The Finance 202: Uber illustrates long Saudi shadow in U.S. business world

Uber took a $3.5 billion investment from the Saudi’s sovereign wealth fund in 2016, a stake for which the regime secured a seat on the company’s board. And the country owns still more through SoftBank’s tech-focused Vision Fund, to which the Saudis have committed $45 billion. The fund is Uber’s largest investor and holds another two seats on the board. 

Uber has remained mum about the country’s investment, as evidence mounts implicating the Saudi government in the death of Post journalist Jamal Khashoggi, a Saudi expat and U.S. resident. But corporate governance experts say the company could seek to make changes to its charter to dilute the Saudis’ stake if it becomes an issue ahead of a blockbuster initial public offering that Uber is expected to undertake next year. 

Uber is hardly alone in facing a potential reckoning over a massive Saudi Arabian investment. Firms from Silicon Valley to Wall Street are engaging in a similarly awkward dance. In the immediate term, they need to broadcast concern over reports that Khashoggi was the victim of a brutal, premeditated murder at the hands of Saudi agents. But they also want to avoid irreversibly alienating the kingdom’s leaders and the gusher of profit-making opportunities they have to offer. 

“This incident is unacceptable, and clearly they have to answer questions,” Goldman Sachs CEO David Solomon told CNBC on Thursday. “How they answer those questions and how more information becomes apparent around this will have an impact on how we all interact.” Solomon said the firm will no longer be sending Dina Powell, a top executive and former Trump administration official, to next week's conference. That doesn’t mean, however, that lower-wattage Goldman bankers won’t still make the trip.

Other top firms have made feints in the direction of skipping the conference while maintaining plans to send some representatives. “Senior investment bankers from HSBC Holdings Plc, Societe Generale SA and Credit Suisse Group AG are planning to attend … even though their chief executives have told the world they’ve canceled appearances there,” Bloomberg News reported Wednesday. “Wall Street firms such as Morgan Stanley and Citigroup Inc., which have yet to publicly signal their intentions, are also expecting to send executives, people familiar with the companies said.” (In part, Barron's notes, banks want in on “future deals as the kingdom ramps up its debt offerings, privatizes huge swaths of its economy, and builds new infrastructure... For instance, the crown prince has a plan to spend $500 million to build a city from scratch, NEOM, on the Red Sea.")

BlackRock CEO Larry Fink announced Monday he's scrapping plans to attend the conference. Then, on Tuesday, he said his firm will not cut ties with the kingdom, even if it becomes clear King Salman bin Abdulaziz Al Saud or Crown Prince Mohammed bin Salman ordered Khashoggi's murder. 

Fink has long-standing ties to Saudi officials and unveiled plans last year to open offices in the country. His firm, with $6.4 trillion under management, is the largest investment fund in the world. (It also holds its own stake in Uber, having invested $175 million back in 2014.) And if BlackRock decides against shunning Saudi Arabia, other major investors could follow suit. That could ease heat on Uber and other tech firms to reckon with Saudi investments.

“If underwriters were to detect purchasers of the stock weren’t going to touch Uber because of the Saudi presence, that would get a reaction,” John Coffee, a professor at Columbia Law School who specializes in securities law, tells me. “But that’s a rather remote possibility in my mind, that there would be enough of a reaction that it would chill the IPO. And if there were a reaction, there are steps Uber could take.”

Because Uber is privately held, it’s unlikely to take any steps in the meantime to diminish the Saudi stake, says Kathleen Rice, principal at Renaissance Capital, which provides pre-IPO research. “There’s not enough pressure yet,” she said, calling it a public policy failure that a company could reach Uber’s size with limited disclosure of its ownership. “I don’t know all I’d like to about their governance… We’re in an era where it’s unprecedented to have this many companies at this size still private. That’s a problem.”

If so, it’s one not unique to Uber. The Saudis are now the single largest funding source for American start-ups, the Wall Street Journal reports. Over the last two years, the crown prince has directed $11 billion in investments to companies either directly or through the Vision Fund. Beneficiaries include WeWork, the office space-sharing outfit, augmented reality device maker Magic Leap, and the messaging platform Slack, according to data assembled by PitchBook. 

But as the Journal notes, Uber has been trying to polish a tarnished brand after an extended run of legal scrapes and other controversies. The company saw a reported 200,000 users delete the app from their phones last year after a social media-based protest to then-CEO Travis Kalanick’s participation on an advisory board for President Trump. For an entirely different reason, Bahrain attempted to promote its own Uber boycott this week — as punishment for Khosrowshahi’s decision to quit the Saudi conference.

