Power Sheet: Why Jim Chanos Is Shorting Tesla

He’s best known for shorting Enron back when most of Wall Street was swooning over it. But I first learned about him many years earlier, when Wall Street was falling for a company called Baldwin United. I thought the Wall Street consensus was right and said so in print. Chanos, having only recently graduated from Yale, thought it was wrong. Within two years, Baldwin United filed for what was then the largest bankruptcy in U.S. history.

Now Chanos is shorting Tesla and its cousin, SolarCity, and as usual, his argument is impressive. Tesla plans to buy SolarCity, a deal that Chanos calls “crazy” and “the height of folly” because SolarCity’s business model is “just plain uneconomic,” and the deal’s only rationale is “to in effect bail out the shareholders of SolarCity.” So why would the companies’ shareholders agree to the deal? Maybe, says Chanos, because the two sets of shareholders are in large part the same; Musk owns over 20% of both companies and is on both boards. SolarCity’s CEO, Lyndon Rive, is Musk’s cousin, and Musk’s brother, Kimbal Musk, is on the Tesla board. Elon Musk and Lyndon Rive recused themselves from the board votes on the deal. Chanos nonetheless calls the proposed deal “a shameful example of corporate governance at its worst.”

If the deal goes through, the result won’t be pretty, Chanos argues. The combined company will have an astronomical burn rate of about $1 billion a quarter, he says. That’s capital that must eventually produce a return exceeding its cost, an achievement that gets harder as the capital’s cost builds over time.

There’s more. Chanos questions Tesla’s ability to produce its Model 3 on time and on budget. He notes that several high-level executives have left in recent months, always a danger sign.

It’s possible that five years from now, Tesla will be a roaring success that transformed the auto industry, and Musk will sit in the pantheon of visionaries alongside Jeff Bezos, Steve Jobs, and Henry Ford. But Chanos believes Tesla will “continue to need more and more capital” and will “continue to lose lots of money,” and Chanos must be taken seriously. If he’s right, we’ll have to conclude that Musk was a brilliant and inspiring leader who was driven by a vision that turned out to be a delusion.

You can share Power Sheet with friends and followers here.

What We're Reading Today

NY Attorney General opens inquiry into Trump Foundation  
Eric Schneiderman said that his office has asked the Trump Foundation for information concerning potential improprieties. It's focused on the non-profit's $25,000 donation it gave to a political group linked to Florida AG Pam Bondi in 2013. Nonprofits aren't allowed to provide political donations. The Trump campaign says the inquiry is a "left-wing hit job," since Schneiderman is a Democrat. NBC News

Bayer to buy Monsanto for $66 billion 
Bayer CEO Werner Baumann's months-long campaign to secure the seed giant has finally paid off as Hugh Grant's Monsanto has agreed to the merger. The combined companies will create the largest seed and pesticide company in the world, but it's expected to face a close eye from regulators, since it would control over 25% of the world's seed supply. BBC

White House to up the amount of refugees it accepts in the U.S.
The Obama administration says it wants to increase the number of refugees that enter the U.S. to 110,000 in 2017. Secretary of State John Kerry explained to Congress how the U.S. would increase the number of refugees allowed to enter the U.S. by 57% since 2015. While Trump has advocated closing off the U.S. to refugees, Hillary Clinton has pushed for the U.S. to provide more support. CNN

Hedge fund manager calls Tesla the 'anti-Amazon'
Jim Chanos, the fund manager that spotted Enron's troubles, has been very vocal about his short of Tesla. He calls the SolarCity merger "crazy" since both companies are in a cash crunch. And he added that Elon Musk's company isn't like Amazon, which struggled to earn profits for years, because Jeff Bezos never had a cash shortage since going public. Tesla, Chanos says, will continue to lose money. Fortune

Building a Better Leader

No Meetings on Thursday
Edmunds.com has instituted a policy for no formal meetings on Thursdays. Implemented in July, it's meant to give employees time to think, get work done, and hopefully spark innovation. WSJ

In order to make friends at a new job...
...join internal network groups, fitness initiatives or community building programs that your office has available. You'll meet new people, and make connections that can benefit your career. Fortune

In order to double your salary...
...take stock of your current situation. Is there room to grow or do you have a promotion possibility in the near future? If the answer is no, then it could be time to find a new industry. Fast Company

On the Defensive

Wells Fargo CEO defends his bank
After Wells Fargo agreed to pay a $185 million fine due to the culture in the bank that led employees to open accounts without notifying the customer, CEO John Stumpf says the company provided "no incentive to do bad things." Stumpf continued to say, though, that it would end branch sales goals, which regulators say led to the practice. Stumpf, however, laid little blame on the leadership of the company, and instead placed it on the shoulders of employees for not doing "the thing that we ask them to do." WSJ

Dalio defends culture of transparency at Bridgewater
The founder of the hedge fund, Ray Dalio has often spoken about the "radical transparency" the company has when it comes to its work culture. But recently that has come under scrutiny, after reports surfaced that it creates fear and intimidation. Dalio says that the culture isn't for everyone. "Some people absolutely hate it and some people can never work someplace else," Dalio added. CNBC

Mike Pence struggles to rally support for Trump on the Hill
The VP candidate headed to Washington yesterday in an effort to rally Republicans around Hillary Clinton's comment, calling some of Donald Trump's followers "deplorable." Some Republicans in both the House and Senate declined to join news conferences with Pence to rebuke the comments. Then when asked about former KKK leader David Duke, Pence wavered on referring to him as "deplorable." NYT

Up or Out

Rich Battista has been named CEO of Time Inc. (Fortune's parent company). He replaces Joe Ripp, who will stay with the company as executive chairman.  CNNMoney

Fortune Reads and Videos

Complaints keep coming from Didi Chuxing riders
Ever since the merger with Uber China was announced, price increases have made customers fume.  Fortune

Mylan agrees to hand over documents to Congress
Several congressional members have demanded for information on the EpiPen price hikes. Fortune

Carl Icahn has considered buying Herbalife
He already owns 20% of the company, but has applied for the option of purchasing up to 50% of the business. And he's thought about acquiring the whole thing. Fortune

BMW and VW team up with ChargePoint to add...
...nearly 100 electric vehicle charging stations on busy stretches of highway on the east and west coasts. The goal is to reduce "range anxiety" in electric vehicles. Fortune

Happy Birthday