway on these two strategy points, you're basically trashing the company. You're going to be forced to then buy and run So you're basically making it worse as a company, and then you have to step in and actually take over. So it's kind of, um, self-defecating in that place. But yeah, let's talk about the— a couple of other things. So the other thing tied to the trial was that Musk was on, um, was on schedule for a multi-day deposition. And you've probably watched Netflix, right? A million different programs. When they do a deposition, it's brutal. Well, if you've ever seen like a Netflix one of like Bill Clinton or anyone like that, um, you know, it's not a pretty sight, uh, certainly for the person in question. And it could generate more unflattering revelations, particularly of someone of the character of Elon Musk, and about— and, and give you insight as to how he works. And I think that's a lot of the special sauce for Elon. About how he actually thinks. And this would— you'd have to bring all of that out into the light. And it's not been a good week. There've been headlines regarding Tesla this week about women, women being abused in the workplace at Tesla. It's come after a summer where there's been reports of racial abuse at Tesla. Then you go and throw him in, in deposition for 3 days, I think it was, I just think that he's obviously made a decision that not only is this going to be unpleasant and ego bruising, if the trial being covered by all— and it will be— major media outlets, the reputational risk, it's just not worth it. Yeah, because he's running the world's most expensive— oh, one of the world's— I was going to say the most expensive car maker, scrap that— one of the world's most valuable companies.

Yeah.

And so why run that risk? Um, so that's kind of the, the sense of the deal. The other side of it, well, he's actually said that now— I read yesterday that it's because one of the people who are going to be doing it had COVID and he wants to delay it because he doesn't want to catch COVID So he's, he's just great. He comes out with everything. Um, but the other thing then is, and maybe you could add some color on this is that Musk has also— so again, it's all delay tactics here, and I must stress that a deal is not a deal until it's a deal. And for Musk, I mean, he's already pulled out the, the COVID card. Now he's pulling out the fact that his offer is contingent on receiving $13 billion US in debt financing He hasn't said that. That's according to people familiar with the matter. So what's he talking about here? Yeah, and why is this important?

So that's, that's the key. Basically, what's his strategy here? And it's either what you've just said, it's like, enough, you know, I want to save my reputation, I don't want this dragged through the court, let's just sort it, let's just, let's just, let's just buy this thing and get on with it. OK, or it's delaying tactics. And there's a very key moment in time, and it's April 2023. I actually don't know the date in April, but in April 2023, because basically after this deal was signed, and the problem Musk has is he's going to lose in court. If it goes to court, he's going to lose.

Fact.

This contract that he signed, it's bulletproof. And the lawyer who's on this has history of sitting on these cases and always siding, always, with the company that's being bought and forcing the buyer to honor the deal and go ahead. He's going to lose if it goes to court, right? But there's one thing in the contract, it's basically, He has to buy Twitter at that valuation unless— or it's dependent on him being able to get financing to buy it. He can't buy it if he can't get financing. He doesn't have that amount of money in cash in his bank account. He's the richest man in the world, but, you know, these assets he owns aren't that particularly liquid, let's say. So he can only buy it, the courts can only force him to buy it if he can get the financing. So the financing, there's various parts to the financing, but part of it is $13 billion of bank loans. Okay, now this was all agreed back in the summer. Okay, all these banks, yep, we'll give you XYZ. You got banks like Morgan Stanley who are one of the bigger players in this kind of $13 billion of debt. And they've all signed up, they all signed up in the summer. 'Right, let's go for it.' Okay, and they are on the hook. Basically, the, the agreements that Musk made with the banks, basically they expire in April 2023. The banks have to provide this financing as agreed unless time goes on and the 12-month period lapses, then the banks can walk away. So one strategy might be that Musk is trying to push this to April 2023. I don't know how he's going to manage that though, because that's a long way off. But if he can get it to April 2023, the banks walk away, the financing is not in place, he doesn't have to buy. Um, and the reason on the debt side of this is obviously since the summer, debt markets have collapsed. And the idea that the banks signed up to was, right, let's lend Elon money, then we'll just sell that debt to our clients and other investors. They'll kind of basically pass on the risk, right? But no one's going to buy this debt off the banks now. The debt markets are in serious trouble. You know, the kind of risk premiums associated with this kind of, you know, debt has gone through the roof. And so you're gonna— these banks will really struggle to pass this on. So they're going to have to sit on this debt themselves, um, which they have to do if this deal gets forced before April 2023.

Yeah, and I was reading about Morgan Stanley would be super reluctant to not go ahead on their, on their promise of what the deal is at the moment because of reputational risks for them, right, for future business.

