Elon Musk Used A Broken Marketplace To Play Us All
Tesla the worst is yet to come
By Soren K.Group Jul. 14, 2016
https://www.marketslant.com/…/elon-musk-how-play-broken-mar…
The Death of a Shell Game?
In July we reported that Tesla, SolarCity, and SpaceX were an America Keiretsu if not a shell game. All three companies are controlled by Musk, financed by the taxpayer’s money and owners of each other’s debt in a shell game surprisingly dependent on the positive cash flow of one company, SPACEX. Today SpaceX may have lost all its future prepaid revenues on the failure of a rocket to launch at Cape Canaveral.
Summary
Businesses cannot stand on their own feet without some form of Government aid. Whether that be in QE form or direct subsidies, the marketplace is no longer a “Free Market”. Tesla and its dependents are an example of what is wrong with our capital market system.
Elon Musk is using the Government as a backstop for his businesses. He is depending on easy money to support companies that would otherwise fail from debt. In short, the business structure of Tesla, SolarCity and SpaceX is a microcosm of the problem with our current capital markets.
– By Soren K. with contributions by Vince Lanci, Doug and Dinsdale Piranha and the CFO of a prominent hedge fund that has no position in the stock.
The Business of Crony Capitalism
Overview
Elon Musk has controlling stakes in 3 companies: Tesla, SolarCity, and SpaceX. Tesla and SolarCity are publicly traded. SpaceX is not publicly traded. This document’s focus will be solely on the financial interdependencies of the companies. There are also incestuous business practices, and nepotism within the leadership of each company Musk controls.
We hope to illustrate simply and clearly the immense risk the US government has taken with your money by giving it to a man who is essentially telling them what they want to hear while picking their pockets doing it.
Background
Tesla borrowed Venture Capital (VC) money from Elon Musk at VC rates. It borrowed VC money from taxpayers at non-VC rates
Tesla needed $500MM to get started in 2008. The US Government lent $465MM to Tesla at 3% interest under its push for Green Energy. Elon Musk lent the company $38MM at10% interest plus stock options. Here are the profits on those loans:
o Elon Musk’s $38MM generates profit of $1.4BB, or 3,600% ROR- a VC payout
o Taxpayers’ $465MM- generates profits of $12MM or 2.6%ROR- not a VC Payout
Taxpayers took VC risk without VC returns. The table is set for Elon to arbitrage the Government’s largesse much more. All in, the US Government committed about $4.9BB to finance Tesla’s operations
Musk Gets More Government Money
Using Government loans, Elon Musk creates 2 more companies; SolarCity and SpaceX. He now controls three government sponsored clean energy companies financed by taxpayer money.
The Companies
Tesla- makes electrical cars, develops technology for same. Loses money hoping for future profits
o Loans money to SolarCity via its own stock
o Borrowed $465MM from Gov’t at 3% and $38MM from Elon Musk at 10% plus stock options
o Does not make money
SolarCity- makes and leases solar panels to homeowners. Loses money hoping for a back-end profit
o Borrows money from Tesla
o Borrows Money from SpaceX
o Does not make money
SpaceX- will provide future service related to satellite launches. It makes money via prepaying customers
o Loans money to SolarCity at approx. 10%
o Borrows Money from Government at approx. 4%
o Makes money
Elon Musk now has 2 companies that do not make money. He has 1 that makes money from prepayments for services yet to be given. All are financed by the US taxpayer at ridiculously below market rates. The table is now set for financing using inflated currency (sound familiar?) in the form of Tesla stock to get real cash in Mr. Musk’s pockets.
The SolarCity Problem
Despite gov’t subsidies SolarCity still needs money to operate. SpaceX, while not profitable, has cash on hand form prepayments and Gov’t subsidies. Tesla, also not profitable, has no cash, but has highly (over)valued stock it can use as currency or loans for cash. Elon Musk owns major stakes in all 3 companies.
SolarCity borrows $165MM from SpaceX at market rates of about 4.4%
SpaceX uses govt loans (2.0%?) to lend $165MM SolarCity
SolarCity borrows another $90MM from SpaceX to avoid defaulting on first SpaceX loan
Yet SolarCity is still in trouble. It needs cash. Government subsidies are on hold. Its stock price is sinking and it is in danger of defaulting on existing loans. Enter Tesla and Elon Musk
Tesla and Musk Bail Out SolarCity
Elon Musk and Tesla loan stock to SolarCity. SolarCity margins that stock for cash so they can make their loan payments to SpaceX.
o Elon Musk used money loaned to him at 2.6% to generate 3,600% from Tesla stock sales
o SolarCity was failing. If it failed, it likely would take SpaceX with it.
o Elon Musk and Tesla used his government sponsored inflated currency (Tesla stock) to prop up a failing SolarCity.
Not Enough
But that was not enough money. Tesla then makes a bid outright to buy all of SolarCity at above market valuations using Tesla stock. This essentially ensures a payout to himself and his partners at SolarCity while eliminating the SpaceX debt. Now it all depends on the price of Tesla stock. And Tesla has been punished by the market since the announcement.
