UNIDENTIFIED PERSON #1, BYLINE: Heads-up - there is one swear word in this show. My parents used to say it around me, but if you're a parent and you don't like swears, now you know.
SYLVIE DOUGLIS, BYLINE: This is PLANET MONEY from NPR.
KENNY MALONE, HOST:
Alexxus Harris has one of those jobs you can't really ask a lot about.
ALEXXUS HARRIS: I am an IT type for the Department of Defense.
MALONE: Oh, no kidding. OK. That's a cool job. So, like, are you not allowed to tell us, like, what you do or...
HARRIS: It does exactly what it means (laughter).
ROBERT SMITH, HOST:
But there are some ways in which her job is like anyone else's job. She gets a little bored at work. She gets some downtime. And she goes onto the Internet for her hobby, which happens to be trading stocks on an app called Robinhood.
HARRIS: So I, like most traders, probably check my Robinhood almost every five minutes to see what's going on.
HARRIS: I'm not even going to lie to you. So I saw that Hertz went down all the way to 80 cents.
MALONE: Eighty cents for Hertz. The stock price of this iconic American rental car company was nose-diving, and Alexxus pounced.
HARRIS: At first, I was only going to buy, like, $100 worth. And I'm like, I'm not going to see as much of a return on my investment if I only put in $100.
MALONE: She thinks, if I'm going to do this, let's not buy $100 worth. Let's buy $2,000 worth.
HARRIS: So the Hertz was a gamble, yes. I will admit that. I'm not - I'm ashamed to, but I will admit it.
MALONE: It was a gamble because what Alexxus knew, what the entire world knew at this point, was that the Hertz Corporation had declared bankruptcy.
SMITH: Now, bankruptcy does not mean that Hertz will disappear forever. Not too long ago, GM, General Motors, declared bankruptcy. They were reorganized and came back stronger. Same story with Delta Airlines. But in both of those cases, the stock in the company became worthless. The investors lost everything. And Hertz is warning people, you know, our stock is also probably worth zero.
MALONE: And yet.
SMITH: And yet.
MALONE: Alexxus Harris is not alone in buying Hertz stock, like super not alone. So many people have been buying Hertz that the price of a probably worthless stock has gone up and up and up and up and up and up and up and up.
SMITH: Up, up, up, and up.
(SOUNDBITE OF TY NOAM FRANKEL SONG, "BREAK GLASS")
MALONE: Hello, and welcome to PLANET MONEY. I'm Kenny Malone.
SMITH: And I'm Robert Smith. Is bankruptcy just a state of mind, a rare chance for everyone to start over, an opportunity for all of us to embrace our hopeful sides and get rich?
MALONE: No. No, it is not.
SMITH: No. Nope.
MALONE: It is a very specific legal process by which a company can sidestep liabilities and reemerge by eliminating equity owners.
SMITH: Today on the show, we'll tell you what that means. And considering that a lot of companies may end up going through bankruptcy in the near future, we take you inside the Hertz bankruptcy - how it happened, how they get out of this mess...
MALONE: And how Alexxus Harris plans to profit off of the whole thing.
SMITH: Way back in 1918, a 22-year-old Chicago man got himself 12 Model T Fords and started renting them out, a concept so novel that he called the company simply Rent-a-Car. Rent-a-Car Inc. would ultimately become the Hertz Corporation
MALONE: And the Hertz Corporation would ultimately, 102 years later, end up on this Zoom call with a bankruptcy judge in Delaware.
(SOUNDBITE OF ARCHIVED RECORDING)
UNIDENTIFIED JUDGE: This is the first day in the Hertz corporation bankruptcy case, so I will turn it over to counsel for the debtor.
SMITH: It's about to be a depressing hearing. So the lawyer for Hertz, he leads with his best material.
(SOUNDBITE OF ARCHIVED RECORDING)
UNIDENTIFIED LAWYER: Today marks the first day in the next chapter - I guess it's fair to call it Chapter 11 - of the long history of the Hertz Rent-a-Car business.
MALONE: That is a Chapter 11 bankruptcy joke in bankruptcy court.
SMITH: The point of a bankruptcy hearing is to lay out before a judge all of the bad luck and bad decisions that got the company into this situation in the first place. It took more than three hours because, frankly, a lot went wrong with the company.
