Hello and welcome back to Dry Powder. 

Thanks as always for being a subscriber to Puck, our new media company covering the intersection of Wall Street, Washington, Silicon Valley, and Hollywood.

Each week, I receive feedback from readers and sources about Wall Street's biggest characters and concerns. Today I'm opening my notebook to address questions about

what Wall Street really made of Elizabeth Holmes, the trouble with Softbank, and Tesla's new price target. Plus, in the spirit of Thanksgiving, I reflect on a few of the greatest Wall Street dealmakers of all time. Or at least those whom I've been lucky enough to observe up close. 

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Bill

Elizabeth Holmes, Softbank’s China Woes, and More Tesla Inanity

Plus: Giving thanks for some of the greatest Wall Street dealmakers of all time.

Each week, I receive feedback from readers and sources about Wall Street’s biggest characters and concerns. I’ll be engaging with some of those questions here—in addition to a few observations of my own.

Softbank's C.F.O. recently conveyed to the Journal some dispiriting news about its investments in crypto and China, among other sectors. Does Wall Street have a revised view of the fund?

Wall Street will always view Softbank as the gravy train, the place to turn to if a startup company you are working with needs a lot of capital fast. There is, after all, no bigger venture capital fund on the planet, and if the WeWork saga made anything clear, it is that Masayoshi Son, Softbank’s founder, has a lot of money at his disposal and a nearly insatiable appetite to spend it. It can be the one-stop shop for all your outlandish funding needs and desires. 

The more interesting story about Softbank is not how lousy its investment portfolio appears to be at the moment, but rather how much money Elliott Management, the hedge fund founded by Paul Singer, made from its more than $2.5 billion February 2020 investment in Softbank. Elliott is an activist investor and pushed Son to buy back Softbank’s stock, in order to increase the stock price, and to take other measures that would increase transparency into Softbank’s $100 billion Vision Fund. The stock nearly doubled in the year after Elliott announced its position, following Son’s decision—at Eliott’s urging—to buy back some $20 billion of Softbank stock. 

Since May, the Softbank stock is down about 35 percent, due largely to Beijing’s crackdown on Chinese tech companies. Still, according to the New York Post, Elliott has made “as much as $500 million” on its investment in Softbank, or about half of what the infamous WeWork co-founder Adam Neumann extracted from Softbank in order to go away. 

The Elizabeth Holmes trial is reaching a momentous inflection point with her decision to testify. Just curious: When Theranos was the toast of Silicon Valley, what were your Wall Street sources saying? 

Holmes testified for about an hour on Friday afternoon, and her testimony is expected to continue into early next week. But, to be honest, it was years before more than a handful of people on Wall Street cared a whit about Elizabeth Holmes. It was only after she started appearing on the covers of Fortune (June 2014), Forbes (September 2015), Inc. (October 2015) and T: The New York Times Style Magazine (also in October 2015) and the valuation of Theranos kept ratcheting up and up and up, to $9 billion, that Wall Street began to take notice of the company in a big way. (Never underestimate Wall Street’s ability to get excited about a potentially hot I.P.O.; see WeWork above.) 

Of course it all came crashing down that same October with the publication of The Wall Street Journal reporter John Carreyou’s front-page article, “A Prized Start-up’s Troubles.” The rest, as they say, is history. The arc of Theranos’ narrative on Wall Street lasted about 15 months, from June 2014 to October 2015. During that time, Holmes was a Wall Street darling, showered with capital and attention. 

The brief period of adulation looks foolish in retrospect, but you have to understand that few people on Wall Street ever take a critical view of a high-flying company, even when warning signs are strewn across the financial landscape. Wall Street thinks in terms of “wallets”—as in, how much in fees can be made from underwriting the debt or equity of a company, or how much money can be made raising venture capital for a company, or how much money can be made advising a company on its sale or on an acquisition or merger. “Oh, this Theranos is a total mess, I’m not going to get near it with a ten-foot pole,” said no one on Wall Street ever. The banker who says something like that gets fired because at the end of the year, he or she has no revenue on his or her ledger, which means there is no way to justify paying him or her a bonus, which means there is no reason to keep him or her around. 

Ultimately, Wall Street is a very Darwinian business. Those that survive the longest generate boatloads of fees year in and year out. And the only way that happens is doing deals that close—a debt offering, an I.P.O. underwriting, or advising on an M&A deal. No one gets paid for not doing deals, or for questioning a company’s ethics or business plan. 

I remember thinking how quaint and paternalistic it used to be at Lazard when Michel David-Weill, who then owned the vast majority of the firm, would occasionally take pity on one or two partners if they’d had a year where they didn’t produce, for one reason or another. Suffice it to say that those days are over at Lazard and never really had much of a place anywhere else on Wall Street. At the senior levels, the mandate is simple: produce revenue or get the hell off the stage. 

