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The business model was always completely flawed: lease long and rent out short. It will always fail if there's a pandemic, WFH trend, hatred of commuting into

The business model was always completely flawed: lease long and rent out short. It will always fail if there's a pandemic, WFH trend, hatred of commuting into CBDs, or everyday recession. Put all four together and it's dead man walking. Just a pity that Adam Neumann made money from an obviously bad idea.

AlexandrB 3y ago
There are several WeWork competitors[1] that are doing just fine with the "lease long, rent short" model. They're just not valued as if they're a tech company like Google[2]. Fundamentally it seems like a pretty boring business of market forecasting and risk management. Not something that's going to yield 10X returns for a VC. [1] https://www.cbsnews.com/news/ftx-bankruptcy-tweet-sam-bankman-fried/ https://www.cbsnews.com/news/ftx-bankruptcy-tweet-sam-bankma... [2] https://www.forbes.com/sites/forbestechcouncil/2019/06/14/how-did-wework-beat-regus/?sh=1908377b4303 https://www.forbes.com/sites/forbestechcouncil/2019/06/14/ho...
turtlebits 3y ago
Rent out short but overprovision as all the renters won't be there at the same time. I think its a perfectly fine business model if you can get enough subscribers. They could definitely raise their prices as the IMO the local competitors cost more and are not as well managed. (At least in Seattle)
xorcist 3y ago
> lease long and rent out short Why does everyone keep repeating that as if it was the worst idea ever? I mean, there are lots of businesses doing exactly that. Banks, insurance companies, other real estate etc. It's just a matter of pricing and not taking more risk than you can afford.
- mikhailfranco 3y ago
  Banks are backed and bailed out by governments when their risk management goes wrong, if they are big enough (TBTF). Private risk and profit, but public liability, often ultimately impinging on monetary expansion and inflation, because fiat currency central banks just print more money for the bailouts. If the banks are small, they might be allowed to go bankrupt. But sometimes they are 'merged' into a bigger bank, under the auspices and supervision of the govt (fin sec regulator), often at a token 1 EUR/USD/GBP price (for the latest, see CSFB->UBS). In some cases, the shareholders and bondholders get to keep their money (!). This is not a real market. At the moment, the Fed & Treasury are punishing the banks by offering high rates on short notes and 2-year bonds. You may have noticed your bank offers <1% on instant access deposits but the US Govt offers 4-5% (easily available at treasurydirect.gov). Money market accounts offer the same, minus fees. Banks cannot survive, so the Fed offers them free money, and interest on reserve accounts, so they are bailed-out by proxy, without anyone having to utter the word bailout. Insurance companies are also bailed out, but only if they are in the financial re-insurance industry and TBTF (see AIG). Other insurers just go bankrupt, unless they are small-medium size, and can reinsure at somewhere like Lloyds of London, with unlimited liability and the skin-in-the-game of personal liability (not ltd protection). Nassim Taleb can explain the fat-tail risk, and why failures will happen eventually. Real estate, especially CRE, will go bankrupt very soon, if interest rates stay at this level any longer. Some of those failures will be cascaded from WeWork's bankruptcy. Watch this space... None of the examples you give are viable business models without implicit or explicit govt backing. They are picking up pennies in front of the Juggernaut of fat-tail risk.
