Elon Musk's gamble

Elon Musk’s recent use of his Tesla shares buy Twitter may spark the memories of history students and those who acutely remember the GFC in Sydney some 15 years ago. Just like buying an investment property by using the equity in your family home, Musk is using the equity in his Tesla shares as collateral to borrow money to buy Twitter.

In 2007 a similar loan structure became the undoing of Allco Finance’s (AFG) management team who along with their company expansion, also financed luxury cars, lavish houses and lifestyles. When tightly held information about the team’s loans and shares in AFG became public, the share price plummeted. Just like Musk’s deal on Tesla shares, the loan will get called in if Tesla shares fall below a certain price. The loans over the AFG shares were to be called in if the share price of ASG on the ASX fell below a certain level and stayed there for three months. Just like a moth to a flame, the AFG share price quickly fell to, and straight through, that trigger price, never to return. The equity of the management team’s AFG shares was burnt along with the price, 100’s of jobs and many Australians’ investment capital.

The risk of Musk’s 2022 deal is higher than AFG’s because we now have two extra factors to consider - ETFs and social media like Wall Street Bets. As ETFs are passive investments with indiscriminate buying and selling based on external indices, when Tesla shares increase relative to other shares on the index, the ETFs must buy more Tesla shares than other shares on that market. The same works in reverse however - when a company is removed from an index, the ETF must sell all the holdings in that company. This often happens to miners on Australia’s ASX when their commodities fall for consecutive years or they hit hard times.

Social media is the other factor which could negatively impact Musk’s deal. It can ramp up a trade idea, like we saw in January 2021 with the short squeeze of Gamestop 2021. In the case of the Twitter deal, both the hedge funds and social groups like Wall Street Bets would be on the same side, going against Elon Musk’s personal loan to buy Twitter.

Just as the AFG information becoming public led to the rapid demise of AFG’s share price and the lifestyles of its board, management team and investors, this deal could be the end of Musk’s extreme wealth and cascade him into a tumble similar to Amazon’s 96% fall from 2000 peaks to 2003 lows.