I don't want to trigger you, Bill, but Wedbush recently raised Tesla's price target to $1,400 per share, suggesting that the automaker could become a leader in a $5 trillion market opportunity. Take a beta blocker and tell us what you think.

What investment banks and brokerage firms such as Wedbush do, and what portfolio managers such as Cathie Wood do, is “talk their own book,” as they say on Wall Street. They publicly advocate for positions that will benefit them, or their investors. This is as old as the hills, and is not illegal but frankly it might as well be. 

I asked for but did not receive a copy of Dan Ives’ report about Tesla, in which he wrote that Tesla’s stock would increase more than 23 percent, but I would bet dollars to donuts that there are two disclosures in his report, way in the back, in tiny print that no one reads. One of those disclosures likely tells readers what role, if any, Wedbush plays in underwriting Tesla securities, or in trading Tesla’s securities; the other disclosure reveals what percentage of Wedbush’s equity research calls are buys, sells, or holds. I would further bet that the vast majority of Wedbush’s equity calls, like sell-side analysts across Wall Street, are recommendations to buy stocks. 

I say that because there is no upside for sell-side analysts to urge investors to sell a stock. That’s a contrarian position that few research analysts have the guts to advocate. Of course, the right call on Tesla is indeed to sell the stock, which is wildly overpriced and has been for years, especially when you consider that the vast majority of Tesla’s profits come from selling carbon credits, not electric cars. I don’t know Ives—he seems like a nice fellow—but the game he is playing, I suspect, is simply to increase his name recognition and media attention. A quick Google check reveals that after Ives made his $1,400 call, he was on Bloomberg, CNBC and Yahoo Finance talking about it. Good for Dan, I guess. Good for Wedbush. Good for Tesla. Potentially very bad for the investors who take Ives’ advice.

As for Cathie Wood, she is the ultimate book talker. Suffice it to say that unlike Ives, who has a credible claim on objectivity, Wood is completely biased. Tesla has been the largest holding in her portfolio for years. It remains by far her largest holding across her various funds—now representing just over 8 percent of her invested assets, or some $3.1 billion. So, ya, I’m not quite triggered but I remain skeptical when those with vested interests provide investing advice. 

Bill, Thanksgiving is coming up. In the spirit of giving thanks, who were some of the best dealmakers that you ever saw in action?

Well, keeping in mind that my last day on Wall Street was more than 17 years ago, my first-hand knowledge of “the best” dealmakers is necessarily more than a little dated. Nevertheless, I still am happy to share my opinions. For pure revenue generation—and I suppose for wisdom too (although that can be debated)—no one that I witnessed first hand in my nearly 20 years on Wall Street could match Felix Rohatyn. In his more than four decades at Lazard, he would often generate one way or another as much as 80 percent of the M&A revenue in any given year. That was incredible, and gave him immense power at the firm. His other partners would fairly cower in his presence. 

Interestingly, Rohatyn wasn’t particularly greedy when it came to money. He made around $10 million a year at Lazard, at a time when that was considered a huge amount of money, but he could have demanded—and received—a whole lot more from Michel David-Weill (see above) had he wanted it. He also could have had a significant slice of the real equity in Lazard had he wanted to ask Michel for it. But he didn’t. When the company went public, in May 2006—one of the last major Wall Street private partnerships to do so—Felix could have made a killing, not unlike the way Michel took out $2 billion as part of the Lazard I.P.O.. But, no, Felix was greedy for power, not money.

Other bankers who impressed me considerably on Wall Street were David Supino, a leading restructuring banker at Lazard whom I worked with closely, as well as Al Garner, one of the longest serving Lazard partners, and Christina Mohr, one of the longest surviving woman bankers on Wall Street. I was also very impressed by Jack Levy, whom I worked for at Merrill Lynch (when he was co-head of M&A there before heading to Goldman as a partner). Jack was like a warm knife through butter. Clients loved him and his team respected him greatly. Jimmy Lee, at JPMorganChase, was sui generis and died much too young. I admired Jimmy greatly, although he could be ruthless. 

I am also quite impressed by bankers I have known for a long time who had the guts to put up their own shingles and try to make a go of it on their own, outside of the protection of the big Wall Street banks. These include people like Blair Effron, at Centerview Partners; Paul Taubman, at PJT Partners; Ken Moelis, at Moelis & Co., and Aryeh Bourkoff, at LionTree Partners. Talk about guts. Wow!

That’s all for today. I’ll be back in your inbox before the holiday with more Dry Powder.

Bill

Have a question you’d like answered in the next edition? Email us at fritz@puck.news.

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