Tuesday, November 5, 2019

WeWork: What Happened? Why?

Earlier this year, the company was a unicorn darling ready for a $50 billion IPO. By late 2019, its solvency is now in question.
Just a few months ago, the company was a darling unicorn, the stock of which was coveted by many. It was about to unveil itself to the world of public markets with a lavish IPO.  At that time, market watchers and equity analysts debated its market value. How much could it fetch in value in public markets? $40 billion? $60 billion? Maybe $70 billion?

Bankers lined up to participate in every way:  Lend money to its revered founder and CEO.  Arrange debt funding for its operations. Sell the IPO to salivating prospective investors.  Lead and underwrite the IPO with fanfare and pats on the back for all.

In one short period this summer through early fall, a giddy market anticipated its public offering; just a few weeks afterward, investors backed off, began to question the value of shares, pondered how the stock would perform in a projected recession, and wondered about the sanity and focus of its CEO. Investors, too, got uncomfortable with the CEO requesting to retain too much voting power. All of a sudden, there appeared to be no predictable timeline for when the company would ever make money.

What is this company that zoomed to start-up and investment-banking heights in early 2019 and is now being regarded by some as near insolvent, fighting for its life in late 2019?

WeWork. (Or We Company, as the holding company that would issue the new stock is called.)

What happened? How could this have happened? What role did banks play in helping to hoist the company to its loft financial heights? What role did they play in thrusting it toward a decline and arguably a questionable existence?

A turning point likely occurred when prudent, common-sense-approach prospective investors took note that other similarly prominent IPOs in the last few years (Uber, notably), which had blazing IPO launches, offered no reasonable timeline for when they will begin to make money.  Investors grew anxious when outlandish payments were intended to the CEO (Adam Neumann) and when they learned more about conflicts of interest between the company and the CEO's interests and outside holdings. All the projected earnings growth that was supposed to follow the company's large start-up and expansion-related losses, all of a sudden, had little expectation of occurring on schedule.

Prospective WeWork investors and the market that would follow its stock became uncomfortable about any management-flavored forecast for when the company would begin to make money.  Value in a company (or WeWork's pre-IPO assessment of $47 billions) is often based on the company generating long-term, sustainable, and achievable earnings and earnings growth. If the $47 billion were based on the company becoming long-term profitable in five years, investors and doubters began to reason that it would be much longer (maybe 7-10 years). If ever. If that long, surely the company couldn't be worth $47 billion today.

Bankers (from the big, notable investment banks), of course, ride a capital markets wave and momentum.  If the timing is right, they push the company toward a pubic offering:  Do it now before uncertainty sets in--uncertainty perhaps spurred by continuing uncertainty regarding China-related tariffs or the 2020 presidential election.  Do it now before investors become disenchanted with technology-branded young companies or prefer another attractive industry. (Bankers, almost without saying, are motivated by fees, including the tens of millions it would have earned from a public sale of We stock.)

Bankers, however, must do due diligence, investigate the validity of numbers, pore through accounting reports, and project performance, although they do so couched with guarded language and warnings that markets and environment change often and alter valuations frequently. But in their initial $40-billion-plus assessment of the company, they, too, may have been blinded by the charisma and style of CEO-founder Adam Neumann and believed with conviction his projections of unrealistic revenue growth from the company's global presence.

Neumann marketed a new business model, or a nuanced business model of something as old as the commercial real estate business.  He allowed the market to treat We as a "technology" play. As fast as it could, WeWork would enter into long-term lease obligations to control properties or consider borrowing long-term debt to purchase buildings. These obligations would be paid out from sublease income (cash flow rental payments from tenants).  Sublet rates, of course, would be determined from supply-demand dynamics and should be more than sufficient meet debt and long-term lease obligations and leave enough cash flow left for employee bonuses and earnings for investors.

The tweaked model is that the subleases (a) would be in small pieces (leases to entrepreneurs, small businesses, or even individuals) and (b) could be over shorter terms. Hence, the leases could turn over  frequently. Inevitably, there will be times when the space would be vacant (generating no cash flow to pay down debt or lease obligations to larger landlords).  While cash outflows (for lease and debt obligations) were fairly fixed and projectable, cash inflow would be uncertain, often volatile and unpredictable.

WeWork and Neuman convinced bankers and its primary pre-IPO investor SoftBank the working world had changed permanently: There would always be sufficient demand from businesses and individuals for this unique, different kind of work space. Workers from different business enterprises would be comfortable and even exciting about sharing work space. They argued this new, evolving working world would lead to surging, predictable cash inflows.

