> The subprime crisis is completely unrelated! And if anything it was proof that money-making assets should be scrutinized more.
I think the connection here is that the assets themselves were money losing but they passed them off as safe assets despite knowing they weren't safe. If I make money by producing counterfeit bills and circulating them then it makes money. It's still counterfeiting. The underlying assumption that makes capitalism desirable is that you are (supposed to be) rewarded based on the value you put into the system. If there are ways to reliably create and dump value inflated assets and those ways are easier than actually producing value, then we shouldn't be surprised when that becomes a competitive business.
Arguably this is what WeWork was trying to do by going public. I don't think anyone here who has followed WeWork over the past few years was itching to jump into day-1 buying even before the current iteration of the Neumann freak show began. Would any engineer here really have taken a stock heavy WeWork comp package in the past two years? On the other hand if you're a rando investor who just sees "oh Uber for office space!" you might line up to get fleeced.
The CDO assets were money losing but in a much more obfuscated way.
They acted like a bet where you make a dollar if you roll 1-19 on a d20, but lose $50 if you roll a 20. And because they had higher-than-sp500 returns, short sighted investors flocked to them.
The one point where WeWork is similar to those CDOs is the stack of complexity used to obfuscate the fairly simple business financials
CDO assets were money losing for people who mispriced them. CDOs are a class of instrument similar to insurance in terms of payout. You collect very regular premium and occasionally have to pay out big when a claim cones in. This is a valuable investment vehicle for people who know what they are doing. They all come under the umbrella of negatively skewed investments, that is, the distribution of returns on these investments have a negative skew. They are fat tailed to infrequent but large drawdowns. Short selling options is another strategy with this profile for example.
In this respect, I'd argue that We is very much playing the CDO game. They enter into long term leases and sell short term leases, harvesting the spread. They take on the risk of finding enough short term tenants to pay for the long term commitments, and their profit is the premium for this risk.
This trade will make a reliable but small margin during good economic environments, but they have to leverage it up a lot to actually make money over fixed costs.
What happens when recession hits? Nobody knows, but it is fair to assume that people will cut high cost, easily broken contracts first - exactly We's revenue source. On the other end, We is on hook for all the long commitment contracts.
Sure, they can just atop honoring the leases and shutter the subsidiaries who actually signed the leases, but this is signing their own death warrant because who will do business with them afterwards?
So I'm seeing a lot of indications of a negatively skewed pnl profile, with not a peep about how We plans to hedge them.
Absolutely true that a CDO is more obfuscated in terms of its actual structure. Pre-crash I don't pretend I would have spotted the risk (because my stats knowledge is meh on a good day).
I would say though that WeWork's insistence that it's a "tech company" is an obfuscation at the social/marketing level. This appears to be working somewhat, as evidenced by the various "Is WeWork a tech company?" articles [0]. Even though this time the trick seems to have been caught early it doesn't make it different in nature, just in how well it worked.
I think the connection here is that the assets themselves were money losing but they passed them off as safe assets despite knowing they weren't safe. If I make money by producing counterfeit bills and circulating them then it makes money. It's still counterfeiting. The underlying assumption that makes capitalism desirable is that you are (supposed to be) rewarded based on the value you put into the system. If there are ways to reliably create and dump value inflated assets and those ways are easier than actually producing value, then we shouldn't be surprised when that becomes a competitive business.
Arguably this is what WeWork was trying to do by going public. I don't think anyone here who has followed WeWork over the past few years was itching to jump into day-1 buying even before the current iteration of the Neumann freak show began. Would any engineer here really have taken a stock heavy WeWork comp package in the past two years? On the other hand if you're a rando investor who just sees "oh Uber for office space!" you might line up to get fleeced.