— Fed's Quarles is optimistic. WSJ's Kate Davidson: “Federal Reserve Vice Chairman for Supervision Randal Quarles reaffirmed the central bank’s gradual monetary-policy course Thursday, saying policy makers should avoid focusing too much on metrics that come with a higher degree of uncertainty, such as some measures of labor slack, productivity and inflation. Speaking to the Economic Club of New York, Mr. Quarles said his outlook hasn’t changed much since February.

"'The U.S. economy is still ‘in a good spot,’ he said, and there are reasons to be optimistic about the economy’s potential capacity. ‘The more the economy’s potential growth increases, the more gradual we can be in our removal of monetary-policy accommodation,’ he said.”

Fed's Bullard less so. Reuters's Jonathan Spicer: “The Federal Reserve’s current monetary policy path would raise the risks of recession in an economy where recent, unexpectedly strong growth may start to taper anyway, St. Louis Fed President James Bullard said on Thursday. In remarks to the Economic Club of Memphis, Bullard pointed to a possible next chapter in the central bank’s discussion: What to do if, as expected, the growth rush from recent tax cuts, increased government spending and other positive economic trends begins to fade.”

— Gary Cohn: Trump should knock off the Fed criticism. CNBC's Jeff Cox: "As the latest former official to speak about Trump's verbal barrage against the central bank, Gary Cohn said the president's job is to appoint the officials who make policy and then let them do their jobs. 'The Fed is doing their job as an independent agency,' Cohn told CNBC's Steve Liesman... Asked if Trump should be critiquing the Fed, Cohn replied, 'I don't think he should make comments on any independent agency.'"

More from Cohn: "If you look at what's actually going on in the economy, when you look at the real numbers, we're way exceeding on growth, we're way exceeding on employment, and the Fed is basically on target. It seems to be like the Fed's in a methodical rate-raising environment, exactly what they're supposed to do."

— Stocks plunge. WSJ's Jessica Menton and Michael Wursthorn: “The Dow Jones Industrial Average tumbled more than 300 points as geopolitical tensions and worries about the state of the global expansion renewed concerns over the durability of the longest bull market rally ever. Losses accelerated throughout Thursday’s session, pulling the Dow industrials down as much as 471 points at one point, as investors confronted several more threats to the market, including companies struggling with rising costs, further instability in the European Union and increasing pressure between the U.S. and Saudi Arabia. While the selloff was broad, investors culled risky stocks from their portfolios, punishing shares of fast-growing companies that have led the market higher this year. Nearly all 30 stocks in the blue-chip index fell, with shares of Caterpillar , often considered a proxy of investors’ views on global trade, and widely held Apple suffering the biggest declines.”

They usually rally after the midterms. The Associated Press's Alex Veiga and Marley Jay: “Regardless of how midterm elections turn out, Wall Street usually ends up a big winner. The S&P 500, the stock market’s benchmark index, has climbed in the 12 months after each of the midterm elections going back to 1946. That’s 18 elections, many of which ended up shuffling the balance of power in Congress. ‘It turns out that under every political makeup in Washington, stocks have gone up and the economy has grown,’ said Kate Warne, an investment strategist for Edward Jones. In midterms going back to 1946, the S&P 500 index had an average price return of 16.7 percent in the 12 months after the elections, according to CFRA.”

— Jobless claims dip. WSJ's Sarah Chaney and Sharon Nunn: “The number of Americans filing applications for new unemployment benefits fell last week, indicative of a tight labor market in which employers are reluctant to lay off workers. Initial jobless claims, a proxy for layoffs across the U.S., decreased by 5,000 to a seasonally adjusted 210,000 in the week ended Oct. 13, the Labor Department said Thursday.”

Government-job manipulation: How U.S. governors have been putting their thumb on the scales at election time (Andrew Van Dam)

TRADE FLY-AROUND:

— Kudlow blasts China. CNBC's Fred Imbert: “Larry Kudlow, the director of the National Economic Council, went after China on Thursday for digging in its heels in trade talks with the U.S. ‘They are unfair traders. They are illegal traders. They have stolen our intellectual property,’  Kudlow said at the Detroit Economic Club on Thursday. ‘China has not responded positively to any of our asks.’ ‘America has the greatest technology in the world; it is the backbone of our economy,’ he said. ‘China can't seem to do that, so they steal it. We can't allow that.’ ”

— Chinese growth seizes. WSJ's Lingling Wei: "China's economic expansion slowed to its weakest pace since the financial crisis, as top financial regulators launched an extraordinary coordinated effort to calm jittery investors. The rate of growth in the third quarter dropped to 6.5%, falling short of market expectations, official statistics released Friday showed. Growth in industrial output and consumption weakened in the quarter, while exports held up despite the country’s bruising trade fight with the U.S.

