1. Twitter is purchased with debt
2. Debt is transferred to xAI via acquisition of X/Twitter
3. Debt is further transferred to SpaceX via acquisition of xAI
4. SpaceX IPO offered at extreme valuation
5. Index fund inclusion rules waived for SpaceX IPO: profitability requirement, inclusion period cut from 90 to 5 days
6. Index funds are largely held by passive investors such as pension funds.
7. Index fund managers are not incentivized to exclude a SpaceX from their indexes. (?)
8. Holders of original X/Twitter debt (banks) incentivized to support the rule waiver since post IPO, SpaceX will have liquidity to service/pay the debt.
9. Passive investors are unable to rapidly respond to these types of changes because liquidating portfolios will incur capital gains taxes. (?)
10. SpaceX is in Texas jurisdiction, where shareholder lawsuits are not possible and must instead go for arbitration. (?)
Correction: index funds don't have a choice. They must follow the index, and so must buy the stock.
side effect: they'll have to sell other stocks, pushing their prices and weighting in market cap weighted indexes down.
> Passive investors are unable to rapidly respond to these types of changes because liquidating portfolios will incur capital gains taxes. (?)
For some active investors, yes. For passive investors (say you through your employer's pension fund), the tax isn't the problem. It's that the market has such a short time to adjust the price of these companies before indexes are forced to include them--and so might buy them at wildly inflated prices. Then, not too long after, the early investors can sell at still-high prices as soon as their lockup periods end. It's a massive transfer of wealth from pension funds and index investors to the early investors in those companies.
Maybe, most indexes do not have to follow the index. they just need to match the returns. An index fund manager has choice of what stocks to buy. However an index fund doesn't have enough managers to make many choices and so they normally buy just what is in the index. However all index fund managers know they are large enough that if they change their holdings "instantly" when the index it self changes the market will collapse and so the fund will under perform. Thus index fund managers are always trying to figure out what the index will do so they can start buying/selling stocks in smaller amounts before the change happens.
How each fund handles this is up to the managers. (and "total market" funds have less ability and need to do this)
Right, if they've advertised as an S&P 500 index fund, they have to robotically follow the S&P 500, stupid inclusions and all. Changing that strategy would require ... a lengthy process involving input from shareholders.
However, someone can still start e.g. a "classic S&P 500" fund that follows the old rules for inclusion, and I suspect we'll see that in response to these recent decision.
Nevertheless it is part of a pattern of weird deals in Elon’s companies. He’ll do anything to move the goalposts and turn his failures into successes. There is no norm he won’t violate, no boundary he won’t cross.
Let’s not make billions into a footnote?
Unfortunately, if you really start digging in to what is going on in the financial world, you will find he has violated no norms here. This is not a defense of Elon; this is a condemnation of the entire financial industry.
The whole thing scares me, honestly. It has never been a clean happy market where lots of honest people get together and are just honestly trying to make a better world for each other, there is no golden past where people were just nice or anything, but damn if computers don't let people build some structures that the robber barons of old could only have dreamt of. I'm really concerned that "index and chill" doesn't just have a "best by" date but that the best-by date could be in the past; I've heard of an awful lot of ways of exploiting it and other retirements schemes we have, this is just one. I find it implausible that these ideas exist but nobody is doing them.
There is video explaining the process
7. ETF managers that track an index aren't allowed to put discretion into what they buy. They offer much lower fees because they don't have to do any thinking, just executing on an algorithm.
8. SpaceX servicing the X/Twitter debt isn't really a question. The total amount of debt is equal to about one year of revenue at the moment, and it's under 3% of the expected market cap of SpaceX. It's less than a third of what SpaceX's IPO is expected to generate selling new shares to the public. It's a non-issue. On the other hand, the fees the banks will get for the IPO could easily convince them to support the rules waivers.
9. This is true of some passive investors. It is not true of pension funds (which are usually not passive) or 401ks or other tax-advantaged retirement accounts. It is likely to be partly true for any individual depending on how much of their assets is in a tax-advantaged account vs a regular account.
10. Yes to Texas. It seems like the arbitration part is likely to be true (SpaceX is certainly claiming it in the prospectus), but there is not the certainty of having a long history of litigation.
Returning to 2+3: The rolling up of all other private Musk companies into SpaceX certainly impacted the investors in those companies, and how much Musk owns vs other people. But the equity adjustments there would be interesting, not the debt.
> ETF managers that track an index aren't allowed to put discretion into what they buy.
I detect a contradiction here.
Pension operators are not typically passive. It's a different story to say that maybe they should be given that their returns don't always match up with index funds.
Morgan Stanley, Goldman Sachs, JPMorgan, Bank of America, and Citigroup
They all know how idiotic Tesla investors are, and they all want those idiots to pick up their bags.
Also: SpaceX debt is $20 billion.