  - xorcist 3y ago
    Well, yes and no. The above is true for a subset of banks in a subset of countries. But it is also not an argument that banking is somehow a bad business idea in general. Banking is one of the oldest business models, and there are many banks that are hundreds of years old and has weathered numerous crises. That alone should settle the argument if banking is a valid business idea or a dumb one that is doomed to fail without government backing. The banking business is risk management. Execution is everything. Compare Silicon Valley Bank with BoA. They aren't remotely similar in the risk exposure. Or compare Scandinavian banks with Italian. There's just no comparison. Regulation has kept the former in check, and is so well capitalized it will survive anything, and this is part of how to properly manage risk when, as you rightly say, the banks are too big to fail. Taleb is interesting and thought provoking to some, but not remotely scientific. It is collection of anecdotes, not principles to base your entire society on. Plenty of banks work well and has done so for centennia.
    - mikhailfranco 3y ago
      Fed currently supporting US banks to the tune of ~$110bn, following failure of 3 medium-sized banks: SVB, Silvergate, Signature. Many/most US banks are technically bankrupt at MTM asset prices, because of losses on bonds, as the fed raises interest rates (ZIRP was not forever?). Some claim they will Hold To Maturity (HTM), others are grabbing Fed money with both hands to cover MTM losses: https://fred.stlouisfed.org/series/H41RESPPALDKNWW https://fred.stlouisfed.org/series/H41RESPPALDKNWW
    - mikhailfranco 3y ago
      All major European countries have had banking crises in the last 20 years. Spanish & Italian banks are infamous. The oldest bank, BMPS went down. https://en.wikipedia.org/wiki/Banca_Monte_dei_Paschi_di_Siena https://en.wikipedia.org/wiki/Banca_Monte_dei_Paschi_di_Sien... Swiss banks - CS bankrupt, merged with UBS. German banks - DB and Commerzbank are both basket cases, with stock prices bouncing along the bottom, and only avoid bankruptcy because of the implicit ECB backing ( Whatever it takes ). Dodgy state-run French banks propped up by the bailout of Greece - no money went to Greece, it just went into an ECB account, then direct to creditors, mostly French banks! Many EU sovereigns and banks and companies have been bailed out by ECB buying risky assets, even commercial bonds, etc. (Fed is also authorized to buy junk bonds, hence tight spreads v. triple-A paper). UK banks collapsed in 2007-9, with run on Northern Rock. The banking system was effectively nationalized for a decade, and many banks merged into the TBTF incumbents. Recently, the BOE had to bail out pension funds because of MTM losses on bonds. https://www.theguardian.com/business/2022/sep/28/bank-of-england-in-65bn-scramble-to-avert-financial-crisis https://www.theguardian.com/business/2022/sep/28/bank-of-eng...