Bankers and SoftBank perceived that to sublease space to a new working generation, the company would need to (a) secure space, (b) build a brand, (c) promote a hip 21st-century culture of working and sharing space, (d) convince investors and lenders that cash flow will rush in, and (e) explain how demand for such novel, progressive work spaces would soar over time.

But what happens when an economy heads downward and entrepreneurs and businesses elect not to renew leases because they no longer anticipate similar business activity or choose another way of managing work space? What happens when entrepreneurs and small businesses cut costs by not renewing leases. The space becomes vacant and cash flows disappear likely more quickly than conventional real estate models.

Until late this summer, bankers and SoftBank rode the hyped model, prepared to lend the group $6 billion and to lead a well-publicized IPO.  Bankers eagerly arranged the debt piece, although they structured it to tie it to the offering of IPO shares to ensure there was a meaningful "capital cushion" below the debt they would offer. They also wanted to make sure there would be, at least for now, lots of cash sitting on the balance sheet at the start of the loan. At least interest would be paid on the debt outstanding for the foreseeable future.

Analysts, banks and investors (pre-IPO) presumed that cash proceeds from an IPO and from the debt (in billions of dollars) could help the company endure operating cash-flow deficits until operating-cash-flow-surpluses appeared. The company, they reasoned, was propped up and ready to endure a year or two without earnings.

But almost overnight, many realized that cash (from banks and the IPO) could disappear more rapidly than projected and no one had a good sense for when profits would appear. That cash might not permit it to survive more than a year or so.

Just like that, a company once prepared to ring stock-exchange bells to celebrate a vaunted IPO was now being dissected for possible insolvency.  The question was no longer whether or not the company's post-IPO share price could grow steadily, but whether the company could meet current obligations to debt holders, lessors, and employees, whether the company could slip into bankruptcy in a matter of months.

Many bankers, instead of reprimanding themselves for trying to push out a stock which today might have about a tenth of the value at which they were willing to promote it, may be praising themselves for having avoided a possible IPO disaster of an IPO and called it off.

The mission at WeWork these days is not about company promotion, creating happy work environments and boosting shareholder value. At least not this year (or next?). The objective now is about survival and getting through this uncertain, tough period.  Founder Neumann has been cast aside and pushed out (for reasons related to and beyond the IPO).  SoftBank has invested new cash to ensure the company can get through the next year or so (and to respond to ongoing concerns about the company's solvency). (SoftBank has even regrouped inhouse and is determined to learn lessons from this episode, announcing recently new standards for investments and company governance.)

The banks are also prepared to provide debt financing--likely at much tougher terms, restrictions and covenants than they might have required earlier this year. They all get to buy time to figure out how to massage what had been a glamorous business strategy and how to plan for more patient, realistic business growth.

New managers, new strategies and a realistic assessment of its marketplace could get it right. And its dreamers and founders, in the long term, could be spot on about the changing nature of work spaces and work environments. Time will tell.

Perhaps the company will have learned a lesson about how much better it is if they present themselves to the public with a much more precise timetable toward profitability.

Tracy Williams

See also:

CFN:  Snapchat and Its IPO, 2017
CFN:  LinkedIn Sells Itself, 2016
CFN:  Twitter's Turn to Do an IPO, 2013
CFN:  Facebook's Rough IPO Start, 2012
CFN: Is Uber Ready for an IPO? 2018
CFN:  Even Shake Shack Goes Public, 2015
CFN:  Alibaba's U.S. IPO, 2014

Thursday, October 10, 2019

Banking Trends in Late 2019

Some of the operating strategies under CEO Tidjane Thiam are now working effectively
Rumblings appear there that banks, big and small, will struggle to report earnings they've enjoyed the past year and a half. This comes after a period of blockbuster results. Partly from the aid of tax breaks and partly from continuing positive signs in the economy, some banks in 2018 posted record earnings and even hurdled past the 10%-return-on-equity barrier.

We're talking about a year where the big-tier banks, one by one, reported over $15 billion in net income--from JPMorgan Chase's $33 billion to Bank of America's $28 billion. Even Goldman Sachs, which since the crisis has joined the club of big universal banks and is just shades smaller than a JPMorgan Chase and Citigroup, topped $10 billion in earnings.

While Wells Fargo is still hampered by scandals and a continuing change-over among CEOs, it still generates enormous profits ($22 billion last year) and reasonable returns (11% last year).  For now, the bank must address regulators' concerns and the wariness of the public after widespread cases of checking-account fraud. 

