Extended version: Why Elizabeth Warren is worried about SpaceX

0:02Last week, SpaceX's initial public offering was the largest in history. And on the morning we're recording this, Tuesday, it briefly passed Microsoft as the fourth largest company by market capitalization. All the while, Elon Musk, the owner of SpaceX, has become the world's first trillionaire thanks to his shares in the AI to rockets business. But for some, the SpaceX listing and its blockbuster valuation is a reason to worry, not celebrate. In the run-up to the IPO, U.S. Democratic Senator Elizabeth Warren wrote to the head of the Securities and Exchange Commission asking the regulator to delay the listing.

0:34Warren is a ranking member of the Senate Banking Committee. She joins me now to talk about why she opposed the SpaceX IPO and what it tells us about the American economy. Senator Warren, welcome.

0:44Elizabeth Warren: Thank you very much. Thanks for having me. So let's start with the most recent update. SpaceX has shot up in value by more than a trillion dollars within just several days of going public. That's from an initial valuation that was already the highest in history. What are your thoughts as you're watching this? Look, I want Americans to have opportunities to invest in companies that help our economy grow. But the confidence of investors is a big reason why our markets are the envy of the world. And this particular IPO has enough red flags on it that it should stop anyone in just thinking about it.

1:25Elizabeth Warren: So look at it this way. First of all, the valuations. Elon Musk valued his company with numbers that analysts call nonsensical and out of this world. in party based on the merger of SpaceX and XAI, which means, I guess, Elon Musk got in a room with Elon Musk and negotiated on how much the merger should be worth. Then secondly, SpaceX pushed the major index providers to change their rules to force SpaceX into index funds at record speed, which will artificially boost the stock price in the short run. And then they've set it up so that insiders will have an opportunity to sell their shares into the market.

2:17Elizabeth Warren: And when they do, they will have this captive audience of the index funds. And then the third is that this IPO really undercuts shareholder protections that have been in place for a long time so that Elon Musk basically keeps all of the control for himself rather than the ordinary way. And that is, you know, if a CEO is running a company into the ground, shareholders can actually get rid of the CEO. I'd like to drill down on one of those concerns in particular, and that's indexing. Sure. As you mentioned, this will affect a lot of people, whether they are interested in investing in SpaceX or not.

3:01Tell me a little bit more about what exactly has you worried?

3:04Elizabeth Warren: Well, when an IPO comes out, and this is true across the board, a lot of froth, right? Not always, but a lot of the time. So the index funds that have said we are the sober investors, we are the non-fancy, a little piece of everything across the market, say, in effect, we're going to let everything calm down for a while before we start bringing in that new IPO into our mix of index companies. And here what's happened is that allegedly under pressure from Elon Musk, they changed those rules and said they were going to bring them in much faster. And that means for lots of investors who bought into funds, they find themselves in the rollercoaster ride along with Elon Musk and SpaceX at a time when it appears those traditional rules are more important than ever.

4:08Senator Warren, there are some folks out there who would consider the nearly$2 trillion initial valuation of SpaceX justified, saying that Elon Musk has the ability to turn a business around. They point to Tesla. Do people have a case there?

4:24Elizabeth Warren: Look, my job here is not to give investment advice. My concern is about the rules and whether the rules are followed. Because these are not rules on the stock market that are put in place. Just to be cranky, there are rules that say before you do an IPO, you've got to show us the numbers, show your homework. And when experts, financial analysts, are calling those numbers nonsensical, then the job of the SEC in general is to say, whoa, whoa, whoa. Let us see just a little bit more about how you got that number. Well, let me ask you, Senator Warren, how do you think this would have gone differently under a different administration?

5:11Elizabeth Warren: I think there would have been a lot more questions asked to start with about valuation. And I think there would have been a lot more show your homework before the IPO comes out. I think it's important to mention some of the main reasons folks are skeptical about the SpaceX IPO is because Elon Musk is raising money for things like going to Mars and other things that are so outside our experience that it might be too difficult to assess for value. And then also SpaceX is losing money right now. Now, you take those concerns and then you look at some of the other companies that are looking to go public, Anthropic, OpenAI, these mega artificial intelligence companies.

5:55How concerned are you about those companies, these other SpaceX-type companies, also hitting the market?

6:04Elizabeth Warren: Well, I'm going to make the same point again, and that is I am concerned about any company hitting the market at a time when the watchdog has evidently fled and is not there to make sure that everyone is following the rules. I am very concerned when at least some of the index providers are all willing to bow down with a giant case of FOMO that they don't want to be left behind. But understand, there are plenty of other red flags in this economy right now. Take a look at private credit. Oh, I'm sorry, you can't take a look at private credit because so much of it is outside the view, either of the regulators or the public.

6:50Elizabeth Warren: And remember, you may think, oh, I'm not a part of that. I'm not that kind of risk taker as an investor. And I'd say good for you, except if your 401k is in an index fund and that index fund has bought in, yeah, you're exposed. Or a bank that lends to private credit is on the hook if that private credit has been pushed into one of these frothy AI investments that can't pay off. And if private credit then gets into trouble, it in turn won't be able to make its payments back to the bank. So I'm reminded here of how interdependent all of the pieces are. And that is the reason we need strong watchdogs at the pivot points.

7:46You keep bringing up all this money sloshing around. Yeah. It's no secret that the U.S. is struggling with inflation right now, which brings us to Wednesday's Fed meeting. It's the first one where Kevin Warsh is leading his chair. How do you think he'll handle these higher prices? Do you think he will push at some point to increase rates?

8:08Elizabeth Warren: I don't know. But what I do know is what you've just identified, and that is that costs are up for American families. Remember, Donald Trump ran for office promising he would lower costs on day one and the cost of groceries is up, the cost of gasoline is through the roof, the cost of healthcare is up, the cost of housing is up. So we have a question around inflation and the Fed. But again, I'll go back to the point I was making earlier. The pieces are tied to each other. The American consumer is showing a lot of economic stress and that in turn will echo through our economy. Donald Trump's policies, one after another, his policies on energy, on healthcare, on starting a war halfway around the world, have all driven up costs for families.

9:04Elizabeth Warren: And the consequence is to put more pressure on our economy overall. Do you think that Kevin Warsh can maintain Fed independence? It seemed like it was something that you were worrying about during the vetting process as he vied for chair. He's going to have to prove himself. Remember, Kevin Warsh was always an inflation hawk. He was actually very well known for it, even at times when I certainly would argue and many others would that he was wrong. But he stuck to his guns right up until a few months ago when Donald Trump said that he needed a new Fed chair and he was only going to take a Fed chair who agreed with him on lowering interest rates.

9:45Elizabeth Warren: And suddenly, Kevin Warsh was no longer an inflation hawk. In fact, Kevin Warsh could not identify in the Senate hearing one single statement that Donald Trump has ever made about the economy, with which Kevin Warsh took the slightest bit of disagreement. So let's just say he's got a lot of ground to make up to prove his independence. Senator Elizabeth Warren from the state of Massachusetts, thank you so much for your time. Oh, and thanks for having me. Just a quick note about something Senator Warren said. Not every major index provider allowed SpaceX expedited access into their indices. The S &P has not.

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