Franklin Hugh Money

In June of nineteen eighty-nine, a seventeen-year-old got off a plane in Montreal carrying a backpack, a suitcase of books, and about two thousand Canadian dollars.

He found a pay phone in the airport and dialed directory assistance, looking for a great-uncle who was supposed to live in the city. The operator had no listing, because the uncle had moved to Minnesota. Nobody was coming to get him.

He picked up the bags and checked into a youth hostel.

His name was Elon Musk. He is, as this episode is recorded, the richest man alive, and this series is about the part of his life almost nobody tells: the thirty years he spent inside the machinery of money. Learning it, building it, getting thrown out of it, and betting everything on himself, over and over, until the bet paid more than any bet in the history of markets.

This is episode one, and it teaches three things: what a sovereign bond is, what it means when debt trades at cents on the dollar, and why a bank can see a fortune lying in plain sight and refuse to bend down and pick it up.

Start with the two thousand dollars, because everything that follows comes out of it.

He had left South Africa alone, with a Canadian passport claimed through his mother. In Montreal he bought a bus ticket, the kind that let you hop on and off anywhere in the country for a hundred dollars, and rode it west to Saskatchewan, to a second cousin's farm near a town called Waldeck. He spent about six weeks there. He tended vegetables and shoveled out grain bins, and he turned eighteen doing it.

Then he worked his way further west, and the jobs got worse as the pay got better. The best-paying one was cleaning the boiler room of a lumber mill in British Columbia. Eighteen dollars an hour, which was the wage a mill paid when the job was crawling through a hot tunnel in a protective suit to shovel out steaming residue. Most people who started that job did not finish the week. He did.

Hold onto that number. Eighteen dollars an hour. It comes back.

Somewhere in these first years in North America, he ran an experiment on himself, and he has described it many times since. He decided to find out whether he could live on a dollar a day for food. He bought in bulk: hot dogs, oranges, pasta, green peppers. Thirty dollars a month. His reasoning, in his own words, was that if he could live on a dollar a day, then earning thirty dollars in a month was not hard, and therefore no failure could actually destroy him.

Notice what that is. Before he ever bought a stock, a bond, or a company, he priced his own downside. He measured the absolute worst case, found it survivable, and from that day forward treated every risk in his life as smaller than it looked to everyone else. Investors call this knowing your risk tolerance. He established his at seventeen, in a grocery store, and it was the first great investment decision of his life, because the asset he was underwriting was himself.

In nineteen ninety he enrolled at Queen's University in Ontario. And here he and his younger brother Kimbal started doing something almost nobody does. They read the newspapers, picked out executives they wanted to know, and cold-called them, asking for lunch.

One of the men who said yes was Peter Nicholson, a senior executive at the Bank of Nova Scotia, one of the largest banks in Canada. Nicholson was a scientist by training, took a liking to the intense kid from South Africa, and gave him a summer internship in the bank's strategy office.

It paid about fourteen dollars an hour. The boiler room had paid eighteen. The most important financial education of his life came at a four-dollar pay cut, and he took it.

Nicholson handed his intern a real problem: go look at the bank's third-world debt portfolio.

Here is what that means, in plain English. Through the nineteen seventies and eighties, big Western banks had lent enormous sums to the governments of developing countries. Brazil, Mexico, Argentina, and others. A loan to a government is called sovereign debt. By the eighties, many of those governments could not pay, and the loans sat on the banks' books worth some fraction of what had been lent. The Bank of Nova Scotia was holding billions of dollars of this.

When a debt like that trades hands between banks, it trades at a discount, quoted in cents on the dollar. Twenty-five cents on the dollar means buyers will pay twenty-five dollars for the right to collect a hundred-dollar debt, because they believe most of it will never be paid.

Now, the United States government had stepped in with a program to clean this mess up. Under a plan named for Treasury Secretary Nicholas Brady, the old loans could be exchanged for new bonds, and the principal on those new bonds was secured by United States Treasury bonds held as collateral. In other words, the poorest outcome had a floor under it, and the floor was built by the full faith and credit of the United States. These were called Brady bonds. That guarantee sitting under a shaky debt is the backstop, and it is the document this episode is named for.

The intern did the arithmetic. Some of this debt was trading in the market at around twenty-five cents on the dollar. By his math, the backstop alone made it worth roughly fifty. He wanted to check that the market price was real, so he called Goldman Sachs in New York. An intern, on a fourteen-dollar wage, and he asked what the debt was going for. The price was real.

Buy at twenty-five what is guaranteed at fifty. He calculated the bank could roughly double its position, an opportunity he later described as the biggest he had ever seen, with nobody moving on it. He wrote it up. Nicholson liked it and sent it up the chain.

The bank said no.

The bank had been burned before, badly, on Brazilian and Argentine debt, and it had no appetite to buy more of the thing that had hurt it, whatever the collateral said. Musk walked away with a conclusion he has repeated for more than thirty years: bankers are rich, and they copy each other. If everyone else is lending, they lend. If everyone else has been burned, they sit still, even when the government of the United States is standing there holding the floor up.

Now the honest audit, because this series checks every legend against the paper, including the flattering ones.

The trade was not free money. The Treasury collateral secured the principal at maturity, and it did not secure the interest payments along the way. A Brady bond could still default on its coupons, and some later did. A careful desk would have bought the position smaller than a nineteen-year-old wanted to.

But read the record forward. Through the nineteen nineties, Brady bonds broadly rallied, and the investors who bought that fear made fortunes. The kid's core read was correct: the price was not measuring the risk in the bond. The price was measuring the fear in the boardroom. His first market lesson, learned at nineteen for fourteen dollars an hour, was that an institution's memory of its last loss can matter more than its math. And he learned something else, which explains the next thirty years of his life: if the people running the money will not act on a correct idea, the only way to act on it is to own the institution yourself.

One disclosure before we close, because this publication owes you it. Franklin Hugh Money writes in four voices, and one of the four is named for this man: first principles, an allergy to boredom, a refusal to accept that a thing must be done the way it has always been done. This series is Franklin Hugh Money going back to find out where that voice came from, and we are telling you that plainly, up front, so you can weigh what follows.

Here is where the ledger stands at the end of episode one. A kid lands with two thousand dollars. He prices his own ruin at a dollar a day and finds it affordable. He takes a four-dollar-an-hour pay cut to see inside a bank, finds a mispriced country on the books, checks the price with Goldman Sachs, and watches the correct trade die in a committee.

So he left. He transferred to the University of Pennsylvania, took a degree in economics from Wharton and another in physics, and pointed himself at California.

The next time money changes hands in this story, it is nineteen ninety-nine, and the check is for twenty-two million dollars. What he does with it, and what it cost him to learn who really controls a company, is episode two. The Cap Table.