MALONE: The company was bought in the early days by General Motors, then sold to the Ford company at some point. It was acquired by private equity firms. It was taken public twice. And weirdly for a while, Hertz was owned by the Radio Corporation of America, maybe to sell more radios. Unclear.
SMITH: It feels like the company was sort of passed around, unloved, from owner to owner, much like a rental Chevy Cruze.
MALONE: (Laughter) And you know how when you rent a Chevy Cruze and you go to the beach, you don't really care that you fill it with sand when you leave? Well, that is sort of how the owners were treating Hertz, except instead of sand, it was being filled with debt.
SMITH: And how much debt are we talking about?
NORA NAUGHTON: Let me go to my notes.
MALONE: Yes, go to the notes.
NAUGHTON: I have 800 windows open.
SMITH: Nora Naughton covers the car industry, including Hertz, for The Wall Street Journal.
MALONE: And Nora says Hertz had been carrying more and more and more debt from those previous owners, but it really ballooned around 2012. That's when Hertz decided to buy some of their rental car rivals, Thrifty and Dollar.
NAUGHTON: Hertz had to borrow heavily in the bond markets and increased its debt by about 50% to $6 billion.
SMITH: Compared to the value of the company, that's huge.
NAUGHTON: It was huge. And I'm not done yet. So on top of that...
SMITH: Keep going.
NAUGHTON: So they take on all this debt, but it's all supposed to work out in the end because there's going to be all of these, you know, synergies and savings. But none of that ends up happening. There is complete mayhem inside. No one knew how to integrate anything, who was in charge of what. The fleets for all the different brands were getting mixed together.
MALONE: This brand mix-up was a real problem for Hertz. You'd have these loyal Hertz business travelers showing up for their luxury sedans, and then they would end up with some, like, Thrifty brand two-door that smelled like Florida cigarette smoke. Loyal customers were not happy about the brand mix-up.
SMITH: Hertz definitely needed some new cars, and not just to keep up appearances. Hertz's whole business model depends on a flow of new cars. Sure, they make money on rental fees, collision damage waiver, that really, really expensive gas, but a huge source of money is also flipping cars. They buy them cheap from manufacturers. They rent them out for a little while. And then they resell the used cars.
MALONE: The problem for Hertz, though, is that they still needed to find the money to buy those new cars.
NAUGHTON: Oh, they couldn't borrow money if they tried.
SMITH: They had so much debt.
NAUGHTON: Yeah. No, there was - the credit cards were maxed out. So they turned to this corner of Wall Street called the asset-backed securities market.
SMITH: Have you noticed, Kenny, that before everything goes wrong, someone always visits a corner of Wall Street?
MALONE: To be fair, other rental car companies do this as well. But, yes, these asset-backed securities are key to understanding why Hertz ultimately ends up in bankruptcy. Because here's how it all worked. Like, let's say Hertz wants a thousand new Chevy Cruzes.
SMITH: Or Chevys Cruze.
MALONE: Or Chevys Cruze. It does not buy those cars. Instead, Hertz creates a separate company to buy the cars, leases the cars from itself, and then goes to Wall Street and says, hey, I know you don't want to lend us, Hertz, money, but what about this brand-new other company that simply has cars and leases cars to Hertz themselves?
SMITH: Yes, it is financial engineering, but it is financial engineering backed by the awesome value of a Chevy Cruze. The value of all of these used cars was propping up the Hertz empire.
MALONE: The bottom line here is that this was a cheap way to get cars for Hertz and a great investment for Wall Street because the investment was guaranteed by cars, which could always be sold if anything went wrong. But then things went wrong - like globally, pandemically wrong.
NAUGHTON: That's the - can I swear on an NPR podcast?
SMITH: Go for it.
NAUGHTON: That's the oh, shit moment.
MALONE: It wasn't just that people stopped renting cars during the pandemic, although that was bad.
SMITH: It was that the rental car resale market also tanked, and that was catastrophic. It was bad for all rental car companies, but especially for Hertz, which was carrying all that debt.
NAUGHTON: They have no safety net. They are living on this razor's edge where the used car market is not at their disposal anymore.
