A Banker and an Automaker Walk into a Bar...
Stop me if you’ve heard this one before: what do you get when the world’s biggest automaker upsets the largest bank in the US? The answer is: a hundred-million-dollar lawsuit. Jokes aside, this is unfortunately what’s been going on behind the scenes at Tesla and JP Morgan for the past week. Over the course of this article, I’ll try to give the best summary I can of this billionaire’s boxing match, and I’ll wrap up at the end with my thoughts on the matter.
To give context to the whole Tesla-Morgan feud, a little background information is needed, as this isn’t their first bout. All of this started back in 2010 when Tesla had its IPO, or Initial Public Offer which was helped by JP Morgan themselves. Since then, Tesla has given JP Morgan more or less of a cold shoulder, as it refused to work with the bank on a regular basis. Musk even went to all of JP’s major competitors (Goldman Sachs, Morgan Stanley, Bank of America Corp.) for personal loans on which he pledged his stockholdings against. Attempts by both companies’ CEOs to patch things over also ended in more adversity. It didn’t help that JP Morgan Chase was hesitant to finance electric vehicles at first due to concerns about battery lives.
Now, as with most scandals that Elon Musk is involved in, Twitter is always to blame. Back in 2018, the maverick CEO tweeted that he had plans to take his company private at $420, a message which sent ripples of discontent throughout the world of finance. What really irked JP Morgan about this move is that back in 2014 it bought warrants from Tesla to help mitigate the risk that an issue of convertible notes would pose. For the uninformed reader, a warrant is a derivative (or financial instrument whose value is dependent on an underlying asset) that gives the owner the right, but not the obligation to buy or sell an equity at a certain price before its expiration date. They are issued by the company itself, are usually traded over the counter and are dilutive, meaning that when they are exercised, the company will issue new shares of stock. When Tesla’s warrants expired, the company would have to pay JP Morgan if the stock was trading above the agreed price of $560 the difference between the share price on the expiry date and $560.
Going back to the story, when Elon made his announcement on Twitter, JP lowered the strike price on the warrants out of fear of not making a profit. The stock was trading at $341.99, when Musk announced his $420 buyback. Both numbers were way below the original strike price, so the bank had to adjust. The whole situation eventually settled down when Elon announced that he was abandoning his privatization plans, and the bank raised its strike price to a level below that of the original.
The warrants eventually expired back in June and July this year at a cool $600 price, meaning that the bank made off with quite a profit. This, however, was not enough to satisfy the financial giant. In the lawsuit it launched, the bank demanded a restitution of $162m for the adjustments made back in 2018, stating that the warrants’ standard provisions allowed them to adjust the strike price to protect their position. Tesla refused to pay, calling the bank’s reaction to the whole ordeal “opportunistic” and its price movements “unreasonably swift”.
Conclusively, this whole series of events comes as no surprise to someone acquainted to Mr. Musk’s Twitter antics and the real-life effects they have on financial markets. His past endorsements of cryptocurrencies alone have propelled prices to never-before-seen levels as his millions of followers piled on to the trend. Even now, with the threat of a lawsuit form the biggest bank in the US looming above him, Musk jokingly remarked that he will give JP Morgan a “one star review on Yelp”, spurring his fanbase to flood the app with negative reviews for the bank.
I believe that this event is just another example of a super-influencer’s virtual remarks having ramifications in the real world. This happened most often with Donald Trump’s Twitter account, but ever since it was deleted, Elon Musk has ascended to the throne of “Twitter King”. For good or bad, his messages have real effects on financial markets, especially on cryptocurrencies and the already super-priced Tesla stock, and no analyst, no matter how skilled, will be able to accurately predict what sort of message will impact the automotive giant and its CEO.