"Shortly before the data was released, People’s Bank of China Gov. Yi Gang, banking and insurance regulatory chief Guo Shuqing and top securities cop Liu Shiyu all issued statements urging investors to remain calm."

Yuan sinks. AP's Joe McDonald: “China’s politically sensitive yuan sank to a 22-month low against the dollar on Thursday after the U.S. Treasury declined to label Beijing a currency manipulator amid a mounting tariff battle. The closely watched yuan fell to 6.9411 per dollar at mid-morning, coming its closest to breaking the symbolically significant level of seven to the greenback since December 2016. It recovered slightly in the afternoon.

"The yuan, also known as the renminbi, or ‘people’s money,’ has declined by almost 10 percent against the dollar since April as China’s economic growth cooled and U.S. and Chinese interest rates went in opposite directions. ... While it helps exporters, a weaker yuan also might encourage an outflow of capital from the world’s second-largest economy. That would raise borrowing costs at a time when communist leaders are trying to shore up cooling growth.”

Trade War Barely Slows Investment Plans, Philly Fed Survey Shows (Bloomberg News)

Japan Caved to Trump on Trade Talks. Now the Real Haggling Begins. (NYT)

MELTDOWN WATCH:

• “Conservatives mount a whisper campaign smearing Khashoggi in defense of Trump.” The Post’s Bob Costa and Karoun Demirjian. 

• “At Montana rally, Trump praises congressman for assaulting reporter.” The Post’s Seung Min Kim and Felicia Sonmez.

• “Kelly, Bolton get in profane shouting match outside the Oval Office.” Bloomberg News's Jennifer Jacobs.

— Trump: “It certainly looks” like Khashoggi is dead. The Washington Post's Erin Cunningham and John Wagner: “Trump said Thursday it appears that Jamal Khashoggi is dead and warned that his administration could consider 'very severe' measures against Saudi Arabia, sharply raising pressures on the kingdom as it prepares its own accounting of the journalist’s disappearance. . . . As he boarded a flight to Montana for a political rally, Trump was asked by a journalist whether he believed Khashoggi was dead. ‘It certainly looks that way to me,’ he said. ‘It’s very sad.'”

Mnuchin to skip Saudi conference. The Post's Damian Paletta and Jeanne Whalen: “Treasury Secretary Steven Mnuchin said Thursday that he would not attend the Future Investment Initiative summit in Saudi Arabia next week, delivering the Trump administration’s first formal rebuke of Saudi’s royal family following the suspected killing of [Khashoggi] inside a Saudi compound in Turkey. Mnuchin made his announcement on Twitter, saying he had met with [Trump] and Secretary of State Mike Pompeo, but he did not explain the reasoning for the decision. . . . Last week, even after reports surfaced about a possible link between the alleged killing and the Saudi royal family, Mnuchin signaled that he would still attend the conference.”

Mnuchin's tweet:

Jared makes himself scarce.  CNN: “Facing scrutiny for cultivating close ties with Saudi Arabia's powerful and domineering crown prince, Jared Kushner has remained intentionally in the background this week as West Wing officials feared a more public role would prompt backlash, multiple people familiar with the matter say. Kushner instead has been operating behind-the-scenes to mitigate the fallout... Senior administration officials said Kushner's close relationship with bin Salman was an early cause for concern among career national security staffers, who worried off-the-books conversations with the young prince could lead to misunderstandings or worse. Kushner is known to have messaged with the prince on the communication app WhatsApp.”

VP Pence warns 'there will be consequences' if missing journalist Jamal Khashoggi was murdered (CNBC)

For All Trump’s Talk, the Saudis Don’t Buy That Much Stuff From the U.S. (Bloomberg News)

— Northern Virginia well positioned for Amazon HQ2. The New York Times's Karen Weise: “Amazon won’t say a word about where it plans to put its much-hyped second headquarters . . . The growing consensus is that the place that checks the most boxes is Northern Virginia. In online betting forums, it has the best odds of landing the project. Analysts at Citi recently said most investors they spoke with also expected HQ2 to end up in the Washington area, noting that Northern Virginia is home to Amazon’s cloud computing division’s ‘largest and fastest-growing office outside of Seattle.’ 

