When markets become little more than casinos, we are in trouble. When they become rigged casinos, we are really, really in trouble.
Recently, Elon Musk violated SEC rules by buying more than 5% of Twitter stock without disclosing his buy to the SEC. The theory is, if someone is buying up a company, the rest of the world has a right to know - before they sell or buy the stock themselves. By failing to disclose his purchase, he picked up the stock at a lower price than he would have, if people knew he was buying.
But it gets worse than that.
The SEC fined him a trivial amount - compared to the tens of millions he stands to make. It is like that pump-n-dump kid from New Jersey back in the 1990's. When the SEC fined him a hundred grand, his only reply was, "do you take a check?" because he made far more than that, pumping penny stocks.
But it gets worse than that.
Musk then went on to say he wanted to take Twitter private with an offer of $54.20 (get it? 420 - as in "smoking pot!' tee-hee!). He used the same "420" gag when he pumped up Tesla stock a few years back, claiming there was a "firm" buyout offer (there was not) and again, he was fined a trivial amount by the SEC. Well, not trivial to us mere mortals. A rounding error to Musk.
Of course, the buyout was a canard. The major shareholders, including some Arabian investment funds, said "no thanks!" to Musk's offer. So it is going nowhere. To top it off, Twitter enacted a poison pill provision, so the whole thing is dead in the water.
So, Musk failed? Hardly. Once his "buyout" offer of $54.20 a share came out, well, the price of the stock went up even further. So at this point, his initial investment to buy 9% of Twitter has increased in value by tens of millions of dollars. How did he do this? He made a few Tweets.
Now, before you get all up in arms about this, bear in mind that the people who bid up the price of Twitter stock (and Tesla stock, before) were not the savvy investment bankers on Wall Street (and if they did, who cares about them?) but rather retail investors who watch television and financial channels and think, "That Space Jesus guy is alright - he knows what he is doing! I'll buy $500 of Twitter stock tomorrow!" And by doing so, the "last idiot in" sets the stock price - not the whale investors.
Was the whole "Twitter buyout" thing a fraud from the get-go? Well, it certainly looks like it and a lot of other people such as Mark Cuban (himself a piece of work) have made similar noises. It is a pretty obvious play.
Win or lose, Musk makes money - with little effort on his part. Actually, "losing" ends up being more profitable than winning, as actually taking Twitter private and trying to run it to make a profit would be hard work - and the profits thin. Yes, Twitter isn't profitable quite yet - although it has shown some profits in some quarters back in 2018 and 2019. So Musk would be better off losing his bet and then selling the stock - at a nice profit, of course.
Or not selling. If you sell stock, you have a capital gain and you have to pay taxes on it - particularly short-term capital gains, which are usually taxed at a higher rate (it used to be 25% versus 15% which is quite a spread!). So how does Musk make money if he doesn't sell?
Well, that's an interesting question and maybe one way the mighty Musk empire may crumble some day. Much ink was spilled a few years ago how Elon Musk and other Billionaires don't pay any taxes, even as they made a lot of money. The way they avoided - or at least delayed - taxes was perfectly legal. You only pay capital gains tax on a realization event - the sale of a stock or other asset, for example. So if you buy $1000 worth of stock and it goes up in value to $2000 you have no taxable income until you sell that stock and realize the gain.
But you know, the Ferrari dealer doesn't accept stock as payment. So what you do is borrow against your assets, which at the low, low interest rates of the last few years, was rather attractive. Banks were eager to loan Billionaires the money as they had "blue chip" stocks to use as collateral. Hey, Tesla stock is a sure thing, right? So you borrow against it, pay 1-2% interest on the loan and pay no taxes. Seems pretty simple - you don't pay taxes on loans, as loans are not "income."
(I digress, but this is why Biden and other Democrats are proposing a Billionaire's tax to force people who make over a hundred million a year to pay taxes on gains, even if there is no realization event. Sounds appealing to the folks in the cheap seats, but it would be a nightmare to tax unrealized gains and keep track of them (and losses as well!) over the years. The only people making money off that are tax attorneys!)
Of course, Musk had to sell some stock last year - likely to make payments on those loans. But the amount he sold was trivial (to him, anyway) and even if taxes were paid, likely they were far less than the amount he would have paid if he sold stock to raise money instead of borrowing against the stocks. As we learned in law school, a tax deferred is a tax denied. Hence the beauty of the 401(k) and IRA - you have 30 years to play with Uncle Sam's money before you have to cough it up in taxes - and often at a lower rate as well.
And even us little people can play this game, too. For example, some folks have life insurance policies with loan provisions. You go to retire and instead of paying taxes on your life insurance policy (by cashing out) you borrow against it instead. Provided the interest rate is fairly low (mine isn't - 8%!) it might be a better deal than paying income tax. For a large policy, if you cash it out, it could put you into the highest brackets. Since this play doesn't work for me, I plan on just cashing those dividend checks and when I die, the insurance payout will go to my next of kin. But I digress. Yet again.
There is a small problem with this borrowing-against-assets model, however - and that is all loans have to be repaid, eventually. If you can keep the loan going until you die, well, you may avoid the tax-man, at least during your lifetime. But even at 1-2% interest rates, the cumulative interest could add up to quite a sum. And with interest rates going up to 5% or more, well, it could get messy. And you can bet your britches these asset loans are variable-rate and callable as well.
Margin players run into this all the time. You want to make a killing short-selling "Gamestop" stock, so you buy an option to sell the stock at a lower price later on. Problem is, most brokerage houses want some sort of collateral backing up your option in case it goes horribly wrong. So you pledge your investment portfolio as collateral and place your bet - literally - on where the stock price is going. Then some idiot on Reddit decides to encourage small investors or "apes" to buy single shares of Gamestop, driving the price UP even as the company circles the drain. Again, share prices are not rational - they are often emotional. The last idiot in sets the share price.
So your option comes due and you have to buy those shares you shorted - at a much higher price - to sell them at the low price you agreed upon. You are out hundreds of thousands of dollars - maybe millions if you are some hedge fund manager. The brokerage house then sells your other stocks to make up the difference. Since they are selling off huge chunks of stock, the price of those tanks, which means they have to sell even more. Shit like this can cause markets to crash.
Now apply this to the Musk scenario. If he has borrowed against his holdings (as so many Billionaires do to avoid paying taxes) and the loans come due or are called or the interest rates skyrocket, then the Billionaire has to sell off shares to make payments on the loan. Selling off big chunks of stock depresses share price. The "founder" of the company selling off big chunks scares the crap out of the market. So he has to sell even more to pay off his bills - and it snowballs downhill from there.
Borrowing is leveraging, and levers are simple machines. "Give me a big enough lever and I can move the world," Archimedes supposedly said. A small force on one side can cause great movement on the other.
So, I could see a scenario where even a high-flying Billionaire could end up broke, over time. With all the electric cars hitting the market right now, can Tesla survive? Studebaker pioneered the compact American car market in the late 1950's and had the market to itself - and was profitable for a few years. But by 1960, the "Big-3" came out with compact cars of their own, and Studebaker was history.
Tesla is Studebaker.