E ARLIER THIS month WeWork delayed its initial public offering ( IPO ) after it became clear that the co-working firm would fetch as little as one-fifth of its latest private valuation of $47bn. Prospective investors began to question its poor governance, lack of transparency, reckless expansion and lack of economies of scale. The company, which has lost $1.4bn in the first half of this year, desperately needs cash. Public markets, creditors and venture capitalists, whom WeWork’s dreamy co-founder, Adam Neumann, has infatuated for years, appeared unwilling to hand over any more unless something changed. This week something did: Mr Neumann agreed to step down as chief executive. Will this be enough to avert WeWork’s slide towards possible bankruptcy? And would its implosion have consequences, other than to leave its backers out of pocket?

Start with WeWork’s prospects. The company has around $2.5bn in cash—about as much as its combined loss in 2017-18. If it continued to burn through this pile at the current, even faster rate, it would run out of money in under a year. The resignation of Mr Neumann, whose name appears 169 times in the company’s IPO prospectus, may be intended to signal a shift away from his quest for growth at all costs towards more responsible stewardship of capital. If that results in smaller losses, investors may loosen their purse strings. But this outcome is far from assured. Mr Neumann remains on the board as non-executive chairman. And a new, humbler version of WeWork may seem a less appealing proposition than his grandiose vision.

A collapse, then, is not out of the question. It would be felt beyond the firm and its investors. First, WeWork’s troubles dim the prospects for other overvalued startups and their venture-capital backers, notably SoftBank (see Schumpeter).

Second, holders of its $669m in junk bonds might take a hit. Big known ones include Lord Abbett, an investment firm, which lent WeWork $44m, and Allianz, a German insurer, with some $21m in exposure, according to Bloomberg, a data provider. But $669m is a drop in the $9trn bucket of America’s stock of corporate bonds. Any spillover into broader financial markets would thus be limited.

More troubling, some financiers and regulators fret that WeWork and fellow co-working companies may threaten financial stability. Eric Rosengren, president of the Federal Reserve Bank of Boston, told an academic conference on September 20th that “this new model for offices has the potential for a run on commercial real estate”. First, he observes, co-working firms generally acquire long-term leases for office space that they lease out for shorter durations to small companies. Smaller firms are more vulnerable to a recession—and, by relying on them for revenue, so are the co-working firms. Next, co-working firms often put leases for individual locations in special-purpose entities that prevent landlords from making a claim on the co-working firms’ entire balance-sheet if they fail to pay the lease. Finally, the argument goes, if landlords are hit, their banks might face losses on loans to them.

But special-purpose vehicles are nothing new in the office-rental industry. Most property-owners “have already priced in the fragility”, says Joseph Pagliari of the University of Chicago’s Booth School of Business. Big corporations, which are less likely to be felled by a recession, now account for some two-fifths of WeWork’s leases. WeWork’s prospectus did reveal some $47bn in lease obligations globally; if WeWork went belly up tomorrow, its counterparties would be hit. As with its debt, though, that big number is still just a fraction of $14trn-17trn in commercial-property leases in America alone. True, flexible workspaces account for 8% of new commercial leases in America. But when assessing systemic risk it is the stock that matters most. Colliers, a property-management firm, puts this at just 1.6% of all office space in the top 19 cities in America in mid-2018. Even if WeWork proves a house of cards, it should not shake the foundations of America’s financial system. ■