Prof G Markets: Will Tesla Reward Elon and Move to Texas? + Bank Earnings and Basel Endgame

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0:43Enjoy the drive in Blue Cruise-enabled vehicles like the F-150, Explorer, and Mustang Mach-E. Available feature on equipped vehicles. Terms apply. Does not replace safe driving. See Ford.com slash Blue Cruise for more details. This week's number, 8.3 million. That's how many people are on China's personal debt delinquency blacklist, meaning they can't purchase luxury items such as high-speed train tickets or nice hotel rooms. Ed, it's not true that China doesn't have free speech. As no one says so, ever.

1:28Get it, Ed? Little geopolitical humor there. Yeah, I get it. Little ge... Sort of a change of pace this week. We're mixing it up a little bit. How was your TED Talk? I love being here. My talk went well. I was really happy with it. I spent a lot of time on it, or specifically Mia spent a lot of time on it. And it just kind of occasionally it all comes together. And it was really nice because I was super fucking nervous. I really like Chris Anderson. I like his wife, Jacqueline Novogratz. And I wanted, and you know, Ted's, for what we do, Ted's kind of the sort of the Super Bowl, if you will. And so it was important to me and I was more nervous than usual.

2:01And I followed Andrew Yang and Bari Weiss. But the thing that's amazing about Ted, and literally in the last 15 minutes, I've had a coffee with one of my role models, Sam Harris, who I just adore. I think Sam got me off of Twitter. Sam is just, I just think the world of him. I love how courageous and just how fucking smart he is. I think he's going to go down as one of the great philosophers of our time. Did you realize that at the time people never think a philosopher is a philosopher? It's not until they're dead. So I think Sam, after he's gone, is going to be remembered as one of the great kind of thinkers of our time.

2:35And then five minutes later, this woman comes running up to me. And I'm like, who's this good-looking brunette? I mean, quite frankly, that was my first thought that seems to want to know me. And it was Monica Lewinsky. And she and I are Twitter friends. She's got a really fantastic Twitter feed. And she's super smart. I've always really admired her. And we became kind of, she's sort of my second Twitter friend. George and I started, George Hahn and I started corresponding on Twitter. We felt as if we knew each other and we talked, but she's a super impressive woman. I was glad to meet her. But I've had a wonderful time.

3:07Vancouver's beautiful. I forgot about how beautiful Vancouver is. And I'm just really, I'm just in a good place right now. The talk went well. Everyone's been super nice to me. I've just had a really, I've had a really nice time. Because the thing about, you know me, I don't like the public. because when I go out in public, I have to deal with the public. But everyone's been so friendly. And so, and I - And they're all famous people, which helps, right? Yeah. Well, but no, there's a whole band of like young people doing vertical farming or saving the planet from volcano radiation or like all these.

3:37I call them rich kids. Other people would call them socially minded. I mean, I literally listen to someone saying, well, I'm trying to figure out a way to turn volcano ash into something that cools the earth. And I'm like, oh, so you're, I think what you're saying is you have rich parents. Is that wrong? Anyways, it's a lot of very impressive people. But enough of that. Let's talk about today. What are we talking about? What are the headlines? Let's start with our weekly review of MarketVitals.

4:12The S &P 500 declined. The dollar was stable. Bitcoin dropped to its lowest level since February and the yield on 10-year treasuries climbed. Shifting to the headlines. The IMF forecasted that the US economy will grow by 2.7 % this year. That's higher than previously predicted and double the rate of any other G7 nation. Microsoft is investing$1.5 billion in G42, an Abu Dhabi-based AI company, which the US government has scrutinized for its ties to China. As part of the deal, G42 will use Microsoft's cloud platform Azure and also add Microsoft's president Brad Smith to the board. United Airlines shares rose more than 17 % after the company delivered a stronger-than-expected forecast for the second quarter.

4:58The airline also posted a beat for the first quarter, despite a$200 million loss in potential earnings from the grounding of some Boeing 737s. United announced it expects 40 fewer planes from Boeing this year than previously planned and will turn to Airbus for new planes in 2026. Truth Social's stock has fallen as much as 70 % from its all-time high. Shares dropped sharply following announcements last week about an expansion into streaming and the sales of millions of additional shares. The stock then rebounded more than 15 % in a single day to break its losing streak. And finally, TikTok debuted its Instagram competitor, TikTok Notes, in Australia and Canada.

5:37The company said the new app, which is a dedicated space for photo and text content, is in the early phases of distribution. And Scott, thoughts? The U.S. economy is just, it's a phenomena right now globally. And the article I read that has everyone is blowing everyone's mind is that everyone assumed that higher interest rates would actually dampen the economy. That's kind of one of the principles of economics, right? It makes the cost to borrow money more expensive, so you're less aggressive about new investments and the economy slows down. And what they think might be happening is the acceleration in interest rates, that there's actually more money in money market vehicles than there is consumer debt owed.

6:18So the amount of money being garnered by households from the additional interest they're getting on their short-term deposits and their money market funds is greater than the incremental cost of higher interest rates, which has put more money in the hands of consumers who are fueling the economy. And it's blowing everyone's mind that the idea that higher interest rates actually might be stimulative to the economy. I just find that fascinating. Consumers seem to be fairly confident. But it's an absolute phenomena. And it just strikes me that Biden's not more popular. That's the most interesting thing to me, that 60 % of Americans still think Biden is doing a bad job on the economy.

6:58So I think the IMF has published an important number here. It's a testament to the great job the Biden administration has done. But the shame is that Americans either won't read it, or if they even do, they probably won't take it seriously. Because as we've learned, when it comes to the economy, politics almost always trumps the actual data. Do you have any thoughts on Microsoft's investment in G42, the AI company? I love this. I want to pull as many Gulf nations westward and towards capitalism as possible. If we can get some of the Arab nations sort of looking west as opposed to partnering with China on AI or what have you, I think it's a good thing adding Brad Smith to the board.

7:43I'm excited about that. On Brad Smith joining the board, I mean, this relates to what we discussed last week, which is interlocking board seats. I find it pretty remarkable that a week later, this has happened again. Brad Smith, president of Microsoft, Microsoft on the board of OpenAI invested in OpenAI and Flexion Mistral. And literally the week after we discussed that, the president joins the board of a different AI company. Do you have any concerns about that? I think this is different, Ed. I think it's a matter of whether you're using, quote unquote, a board seat to have implicit and explicit control of the company without triggering a DOJ review, or you're just, this is a big corporate investment, we want representation on the board.

8:28I think that's, this feels like a different situation to me. I'm surprised you say that because what we've been focusing on is this soft power that they have with all of these different AI companies. And the other side to this is that Microsoft is now going to be G42's primary cloud service provider. So that's the other string that's attached to these investments. It feels like every time we see an announcement on one of these investments, it's like, oh, and they're also announcing a partnership where they're going to use Microsoft or Amazon as their dominant infrastructure provider. And there's just one stat that really drives this home for me, which is that last year, Microsoft and Amazon alone accounted for two-thirds of all AI investment globally.

9:11That's roughly$20 billion. And Microsoft alone invested more in AI than every other VC firm in the world combined. so it is the biggest vc firm in the world for ai does that not i'll just say now it concerns me i'm surprised it doesn't concern you what it comes down to for me and i have been on a couple boards where there's a corporate investor they invest they go on the board and then we get an offer from a competitor and if it's good corporate governance you ask that person to recuse himself from the conversation. I was on the board of Gateway Computer, and I said to Gateway when they were raising money, the hedge fund I'm working with would be interested in providing financing.

9:54And I said, okay, there's a conflict here because you want the price to be as high as possible for the money we're borrowing from you. We want the price to be as low as possible, so you're conflicted. So I recused myself from conversations. So if there's good governance here in their minority shareholders, they should be able to, for example, sell to another company, make moves that are not in Microsoft's best interest, but in the interest of G42. So you can have, you know, I would call decent corporate governance here. What you're talking about is really interesting in the sense that at some point, do all of these investments mean that they are this multi-tentacled hydra or multi-headed hydra where the market becomes ossified because no one can sell to anybody else.

10:37Every deal benefits Microsoft. And if a plaintiff's attorney or someone at the DOJ says, we have evidence that all of these investments are disadvantaging the market and creating a less competitive market, then they'll have a case. But they should be able to handle this with good corporate governance. Truth social, I think that that is, I mean, this is a meme stock now, right? It has absolutely nothing to do with the underlying business, $4 million business. Prop G will be a bigger business than True Social. And everyone says, oh, the stock is down 70%. It's still worth$4 billion or a thousand times revenue.

11:13So it's a meme stock. It's trading on things other than anything to do with the underlying business or the fundamentals. Now, the thing about meme stocks is they always return to gravity. Michael Jordan, when he jumps from the free throw line, looks like, oh, this guy can defy gravity. Every time, 100 % of the time, he hits the ground again. Gravity is unnegotiable. It's non-negotiable. And I feel the same way about the markets with respect to meme stocks. And that's whether it's Bad Bath & Beyond, AMC, GameStop. Yeah, they might stay airborne for a while. At some point, at some point, gravity kicks in.

