Matt Levine of Bloomberg View points to a recent plan by a hedge fund manager to work around GM stock. All kinds of jargons/fancywords are used to package the idea:
Every four years or so, David Einhorn, the founder of Greenlight Capital LLC, rediscovers the concept of preferred stock and publishes a big presentation about it. I think it is about the most moving and beautiful recurring event in finance, like the migration of the Demoiselle cranes over the Himalayas, but for preferred stock. His current idea is that General Motors should split its common stock into two classes. Here is Greenlight’s proposal. One class of stock — the “Dividend Shares,” ticker GMD — would get the current dividend of 38 cents a quarter. The other class — the “Capital Appreciation Shares,” ticker GM — would have most of the other rights of shareholders; in particular, they’d be the ones that participate in any future growth, in the form of stock buybacks or dividend increases. (They’d also have 10 times the voting power of the GMDs.) Each current GM share would be split into one GM share and one GMD share, and then everyone could trade so the shares could find their natural homes. “The Dividend Shares will be attractive to yield-oriented investors,” says Greenlight, while “the Capital Appreciation Shares will be attractive to growth-focused investors.”
The normal way to describe this would be to say that the GMD shares are “preferred stock” — entitled to fixed dividends, but not growth or (much in the way of) voting rights — while the GM shares are “common stock.” Einhorn avoids those terms, possibly because “preferred stock” sounds sort of old-timey and fuddy-duddy, or possibly because it’s weird for a big industrial company to have preferred stock equal to more than half of its common equity market capitalization, or possibly (most likely) because “preferred stock” has some negative implications for credit ratings.
🙂 It happens all the time. Keep inventing buzzwords to excite investors.
Finance after all is also about arts:
It is easy and fun to be sarcastic about all of this, but that is mostly the wrong response. This is what finance is. Creating value by raising money from investors and using it to build cars is great and all, but there is nothing particularly interesting about it as finance. It’s just car-making. The magic of finance — the reason it’s a big industry, and the reason that hedge-fund managers are often a lot richer than car-company executives — is that it can, in its finest moments, create value out of nothing.
There is a straightforward and unromantic way to explain that. Finance is about dividing up risks, and allocating those risks to the people most able and willing to bear them. People who want more risk cushion those who want more safety; people who want more safety compensate the willing risk-takers for that insurance; everyone is better off. Progress in finance, then, is about finding clever ways to slice risks more finely and market them to people who want them. People who like General Motors’s business but want safe steady income can just buy its bonds. People who like its business and want more upside in exchange for more risk can buy its common stock. But these are crude divisions, and a true financial visionary will see a category of risk — Dividend Shares — that doesn’t exist yet and try to fill that need.
But describing the mechanism in that way, as risk allocation, shouldn’t diminish the magic of this effort to create value where there was no value before. The beauty of Einhorn’s proposal — whether or not it’s right — is the faith he puts in the power of the human imagination. General Motors has some stuff. Einhorn doesn’t propose to change that stuff. He just wants us to look at it differently, to see the same facts in an altered light, to reconstruct the mental categories with which we think about the stuff. He thinks that effort — the purely mental process of thinking about GM in a new way — is worth at least $13 billion.
Einhorn’s proposal, then, is to take all of the current elements of General Motors, add nothing, subtract nothing, but just arrange them in a subtly different and more pleasing pattern, one that excites people more, one that people will pay more money for. That’s what art is. This is art.
Indeed it is.
One lesson you learn while working at investment banking is how little finance is really needed. It is mostly marketing and all this arty stuff which keeps the action going…