MALONE: So are you saying that the future of Hertz essentially depended on the ability to make good money off of selling used cars?
NAUGHTON: Yeah, isn't that surprising? Actually, you know, rental car companies make a lot more money on their car sales than they do off of rentals.
SMITH: To be specific here, we are not talking about profits. There's not much of those around these days. We're talking about revenue. We checked Hertz's annual report. And, sure enough, more money flows into the company through selling used cars than through renting those cars to travelers.
MALONE: Hertz - you thought it was just a rental company, but it is also a Frankenstein's monster of financial engineering and used car sales.
SMITH: But now, after the pandemic, the people who lent Hertz money for those cars are like, wait a minute. If your used cars are worth less now, then how can we be sure we're going to be repaid? You need to pay us now.
MALONE: Hertz does not have that money now. The pandemic has destroyed car rentals. They can't sell off their fleet. And remember; their credit cards are maxed out.
SMITH: What is the number, the amount of money that Hertz owes to people?
NAUGHTON: It is a little over $17 billion.
MALONE: That's so much money.
SMITH: Could you say that again? Just say that again so we can live in this number.
NAUGHTON: A little over $17 billion.
SMITH: A healthy company might be able to handle $17 billion in debt, but not Hertz. They looked at what they owed in interest, what they had coming in, and they said, we're going to run out of money in, like, two or three months.
MALONE: And that is why, last month, a lawyer for Hertz went on a 10:30 a.m. Zoom call and made it official. Hertz was filing for bankruptcy. And by this point, Hertz had to dig itself out of almost $20 billion of debt.
(SOUNDBITE OF ARCHIVED RECORDING)
UNIDENTIFIED LAWYER: I guess I will conclude by referring to the Hertz motto. We're here to get you there. Seems like it fits. That's what we're going to do. We're going to get there.
SMITH: Now, the company is still operating. You could rent a Hertz car this week. I have one reserved for August. Fingers crossed. This is not one of those bankruptcies where they shut the doors and sell off all the office chairs in the street - you know, everything must go.
MALONE: This kind of bankruptcy is called Chapter 11. It is a reorganization. And the idea is that maybe it's actually better if a company like Hertz doesn't just disappear off the face of the Earth. If you can reorganize Hertz into a slimmer version of Hertz, that might be better for the employees, for the customers, even for the people Hertz owes money to because at least there is a Hertz.
SMITH: It is a beautiful utopian vision of rebirth. But before you get there, the bankruptcy process always gets ugly. There is not enough money for everyone. And the bankruptcy court is where they go to get that sorted out.
MALONE: You have some expertise in bankruptcy is my understanding.
KATE WALDOCK: Yeah. That's my primary area of research.
WALDOCK: I like to tell people I study the dismal part of the dismal science, which is, like, precisely what it is.
SMITH: That is Kate Waldock, an economist at Georgetown University. And we called her because bankruptcy court is equal parts fascinating and impenetrable.
MALONE: For instance, the very first thing that happens in bankruptcy is that everybody who's demanding money from Hertz, they have to take a deep breath and just calm down.
WALDOCK: Because of the automatic stay.
SMITH: The automatic stay.
WALDOCK: The automatic stay (laughter) just means that your creditors can't demand their money right away.
SMITH: So nice. So the phone stops ringing.
WALDOCK: I mean, they might still be calling you, but you don't have to pick it up.
SMITH: And this is where the bankruptcy judge comes in. Before Hertz can start paying back all these people, they have to decide how much money does the company have and who should get the money first. So what essentially happens in bankruptcy court is that the judge helps line everybody up who has a stake in the company, everyone hoping to get paid back someday.
MALONE: It helps me to picture this as an actual line forming in the courthouse. Now, there are no hard-and-fast rules for this, but generally, first up in line, right in front of the judge's bench, you're going to have the lenders who have some sort of claim on property, so let's say a bank that gave a mortgage to the Hertz company for its headquarters, or maybe the investors who lent money for the cars.
WALDOCK: Technically, like, both of those lenders are first because if they don't get paid back, they can just seize that collateral. They can just go in and basically rip the company apart by, like, taking the machines and taking the land and selling it off. And so for that reason, they are first.