Has Wells Fargo finally overcome the cultural and organizational risks that led to the consumer-bank scandals?  In the past month, the bank appointed its third CEO in recent years by enticing BNY Mellon's CEO Charles Scharf to assume a bigger, more challenging role in scrubbing the organization at Wells Fargo.

Scharf comes from the inner circle of JPMorgan's CEO Jamie Dimon, under whom he worked while running much of the consumer bank there years ago. Like Dimon, Scharf is a businessman running a financial institution, a leader focused on revenue growth, cost control and strong balance sheets rather than a blue-blood cultivation of client relationships.

JPMorgan Chase, Goldman Sachs and other big investment banks are suffering mild blows after the sudden cancelation of the vaunted We Work IPO, the glorious offering of new stock that would seize headlines in late 2019. Big banks prepared to provide debt financing (up to $6 billion), while arranging an IPO valued above $40 billion.

But a September equity market couldn't digest it and questioned the assessed value of the company and predicted the company wouldn't be profitable at all for many years to come. The once $60 billion company was reduced to $40 billion to $20 billion and now to questionable, uncertain value. Some negative observers even wonder if the company can remain solvent in a few years (although cash received from the new IPO was supposed to help it remain viable in the short term).

The IPO was put back on the shelf, while the market hinted that venture-capital-backed new companies need to do a better job about projecting when they will turn billions in losses to millions in gains. 

Otherwise, the banking momentum of 2018 continued through much of 2019, until issues with China trade and suggestions that the recovered economy had peaked haunted markets and now threaten bank earnings.

Equity markets have become volatile, and there are further hints that interest rates will trickle downward this year. There was confusion this summer about an inverted interest-rate yield curve. Now banks have begun to prepare for a less-than-spectacular second half, 2019.

Banks normally dislike when interest rates decline, because they hurt earnings.  Loan interest-rate spreads decline, especially related to floating-rate loans in the portfolio.  Long-term loans, particularly loans that were booked at higher fixed rates, are pre-paid.  So last year when consumers and corporate borrowers were squeamish about higher rates, banks quietly enjoyed upturns in net-interest earned. When interest rates trickle downward, they prepare for tighter spreads and declines in net interest. 

There is a consensus that if there were another recession or an extended downturn, banks are better prepared, better capitalized, and closely watched.  Although the mid-2000s crisis is now a chapter in financial history books and many lessons learned have been set aside, new rules have helped ensure banks can endure tougher times.  Losses on loan portfolios and trading positions are inevitable, but if banks have more capital and liquidity, losses won't lead to calls for bank regulators and central banks to bail them out. At least that's what the calculations related to new rules and minimum amounts of capital suggest.

As we approach late 2019 and even if banks, big and small, report slowdowns in earnings, they confront familiar issues and challenges, some of which could be turned into opportunities.

Trading and Market Risks

Post Dodd-Frank regulation, this is the domain of big banks, which continue to trade an assortment of asset classes (interest rates, equities, commodities, currencies, derivatives, etc.), but in the U.S. under the gaze of the Volcker Rule, the Dodd-Frank requirement restricting proprietary bank trading activity. Banks aren't suppose to trade like hedge funds; they are permitted to trade securities, commodities, currencies and derivatives if such trading facilitates customer flow.  Despite restrictions, big banks generate billions in trading revenue ($12 billion at JPMorgan last year, $8 billion at Bank of America). 

Trading revenues are and have always been volatile, although banks quarter after quarter, year after year, lament the unpredictability of performance.  Market behavior, volumes and outlook often dictate what banks earn in trading.  When markets slow down, get worried and behave in uncertain ways, banks get pummeled in trading.

Turmoil in markets (equity markets, inverted yield curves, uncertainty about trade tariffs, etc.) will lead to declines in bank trading profits (or perhaps losses in some asset classes). The big banks (from Citigroup to Morgan Stanley and Goldman Sachs) remain committed, even if related revenues surge and dive, surge and dive.

Notwithstanding volatility, probably the most important trading topic in the U.S. is how and whether the Volcker Rule will be changed. Proposals are under review to simplify the rules and turn back time a little toward pre-2010.  Banks must still trade for customer accounts and customer flows, but they may not be subject to the complex burden of proof that the trade was not a proprietary trade, one for the bank's own account. Regulation could lean toward the presumption that all trades are customer-related unless the bank shows they are proprietary (or "hedge fund"-like). Stay tuned. 