"Many have gone a step further, suggesting that Crystal City, an older office area being revitalized just across the Potomac River from Washington, offers the best site. Its upsides: good transit, diverse residents, a friendly business climate and a single developer with a big chunk of land . . . Amazon says it will announce its decision by the end of the year.” (Amazon.com founder and chief executive Jeffrey P. Bezos owns The Washington Post.)

— Marchick to leave Carlyle Group. The Post's Thomas Heath: “One of the architects of The Carlyle Group’s expansion from a boutique private-equity firm into a global publicly-traded asset manager is leaving. David M. Marchick, 52, a member of the firm’s management committee, will depart by year’s end, moving to a senior adviser role as the company completes its transition into new leadership. More changes could come as the next generation of private-equity executives puts its stamp on the firm, seeking to boost Carlyle’s lagging stock price and compete with rivals Blackstone Group and KKR. . . . Marchick is an attorney who started at Carlyle as head of global government affairs as the firm expanded overseas and evolved from traditional leveraged buyouts into an array of assets with $210 billion under management.”

— Musk announces cheaper Model 3. The Post's Drew Harwell: “Tesla chief Elon Musk said late Thursday that the automaker was preparing to sell the cheapest version yet of its newest electric car, the Model 3, signaling an attempt to get back to business after months of controversy. Musk said on Twitter that the sedan, with its ‘mid-range’ battery pack, would cost $35,000, bringing it in line with the mass-market model he had promised for years would revolutionize the availability of electric cars. But that price takes into account federal and state tax rebates.”

Wall Street Loves These Three Letters. The Rest of Us Should Be Wary. (NYT)

Secretive Data Company Palantir Weighs Giant Public Offering (WSJ)

How Mega Millions and Powerball changed the odds to create monster jackpots (Alex Horton)

— Warren pushes Fed to fire Wells chief.  Reuters: "U.S. Senator Elizabeth Warren said on Thursday the Federal Reserve should not allow Wells Fargo & Co to grow in size until the bank replaces Chief Executive Officer Tim Sloan. In a letter to Fed Chairman Jerome Powell, Warren said Sloan, a 30-year veteran of Wells, was 'deeply implicated' in prior bank misconduct and it was untenable for him to remain at the bank as the Fed sought a drastic overhaul of its operations. 'The Wells Fargo Board of Directors cannot plausibly claim that it is "ensuring senior management’s ongoing effectiveness in managing the firm’s activities" while retaining a CEO that helped oversee this much misconduct,' she wrote."

— Kamala Harris pitches middle-class tax break. Politico's Brian Faler: "Sen. Kamala Harris, a potential 2020 Democratic presidential candidate, today proposed a big new tax break for average Americans. The California Democrat wants to create a new $6,000 tax credit for families earning up to $100,000. The break would be “refundable,” which means people could claim it even if it exceeded their tax liabilities, by receiving a check from the government for the difference... Harris's office said it doesn't yet know exactly how much the plan would cost, but that Harris would finance it in part by repealing the parts of the Tax Cuts and Jobs Act that benefit people earning more than $100,000. She would also impose a new bank tax on institutions with more than $50 million in assets."

— CFPB to probe official's racial comments. The Hill's Sylvan Lane: "The acting director of the Consumer Financial Protection Bureau has asked internal government watchdogs to investigate the emergence of and response to writings by a top agency employee dismissing racial discrimination. Acting CFPB chief Mick Mulvaney has asked the Federal Reserve Inspector General Office to probe the growing controversy over 14-year-old blog posts written by Eric Blankenstein, associate director of the Office of Supervision, Enforcement and Fair Lending... The Washington Post reported last month that Blankenstein had written anonymous blog posts in 2004 arguing that most reported hate crimes were hoaxes and questioning whether using the N-word was inherently racist."

Coming soon

• The Heritage Foundation holds an event titled “Problems with the JOBS Act and how they can be fixed” in Washington on Tuesday.
• The Brookings Institution hosts a panel conversation  titled “Taxing the gig economy” in Washington on Tuesday.
• The American Enterprise Institute holds a presentation of the book “Borrowed Time: Two Centuries of Booms, Busts, and Bailouts at Citi” by James Freeman and Vern McKinley in Washington on Thursday.

— From the New Yorker's Tom Toro:

Why don’t these Americans vote?

Royal couple charms in Australia:

Remembering Big Bird and Oscar through the years: