November 27, 2022

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SoftBank is a pioneer when it comes to losing money on tech bets

3 min read

Shortly after the FTX meltdown came to light last week, the SoftBank name emerged among early supporters of the ailing cryptocurrency exchange. Inevitable maybe.

The Japanese tech conglomerate, people close to it say, is set to write off its approximately $100 million FTX investment in full: terrible, but compared to the even more impressive $10 billion investment loss SoftBank reported on Friday announced its second quarter results, almost reassuringly modest.

Now properly embedded in WeWork’s glitched trail to this latest debacle is the sense of omni blunder of the world’s most prominent (and self-proclaimed) “vision capitalist” that its founder is less involved in managing the investments. But where there is an opportunity to lose money on technology these days, Masayoshi Son still seems to be ahead of the market as he found it ages ago. Along with visionaries like Elon Musk and Mark Zuckerberg, he might also be among the clearest modern redefinitions of John Kenneth Galbraith’s “Bezzle.”

Coined nearly 70 years ago by the famous economist, the term describes the temporary discrepancy between perceived assets and their actual longer-term value – a gap that historically widens most during boom times and times of irrational exuberance.

Galbraith derived his concept from the idea that in the sometimes long time between commission and discovery of a crime, both the embezzler and his victim can enjoy the same sense of ownership of an asset. This false dual possession defines the bezzle, he suggested, and the victim is in possession of a sometimes significant amount of “psychic wealth” at this point.

Charlie Munger, the billionaire vice chairman of Berkshire Hathaway, refined the concept 20 years ago, arguing that the Bezzle didn’t require embezzlement, pyramid schemes, or any kind of fraud to exist. When market valuations detach from the asset’s true earning capacity, they too create that illusory “psychic wealth” on which individuals, businesses, and entire economies can thrive for often surprisingly long periods of time.

Three years ago, Merryn Somerset Webb argued in the FT that a decade of easy monetary policy following the global financial crisis has once again updated the bezzle for modern times: all it takes is great PR, easy money and a time when the Markets are unperturbed by the “impossibility of profitability”.

Others have argued that the Bezzle has evolved many modern faces. Most of them are well outside the original fraud framework, and many, says economist Michael Pettis, occur in parallel with cases where debt is also skyrocketing.

In addition to the confusion created by inflated asset bubbles, overpriced collectibles, and speculative currency storms, Pettis notes that one of the greatest causes of confusion in an economy arises when vast overinvestments are made in infrastructure or manufacturing facilities that are never justified in the economic created Value. Japan’s infamous building of “bridges to nowhere” and more recently China’s construction boom, he says, are the main ignition generators.

However, Son, Musk, Zuckerberg and others could now be in a class of their own. Certainly one can argue that they are simply part of the already identified sources of buzz creation: the valuations of their own companies and those they invest in suddenly look a lot like gas giants in a larger asset bubble universe.

But it could also be argued that these numbers — and others in the tech world who have thrived on the advent of metrics that didn’t exist a few years ago — represent a hoax of foresight.

Son and others pose as visionaries and are readily cast by their fans. Success in one or more areas has given them the impression that they know what technology, industries, economies and societies are doing and wanting to do next. In the shadow of these visionaries, others have often received a similar benefit of the doubt, especially when someone like Son has supported a less visionary by pumping billions of dollars into their vision.

The plummeting tech valuations that have hurt SoftBank still don’t completely invalidate the suspicions some of these numbers have been betting on. Sohn and others could prove resoundingly right in the years to come. But it seems increasingly clear that they have become incredibly wealthy in a bubble of belief in the power of sight, which in turn has spawned a new breed of Bezzle waiting to be revealed in the months and years to come.

leo.lewis@ft.com

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