Deutsche Bank and Its Continuing Woes

Among global banks with a footprint everywhere, including in the U.S., Deutsche Bank has had to regroup time and again over the past few years. Investment banking strategies have been misguided, as the bank pushed aggressively to step into the top rungs of underwriting, mergers and acquisitions, and trading (especially in derivatives).  Yet the bank wanted to maintain its roots as an important consumer and corporate bank in Germany.

The balance sheet grew faster than capital; earnings hobbled. Sometimes it reported losses, when its peers started having banner years.  The marketplace wondered if it could be the next financial-institution behemoth to implode.  The New York-based subsidiary was supposed to be the tail wagging the dog and eventually became the tail that unraveled. Top talent has fled.  

Replacing leadership with new sector leaders and CEOs hasn't necessarily helped.  The bank has tried to complete and replicate what its peers have done (especially in investment banking and trading), but the plans on paper have never resulted in a stream of solid earnings. Something hasn't been right.

Deutsche Bank, once again in 2019, has had to contemplate a reinvention. This time, it promises to step back somewhat from its investment-banking dreams, while it once again shuffles leadership. The bank is not a Lehman or Bear Stearns on the horizon, but it may need to follow strictly its plans to return to plainer, basic consumer and commercial banking roles.

At Thiam's Place

Meanwhile, Credit Suisse had to address similar issues. It, too, has tried to thrust itself into the highest rungs of investment banking and trading. It has tried to whole fast to an investment banking legacy arising from its First Boston roots (when that American investment bank was undoubtedly a top-tier bank during some of the glory days of investment banking in the 1980s and 1990s.)

It, too, had similar performance problems.  In  2015, after a lackluster 4.5% ROE performance while its peers were headed toward 10%, Credit Suisse decided to hire a businessman outside, Tidjane Thiam, an insurance-company executive. In sometimes ruthless fashion, he reorganized, restructured, and pared back strategies at the bank. He reduced the emphasis on investment banking and trading and acknowledged Credit Suisse's European heritage in corporate banking and private banking. 

Years later, the bank has cleaned up its act and returns are reaching 9% (ROE).  Thiam's plan was to overhaul the place, not tweak or massage it, and the results show progress. 

(In recent weeks, however, Thiam and team have had to respond to accusations of "corporate espionage." Thiam eased out a top bank executive after the two reportedly had problems getting alone. In the aftermath, there have been accusations the bank engaged in some form of spying in the process. More to come?)

Can Marcus Come Through?

Over the past decade, no doubt mighty Goldman Sachs, now a bank holding company, has observed the successes in consumer banking at its peers.  Consumer banking brings in cheap deposits, diverse loan portfolios, and high loan spreads. Other banks also projected continuing growth in consumer banking, especially as the banks look for stable sources of revenue to offset the volatility of revenues in investment banking and trading. 

So Goldman stepped into consumer banking. Instead of acquiring an established mid-size regional bank and rebranding it Goldman. Goldman, effectively, has tried to build a consumer bank from scratch.  It has branded its consumer business as "Marcus," in an honor of sorts to one of its long-ago founders. 

Yet Goldman has stumbled out the door, incurring some losses, partly due to loan losses and inadequacies in risk management, something in which on the trading and corporate banking side it sometimes has few peers. (On the corporate side, it has an $80 billion-plus corporate loan portfolio.) In some ways, it may have tried to grow too fast and too quickly, tolerating exposures and approving loans with improper regard to credit risk if only to gain market share. 

Goldman won't quit too soon. It's the Goldman way to commit, learn from its mishaps, polish a strategy that permits it to take advantage of financial technology, and recommit in bigger ways. But this strategy make take a long time. Marcus right now may be for, now, no threat to the offerings from Citi, PNC, USBank, Regions or even some community banks.  

Tracy Williams



Monday, July 8, 2019

And Now Comes Libra

No surprise? Facebook leads the charge to establish a new cryptocurrency
In June, Facebook took yet another step to show its digital dominance, while presuming it has sufficiently managed a batch of issues it has encountered in recent years (issues like privacy, data accumulation, data exploitation, and the call from politicians and editorial writers that it should be broken up). 

Facebook, after leaks to the public, announced the creation of a new digital coin, Libra. Instead of observing from the sidelines the fuss and fury of Bitcoin, Ether, Blockchains, and the ferocious volatility in cryptocurrencies, it decided to join the circus by helping to create its own. 