11:51This company is not worth 50 million, much less 4 billion. And so the question is, when does gravity kick in? And I think it's going to kick in sooner rather than later, because I think that the people who went into this, even if they went into it to support Trump, and every week they could see all these headlines that their$1 ,000 is off 30%, I think that's a decent amount of pain. And I think after a while, at some point they go, you know what, I'm the idiot. It's like that thing, if you're in a room and you don't know who the stupidest person is, that means it's you. I think at some point, a lot of these investors are going to go, what am I doing?

12:27Why am I the dumb one? Especially when they see headlines like Trump is doing everything he can, obviously, to try and sell shares and he's suing the founders. So this is nothing. It's off 70%. It's still more to go. Oh, my God. This thing hasn't even really started its deceleration. Probably the most interesting story that people are talking about is the TikTok one. I think that's just wow. I think TikTok has such unbelievable technology, has executed so well. They have such a built-in consumer base. This is going to be very interesting. This is them going up and saying, hey, Meta, we're not scared of you.

13:03As a matter of fact, we're coming for your lunch. And how this translates is I actually, despite the fact that I think TikTok is a defense threat, I do think it's going to be divested. And from a pure capitalist standpoint, I think this is a great time to go into the secondary market and buy TikTok shares. because I do think this thing is going to, I do think that the divestment is going to happen. The geopolitical cloud will be lifted. And if this thing works, I don't think there's any reason why you wouldn't look at TikTok and say, well, they're kind of in the same weight class as Meta, growing faster, not as big, but growing faster, which might get them, I think what's Meta 1.3 trillion might get them a trillion dollar market cap or four times what it is now.

13:48We'll be right back after the break with a look at Tesla's new shareholder vote.

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15:34We're back with Prof G Markets. Tesla's board is asking shareholders to vote on Elon's$56 billion pay package again. As we discussed back in February, a Delaware judge rejected that payment plan finding that the board failed to engage in a meaningful negotiation over the package's terms. Now, shareholders will vote on whether to reinstate the package anyway, and they'll also vote on whether Tesla should leave Delaware and reincorporate in Texas. This is an awkward time to solicit shareholder opinions. Earlier last week, the company announced it will lay off 10 % of its workforce, and two senior executives departed.

16:10Shares are also down 39 % this year, making Tesla the worst performing stock in the S &P 500. Here to help us break down what this new vote means for Tesla and beyond is Charles Elson, founding director of the Weinberg Center for Corporate Governance at the University of Delaware. You might have noticed that Charles and I share the same name. That is because Charles also happens to be my uncle. But don't let that cull your opinion of him. He is a leading expert in the field of corporate governance, and we're very happy to have him. Charles, thank you for joining us. I'm very happy to be with you all today.

16:45So about two months ago, Scott and I were discussing this ruling by the Delaware court that found Elon's compensation plan, that it found that it was invalid. Before we discuss this recent proposal from Tesla, could you just remind us why that original compensation plan was, according to the courts, unacceptable. The court concluded a couple of interesting things in a ruling back in February. It was done by Chancellor McCormick, who is the chief judge, if you will, the Delaware Court of Chancery. What she said is, first of all, the directors who awarded this to him were not independent of him, which is really important in a compensation decision.

17:26In this case, she found that there really wasn't any negotiation, that there was no effort done to really compare the comp to peer groups and things like that, and that the committee itself was clearly, in her view, non-independent and did not carry out an effective process of negotiation. In fact, Musk himself effectively in depositions and testimony basically said he was negotiating with himself on the plan. It was his idea, and that was that. She then found that the plan as disclosed to the investors wasn't appropriately done, that when they voted to approve the plan, that all of these details that she discovered in the trial or found and had occurred in the trial weren't disclosed to them, and therefore their vote was not effective.

18:14Now, this is the key to the decision. She, in the decision, says, look, awful process, not independent directors, and I find that the result of this was an unfair plan. She made the argument, interestingly enough, he had 20 % of the company itself, its equity. Giving him another gosh knows how many shares really doesn't get you anywhere, doesn't incent him to do anything differently than if he had the same equity he held it holding with none of these extra shares. If you have a transaction, even if a majority of the shareholders approve it, if it has nothing to do with a company, it doesn't match corporate purpose, which she suggested this plan did not, that it basically is a gift.

19:04Shareholders can always approve a gift of company money to someone, but everyone has to do it. It has to be unanimous shareholder approval, which obviously didn't happen here. That's why she said the plan is not equitable and I'm ordering rescission. In other words, canceling the whole thing out. That's the sticky wicket today is how you fit a new vote, even if informed, so to speak, by the shareholders, fit into that paradigm. And I don't think it does. It's certainly helpful for a company to have independent shareholders vote on something. But ultimately, if it's not fair, it has to be unanimous.