That's right, there's a kind of legal and a reputational side to that. The Musk bank kind of deal with the financing. So yeah, they can't really walk away unless they manage to get to April next year, and then they can.

So everything you said, it reminded me of a podcast I was listening to, and this was absolutely not intended, but I was listening to a podcast about negotiation tactics.

Yeah.

Because I find them quite useful for workplace, but also for understanding markets more so because a lot of it is negotiation, particularly in M&A, of course. And yeah, and this one guy was saying that business negotiations break down when a price is fixed. And the reason why is because typically what happens from a behavior point of view, as soon as the price is settled, the other side, they basically let their guard down. Then that's when— and this guy said the perfect case study of a person who's done this as a strategy over and over and over again is the famous activist investor Carl Icahn, who thrives on the idea of the devil is in the detail. He then, in this situation, he's done it before being an activist investor, is once the price settles, he then starts to get interested. Because then he starts to look at the fact that everyone goes, oh, that's it, the deal's done. And he starts looking at the devil in the details. So yeah, he, he's got a bit of involvement in this as well, right? Carl Icahn. So what, what's he been up to?

Well, when, well, when Musk pulled out, well, of course, he, I guess I should say, tried to pull out in the summer. Musk said, deal's off. You know, Twitter, you've lied about the number of bots. You know, your company's not as valuable as the price we agreed because revenue— advertising revenue potential is a lot lower than I thought it was based on you telling me only 5% of users are fake. It's more like 20%, might be more, right? And Musk was saying, you can't— you're not measuring it properly. I, I I'm out. Right. So the share price collapsed because everyone's thinking, right, okay, well, the deal's off. He's not going to buy it at $54 per share. And so it collapsed back down to— where did it get down to?

About—

in the summer it went down to $32, pretty much. It went down to $32. Right. This is where Icahn comes in because the devil's in the detail. So he got at the contracts. Well, I don't know if he actually— I don't know if it was publicly available, but anyway, he's aware of obviously these kind of M&A kind of deals, and he made the bet that Musk can't pull out and that actually legally he is obligated to buy at $54. And so Carl Icahn started to buy Twitter shares, um, in their 30s. And when I say buy, He bought $500 million worth around about— we think his average entry price is $35. Average.

And we're trading at $50 as of today.

We're now trading $50. So he's just made $250 million in this Twitter. Now, I don't know whether he's— because the share price hit $52 yesterday, and then it kind of came off into the close, right? He came off to $49.39. I don't know whether— I'd expect that he's now selling.

Yeah.

Because there's not much point holding out to $54. He's made most of his possible profit. Now the risks are actually skewed the other way, where Musk might be delaying it and trying to get to April next year. And so he's basically— so it's most likely he was selling. Right, which is what's brought that price back down below 50 into the close. Um, yeah, so he's— he'll bank around about $250 million from this trade.

Decent, decent. So there's also the vultures on the sidelines who are picking away at the bones of this as well. And, uh, not to belittle the legal industry, but there's other people making some serious dollar on this. Yeah. So there's more than— well, there's a couple of number game guesses here then. So how many lawyers do you think were admitted to Delaware Chancery Court to represent both parties?

Okay, total combined from both sides?

Yeah, billable lawyers. Wow.

Um, I'm gonna say— what, I reckon 15 on each side? I'm gonna go 30. In total?

70. Oh, 70 were submitted, um, with all the lawyers in the case and also the potential subsequent knock-on further litigations that could come on the back of this beyond this deal but associated to it in its aftermath. I read this one, this one very well-recognized professor at Columbia University specializes in M&A And he said the predicted value of the total legal fees on this one case, $1 billion.

What?

$1 billion?

You are kidding me.

Legal fees. That's just insane, isn't it? And so let me, let me, let me throw you some more numbers.

How much is that per lawyer?

Well, no, no, no, let me, let me throw my numbers at you first and I'll answer that question for you.

Ah, okay, go on then.

Some top-tier attorneys, um, on an average basis, if you want the top guy, how much do you think he bills an hour on an average?

Oh, top, top, top guy, what, £1,000 an hour, maybe more?

$1,700 an hour. Yeah, so talking like 30 bucks a minute. Yeah, so in August 2022 So the current state of play, yeah, the US average hourly earnings for all employees, United States of America hourly wages average works out $11, right? The lawyers in this case are making that in 20 seconds. Hello, my name's Anthony. I'll be your lawyer for today.

Ching!

Pretty cold outside.

Ching! Ching!

It's an hour's work.

Yeah.