MALONE: They're first in line because we don't want them to rip the company apart. Hertz is going to need that kind of stuff to survive and emerge from this bankruptcy.
SMITH: Next up, you have your banks with outstanding loans. There are the owners of corporate bonds.
MALONE: These are people that can't rip the company apart when they call in their debts. Also, maybe there are outstanding invoices. You sold Hertz air fresheners. You haven't been paid yet? All right, come on in. You're in line, too. Over here. Over here.
SMITH: Anyone here from the government? Hertz almost certainly owes taxes, so, Uncle Sam, get in the line.
MALONE: This is a line of all kinds of people with all kinds of IOUs from the Hertz company. And now the job of the court is to figure out how many of these IOUs can reasonably be paid if Hertz is going to reemerge from this bankruptcy.
SMITH: I imagine it like a giant candy bowl. And there's only so much candy in the bowl, and it gets passed down the line, starting at the front.
WALDOCK: Yeah. So, like, senior guys No. 1, they get a hundred candies. Senior guys No. 2, they get a hundred candies. And then it gets down. Everyone's getting a hundred until it gets to you. You're an unsecured guy. You're going to get one candy.
SMITH: And that one candy is just a Tootsie Roll. Like, that's how bad it is.
WALDOCK: I love Tootsie Rolls.
MALONE: Tootsie Rolls are good.
MALONE: What's the matter with you?
SMITH: OK, OK, OK. Now, the people at the front of the line, they are fine. They're going to get paid back. But eventually, the candy bowl runs out.
MALONE: And that moment that the candy bowl runs out - that has a fancy bankruptcy name. It is called the fulcrum.
SMITH: (Whispering) Fulcrum.
MALONE: And to everybody in line after this point, the company will say, sorry, but we're not going to be able to pay you back. However, we can convert that IOU you've got into new stock. Like, you're going to get a nice, big piece of our new and hopefully improved company.
SMITH: New stock. The lenders will essentially own the company. Now, if you have old stock, if you are the old owner of the company, what happens to your shares of stock?
WALDOCK: The judge, like, metaphorically just rips them up and says, this is no longer equity. Sorry.
SMITH: At the end of this whole reorganization process, in almost all cases, a new company emerges, but the old stock is worthless. Poof.
MALONE: And this is a very good thing to remember when you are buying and trading stock. Existing shareholders are at the very back of our imaginary bankruptcy line. This is the fundamental bargain you strike when you buy that stock. If the company is successful, you stand to get a lion's share of the profits. There's huge upside, but it comes with huge risk, and that risk is that when a company goes bankrupt, you're going to get the pain.
SMITH: And if you're at the back of an extremely long line, it is almost 100% certain that you will lose your money. And the Hertz line is stretching all the way out the courthouse, around the block. You can sort of see in the next - I don't have my glasses, but way in the back, who is that?
MALONE: Hey, Robert, it's Alexxus. Alexxus.
MALONE: Hey, it's our Department of Defense IT contractor who bought $2,000 worth of bankrupt Hertz stock. How that's working out for Alexxus after the break.
(SOUNDBITE OF DAN STEIN'S "MASTER CHI")
SMITH: In theory, the Hertz stock that Alexxus bought should be worth $0 today because when a company says its stock will soon be worthless, no one should want to buy that stock and the price should plummet. This is what I was taught.
MALONE: However, this is not what happened with the Hertz stock and with Alexxus because Alexxus bought in for 80 cents, and then other people started to also buy the stock.
HARRIS: I was checking it all the time just to see what was going on. And maybe two to three days later, it just started to spike. It was - it went from a dollar to $3 to $5.
SMITH: Kenny and I were also watching the price of the stock, amazed. The whole financial world was watching, including Nora Naughton from The Wall Street Journal.
NAUGHTON: You know, if I can speak reporter to reporter for a second, you know, I spent my entire Memorial Day weekend writing this company's obit. And I come back from the holiday, and this worthless stock is on a tear. And, you know, we were scratching our heads. I was calling every analyst I could to get them to explain it to me, wasn't finding a lot of answers.