19:46Mr. Nelson, nice to meet you. Thanks for being here. So the problem I find is the word equitable. And some of the things that I think are a bit misleading here is, okay,$55 billion pay package. Well, right away, that doesn't sound equitable. It sounds like an insider job where the board directors aren't representing the fiduciary interests of all shareholders, meaning that they could have paid him$5 billion and he probably still would have showed up for work, you know, 20 % of the time, which is what he's kind of doing now. But isn't the correct number to evaluate around quote-unquote equitable?

20:16And it distincted the corporate governance around their obligation to do a market check, negotiate with them. But the number is sort of the headline news here, that it's really the value of the options package that was awarded to them at the time of award. And actually, that number is much lower, right? Because the stock went up 5 or 10x. So wouldn't the right number to look at whether or not they were serving their shareholders be sort of in the billions? And again, and I hate defending Elon Musk, but if someone said, if Tim Cook said, I want to take Apple from$3 trillion to$30 trillion, and you're going to pay me$1 trillion, wouldn't shareholders approve that?

21:00You know, they may, but again, what she found was this an incentive plan. In other words, suppose you didn't do anything at all. Wouldn't he have had the same incentive to, in fact, bring it to that value? This wasn't a little stock award, ignoring the, quote, value. This was giving him a nice chunk of the company. I can remember years ago, I was on a board, a company called Sunbeam, and we had a superstar our CEO. So they said Al Dunlap. Chainsaw Al. Chainsaw Al. Yes, I actually had to make the motion to fire Chainsaw Al. But Chainsaw Al made a similar request and that, well, you know, I produce so much value and I should take home so many percent of what I produce.

21:48Well, that was kind of a misnomer. He didn't really produce it. It were the other people, the company working with who produced it. And he had a lot of equity in the company anyway. And I've always been suspicious of those kinds of demands for mega, mega grants to begin with. This one was significant. It wasn't one or 2%. It was huge. And I think that you have to remember too, the court of chancery is a court of equity, not a court of law, a court of equity. And an equity court has the right and responsibility to make equity in a given situation. That's their power. And it was not equitable in her view, in that you were awarding him so much of the company for something that he was already incented to do.

22:37And it's also interesting to note that Mr. Musk did sell a lot of his 20 % to fund the purchase of X. What was he doing selling his stock in Tesla, right? Which is not a great sign for an investor. The CEO is dumping stock to deploy his assets somewhere else where he feels he will make more money rather than keeping it in his own company. That's not a great sign one way or the other. As it turns out, Mr. Musk, as you correctly point out, doesn't spend all his time with Tesla. In fact, very recently, if I recall, that he demanded another enormous equity grant if he were going to allow Tesla to develop AI.

23:21Otherwise, he'd say, I'll just set something else up. Well, he has a duty of loyalty to the company who employs him, to the shareholders who he serves, and threatening to take this corporate opportunity, theoretically somewhere else to a business that he would own 100 % of is really not the way a fiduciary, which he is as the CEO, should operate. So anyone who can ask you for that kind of money and threaten to blow themselves up if you don't isn't, in my view, worth ultimately keeping on. Remember this, Tesla, the shareholders of Tesla believe it's a perpetual organization. In other words, it goes way beyond the career of Elon Musk.

24:08And if someone can hold you over a barrel like that and threaten to go and make unreasonable demands, which I think she thought this was, particularly the way it was handled within the board, that at some point you have to say enough. because your obligation as a director isn't to Mr. Musk. It is to the shareholders of the organization. And if Mr. Musk gets hit by a bus, decides he'd rather live on an island somewhere, the company doesn't disappear. There are other people out there who can do the same thing. And I think that was the mistake of the board. And I think that certainly factored in their decision.

24:45I also think that after this happened, interestingly enough, as companies do compensation by comparing to other companies, we began to see in Silicon Valley, another group of CEOs asking for the same thing, these megagrams. So the damage wasn't just to the Tesla shareholders, it became industry-wide, Silicon Valley-wide, I guess, which was the disadvantage of shareholders in other companies. It became a peer model. And I think that that, I think, factored in decision. She had mentioned, I did an amicus brief and that was a point I made and she adopted the brief, seemingly. But, you know, that was a problem too.

25:25We're both brothers from another mother on this. And that is, I'd call us old school, for lack of a better term, boomers on corporate governance. And that is, when I was the CEO of companies and I would occasionally say, well, we're giving up all these options. I'd like some more. They'd say, Scott, you're the founder. You're the largest shareholder. We think you're fully staked. We're not giving you additional equity. And I thought that was reasonable. And I never threatened to leave the company. I was incentivized. What I have found is that the cult of the founder has grown, that that's no longer common practice, that CEOs expect, regardless of how many shares they already have, that they expect to get more and more shares.