Muddy Waters’ Carson Block believes London Stock Exchange is the world’s “cleanest” stock exchange
One of America’s most fearful short sellers said that the London Stock Exchange must avoid a “race towards the bottom” against New York.
Carson Block, chief executive of Muddy Waters research, has urged policymakers to avoid loosening the rules in London so that it becomes more attractive for listing.
He said that London should maintain its reputation of being the “cleanest stock market” in the world.
Mr Block said: “The US is the leader in the race for the worst corporate governance practices.
The moral choice is for the UK to remain a non-tech market with a small niche, but have one of the most liquid and clean markets in the entire world.
“That is somewhat contrary to attracting listings, but perhaps that tells you all you need to about a firm that would avoid a market which demands accountability and transparency.”
The London Stock Exchange is losing relevance after a drop in new listings and a rise in the number of companies leaving the market. Companies like Arm are also shunning London for New York.
The travel agent Tui was the latest company to move forward with plans to leave London. It urged investors to support its plans to list exclusively in Frankfurt.
Prime Minister Rishi sunak and Chancellor Jeremy Hunt made reviving London’s market a priority. The City watchdog announced recent rule changes to attract companies through New York-style competition.
Block is not a fan of the US stock exchange.
He said: “At a certain point, after the financial crisis, investors ceased to see themselves as being compensated for avoiding risks and began buying narratives. You know, the really exciting ones.”
He calls this “lie to me culture” whereby CEOs try to fake it until they make it. His point is backed up by a string of scandals in which founders promised more than they could deliver, from Theranos blood testing devices and Nikola’s electric vehicles.
“Buying into this culture of ‘lie to you’ is part of what it means to be the center of the universe in terms of tech investment [in the US].”
The UK equity investor community is less prone to the “lie to me” culture.
Mr Sunak, and Mr Hunt’s strategy to revive Britain’s stagnant growth has made the stock market one of its key pillars.
But Mr Block said that a thriving stock market would not do much to boost the real economy.
He said, “When equity bubbles occur, they redistribute to people who are lucky rather than good.” It is a system that takes from many people and gives to fewer, but these few are not always the most capable.
When you mention the name Carson Block, a look filled with horror will appear on their faces.
The 46-year old New Yorker is a man of repute for his ability to take over boardrooms all around the globe.
His fund says it “does the work Wall Street will not” by uncovering balance sheet shenanigans, and other corporate chicanery.
Block explained that “a typical thesis is when we expose the wrongdoing of a small group of people.”
Muddy Waters borrows and sells shares in businesses that have ugly secrets uncovered. They do this to profit from the fall in stock prices.
Muddy Waters is a company that has made a name for itself by investigating Chinese companies listed on North American stock exchanges in the early 2010s. Its prey is usually smaller or overseas companies.
Block’s new short-selling target is all the more compelling because of its fire and brimstone strategy.
Last month, he took aim at a fund managed by Wall Street financial giant Blackstone led by billionaire Steve Schwarzman.
Muddy Waters rarely finds ammunition in a blue-chip business such as this. Block, unlike previous targets, does not allege any wrongdoing, or misdirection.
Block stated, “We don’t think there’s anything wrong with anyone because we can’t see it.” They’re caught in a storm that we believe is perfect. “They’re at the wrong place and time.”
Blackstone Mortgage Investment Trust (BXMT), also known as BXMT is a book of IOUs worth $22bn. The trust has lent money to landlords for the purchase of commercial property.
Muddy Waters claims that BXMT will be unable to repay the fund because of higher rates.
After-Covid has led to more people working from home, and tenants reducing the amount of space they rent from landlords.
Moreover, the landlords have to refinance the loans that they originally took out in order to purchase the offices at higher interest rates.
According to the US Mortgage Bankers’ Association (USMBA), $117bn in office loans will need to be repaid this year or refinanced at rates that are significantly higher than the original loan terms.
Block claims that BXMT may face losses on loans of up to $4.5 billion and the risk of a total wipeout of its shares.
Block believes that there are some similarities with the days of financial crisis when debt was a major factor. Block likes to use former Citigroup Chief Chuck Prince’s quote that “as soon as the music starts playing, you have to get up and start dancing” to describe the recent wall of money lenders who poured into commercial properties.
Block said: “With hindsight of 20/20, it turned out to be unwise.”
BXMT funds have a US focus, but the same trend seems to be in play in the UK.
Block said: It’s fair extrapolating that the office demand in Britain is structurally lower than before the pandemic.
Rates are also higher, and this has a negative impact on collateral values. The market demands higher returns, and you’re left in a situation where properties produce lower yields.
BXMT shares fell on the day that he announced his short position during an event in London.
A dip into Muddy Waters
BXMT denies Muddy Waters claims. It says that more than $8bn in loans were repaid last year or rolled forward, and the fund received $3.8bn as repayments.
BXMT published figures that minimize its exposure in offices. It claims only 36pc.
A spokesperson said: “Facts are, with the vast majority performing… BXMT is continuing to show resilience in a challenging background.”
Block was born in New York and began his career working for his father, a stock analyst, before attending law school. He then moved to China to research overhyped shares.
He became famous for a critical report he wrote on Sino-Forest – a Chinese forestry firm worth $8bn that was declared fraudulent by Chinese authorities.
Block then followed it up with several other direct hits that earned him a reputation as a financial rock star. Block’s comment on TV that he was shorting a Hong Kong company, but did not name it, caused the Hang Seng Index index to fall.
His crusades led to some gruesome war stories. He claimed that a corporate spy had posed as a Wall Street Journal journalist to meet him in order to obtain information. Block filmed and released footage of the entire episode.
Block has previously targeted UK-listed firms, including NMC Health the Middle Eastern hospital operator which collapsed in 2020.
The government will soon abolish EU rules on short-selling disclosures. This will allow funds such as Muddy Waters to remain hidden for longer.
Block said: “The UK is a lot more appealing, you know, to short sellers.”
Block, a crusader who keeps companies honest even if London’s rules are relaxed.
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