MALONE: Because think about what is happening when people are trading the stock of Hertz while it is in bankruptcy. People are essentially buying each other's place at the very end of the bankruptcy line, waiting to be told that they will get nothing. That is a weird spot in line to pay for.
SMITH: There are two possible theories here. One is that there is a tiny, tiny chance the rental car market will rebound so fast, with so much money flowing in - a renaissance of rental - that Hertz will be able to honor its debt and the stock will bounce back and be worth a fortune and investors are geniuses.
MALONE: Or the more plausible theory going around is that people are simply gambling. They're stuck at home. They don't have sports to watch or to bet on. But they do have stimulus money from the government, and people thought, what the hell? Why not bet on Hertz?
SMITH: At some point in this mania, even Hertz seemed to throw up its corporate hands in confusion. Their lawyer told the bankruptcy judge, quote, "there are forces at work that us nonfinancial people, we can only observe."
MALONE: And in an amazing moment in bankruptcy history, Hertz asked the judge, essentially, given that all these people are buying our stock from each other, would it be cool if, like, we printed more Hertz stock and then sold it to people because that would definitely help us with this whole, you know, bankruptcy problem?
SMITH: Government regulators have since come in and said, you want to sell people more stock that is probably going to end up worthless? We are not so sure about that.
MALONE: Alexxus Harris is watching all of this. And she figures, like, sure, existing Hertz stock might get ripped up in, like, six months. That means that she has six months of opportunity to sell it to another gambler who is willing to pay more for that stock.
SMITH: It's like that old saying. You don't have to run faster than Frankenstein's monster. You just have to run faster than the investor next to you.
MALONE: On June 8, the Hertz stock price hit seven times higher than what Alexxus Harris had paid, and it was starting to go down. So she figured, OK, it is time to cash out.
HARRIS: Oh, man. My hand was shaking, and I was just - I was just hoping that the Internet at my job would be fast enough to execute it before it dropped any lower.
SMITH: She hits sell, hopes it goes through. And, boom, there it is - confirmation email.
HARRIS: I was like, oh, I could breathe. I was sweating. My armpits were sweating and everything. I was so nervous.
MALONE: So in the end, how much did you end up making off of Hertz?
HARRIS: Yeah, my profit was about 10 grand, so it was great - (laughter) great.
MALONE: Ten thousand dollars by buying something that most people think is worth nothing and selling that thing that's worth nothing to other people who, for some reason, were willing to pay more for it.
MALONE: That has got to be one of the greatest trades that I have ever heard of.
HARRIS: That's probably the best one I've ever pulled off. And I'll probably never ever do it again.
SMITH: For 20 minutes, we have explained corporate finance, bankruptcy, the fulcrum security, but all anyone is going to remember from this show is, oh, that's how you make $10,000.
MALONE: But to be clear, Alexxus Harris does not mince words about this. People keep asking her, should I, too, try something like this Hertz trade?
HARRIS: And I'm like, no, no. Absolutely not. No.
MALONE: Yeah. She says she got lucky. But as more companies are probably going to go bankrupt, she says she is done messing around with bankrupt stock.
(SOUNDBITE OF ERNEST SAINT-LAURENT'S "FLUTING ME SOFTLY")
SMITH: Have you made a spectacular long-shot trade, risked it all and it paid off for you? We don't really want to hear those stories. You can leave those on r/wallstreetbets. But if you have other good story ideas, you should contact us. We're firstname.lastname@example.org or on all the socials, @planetmoney.
MALONE: We're also on TikTok now, @planetmoney. Come for the dancing, stay for the explanation of diminishing marginal utility.
SMITH: And have you ever seen those flyers on telephone poles that say, work from home, make money? Those are usually fake, but the following offer is not. We have an opening for a PLANET MONEY intern. You can work at home. You can make money. And you can help craft this show. You can find more information at npr.org/money.
MALONE: Today's episode was produced by Liza Yeager, Lauren Hodges and former intern, now producer James Sneed. Today's episode was edited by Nick Fountain. Alex Goldmark is our supervising producer, and Bryant Urstadt edits the show. I'm Kenny Malone.
SMITH: And I'm Robert Smith. This is NPR. Thanks for listening.
(SOUNDBITE OF ERNEST SAINT-LAURENT'S "FLUTING ME SOFTLY")
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