Boom-Time Memories of a Bust Gone By

By John Banks

Try to guess the visionary entrepreneur we are thinking of based on the following clues:

  • He is especially fond of the letter “X,” including it in things he has named.
  • His net worth — at valuation in the tens of billions — put him on among the top 10 richest people on the planet.
  • He once vowed to take the mantle of “world’s richest man.”
  • He is a flamboyant showman who sells dreams — and has a global army of true believers.
  • He took a combination of government loans and subsidies to get his empire up and running.
  • His naysayers think he is full of hot air — but his backers know he can do anything.
  • He has raised huge sums from investors — for visions that aren’t proven. 
  • His controversial actions, and statements, generate lots of press coverage.
  • His bold and brash spirit is the pride of a nation.
  • He is known for not just one company, but multiple companies, all interlinked.
  • His ventures seem to defy gravity, with valuations in the stratosphere.

If you thought it was Elon Musk, your guess makes sense.

After all, Musk just made headlines for surpassing Warren Buffett on the list of richest people based on net worth. This happened because of the stratospheric run-up in Tesla, with a valuation greater than General Motors, Ford, Fiat Chrysler, Daimler, Ferrari, Honda, BMW, and Hyundai all combined.

But the visionary we were thinking of is not Elon Musk. It was Eike Batista eight years ago.

In 2012, Eike Batista was ranked as the eighth-richest man in the world, with a net worth of $34.5 billion.

But 18 months later, Batista’s fortune had collapsed to just $200 million, according to the Bloomberg Billionaires Index. After that, his net worth went negative, making Batista a contender for the largest and fastest personal wealth collapse of all time.

Things grew still worse for Batista, who had once publicly vowed to become the world’s richest man.

Through his ties to Brazilian political figures, and a charge of paying out at least $16.5 million in bribes, Batista was implicated in one of the worst corruption scandals in Brazilian history. He was ultimately sentenced to 30 years in prison in 2018.

Batista, at one time, was a mining magnate building a Brazil-based commodity empire. He loved the letter “X,” believing it signified the multiplication of wealth, and used the letter X in stock symbols for his various companies.

Batista’s rocket-rise began in 2006, when he began listing a series of publicly traded Brazilian commodity companies. Eventually there were five of them, all with names ending “X.”

Batista was a consummate showman, drawing in large investors, like pension funds, with jet-setting presentations all over the world. His pitch was tied to the rise of emerging markets and an insatiable demand for Brazilian natural resources. His companies, according to Batista, were “idiot-proof.”

Except the investments weren’t idiot-proof. Batista’s crown jewel, a company called OGX for “Oil and Gas X,” saw its stock price fall 96% after failing to produce the 10.8 billion barrels of oil Batista had promised.

After Batista’s empire collapsed, a who’s who of large investors, from Pimco to Blackrock to Abu Dhabi’s sovereign wealth fund, had to fight tooth and nail to claw back what they could from tens of billions in debt and equity funding they had sent Batista’s way.

At the peak of his ascent, Batista looked and sounded bulletproof. He knew the compelling power of Brazil’s emerging market story, intertwined with a booming natural resource narrative — and he knew how to generate publicity and work the financial press.

Then, a few years after the collapse, investigations began into “Operation Car Wash,” the most all-encompassing corruption scandal in Brazilian history. The discovery of Batista’s bribes then led to Batista’s ultimate downfall, a 30-year prison sentence.

It all worked so well — until it stopped working at all.

We were reminded of the Batista story watching Tesla’s share price leave orbit, to a valuation that could only make sense if Tesla somehow ramped its vehicle production by 800% to 1,000%, and did so while maintaining fatter profit margins than any automaker in history, with no competition from any EV (electric vehicle) carmaker at all.

But of course, what is going on with Tesla is about showmanship and enthusiasm, not valuation.

“Tesla stock gets 10,000 new buyers an hour on Robinhood,” Bloomberg reported this week.

“Almost 40,000 Robinhood accounts added shares of the automaker during a single four-hour span on Monday,” said Bloomberg, “according to website Robintrack.net, which compiles data on the investing platform that’s much beloved by day-trading millennials.”

“The one-day return may not have turned out so well,” Bloomberg added. “Tesla was up as much as 16% at one point before paring gains through the day and finishing 3% lower.”

As Tesla breaks records for bullish sentiment among Robinhooders, it is also breaking records for the total volume of short bets wagered against a single company.

According to S3 Partners, a research firm, the total value of short sales against Tesla is approaching $20 billion (and may have surpassed that by the time you read this).

Professional short sellers tend to focus on factors like cash flow, valuations, and balance sheets — things the Robinhood crowd couldn’t care less about.

It is remarkable how determined the short sellers have been in the midst of Tesla’s historic run-up. This is probably because Tesla, as a company, displays far more glaring red flags (via signs of questionable accounting or business practices) than one typically finds in a single company.

Then, too, there doesn’t have to be anything fishy going on for a massive drop to occur. The end of mania pricing would do it.

Relative to realistic sales prospects, and the need to raise additional capital for output expansion — TSLA will need an order of magnitude more volume, at least, to have production in line with peers — Tesla shares could decline in value by 50-70% or more and still be richly priced.

A reversal of fortune may look impossible now. But that’s what Batista’s backers thought, too.