Finally there is the loaned stock by Elon Musk to SolarCity. If Tesla drops enough for a margin call, it is all over in our opinion. what we have not covered includes the valuation offered to buy SolarCity. Public shareholders of Tesla should be incensed at the price being paid for SolarCity. Meanwhile, much of SolarCity’s stock is still in the hands of Musk and family members.
If Tesla stock drops enough, it could take out potentially all 3 companies. Essentially Musk is at the center of an American Keiretsu.
Conclusion
The interdependent relationships between the 3 government subsidized companies Elon Musk owns or has a controlling stake in are an abuse of government largest towards Green Energy. Taxpayer money is being used at market risk without market returns to prop up 3 unprofitable companies. While we do not debate the technology Tesla has developed, we question the leverage with which these companies are able to operate under. If something were to go wrong, we feel an eventual Solyndra Greenmail situation would occur. Tesla would be TBTF to the Government and have to pay. We feel Elon Musk knows this and is will play that card if need be.
Not Discussed: Business practices, Nepotism, valuations used for buyouts and other in depth proofs of what we are merely glossing over for now.
Businesses cannot stand on their own feet without some form of Government aid. Whether that be in QE form or direct subsidies, the marketplace is no longer a “Free Market”. Tesla and its dependents are an example of what is wrong with our capital market system.
Here’s what bloggers had to say:
This guy got with some PR firms, pretended to be Tony Stark, told libtard boomers about green energy and libtard millennials how he was gonna take their useless ass to Mars, and abracadabra.
Also: “The Treasury department’s Bureau of Investments oversees investment of more than $60 billion in the State of Michigan Retirement Systems. That includes four systems: the Michigan Public School Employees’ Retirement System, Michigan State Employees’ Retirement System, Michigan State Police Retirement System and Michigan Judges Retirement System.
The retirement funds owned 104,821 shares of Tesla as of March 30. By the end of June they had 339,623 shares worth $72 million, according to U.S. Securities and Exchange Commission filings. That means that as of June 30, Michigan retirees owned more Tesla stock than even the Swiss National Bank, which according to its latest 13-F owned “only” $59 million in shares of the car maker.”
So who in the Michigan Treasury Dept.’s Bureau of Investments got envelopes and vacations to Palm Springs and Boca from Elon to approve this fixation? *chuckle*
Its pretty hard to compete against a co that need not post a profit
In 2015, Musk’s statements came under further scrutiny after an LA Times article claimed that SpaceX, Tesla Motors and SolarCity had or was projected to receive together an estimated US$4.9 billion in government subsidies.
Musk has stated that he does not believe the U.S. government should provide subsidies to companies but should instead use a carbon tax to price in the negative externality of air pollution and discourage “bad behavior”. Musk argues that the free market would achieve the “best solution”, and that producing environmentally unfriendly vehicles should come with its own consequences.[125]
Musk’s statements have been widely criticized, with Stanford University Professor Fred Turner noting that “if you’re an entrepreneur like Elon Musk, you will take the money where you can get it, but at the same time believe as a matter of faith that it’s entrepreneurship and technology that are the sources of social change, not the state. It is not quite self-delusion, but there is a habit of thinking of oneself as a free-standing, independent agent, and of not acknowledging the subsidies that one received. And this goes on all the time in Silicon Valley.”[126] Author Michael Shellenberger argued that “in the case of Musk, it is hard not to read that as a kind of defensiveness. And I think there is a business reason for it. They are dealing with a lot of investors for whom subsidies are not the basis for a long-term viable business, and they often want to exaggerate the speed with which they are going to be able to become independent”. Shellenberger continues, “we would all be better off if these entrepreneurs were a bit more grateful, a bit more humble”. While journalist and author Jim Motavalli, who interviewed Musk for High Voltage, his 2011 book about the electric vehicle industry, speculated that “Elon is now looking at it from the point of view of a winner, and he doesn’t want to see other people win because they get government money – I do think there is a tendency of people, once they have succeeded, to want to pull the ladder up after them.”[127]
Author Mark Dowson’s final comments
The key question is this, “If our city infrastructures often collectively fail during man-made and natural disasters, and water is used for drinking, but also for local agriculture and power generation, then are systems that are built like silos by Musk left without a realistic masterplan to integrate all systems?”
All of his enterprises become interdependent upon each other and can make a city brittle if he does not have a good masterplan in place or government has lead control for long term stability, renewal and growth. It also means that in a disaster, a failure in one system quickly cascades to the next, without a good city infrastructure plan. If Musk is building a solar city that powers Tesla cars, Space X and his Hyperloop, and the infrastructure is not set in place to operate such interdependent technologies. Nor is there a well thought out plan in place if a power cut occurs to the solar storage generation or if power generation is reliant on water to help create the power generation but is severely constrained as a priority use for human consumption and water for agriculture, if a drought occurs. Which leads on to the next question, ”Without the correct design philosophy what good is technological innovation?”
