Tuesday, April 28, 2020

Tesla Says Its D&O Insurance Quotes Were "Disproportionately High"

This is too funny:

Tesla determined not to renew its directors and officers liability insurance policy for the 2019-2020 year due to disproportionately high premiums quoted by insurance companies. Instead, Elon Musk agreed with Tesla to personally provide coverage substantially equivalent to such a policy for a one-year period, and the other members of the Board are third-party beneficiaries thereof. The Board concluded that because such arrangement is governed by a binding agreement with Tesla as to which Mr. Musk does not have unilateral discretion to perform, and is intended to replace an ordinary course insurance policy, it would not impair the independent judgment of the other members of the Board.
Have you ever heard of a $144 billion company that cannot get D&O liability insurance? Jim Chanos says he has never seen this before:
You would have to be crazy to be a director relying on Musk for cash to defend and settle claims from shareholders. For one thing, his ability (and willingness) to pay is probably inversely proportional to the quantity and seriousness of claims made.

Another problem for a director is that if you get sued (and you will) you have to play ball with Musk or he won't put up the cash to defend you. That is what makes it alarming from a corporate governance standpoint. The directors are in for a penny, in for a pound.

Speaking of which, Musk increased his borrowing against his shares; perhaps he got a margin call last summer when the price went below $200:
There are investors who think that right now is a generational buying opportunity with lots of cheap companies on sale. It is hard to square that idea with the amount of fraud and recklessness taking place. Every day brings a new example, whether it is the leveraged Airbnb pyramids or the people who are paying record premiums over spot to buy gold coins.

Can anyone think of a time when paying a "record premium" to own something worked out well? And that goes for both the underlying they were trying to get exposure to, and the overpriced proxy for it that they bought. The bitcoin ETF and the USO oil ETF are both examples from this cycle.

Meanwhile, fraudulent companies are holding up so well that people are talking about a "fraud asset class".
Nothing lasts forever. An economic system of "Lockdown Socialism" and frauds is going to have a messy collapse.


CP said...

retail dip buyers:


CP said...

His agreement to provide coverage to the directors is dependent on his financial ability to honor his commitment. However, the directors’ need for coverage could arise in a set of circumstances that could itself undermine Musk’s ability to honor his commitment. Of course Musk is famously wealthy (albeit with his wealth tied up in companies, including Tesla, with a truly impressive propensity to lose money). But as the above example shows, things can change – things can change in a hurry. In that regard, it is important to keep in mind that the most important function of D&O insurance is to protect a company’s directors and officers in times of crisis and catastrophe. It might well be that the directors need Musk’s promised “coverage” at the very moment when both Musk and Tesla have both encountered a dramatic reversal of fortunate – as indeed was the case with the bank I described above.

There is another thing about this arrangement and its dependence on Musk’s wealth. The fact is that this arrangement puts the directors in a position in which they have a direct financial interest in Musk being able to maintain his financial well-being. It is in their interest to ensure that Musk remains financially able to honor his “coverage” undertaking to them, which I think sheds interesting light on the statement in the company’s SEC filing that the arrangement does not impair the board’s independence.


Allan Folz said...

We slipped, imperceptibly at first and inevitably at the last, from Everything Bubble to Everything Fraud.

Stagflationary Mark said...

We’ve lost the ability to fairly safely increase our net worth by buying long-term TIPS and simply holding to maturity.

Not a problem though. Risk is the new safe! We’re told that we can “safely” write-off 2020. Doesn’t even matter. Here is our theme song for 2021!

Candy Mountain Song

Other than the fact that Charlie lost a kidney in that cave and there was no actual candy, things worked out fairly well for him. What didn’t kill him, made him stronger. Ha!

(I’m content in cash. No desire whatsoever to chase returns right now. Certainly not buying Tesla.)

Stagflationary Mark said...

CNBC: US weekly jobless claims hit 3.84 million, topping 30 million over the last 6 weeks

First-time filings for unemployment insurance hit 3.84 million last week as the wave of economic pain continues, though the worst appears to be in the past, according to Labor Department figures Thursday.

Another 3.84 million people just filed for unemployment but the worst appears to be in the past?

I wouldn’t say the worst is behind us until the total number of unemployed actually peaks.

Mountain Guide: Great news! Looks like the worst is behind us!
Concerned Climber: It’s really cold and it’s 3.84 degrees colder than yesterday!
Mountain Guide: Yeah, but it’s getting colder at a slower pace. Nothing to worry about.
Concerned Climber: I can’t feel my toes.


Stagflationary Mark said...

The Guardian: Ten reasons why a 'Greater Depression' for the 2020s is inevitable

Gaga stock market investors: Only 10 reasons to walk away? But baby, I just need one good one to stay!

Million Reasons

Gallows humor. *shrug shoulders*

Anonymous said...

Many people believe that our perceptions of human beauty are primarily determined by societal norms. But could there be something innate in our brains that influence whether we think a face is beautiful? Here, a group of researchers tested this hypothesis by determining whether chickens have any innate preferences for certain human faces. To do so, they trained chickens to react to either an average human male or female face.

They then showed the chickens a series of faces of different levels of attractiveness and measured how much the chickens pecked at each face (a measure of their preference for the face). Surprisingly, they found that the chickens preferred the same faces as did human volunteers (in this case university students asked to rate the faces for attractiveness), suggesting that something about these faces makes them inherently more attractive to our nervous systems. So there you have it: the next time you want to know which photo to use for your profile picture, consider asking a chicken.

CP said...

Elon Musk
Tesla stock price is too high imo
8:11 AM · May 1, 2020·Twitter for iPhone

Stagflationary Mark said...


He who can destroy a thing, controls a thing. - Paul Atreides