Right away, to attract attention and offer comfort to Facebook followers who might buy (or invest in) the coin, it presented a different approach. 

The Libra coin, unlike other cryptocurrencies, will have value tied to a basket of bank deposits and government securities in different currencies. Hence, unlike Bitcoin, the underlying market value of Libra will be tied less to emotional and sometimes irrational supply-demand dynamics for the cryptocurrency and more tied to the value of the basket.

But before we understand the potential value and usefulness of the coin, why is Facebook doing this in the first place? Or why is Facebook leading the charge?

In almost none of the announcements has Facebook explained a profit motive, an opportunity to increase long-term revenues and expand into businesses beyond social networking--a strategy that might appeal to long-term shareholders.

But it's not an unusual ploy for large technology companies. They can't stand still; they must do research and invest in the next generation of products/services, because old products die, fade out or must evolve. Facebook the social network may one day reach a top limit in how many billions of accounts it has in place. Hence, the company, in amoeba-like fashion, ventures in many directions. A popular ploy, until now, has been to acquire smaller competing or complementary ventures and experiment with them until they contribute to growth (or they don't) (e.g., Instagram, WhatsApp, etc.). 

Another popular big-tech strategy is to step beyond comfortable grounds and do something radically different and take advantage of being big:  Amazon acquires Whole Foods and experiments with drones. Google introduces a smart phone and contemplates driver-less cars.   

Indeed Facebook, not even two decades old, is big today. It generated over $55 billion in revenues in 2018, resulting in $22 billion in net income. Operating costs are well-managed, sufficient enough for it to spend over $10 billion in research and develop last year (a few dollars of which likely resulted in the Libra venture). 

At this point, despite public-reputation woes and everybody's concerns about Facebook being too all-knowing and too powerful, the company by 2019 is generating about $7-9 billion a quarter in new operating cash flow. That helps explain why over $40 billion of cash and cash-equivalents sit on the balance sheet--cash it could give back to shareholders or cash it will likely use to fund new ventures or non-social-network growth. It's cash, too, it has to shoulder it from possible privacy-related settlements and lawsuits or to fund the promised investments in systems to ensure it has the privacy issue under control.

And now comes Libra. 

In the aftermath of the announcement, critics have shared their views. (Nobel laureate and Columbia economics professor Joseph Stiglitz in late June wrote an essay lampooning it. New York Times op-ed writers have weighed in quickly.) Tech-industry watchers and market analysts have scrutinized it. 

As the coin is unveiled and the system is implemented, there are questions that require answers and issues that must be addressed:

1. What will be Facebook's stated objective to account users, expected users of the digital coin, shareholders and government regulators vs. any underlying, unspoken goals (e.g., increase in account users, increase in site clicks and volume, diversify revenue sources, expand into new markets and regions, etc.)?

Will it aggressively seek to make money from this activity or present itself as a "utility"? Shareholders will question the company's willingness to step into a non-profit, utility role unless there are other expansive, important social benefits.

Initially Facebook has announced the Libra initiative will be managed through its Calibra subsidiary and Libra business operations will be separate from all other activities. The same subsidiary will be a member of the "Libra Association," which will oversee coin operations and the Blockchain. 

2. Will it be able to extract and exploit data (metrics, trends, numbers, account activity, etc.) from this line of business for purpose in the core business (increase account activity and account users to attract more numbers and more effective digital advertising)?

For now, Facebook contends data culled and aggregated from Libra will be segregated and not used by the social-network, digital-advertising business model.  But Facebook management will certainly need to show and prove how the separation will be enforced. 

3. Will it be able to explain honestly and openly the advantages of its currency vs. other cryptocurrencies vs. government-supervised country currencies? What are such advantages?

Will there be vivid, significant advantages in its payment system vs. what exists around the world today? The company and some observers say participants around the world will welcome a system of global payments (among individuals, companies, and institutions) that is cheaper and quicker, embraces technology fully in various ways (mobile payments, etc.), and not vulnerable to cyberthreats or information leakage. 

Facebook also contends the system will permit populations not able to have bank accounts to establish accounts and move money in ways they can't do so today. 

4. How will regulators intervene? 

When the new idea of "ICOs" (initial public offerings of new companies by issuing digital coins instead of stock and, therefore, bypassing regulators and investment bank underwriters in the process) sprouted, government regulators (the SEC in the U.S. notably) opined and offered public statements soon afterward. They explained situations ICO activity would be stepping out of beyond into realms of illegality and rationalized how the SEC must be involved. 

