WeNow know what is going to happen next at WeWork. The office-leasing company’s biggest investor, the Japanese firm SoftBank, plans to spend $10 billion to acquire an 80 percent ownership stake; here is the surreal arithmetic of the new arrangement, per Reuters:
SoftBank’s total investment in the money-losing firm will rise to more than $13 billion to give it an 80 percent stake in, but not control of, WeWork, now valued at $8 billion.”
As part of the deal, WeWork’s CEO-founder Adam Neumann will get around $1.7 billion, through a mixture of new credit, stock sales, and “consulting fees” paid to him by SoftBank. He will also no longer be a part of WeWork, and this can be considered his severance package.
SoftBank has invested in WeWork through its so-called “Vision Fund,” a $97 billion pool of other people’s money, most notably that of sovereign wealth funds of governments like Saudi Arabia and the United Arab Emirates. The fact that Saudi blood money went to pay for things like Neumann’s $60 million private jet or his wife’s WeWork-branded elementary school has led to some understandable schadenfreude. There is justifiable pleasure to be taken in watching bright and shiny things shatter into a million different pieces. But this is not, as BuzzFeed’s Tom Gara argues, a victimless crime.
Working towards a unified theory of WeWork as an almost entirely victimless crime, aside from the staff who are going to lose their jobs. The $$ burned came from the funniest places, and the actually business didn't contain weirdly evil elements a la Uber or Theranos etc— Tom Gara (@tomgara) October 22, 2019
A relevant corollary to this argument comes from Matt Levine, the brilliant Wall Street columnist at Bloomberg, who argues in his newsletter today that Neumann can be compared to John Paulson, the hedge funder who earned several billion dollars by shorting the housing bubble at the end of the last decade:
[Neumann] spotted a bubble in venture-subsidized fast-growing money-losing capital-intensive low-margin tech-adjacent companies, noticed in particular that SoftBank seemed to be on the long side of that bubble, and set himself up to profit on the other side—by raising money for his own ultra-unicorn, by setting up the governance of that unicorn in a maximally self-interested way, and by selling and margining a bunch of his personal shares. When investors like SoftBank were frenziedly buying unicorn stock, he was frenziedly selling it. He set himself up to profit from the collapse of the unicorn bubble, and accelerated that collapse. Lessons were learned, and he taught them. Now he’s rich.
In this telling, Neumann becomes some kind of Don Quixote figure of private-investment markets, an oblivious knight-errant who reveals the fictions that investors tell themselves. It doesn’t matter if he wasn’t making a prescient bet like Paulson, what’s relevant is that he showed investment firms like SoftBank to be too clever by half.
Though Levine generously allows that he “can’t quite say that Neumann improved the allocation of capital” as Paulson did with his housing bet, Neumann’s SoftBank-supported insanity about what WeWork is and aspires to be (“The We Company's guiding mission will be to elevate the world's consciousness.”) has shown that there was a killing to be made if you were able to sufficiently charm investors. An irrationality of the market was exposed in its gaseous form.
This amounts to literary criticism as economic analysis. Shares in WeWork, as with any other financial instrument, represent the value of assets as determined by its investors. In a more “normal” environment, this would be happening on the public market, which means that it wouldn’t be happening at all because Wall Street investors wouldn’t give someone like Neumann the long leash that he received from SoftBank. This incongruity, as Levine points out, is what Neumann, wittingly or not, ultimately turned into a $1.7 billion payout.
But a separate truth remains true in both public and private markets — the “true” value of WeWork’s shares are its assets and liabilities. Given that it’s a money-losing leasing company, there are a lot more liabilities than assets, and some of those liabilities have to feed their children and pay their rent. As was expected, SoftBank’s rescue package for WeWork (which reportedly would have run out of cash next Friday), will require the company to shed “thousands” of workers from its head count of more than 12,500 employees. In fact, WeWork needed this rescue package in order to conduct the coming layoffs, because without the money it would have been unable to afford employee severance costs. Neumann, on the other hand, will soon be in a position to buy a dozen more private jets and elementary schools if he so desires.
Setting aside briefly the question of how WeWork’s possible collapse might affect commercial real estate markets, the human cost of WeWork’s meltdown cannot be so easily swept under the rug. Whatever surreal inefficiency Neumann revealed in the late-stage venture funding market is subordinate to the damage he will do to the thousands of people who have worked for him. In this, WeWork bears similarities to the financial crisis. The discomfiting truth of journalism like Michael Lewis’ The Big Short and John Paulson’s $4 billion bet against the housing market is that the intellectual and narrative justice of betting correctly supersedes the actual story of the crisis: people were harmed.
I will allow, for a moment, as Gara does, the concession that WeWork is not so evil, in relative terms. Uber employs hundreds of thousands of drivers in the U.S., many of whom are paid poverty wages and sleep in their cars to survive. Theranos lied to customers about their blood tests. WeWork, on the other hand, simply leased tacky office space with (at one time) free beer. This perspective ignores the biggest question about what comes next, to which no one seems to have a certain answer, which is what happens if this rescue effort should ultimately fail. Who will be harmed next?
Last month, the chief of the Boston Federal Reserve Bank warned that lease agreements of companies like WeWork's are structured in such a way that can inoculate them from major payouts to landlords in the event of a bankruptcy. And while SoftBank was able to step in and save the day in this instance, what happens in the event of a recession where WeWork’s small business customers can no longer afford their WeWork spaces? Can we count again on the hubris of SoftBank not to let its signature investment wither and die?
And when those landlords, who have already leased out staggering amounts of space to WeWork, are suddenly taking gigantic hits to their portfolio — what’s going to happen to them? If we are to look back to the financial crisis, we may have an idea of which way it’ll go: it won’t be venture capitalists or real estate barons eating their hat. It’s going to fall on ordinary people, debt-burdened and innocent, to bail out the bad guys once again.
In fact, the story of WeWork is a story of victims in the present and in the future. And its failure will reverberate for them for a very long time.