So yeah, they're also making a decent—

I've worked it out. I just did some maths. If it's a billion and there's 72 lawyers, did you say, that's $13, basically $14 million per lawyer.

But you know what? I actually read that they're really upset about this. And you know why?

The lawyers, um, gone.

They want it to go to trial.

Well, yeah, well, no, because, well, if, let's say, if Musk, he could get the trial postponed, in which case the lawyers are going to be pretty happy with that situation. Yeah, I guess worst case for the lawyers, Musk has just gone, you know what, enough. I'll buy it. Let's move on.

Exactly.

Yeah, yeah. Oh no, well, I was looking at it because I, I actually think— I do actually think if I was gonna bet, I think Musk has just gone, enough, let's just, just get on with this now. Um, because, you know, um, I was looking, he tweeted, um, earlier this week about, uh, he mentioned X. Yeah. In a tweet on Tuesday. Now, the letter X has a very important sort of position in Musk's life. Not only you might think SpaceX, but actually if you go back to his early days, he— his second business, because his first business was something called Zip2. Which was an online directory of local businesses. This is in 1999. He sold Zip2, that was his first business, to Compaq for $300 million. He then set up X.com and that was his URL, X.com. Okay. And it was an online bank. And he set that up in 1999. Then that actually merged with a competitor called Confinity in 2001, and then they rebranded— you might, you might have heard of it— PayPal. Um, they then sold PayPal for $1.5 billion in 2002. It's not bad because he set— hang on— he set up X.com in 1999, merged, sold it in 2002 for $1.5—

that's incredible—

bill. Um, he made about— he himself made about $180 million out of that. Then he started Tesla. And he used that PayPal war chest to start Tesla. But interestingly, in 2017, he bought x.com, the URL. He bought it back off PayPal in 2017. And he said at the time, look, nothing major here, guys. Just buying this. I'm not going to do anything with it yet. I want it back. And he's tweeted X earlier this week, right? And everyone knows that what he wants to do, or one of the ideas behind— one of X.com originally was really become this all-encompassing platform like WeChat is today, right? Where it's a messaging system, it's an e-commerce platform, it's a payment system, it's everything all in one. And he's been quite critical, if you read his autobiography, that was published 5 or 6 years ago. He was saying, you know, why aren't PayPal— why aren't they doing this? Well, it's, it's a no-brainer. They should be moving in that direction and becoming the WeChat of, of the West, and they're not. And then he bought X.com back, and these— I think his idea with Twitter— all right, there's the whole freedom of speech thing that he was peddling, but I think more than that, he wants to really create the WeChat that's not in China. And maybe X.com is his plan. And I think, yeah, sure, he's going to have to pay more money for Twitter than he would have liked. But he said this week, look, Twitter is a good first starting point for this X.com plan. It'll probably— I could just start from scratch, but buying Twitter will probably save me about 5 years. Is what he basically said. So I actually think, I actually think he's moving ahead. He's going to buy it, and X.com is coming, and the X app will be a WeChat rival. And who knows? I mean, he has got a reputation of doing pretty well, kind of running or starting businesses. So yeah, it could be that fine, he's paying a massive premium because M&A deals, on average, the average premium you pay on an M&A deal is about 30% above the existing share price. So if you think that, what is the price of Twitter? Well, it was in the 30s, right? 35, let's just call it 35. So 30% premium on that is in there— what is that? It's in the kind of 40— yeah, mid-40s, right? So let's call it $45 might be the price, but He's paying 54. So yeah, he's paying a premium, but if he executes, I mean, the value of this thing could be way north of that in the years to come, right?

Yeah, yeah. And you look at all of this and go, oh, what a great— what a smart move. All of that, that episode of trying to take over Twitter. But look, I find it hard to talk up Elon Musk, so let's move on. Uh, final one, we'll try and keep this as, uh, fairly brief just to wrap the show. So OPEC+, Saudi Arabia and Russia, lowered its collective oil production target by 2 million barrels a day. That equates to roughly 2% of global consumption, um, earlier this week. And from a trading perspective, that number was actually in line with expectations, albeit that expectation had moved through the week I think we originally started, uh, last week around a million was expectation, and it started to leak out into the market, the discussions that were happening, very typical of OPEC. And so the market, the oil market, was already rallying through the week at the point when the meeting actually took place, and they delivered on that, uh, 2 million marker. Oil is trading on the front foot still. So despite, you know, the risk inbound doom and gloom recessions headlines. Oil's now heading to $90. A lot of people think that's where Saudi wants it, in fact above that, in order to pay for a lot of their diversification that's been going on and will do so over the long term. So a couple things here then. Um, one thing I saw was Saudi Arabia's energy minister, um, Al-Daluis bin Salman, He suggested the group did not want to repeat the recent mistakes of central banks, which he implied had erred by not reacting quickly enough to inflation. Shots fired. He is taking a pop at, you know, could we— we talked about this many months ago when we said that actually this guy comes from a school of thought of that it's sensible to deploy forward guidance communication to manage— not manipulate— manage the market accordingly, because it helps as an influential factor to guide price. But he's taken some, some real shots there at the central banks, who obviously markets are critical, have been very slow to react and caught off guard, and that's exacerbated the current situation. The US not happy at all about this, um, as you can imagine. And we talked about before, the White House has come out now quite vehemently and said that OPEC+ are aligning with Russia, uh, and it's damaging the global economy. Um, two names, Jake Sullivan, President Joe Biden's National Security Advisor, and Brian Deese, The top economic advisor pointed to possibly tapping the SPR, which is the National Strategic Petroleum Reserve, which they've already done. I don't know if you have any stats, but it's already, I would imagine, fairly depleted in the historical average point of view. And all of this, of course, because the price of oil is very important right now, specifically because the US midterms are happening in like 4 weeks' time. Um, so we've had months of this kind of petro diplomacy to patch up relations. The White House went on the charm offensive, if you remember. Biden was out there, yeah, after being highly critical of Saudi Arabia and their government and their dealings, to then pumping fists with MBS himself, all in an attempt to try and get them to, to do the opposite of what they've done, which is don't do this. We need price to come down because inflation's hurting the consumer, and that's hurting my, my political ability during the, during the midterms. Now, I guess a couple of points for context. Why has there been, uh, this relationship has been degrading over time? A lot of this starts from in 2019, there was a drone attack, very large scale in fact, key infrastructure in Saudi Arabia by what is believed to have been the Iranians that, that were piloting that drone. Um, and Saudi's never been particularly happy about the response that the US did as an allied country who the Saudi Arabians are highly, if not solely, dependent on from a military perspective. So This then brings, I think, kind of two key points. One, um, well, I guess one leads on to the other. The first one is the fact that you probably would have seen that Saudi's been making lots of appearances alongside China's Xi Jinping, and also within that club sits Russia and Vladimir Putin. Now, one of the problems here for the Americans is the fact that as the kingdom is looking to diversify these alliances, um, Russia was now— well, Russia and China are basically the biggest customers in that sense. So yeah, for, for crude, rather than the US, which traditionally has always been the case. The problem that Saudi have though, if they move towards which makes operational sense if you're a business. I go to my biggest customers where the demand is, so I'll go to the Chinese, for example, and thus indirectly aligning with Russia, which obviously causes Western friction in, in the diplomatic sense. But the problem Saudi have and the decision they must make is that at this point, at least, they are heavily dependent on military support from the Americans, and the Americans are the largest single biggest supplier of military equipment to Saudi Arabia, as well as an actual presence within the Persian Gulf, which is the key for the maritime passage of oil. So what do you think? Do you think that— do you think this is an important— we're coming up, and it almost feels like this is inevitable, right, for Saudi Arabia? It's coming. They're gonna have to pick a side here, Team China or Team America.

Well, it's a slow-motion pivot. Yeah, because as you said, this kind of goes back years, right? 2019. And it's a slow-motion pivot. And like, don't forget, they brought Russia into the OPEC community and called it OPEC Plus. You know, they did that. When did that happen? I mean, that was, I don't know, what, 5 years ago?

Yeah, I don't think it was too long ago, but yeah, a couple of years now.

Anyway, I mean, this is, this has been coming. It's just a continuation of the pivot, obviously. Look, Thinking long term, Saudi are, have been almost entirely dependent on oil, right? And actually, I don't know if it's still true, but certainly a few years ago, I know that 87% of their government's revenue came from oil. Okay, so fantastically dependent on it, but obviously long term, we're trying to move away from fossil fuels. And actually, this Russia invasion of Ukraine and this energy crisis is just only going to accelerate that over the next decade, right? So Saudi aren't stupid. They're incredibly dependent on a commodity that's got a short shelf life. So they got to maximize their revenue generation from a commodity that's going to die. And so obviously they have to align with their biggest customer, China. I mean, it's— It makes complete sense. I mean, when you— if all you do is just put your political hat on, then fine, you can go, well, you know, this is maybe a, a very important moment in global geopolitics where we get this pivot and, and, you know, the, the kind of China-Russia axis, you know, becomes stronger with the addition of these countries like Saudi. Um, and sure, that, that, that is true, but in the end Saudi's motives, I wouldn't say are political here. I'd say they're primarily commercial. And look, yeah, Biden's gonna get pissed off, but there's nothing he can do about it. I mean, he went to Saudi in, in the summer, begged, and, um, they said, yeah, yeah, sure, Joe, no worries, yep, yep, yep. And then as soon as he got on the plane, they basically just entirely ignored it. So yeah, they've cut production by 2 million. And prices are on the up. I mean, what I would say— maybe we'll come back to the political point in a minute— but 2 million barrels a day, right? They're going to cut production by 2 million barrels a day. It won't actually end up being that much because lots of member countries, OPEC members, they weren't actually meeting their production targets. So there's an official production like group OPEC barrels per day target, right? And that official number has been cut by 2 million, but they weren't actually producing their target amount. So it'll likely be a cut, a real terms cut of about probably closer to a million barrels a day, I would say, rather than 2.

But I was just looking at the the map of Africa and the Middle East, and I was just looking at it because I like to think of it as a chessboard when it comes to geopolitics.

Yeah.

And if China is aligned with Iran, for example, which sits on the eastern side of the Persian Gulf, you've then got Saudi. And let's say, for argument's sake, Saudi flipped Chinese because the destination of crude coming out of that maritime you've then secured the Persian Gulf essentially, and then you've got the maritime route out to the, to the east through the Arabian Sea. But if you go the other way, obviously it's well known that China are a huge investor in the African continent.

Yep, absolutely.

Through both trade specifically and transportation hubs and ports. One of the other things is that then if you think about the overall bigger picture for China, um, China is the single biggest user of the Suez Canal, which has always been— so the US, when it comes to friction between nations, it's always down to trade, because trade is power and money.

Yeah.

And America have always made sure that they have control in the Suez, in Egypt, They have an influence, and also Saudi Arabia, the predominant traditional largest producer of crude oil. If then what's happening is that east of Cairo, near the Suez Canal, is one of the largest concentrations of the Chinese investment into Egypt and Africa as part of their Belt and Road Initiative, that development of that global infrastructure plan. So yeah, I think it is a pivot in slow motion, but in my mind it's a pivot that I see. It's hard to fight against the tide at this point in time because of the state of play of things like the current economic situation that's unfolding. Yes, China has its challenges, but by de facto we go back to the setup of how a democracy works compared to a communist party and how they can then facilitate long-term agendas. Yeah, it's hard to see that. And if, you know, China increasing investments in that way in these particular strategic important areas, it's— yeah, it's getting, it's getting interesting.

Yep, it certainly is. And then, yeah, I mean, this is again the, the kind of the cycle of superpowers, right? The US are in decline. They peaked and they're in decline, and we're gonna transition to a new superpower. And will it be China? And that narrative you've just given is pretty compelling. I mean, there are counterarguments, um, in the— certainly China from a demographic point of view Obviously China's got its own issues, talking like housing markets and all the rest of it at the moment. But from a longer-term perspective, from a demographics point of view, their population is aging, their birth rate is shocking, really low. And actually therefore, will the demographics of it all be actually the thing that prevents China from— and Xi Jinping from delivering on this multi-decade plan of becoming the world's superpower.

So, so my counter argument to that is, if I know that that's the case, right, there's countries like Nigeria, for example.

Yeah.

Whose growth potential is huge when looking at a bigger, wider context. They don't necessarily— to, to have influence on the global stage, they They don't— these people don't necessarily have to be Chinese.

Yep, that's true.

The end paymaster just needs to be Chinese. And so by heavily getting in now, of which, given the state of, say, the ability to facilitate that type of size investment over the long term like China has, you pump it in now and actually you use the African continent, which is untapped resource in both productivity in technological shifts through improvements in wealth and education, and you unlock what has been just a too expensive exercise in history to even contemplate in Africa. So China's, I think, prosperity comes not only from their own but through there as well, and that would then help that domestic issue that they have that you mentioned.

But Yep. And what, Xi Jinping becomes king of the world and Elon Musk is his head of communication, right?

Well, let's wrap it up there. Um, thank you, uh, Piers, and thanks for everyone for listening. Uh, as per usual, check out some of the links that I'll add to the show notes for our daily newsletter. Um, I was talking to some students about this yesterday. It's basically picking out some of the main stories of each trading day that you should really be aware of. It's really important if you're applying for internships at the moment that you're on your A-game in terms of actual commercial awareness. So hopefully that will help a lot. And then, yeah, we'll see you next week.

Yep. Cheers, Ant.

Have a good weekend. Cheers.