AlexandrB 3y ago

There are several WeWork competitors[1] that are doing just fine with the "lease long, rent short" model. They're just not valued as if they're a tech company like Google[2]. Fundamentally it seems like a pretty boring business of market forecasting and risk management. Not something that's going to yield 10X returns for a VC. [1] https://www.cbsnews.com/news/ftx-bankruptcy-tweet-sam-bankman-fried/ https://www.cbsnews.com/news/ftx-bankruptcy-tweet-sam-bankma... [2] https://www.forbes.com/sites/forbestechcouncil/2019/06/14/how-did-wework-beat-regus/?sh=1908377b4303 https://www.forbes.com/sites/forbestechcouncil/2019/06/14/ho...

turtlebits 3y ago

Rent out short but overprovision as all the renters won't be there at the same time. I think its a perfectly fine business model if you can get enough subscribers. They could definitely raise their prices as the IMO the local competitors cost more and are not as well managed. (At least in Seattle)

xorcist 3y ago

> lease long and rent out short Why does everyone keep repeating that as if it was the worst idea ever? I mean, there are lots of businesses doing exactly that. Banks, insurance companies, other real estate etc. It's just a matter of pricing and not taking more risk than you can afford.

mikhailfranco 3y ago
Banks are backed and bailed out by governments when their risk management goes wrong, if they are big enough (TBTF). Private risk and profit, but public liability, often ultimately impinging on monetary expansion and inflation, because fiat currency central banks just print more money for the bailouts. If the banks are small, they might be allowed to go bankrupt. But sometimes they are 'merged' into a bigger bank, under the auspices and supervision of the govt (fin sec regulator), often at a token 1 EUR/USD/GBP price (for the latest, see CSFB->UBS). In some cases, the shareholders and bondholders get to keep their money (!). This is not a real market. At the moment, the Fed & Treasury are punishing the banks by offering high rates on short notes and 2-year bonds. You may have noticed your bank offers <1% on instant access deposits but the US Govt offers 4-5% (easily available at treasurydirect.gov). Money market accounts offer the same, minus fees. Banks cannot survive, so the Fed offers them free money, and interest on reserve accounts, so they are bailed-out by proxy, without anyone having to utter the word bailout. Insurance companies are also bailed out, but only if they are in the financial re-insurance industry and TBTF (see AIG). Other insurers just go bankrupt, unless they are small-medium size, and can reinsure at somewhere like Lloyds of London, with unlimited liability and the skin-in-the-game of personal liability (not ltd protection). Nassim Taleb can explain the fat-tail risk, and why failures will happen eventually. Real estate, especially CRE, will go bankrupt very soon, if interest rates stay at this level any longer. Some of those failures will be cascaded from WeWork's bankruptcy. Watch this space... None of the examples you give are viable business models without implicit or explicit govt backing. They are picking up pennies in front of the Juggernaut of fat-tail risk.
- xorcist 3y ago
  Well, yes and no. The above is true for a subset of banks in a subset of countries. But it is also not an argument that banking is somehow a bad business idea in general. Banking is one of the oldest business models, and there are many banks that are hundreds of years old and has weathered numerous crises. That alone should settle the argument if banking is a valid business idea or a dumb one that is doomed to fail without government backing. The banking business is risk management. Execution is everything. Compare Silicon Valley Bank with BoA. They aren't remotely similar in the risk exposure. Or compare Scandinavian banks with Italian. There's just no comparison. Regulation has kept the former in check, and is so well capitalized it will survive anything, and this is part of how to properly manage risk when, as you rightly say, the banks are too big to fail. Taleb is interesting and thought provoking to some, but not remotely scientific. It is collection of anecdotes, not principles to base your entire society on. Plenty of banks work well and has done so for centennia.
  - mikhailfranco 3y ago
    Fed currently supporting US banks to the tune of ~$110bn, following failure of 3 medium-sized banks: SVB, Silvergate, Signature. Many/most US banks are technically bankrupt at MTM asset prices, because of losses on bonds, as the fed raises interest rates (ZIRP was not forever?). Some claim they will Hold To Maturity (HTM), others are grabbing Fed money with both hands to cover MTM losses: https://fred.stlouisfed.org/series/H41RESPPALDKNWW https://fred.stlouisfed.org/series/H41RESPPALDKNWW
  - mikhailfranco 3y ago
    All major European countries have had banking crises in the last 20 years. Spanish & Italian banks are infamous. The oldest bank, BMPS went down. https://en.wikipedia.org/wiki/Banca_Monte_dei_Paschi_di_Siena https://en.wikipedia.org/wiki/Banca_Monte_dei_Paschi_di_Sien... Swiss banks - CS bankrupt, merged with UBS. German banks - DB and Commerzbank are both basket cases, with stock prices bouncing along the bottom, and only avoid bankruptcy because of the implicit ECB backing ( Whatever it takes ). Dodgy state-run French banks propped up by the bailout of Greece - no money went to Greece, it just went into an ECB account, then direct to creditors, mostly French banks! Many EU sovereigns and banks and companies have been bailed out by ECB buying risky assets, even commercial bonds, etc. (Fed is also authorized to buy junk bonds, hence tight spreads v. triple-A paper). UK banks collapsed in 2007-9, with run on Northern Rock. The banking system was effectively nationalized for a decade, and many banks merged into the TBTF incumbents. Recently, the BOE had to bail out pension funds because of MTM losses on bonds. https://www.theguardian.com/business/2022/sep/28/bank-of-england-in-65bn-scramble-to-avert-financial-crisis https://www.theguardian.com/business/2022/sep/28/bank-of-eng...