In Libra's case, regulators will step up to review, examine and opine--especially if there is any indication that users (including individuals) would be deceived, exploited or disadvantaged in hurtful ways. As a vast payments system, it will justify intervention because of potential impact on financial markets and the global financial system.

For now, Facebook states the organization structure will be under the umbrella of a Libra Association (including other known companies like Mastercard, Uber, eBay, PayPal and Visa). Hence, it won't act alone to determine the rules and requirements of the system. The early members of the association will make cash investments to cover initial operating costs to get the system started (technology, administration, and legal expenses, e.g.). Governance will include other corporate parties, none of which are (to date) sovereign government entities (central banks, government agencies, etc.).

Just like familiar cryptocurrencies, BlockChain transactions (or Digital Ledger Technology) will be under surveillance and confirmation by designated "miners" (participants who confirm transactions on behalf of all other participants and who earn a new coin (or commission or fee) for serving in the role). The Libra Association will define how miners will be compensated. 

5. Will the currency be subject to vast swings in value, unexpected and intolerable volatility? 

Perhaps not, if it is possible that owners of Libra will 

(a) know the value will be tied to a basket of well-known, government-sanctioned global securities in several currencies and 

(b) know any holder of the currency can cash out within a reasonable time (a few days?) from the sale of low-risk sovereign securities. 

In some ways, the set-up of Libra can be viewed like an open-ended mutual fund (or an "Exchange-Traded Fund" (ETF)). Libra coin holders can use Libra units for payments with other users and can choose to cash out into dollars or other currencies within a short time period. 

Like an ETF, Libra coin holders can acquire and deliver among themselves. Like a mutual fund, Libra coin holders can require the Association to cash out securities to redeem units in cash. 

Libra owners will have claim on a large pool of deposits and sovereign securities (including U.S. Treasury securities), but not as a source for an investment return. Interest income from the Treasury pool (after other operating costs) will accrue (at least for now) to "miners" and to members of the association. (In a traditional mutual fund, the interest income, of course, accrues to investors who own fund units.) 

Libra "value" will be a function of the value of the securities basket, which in theory should not fluctuate significantly. (Within the basket, if the dollar depreciates, then the Euro or the Yen might appreciate.) The intrinsic value of the basket could be updated daily. 

Because the system appears to look somewhat like a mutual fund with large numbers of purchasers of "units," U.S. regulator might have a convenient path to show the coin must be regulated. If we don the regulatory cap, we might deduce what regulators will expect to see. They could argue: 

(a) "Investors" or users of the coin will require various forms of investor protection. 

(b) Investor-users must be informed at all times of the value of the underlying securities that back the coin and that value should include a margin or cushion above the value of the coin outstanding. 

(c) Regulators should, therefore, be permitted to review the Digital Ledger and exclude undesirable participants and approve who will act in the role of "miners." 

(d) Regulators may require the "association" establish a reserve to ensure that losses from investments in Treasuries (from interest-rate swings) will not result in losses in value of Libra. 

(e) Regulators may require the “association” to increase its commitment to purchase a minimum amount of the coin (“skin in the game” notion). And they may stipulate that if the organizers and administrators of the system do not perform duties, income or compensation should accrue to coin holders. 

(f) Regulators, of course, will also probe for concerns about money-laundering and suspicious activity and will find a way to force Libra organizers to comply with bank-secrecy rules financial institutions must comply with today. 

(g) Regulators, central bankers and politicians will argue that if the system proves to have exceptional influence on global payments and the financial system, there will be systemic risk, which must be supervised. (Could Facebook and the association one day find itself designated a "Significantly Important Financial Institution"--especially if total coin value exceeds, say, $500 billion?)

Because the “association” will be entitled to interest income from the Treasury pool, there is money to be made. That will be tied to volume. Therefore, Facebook and its association cohorts will likely seek to promote the advantages of usage of the coin. In this case, it’s not about the number of account users, but also about the magnitude of coin each user is willing to buy.

Facebook promises Libra and the social network will operate separately. No doubt, however, the social-network users will be subject to advertising from and tie-ins to Libra. 

Facebook announced the project before it was ready, because of reported leaks. The implementation is still a year or two away. What wasn’t leaked (at least not yet) was projections of long-term earnings and value that could accrue to the company as a result of this expansion into a new venture. Few will believe this is primarily a venture in social justice and empowerment for the populations that don't have access to the banking system. 

Tracy Williams 

See also: