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The BAN Report 7/15/21

The BAN Report: Big 4 Bank Earnings / Powell Dismisses Inflation Concerns / Roubini Speaks Up / Expanded Unemployment Hurting Hiring / Calk Convicted

Big 4 Bank Earnings

The four largest banks released their earnings for the second quarter this week. All 4 beat on earnings, but revenue and loan growth were disappointing.

JP Morgan Chase

JP Morgan Chase earned $3.78 / share, exceeding estimates of $3.21 and exceeded its revenue estimate as well. Improving credit added $2.3 billion to their earnings as the $3 billion in released loan loss reserves were off-set by $734 million in charge-offs. In the prior quarter, JP Morgan released $5.2 billion in reserves. A big disappointment was trading revenue.

Trading revenue fell 30% from the year earlier period, an expected outcome after the frenzied activity in the aftermath of Federal Reserve actions to bolster markets during the early stage of the coronavirus pandemic.

Loan growth has also been tough as average loans are down 3% from the prior year, while average deposits are up 25%. It also looks as if the second quarter was particularly tough for loan growth, as the quarter-to-quarter decline was 3%.

Bank of America

Bank of America beat on earnings helped by an income tax benefit, but missed on revenue.

The company said revenue fell 4% from a year earlier, driven by a 6% drop in net interest income because of lower interest rates. Lower trading revenue and the absence of a $704 million gain a year earlier also hit revenue, the bank said.  

Bank of America’s results show the impact of falling interest rates on the industry. Banks gather deposits and extend loans; falling interest rates squeeze the margin between what they pay depositors and charge borrowers. The bank’s net interest margin of 1.61% in the quarter was 26 basis points lower than a year earlier and below the 1.67% estimate of analysts surveyed by FactSet.

CFO Paul Donofrio cited the “continued challenge of low interest rates” in the bank’s earnings release. The 10-year Treasury yield broke above 1.75% in March amid the economic comeback, hitting its highest level since the pandemic began.  But the benchmark rate has pulled back to around 1.40% as of Tuesday.

A 1.61% net interest margin is pretty remarkably skinny. The ‘Q1 Quarterly Banking Profile showed 2.56% for the entire industry – the lowest ever. Moreover, B of A’s margin shrunk by 7 basis points from the prior quarter, which suggests the industry has not yet turned the corner on rates. The good news is B of A grew loans in the second quarter – the first time since early last year.   They also released $1.6 billion in loan loss reserves.

Wells Fargo

The market reacted favorably to Wells Fargo’s earnings, as it beat on both earnings and revenue. Loan growth was disappointing.

Wells also reported a net interest margin — a measure of how much a bank earns from the difference between what it pays on deposits and what it takes in on loans — of 2.02% for the quarter. Analysts were expecting 2.05%, according to FactSet. Persistently low interest rates have continued to weigh on that part of the bank business.

CEO Charlie Scharf said in a press release that demand for the bank’s loans remains somewhat muted despite the economic recovery.

“Wells Fargo benefited from the continued economic recovery, strong markets that helped drive gains in our affiliated venture capital businesses, and our progress on improving efficiency, but the headwinds of low interest rates and tepid loan demand remained,” Scharf said in the earnings release. “Our top priority continues to be building an appropriate risk and control infrastructure for a company of our size and complexity and we continue to invest in additional resources and devote significant management attention to this work.”

Describing loan demand as “tepid” suggests Wells has not yet seen uptick in loan demand. Earlier this month, Wells announced it was shutting down all existing personal lines of credit, so Wells appears to be less focused on loan growth.


Citigroup had a great quarter, beating on earnings, revenue, and showing loan growth from the prior quarter.

The firm’s earnings jumped after it released reserves set aside for loan losses, resulting in a $1.1 billion benefit after $1.3 billion in charge-offs. A year ago, the bank had been forced to set aside billions for expected credit losses, resulting in an $8.2 billion credit cost.  

“The pace of the global recovery is exceeding earlier expectations and with it, consumer and corporate confidence is rising,” CEO Jane Fraser said in the release. “We saw this across our businesses, as reflected in our performance in investment banking and equities as well as markedly increased spending on our credit cards. While we have to be mindful of the unevenness in the recovery globally, we are optimistic about the momentum ahead.”

Like other Wall Street rivals, Citigroup posted a sharp decline in fixed income trading revenue in the quarter. Fixed income operations generated $3.2 billion in revenue, below the $3.66 billion estimate.

But the bond trading decline, which was expected, was offset by better-than-expected results in equities and investment banking.  

In the second quarter, Citigroup announced it was exiting retail operations in 13 countries outside of the US.

Overall, banks continue to benefit from releases in loan loss reserves, as credit quality improves. However, margins and loan growth continue to be tough. With higher rates on the way and an economy growing in the high single digits, one would expect the rate environment to finally turn the corner for banks and loan growth should improve. For smaller banks that saw strong PPP originations, loan growth will be especially challenging as PPP forgiveness accelerates in the second half of the year.

Powell Dismisses Inflation Concerns

Yesterday, Fed Chairman Jerome Powell acknowledged rising inflation, but gave no indication that the Fed is considering a change of policy.

Jerome H. Powell, the Federal Reserve chair, told House lawmakers on Wednesday that inflation had increased “notably” and was poised to remain higher in coming months before moderating — but he gave no indication that the recent jump in prices will spur central bankers to rush to change policy.

The Fed chair attributed rapid price gains to factors tied to the economy’s reopening from the pandemic, and indicated in response to questioning that Fed officials expected inflation to begin calming in six months or so.

Mr. Powell testified before the Financial Services Committee at a fraught moment both politically and economically, given the recent spike in inflation. The Consumer Price Index jumped 5.4 percent in June from a year earlier, the biggest increase since 2008 and a larger move than economists had expected. Price pressures appear poised to last longer than policymakers at the White House or Fed anticipated.

“Inflation has increased notably and will likely remain elevated in coming months before moderating,” Mr. Powell said in his opening remarks.

He later acknowledged that “the incoming inflation data have been higher than expected and hoped for,” but he said the gains were coming from a “small group” of goods and services directly tied to reopening.

Mr. Powell attributed the continuing pop in prices to a series of factors: temporary data quirks, supply constraints that ought to “partially reverse” and a surge in demand for services that were hit hard by the pandemic.

He said longer-run inflation expectations remained under control — which matters because inflation outlooks help shape the future path for prices. And he made it clear that if the situation got out of hand, the Fed would be prepared to react.

Given how unprecedented the economic situation has been in the past year and a half, no one really knows how this inflation story plays out. But, others are more worried, including Nouriel Roubini.

Roubini Speaks Up

Nouriel Roubini, professor of economics at New York University’s Stern School of Business, was the go-to economist in the 2008 financial crisis, earning the moniker “Dr. Doom.” He warned earlier this month how surging inflation could present a very difficult challenge to central banks.

We are thus left with the worst of both the stagflationary 1970s and the 2007-10 period. Debt ratios are much higher than in the 1970s, and a mix of loose economic policies and negative supply shocks threatens to fuel inflation rather than deflation, setting the stage for the mother of stagflationary debt crises over the next few years.

For now, loose monetary and fiscal policies will continue to fuel asset and credit bubbles, propelling a slow-motion train wreck. The warning signs are already apparent in today’s high price-to-earnings ratios, low equity risk premia, inflated housing and tech assets, and the irrational exuberance surrounding special purpose acquisition companies, the crypto sector, high-yield corporate debt, collateralized loan obligations, private equity, meme stocks, and runaway retail day trading. At some point, this boom will culminate in a Minsky moment (a sudden loss of confidence), and tighter monetary policies will trigger a bust and crash.

Making matters worse, central banks have effectively lost their independence because they have been given little choice but to monetize massive fiscal deficits to forestall a debt crisis. With both public and private debts having soared, they are in a debt trap. As inflation rises over the next few years, central banks will face a dilemma. If they start phasing out unconventional policies and raising policy rates to fight inflation, they will risk triggering a massive debt crisis and severe recession; but if they maintain a loose monetary policy, they will risk double-digit inflation – and deep stagflation when the next negative supply shocks emerge.

Mr. Roubini makes a great point – today’s high debt levels make the cure to inflation (higher rates) more painful than it would be otherwise. The Fed argues that much of the inflation is temporary and will ease when COVID-induced frictions wane.

His views on Bitcoin and cryptocurrencies are very interesting. For some reason, the CoinGeek Zurich invited him to give a keynote speech and he just eviscerated Bitcoin, arguing that it has negative value.    This often-hilarious speech is worth watching.

Expanded Unemployment Hurting Hiring

For months, there’s been anecdotal evidence that employers are having difficulty hiring low-wage workers due to the more generous unemployment insurance. A poll this week provided empirical evidence of this unique employment problem.

About 1.8 million out-of-work Americans have turned down jobs because of the generosity of unemployment insurance benefits, according to Morning Consult poll results released Wednesday.

Why it matters: U.S. businesses have been wrestling with labor supply shortages as folks capable of working have opted not to work for a variety of reasons.

By the numbers: Morning Consult surveyed 5,000 U.S. adults from June 22-25, 2021.

Anyone who has traveled recently can see how many employers are operating with skeleton crews despite strong demand.

Calk Convicted

Chicago Banker Stephen Calk was convicted this week of bribery after making loans to Paul Manafort, in exchange for a possible Trump cabinet post.

A federal jury in Manhattan convicted a former bank executive on charges that he helped arrange $16 million in loans to former Trump campaign chairman Paul Manafort, in exchange for help getting a high-level job in the Trump administration.

Stephen M. Calk, the founder and former chairman of the Federal Savings Bank in Chicago, was found guilty on both counts he faced: financial-institution bribery and conspiracy to commit financial-institution bribery. Federal prosecutors said Mr. Calk pushed the bank to approve the loans to Mr. Manafort, despite multiple red flags, because he hoped to be named secretary of the Army.

Mr. Calk’s lawyer, Paul Schoeman, argued at trial that Mr. Calk thought he was making profitable loans—which were unanimously approved by the bank’s loan committee—and said Mr. Calk wasn’t acting in bad faith. Instead, Mr. Schoeman said, Mr. Manafort and one of the bank’s loan officers were defrauding the bank Mr. Calk had dedicated his life to building.

The bank agreed, and Mr. Manafort asked Mr. Calk to join the campaign’s economic advisory council. Bank underwriters soon uncovered trouble with Mr. Manafort: his credit score had plummeted, he had no income in 2016, and he had a $300,000 credit card bill. He was in default, on the outs with the Trump team, and facing foreclosure.

Prosecutors and several witnesses said at trial that nobody at the bank supported the loan—which had grown to $9.5 million—aside from Mr. Calk and Mr. Raico, who stood to earn a commission. Mr. Calk’s lawyers said bank employees and executives didn’t tell Mr. Calk about their concerns.

This wasn’t an easy case for the government to prove, but making a loan in excess of the bank’s lending limit to a borrower with financial problems was such an outlier that the government obtained a conviction without a clear quid pro quo. It does suggest that bank should be extremely careful about making exceptions on loans to politically-connected borrowers.

The BAN Report 7/1/21

The BAN Report: Home Prices Soar / Office Return Battles / Record Stock Sales from Unprofitable Firms / Surfside Tragedy / NCAA Opens Up College Athletes / The 9MM Midwest CRA Portfolio-7/1/21

Home Prices Soar

First off, Happy Bobby Bonilla Day! Today, we fully appreciate the beauty of compound interest. We can also wonder at the remarkable strength of the US housing market. Home prices in April rose by 14.6% from the prior April – the largest increase in the history of the index.

Housing prices accelerated their surge in April 2021,” says Craig J. Lazzara, Managing Director and Global Head of Index Investment Strategy at S&P DJI. “The National Composite Index marked its eleventh consecutive month of accelerating prices with a 14.6% gain from year-ago levels, up from 13.3% in March. This acceleration is also reflected in the 10- and 20-City Composites (up 14.4% and 14.9%, respectively). The market’s strength is broadly-based: all 20 cities rose, and all 20 gained more in the 12 months ended in April than they had gained in the 12 months ended in March.

“April’s performance was truly extraordinary. The 14.6% gain in the National Composite is literally the highest reading in more than 30 years of S&P CoreLogic Case-Shiller data. Housing prices in all 20 cities rose; price gains in all 20 cities accelerated; price gains in all 20 cities were in the top quartile of historical performance. In 15 cities, price gains were in top decile. Five cities – Charlotte, Cleveland, Dallas, Denver, and Seattle – joined the National Composite in recording their all-time highest 12- month gains.

“We have previously suggested that the strength in the U.S. housing market is being driven in part by reaction to the COVID pandemic, as potential buyers move from urban apartments to suburban homes. April’s data continue to be consistent with this hypothesis. This demand surge may simply represent an acceleration of purchases that would have occurred anyway over the next several years. Alternatively, there may have been a secular change in locational preferences, leading to a permanent shift in the demand curve for housing. More time and data will be required to analyze this question.

“Phoenix’s 22.3% increase led all cities for the 23rd consecutive month, with San Diego (+21.6%) and Seattle (+20.2%) providing strong competition. Although prices were strongest in the West (+17.2%) and Southwest (+16.9%), every region logged double-digit gains.”

While these increases will likely taper off, the current home price rally is not being driven by loose lending like the last crisis, although it is being fueled by high commodity prices, government stimulus, a loose Fed, and foreclosure and eviction moratoriums. Moreover, home prices are rising globally.

From the U.S. to the U.K. to China, housing is riding an extended boom. Global valuations are soaring at the fastest pace since 2006, according to Knight Frank, with annual price increases in double digits. Frothy markets are flashing the kind of bubble warnings that haven’t been seen since the run up to the financial crisis, a Bloomberg Economics analysis shows.

On the ground, outrageous stories are rife, with desperate buyers promising to name their first-born after sellers and derelict buildings selling for mansion prices.

In the US especially, rapid home price appreciation is a direct result of a lack of new construction.   As we have been arguing for as long as this blog has been in existence, the US went from over-subsidizing home ownership to over-subsidizing renting. It is still difficult for smaller homebuilders to get enough credit to build homes at the rate of demand. Fortunately, lumber futures tanked more than 40% in June, so the lumber bubble appears to be bursting.

Office Return Battles

As companies push their employees to come back to the office, many employees are threatening to quit, as they’ve adjusting to their new lives without daily commutes, setting up one of the most difficult HR challenges for companies in years.

Before Covid, Blaze Bullock, 34, was on the road one week a month as a marketing consultant in the auto industry.

Then, when the country shut down, Bullock began working remotely. “Now they want me to start traveling again and visiting car dealerships,” he said. “I don’t want to do that at all.”

Bullock said he likes working from home and spending more time with his friends and family in Salt Lake City. “I realized this is the only way I want to live.”

The pandemic has caused a lot of people to reevaluate, particularly when it comes to work.

In what’s been dubbed the “Great Resignation,” a whopping 95% of workers are now considering changing jobs, and 92% are even willing to switch industries to find the right position, according to a recent report by jobs site 

Most say burnout and lack of growth opportunities are what is driving the shift, Monster found. 

“When we were in the throes of the pandemic, so many people buckled down, now what we’re seeing is a sign of confidence,” said Scott Blumsack, senior vice president of research and insights at Monster.

Already, a record 4 million people quit their jobs in April alone, according to the Labor Department.

Harvard Business Review argued that Working from Home is corroding trust within companies.

About a third of the employees of a regional bank have returned to working onsite, and the president holds a weekly all-staff town hall meeting by videoconference. Employees are encouraged to submit anonymous questions for him or other senior leaders to answer. For the past six weeks, an increasing number of people have asked, “How do we know if the people who are still working from home are actually working?” Some employees have even suggested specific technology-based monitoring approaches to track remote workers’ onscreen time and activities.

Each week, the president assures his employees that the business is on track and that measures of productivity (like the number of loans taken out) are above expectations. “But it’s exasperating,” he said. “No matter how much I try to convince them or even use numbers and other kinds of evidence, it’s not sinking in. You’d think that if I can trust people, surely they can trust each other, right? But no.”

The crisis of trust this bank is facing is increasingly common as the strains of remote working wear down company culture and people’s goodwill. 

If you have high-performing employees that are performing effectively remotely, how do you let them go if they won’t come back to the office? And, if you make exceptions, does that harm your overall culture? This is such a delicate issue and companies have to balance numerous competing interests.   How organizations deal with this topic will be critical to their futures.

Record Stock Sales from Unprofitable Firms

Many unprofitable companies are leveraging the surging stock market to sell shares in their companies.

Since the end of March, almost 100 unprofitable companies, including GameStop Corp. and AMC Entertainment Holdings Inc., have raised money through secondary offerings, twice as many as coming from profitable firms, according to data compiled by Bloomberg.

Granted, troubled companies are tapping into buoyant demand during a 16-month rally to beef up their balance sheets. And it’s further evidence that the capital market functions as smoothly as it’s supposed to. Yet some warn that the flood of shares coming from money losers is becoming extreme.

During the past 12 months, almost 750 money-losing firms have sold shares in the secondary market, exceeding those that make profits by the biggest margin since at least 1982, data compiled by Sundial Capital Research show. “That perhaps points to companies getting greedy,” said Mike Bailey, director of research at FBB Capital Partners. “Anytime you have a bunch of selling by desperate companies,

“That perhaps points to companies getting greedy,” said Mike Bailey, director of research at FBB Capital Partners. “Anytime you have a bunch of selling by desperate companies, that could be a signal we’re closer to a top than a cyclical bottom.” In fact, the previous two periods in which unprofitable firms dominated the pool of equity offerings, the S&P 500 Index was either at the start of a bear

In fact, the previous two periods in which unprofitable firms dominated the pool of equity offerings, the S&P 500 Index was either at the start of a bear market, or already in one.

Well, bankers always tell unprofitable companies that they need more equity, not less debt. So, it’s certainly better that these firms are improving their balance sheets, thus allowing them to ride out a period of unprofitability. But it certainly could be a sign that the market is overheated, especially if companies with poor current and future prospects are able to tap strong equity markets.

Surfside Tragedy

The collapse of the Champlain Towers South building in Surfside, Florida, has already claimed 18 confirmed lives and is likely to be significantly higher as 145 people are still missing. This tragedy has important implications for condominium and rental buildings everywhere, as the costs to repair structural problems can be exorbitant. The WSJ had a visual analysis of the problems with the building.

A 2018 engineering report on the south tower released by the town alleged the building had a flaw that inhibited proper drainage, allowing water to pool near its base.

“The main issue with this building structure is that the entrance drive/pool deck/planter waterproofing is laid on a flat structure. Since the reinforced concrete slab is not sloped to drain, the water sits on the waterproofing until it evaporates. This is a major error,” Morabito Consultants, which has offices in Florida and Maryland, wrote. “The failed waterproofing is causing major structural damage to the concrete structural slab below these areas. Failure to replace the waterproofing in the near future will cause the extent of the concrete deterioration to expand exponentially.”

Condominium owners were set to begin making special assessment payments a week after the building’s collapse.

The Champlain Towers South condo association approved a $15 million assessment in April to complete repairs required under the county’s 40-year recertification process, according to documents obtained by CNN.

The documents show that more than two years after association members received a report about “major structural damage” in the building, they began the assessment process to pay for necessary repairs.

Owners would have to pay assessments ranging from $80,190 for one-bedroom units to $336,135 for the owner of the building’s four-bedroom penthouse, a document sent to the building’s residents said. The deadline to pay upfront or choose paying a monthly fee lasting 15 years was July 1.

Condominium associations are notorious for dragging their feet to complete needed repairs because no one wants a special assessment. Local governments are going to increase building inspections and enforcements, thus forcing buildings to take action sooner. But will every building have the resources to make these repairs?   There will be buildings that need repairs, but the condominium owners may not have the resources, potentially creating unsafe zombie buildings. In Florida, Hurricane Andrew in 1992 led to much tougher building codes, so buildings constructed earlier are especially vulnerable to structural issues and exorbitant repair costs.

NCAA Opens Up College Athletes

Late last month, the US Supreme Court ruled against the NCAA for violating antitrust law by limiting academic benefits for student-athletes. The NCAA then voted this week to allow student-athletes to make money of their brands, thus setting up a frenzy of activity between brands and athletes.

Companies that sell everything from fast food to protein powders are preparing to court student-athletes after the National Collegiate Athletic Association moved to transform the world of college sports and players’ ability to make money.

The NCAA voted on Wednesday to allow student-athletes to exploit their names, images and likenesses — a move that will let players profit from autographs, social-media posts and commercials. With the landscape set to change after decades of strict rules, brands such as Six Star Pro Nutrition are looking to lock in deals with newly eligible athletes.

The potential for partnerships goes beyond just promoting brands and products and could result in big payouts for autographs. Fanatics Inc., a sports-licensing giant with partnerships across the college landscape, expects to connect with student-athletes to make merchandise and collectibles.

“We look forward to doing this the right way and build long-term value for the student-athletes and our campus partners,” said Derek Eiler, an executive vice president for Fanatics’ college division. “This is an evolutionary day in college athletics.”

Jim Walter, a sports agent, and CEO of YSK Agency, gave us some context on what this all means.

“It is arguably the biggest day in college sports, perhaps all sports, since Title IX was passed in 1972.

Today’s college student athletes are resilient.  They are hometown heroes and have an acute understanding of social media and personal branding on a national scale. These young men and women are exceptional at leveraging their NIL for unique influence. It is incredible that they now have the ability to defray and diminish the cost of living and support their families.

The floodgates are now open, and the student athletes are no longer deprived of the Hallmark of American business — simply the opportunity and chance to turn their brand into their own business.

There is a lot of uncertainty from all parties.  However, it is truly refreshing to hear first-hand how respectful and ready both the student athletes and national brands are to partner together to change the collegiate landscape.  The rules and governance are being written right before our eyes.  Today is truly evolutionary.”

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CEO Jon Winick American Banker Feature-6/11/21

Customers Bank, light on branches and heavy on technology, is expanding nationally with a new chief executive intent on hiring lending talent and capitalizing on tech initiatives in major growth markets.

Sam Sidhu has been the bank’s vice chairman and chief operating officer as well as head of corporate development at Customers Bancorp, the bank’s parent company, since January 2020. He will become the bank’s president and CEO on July 1, succeeding the retiring Dick Ehst.

The promotion, telegraphed to markets months earlier, puts Sidhu in a position to also take the helm of the $18.8 billion-asset holding company when his father, Jay Sidhu, retires. The elder Sidhu, 69, is the chairman, CEO and founder of the holding company, which is based in Wyomissing, Pennsylvania.

The younger Sidhu, 37, acknowledged in an interview he has faced some criticism about nepotism. But he is focused on winning over critics by delivering on growth plans already in motion as he moves into the bank’s top job this summer. Customers said in May it would open commercial and private banking offices in major cities across the country.

Customers plans to hire talent in new regions rather than seek M&A targets in the near term. “It’s difficult to find a bank that looks and feels like us,” said Sam Sidhu, who becomes CEO in July.

Jon Winick, CEO of the bank consultancy Clark Street Capital, said an organic national expansion is a bold move that does come with some risk. Namely, he said, Customers will face stiff competition from longstanding community banks as well as national powerhouses, given that it is focused on major markets where the biggest banks often are entrenched. It takes time to build the scale necessary to compete and drive profits in new markets, he said.

But he noted Customers is highly regarded for its tech prowess, and he said its plan to expand without building branches should prove relatively inexpensive, minimizing the risk if a foray into any given market flops. “So from the outside,” Winick said, “I’d say it’s not necessarily a good idea or bad idea. It just boils down to how well they execute, how effective they are in finding talent.”

Sidhu said the bank has a list of 25 possible markets to enter. It will begin this year with new banking teams in Dallas and Orlando, Florida, while building out its relatively small presence in Chicago. Bankers will provide treasury management solutions and commercial loans for companies with $5 million to $100 million of annual revenue.

Dallas and Orlando are both thriving markets with no state-level income taxes. They have favorable weather and aggressive reopening policies amid the pandemic, and are attracting residents from states such as New York and California, which have a higher cost of living. Mike Matousek, a trader at U.S. Global Investors, said investors are closely tracking companies that are expanding in such areas — both banks and their commercial customers.

“If you are going to expand now, you do it where there is population and economic growth, where the trends are positive,” Matousek said. “You see that in Texas, Florida and a few other places like Nashville and Phoenix.”

Customers is concentrated on the East Coast, with locations from Pennsylvania to New York, but it has several business lines that operate nationally, including mortgage warehouse lending, equipment leasing and Small Business Administration lending. It plans to complement those businesses with robust commercial lending in more heavily populated and high-growth markets, Sidhu said.

Analysts say new growth initiatives are needed and could separate winners from losers among banks over the next couple of years.

Chris Whalen, chairman of the research firm Whalen Global Advisors, said that while the banking industry as a whole posted strong first-quarter profits, that was driven by the release of loan- loss reserves, not new revenue, and that is not sustainable.

After putting aside $60 billion in reserves in the second quarter of last year to guard against potential pandemic-induced loan losses that did not materialize, the U.S. bank industry is now releasing these funds back into income — “an accounting rather than a cash event,” Whalen said.

New revenue will have to replace the one-time accounting boost to keep bottom lines strong.

Customers benefited from a reserve release in the first quarter. But it also has momentum. It has doubled its asset size over the past five years by hiring experienced lenders and developing new business lines and services, and it expects such efforts to continue.

Sidhu did not rule out traditional bank M&A to bolster growth but said it was unlikely in the near term because there are few banks like Customers — that have technological agility but few branches and “technology agile,” as he puts it — making cultural fits hard to identify.

“It’s difficult to find a bank that looks and feels like us,” he said. “So it’s not in the cards in the near to medium term.”

Customers has only 13 branches and deep roots in digital banking. Not long ago, it operated a digital-only bank but decided to sell it in 2020 to Megalith Financial Acquisition — where Sidhu’s sister is chief executive — and focus on becoming a larger commercial lender. But Sidhu said Customers would continue to invest in cutting-edge technology to ensure the bank’s digital platform and services stay ahead of clients’ expectations.

This year, for example, Customers announced a partnership with the digital platform Tassat to implement a business-to-business payments network for its corporate clients that is based on the blockchain.

“This is not something customers are demanding today,” but “we’re doing something we know they will want — and frankly expect — in the next several years,” Sam Sidhu said. He said Customers expects demand for digital financial services to intensify — and he pointed to the increased use of digital banking amid the pandemic as evidence the trend is gaining momentum.

“We want to stay five steps ahead,” Sidhu said. That’s how a bank can drive growth without the lofty fixed costs of a large branch network, he said.

Customers would continue to develop a hybrid model of banking and financial technology, but would partner with fintechs rather than own them, Sidhu said.

Sidhu has worked his way up through the ranks amid criticism from some investors, which he acknowledges as fair.

At issue: Sam Sidhu was the founder and CEO of Megalith Financial. Luvleen Sidhu, Jay Sidhu’s daughter and Sam Sidhu’s sister, was BankMobile’s CEO. She is now chief executive of BM Technologies, the name Megalith took on after acquiring BankMobile.

The evolving family dynamic atop the Customers banking enterprise confuses investors at times — and was bound to raise some questions about whether the company pursues the most qualified leaders or instead grooms Jay Sidhu’s adult children for top jobs, Winick said.

“It’s a very natural comment,” Sam Sidhu said. “I would make the same comment as an investor.”

Winick, however, said that executive banking talent is hard to find, and he said Sidhu’s eight years on Customers’ board, coupled with an impressive resume, make him qualified on paper. “I don’t think you could ever answer definitely who the absolute most qualified person is, but he’s got a great background.”

When he left Megalith and joined Customers in a top job, Sam Sidhue said, questions about nepotism flowed in early. Sidhu said he drew on his experience — before co-founding Megalith, he worked in private equity with Providence Equity Partners and investment banking with Goldman Sachs, after earning an MBA from Harvard — and he sought feedback from investors. He wanted to ensure them that he cared about their concerns but also shared their ultimate interest: bottom-line results.

Customers Bancorp reported core earnings of $2.14 per share for the first quarter, up from 16 cents a year earlier. Core earnings exclude the impact of discontinued operations, notably BankMobile. The company said it expects to earn at least $5.00 in core EPS in 2021 and 2022, well above last year’s $3.59 and double what it earned a year before that.

The KBW Nasdaq is up about 30% in 2021. Shares of Customers have surged more than 120% this year.

Sidhu said operating conditions broadly are improving, potentially opening paths for more growth. The pandemic’s effects are fading as vaccines take hold, and demand pent up for everything from cars to travel is unfurling and driving economic momentum. He said he thinks that will translate into business growth — and eventually stronger commercial loan demand to finance expansion efforts.

“We are truly seeing the green shoots across the economy,” he said.

Jim Dobbs 

Reporter, American Banker 

The BAN Report 4/29/21

The BAN Report: Re-Opening Update / Big Four Bank Earnings / Housing Shortage / $12.3 Trillion Matters / Worst Boss Ever-4/29/21

Re-Opening Update

While US GDP grew by 6.4% in the first quarter, the full re-opening of the US economy picks up steam. New York City announced a full re-opening by July 1.

New York City is aiming for a full reopening on July 1, Mayor Bill de Blasio said Thursday, suggesting a total removal of COVID-19 restrictions that have been in place for well more than a year by early summer.

“Our plan is to fully reopen New York City on July 1. We are ready for stores to open, for businesses to open, offices, theaters, full strength,” the mayor said on MSNBC.

De Blasio is expected to elaborate further on the plan later in the day. It’s not clear if additional COVID requirements — like proof of vaccinations — would apply to his plan to bring restaurants, gyms, shops, hair salons and arenas back at full capacity.

The mayor has also said indoor masking will remain the norm for some time — a statement he reiterated Thursday as it relates to the full reopening.

“I want people to be smart about, you know, basic – the rules we’ve learned, you know, use the masks indoors when it makes sense, wash your hands, all the basics,” de Blasio said. “But what we can say with assurance now is we’re giving COVID no room to run anymore in New York City. We now have the confidence that we can pull all these pieces together and get life back really in many ways to where it was, where people can enjoy an amazing summer.”

New York State also announced that all indoor and outdoor curfews for bars and restaurants will be lifted by the end of the month. Las Vegas saw its best March since February 2013.

Las Vegas is bouncing back to pre-coronavirus pandemic levels, with new economic reports showing increases in airport passengers and tourism, and a big jump in a key index showing that casinos statewide took in $1 billion in winnings last month for the first time since February 2020.

“I don’t believe anyone imagined this level of gaming win,” Michael Lawton, senior Nevada Gaming Control Board analyst, said of a Tuesday report showing 452 full-scale casinos in the state reported house winnings at the highest total since February 2013.

The cruise lines have gotten approval from the CDC to start sailings by mid-July.

Cruise operators could restart sailings out of the U.S. by mid-July, the Centers for Disease Control and Prevention said, paving the way to resume operations that have been suspended for longer than a year due to the Covid-19 pandemic.

The CDC, in a letter to cruise-industry leaders Wednesday evening, also said cruise ships can proceed to passenger sailings without test cruises if they attest that 98% of crew members and 95% of passengers are fully vaccinated. The move was a result of twice-weekly meetings with cruise representatives over the past month, the agency said.

The CDC also relaxed its rules for fully vaccinated Americans.

The Centers for Disease Control and Prevention took a major step on Tuesday toward coaxing Americans into a post-pandemic world, relaxing the rules on mask wearing outdoors as coronavirus cases recede and people increasingly chafe against restrictions.

The mask guidance is modest and carefully written: Americans who are fully vaccinated against the coronavirus no longer need to wear a mask outdoors while walking, running, hiking or biking alone, or when in small gatherings, including with members of their own households. Masks are still necessary in crowded outdoor venues like sports stadiums, the C.D.C. said.

The CDC ruling opens the door up for outdoor concerts and sporting events this summer. In Massachusetts, for example, new rules announced by the Governor will allow large venues at 100% by August 1, thus allowing the Boston Marathon, full capacity at Fenway, and full crowds at Gillette Stadium. By the second half of this summer, Americans can enjoy a world that looks more like 2019 than 2020.

Big Four Bank Earnings

Banks reported robust earnings this month, buoyed by strong trading and releases of loan loss reserves.

Bank of America

Bank of America beat expectations for the first quarter.

The bank posted a first-quarter profit of $8.1 billion, or 86 cents a share, exceeding the 66 cents a share expected by analysts surveyed by Refinitiv. The company produced $22.9 billion in revenue, edging out the $22.1 billion estimate.

“While low interest rates continued to challenge revenue, credit costs improved and we believe that progress in the health crisis and the economy point to an accelerating recovery,” CEO Brian Moynihan said in the release.

Like other banking rivals, Bank of America saw a large benefit from the improving U.S. economic outlook in recent months: It released $2.7 billion in reserves for loan losses in the quarter. Last year, the firm set aside $11.3 billion for credit losses, when the industry believed that a wave of defaults tied to the coronavirus pandemic was coming.

Instead, government stimulus programs appear to have prevented most of the feared losses, and banks have begun to release more of their reserves this quarter.

Expenses were higher than expected and loan growth was not great, but overall a good quarter.

JP Morgan Chase

JP Morgan Chase had a great quarter, exceeding expectations on earnings even without the $5.2 billion release from loan loss reserves.

The bank posted first-quarter profit of $14.3 billion, or $4.50 a share including a $1.28 per share benefit from the reserve release, higher than the $3.10 per share expected by analysts surveyed by Refinitiv. Excluding the impact of a $550 million charitable contribution, which lowered earnings by 9 cents, the bank earned an adjusted figure of $4.59, exceeding the $3.10 estimate.

Companywide revenue of $33.12 billion exceeded the $30.52 billion estimate, driven by the firm’s trading operations, which produced about $1.8 billion more revenue than expected.

JPMorgan’s release of $5.2 billion in reserves is the biggest sign yet that the U.S. banking industry is now expecting to have fewer loan losses than it did last year, when it set aside tens of billions for defaults anticipated from the coronavirus pandemic. A year ago, the firm had added $6.8 billion to credit reserves.

“Overall, this was a great quarter for JPMorgan,” said Octavio Marenzi, CEO of consultancy Opimas. “It is now increasingly clear that the bank over-reserved, and that money is now flowing back into its earnings, concealing some of the weakness in consumer banking.”

Wells Fargo

Wells Fargo also had a strong quarter, beating estimates on earnings and revenue.

Wells Fargo results were helped by a net benefit of $1.05 billion from reserve releases. Banks bulked up their credit loss reserves last year as the pandemic pulled the U.S. economy into a sharp recession, but the financial firms have started to release those reserves as the recovery takes shape.

“Our results for the quarter, which included a $1.6 billion pre-tax reduction in the allowance for credit losses, reflected an improving U.S. economy, continued focus on our strategic priorities, and ongoing support for our customers and our communities,” CEO Charlie Scharf said in the earnings release. “Charge-offs are at historic lows and we are making changes to improve our operations and efficiency, but low interest rates and tepid loan demand continued to be a headwind for us in the quarter.”

The bank expects to see its commercial and middle market loan portfolio to grow later in the year as the economic recovery gains steam, chief financial officer Michael Santomassimo said on the earnings call.

“The demand across most commercial client segments has been pretty weak, and it seems to have stabilized over the last couple of months … we do really expect to see that commercial banking demand start to pick up as the economy picks up,” Santomassimo said.

Commercial loan pipelines take time, so it will be another quarter before any uptick in commercial lending is seen by banks.


Citigroup completed the strong quarters for the major banks, beating on both earnings and revenue.

Citigroup on Thursday posted results that beat analysts’ estimates for first-quarter profit with strong investment banking revenue and a bigger-than-expected release of loan-loss reserves.

The firm also said it was shuttering retail banking operations in 13 countries across Asia and parts of Europe to focus more on wealth management outside the U.S., one of the first big strategic moves made by CEO Jane Fraser, who took over in February.

The bank reported profit of $7.94 billion, or $3.62 a share, exceeding the $2.60 estimate of analysts surveyed by Refinitiv. Revenue of $19.3 billion topped the $18.8 billion estimate.

Citigroup said it had released $3.9 billion in loan-loss reserves in the quarter, which resulted in a $2.06 billion gain after $1.75 billion in credit losses in the period. Analysts had expected a $393.4 million provision in the quarter.

The bank posted record revenue from investment banking and equities trading, similar to rival banks that have reported earlier.

The retrenching of retail banks outside of the US is a big move for Citi, which always strived to be the most international of the large banks.    Shrinking bank branches is not limited to the United States.

Overall, the banks reported strong earnings this quarter, although a good portion of the beats was due to reserve releases. The test for banks will be to show meaningful loan growth this year, which will be especially challenging for banks that were most active in PPP as the run-off in PPP will be a tough headwind.

Housing Shortage

Housing prices are surging due primarily to a shortage of housing, thus giving millennials their second housing crisis in twelve years.

A recent bank note from Jefferies said the US was short 2.5 million homes, while Freddie Mac put that estimate higher at a shortage of 3.8 million. There are 40% fewer homes on the market than last year, a Black Knight report found. 

It’s bad news for many aspiring homebuyers — but especially for millennials. It’s just the latest chapter in a long line of bad economic luck.

Daryl Fairweather, the chief economist at Redfin, told Insider it was unfortunate the generation that suffered from the last housing crisis — entering the job force in the middle of a recession — was now facing a different kind of housing crisis.

“Now that they have economically recovered and are looking to buy a home for the first time, we’re faced with this housing shortage,” she said. “They’re already boxed out of the housing market.”

The shortage is a result of several things: contractors underbuilding over the past dozen years, a lumber shortage, and the pandemic. It comes at a time when millennials have reached the peak age for first-time homeownership, according to CoreLogic, and led the housing recovery. But such increased millennial demand has exacerbated the shrinking housing inventory.

“We’ve been underbuilding for years,” Gay Cororaton, the director of housing and commercial research for the National Association of Realtors (NAR), told Insider. She said the US had been about 6.5 million homes short since 2000 and was facing a two-month supply of homes that should look more like a six-month supply.

There have been 20 times fewer homes built in the past decade than in any decade as far back as the 1960s, according to Fairweather. She added that was not enough homes for millennials, who are the biggest generation, to buy.

Another unmentioned cause is the moratoriums on foreclosures and evictions, which are effectively removing distressed inventory from the market. Fundamentally though, the roots of this problem go back to the Great Recession, as we essentially shifted from over-subsidizing home ownership to over-subsidizing rental buildings. Several years ago, I proposed a hypothetical project to a Houston bank.   Two, identical high-rise buildings adjacent to each other in downtown Houston. One was a high-end apartment building. The other was a condo building. The CCO said “we don’t do condos.” I responded, “You proved my point!”

$12.3 Trillion Matters

$12.3 trillion has effectively put the credit default cycle on hold for now.

First, cheap borrowing costs help companies stay alive longer and more easily. That’s a big part of the reason Fitch Ratings just dropped its expected U.S. junk-bond default rate for 2021 to 2%, the lowest since 2017, and doesn’t see it rising much more from that in 2022. About $90 billion of distressed debt was trading as of April 16, down from almost $1 trillion in March 2020, according to data compiled by Bloomberg.

Second, government officials have flooded the global economy with cash at an unprecedented pace. Monetary and fiscal stimulus for just the U.S. could have amounted to $12.3 trillion from February 2020 through March 2021, according to Cornerstone Macro Research data posted on the Wall Street Journal’s Daily Shot.

That’s a lot of money, leaving a lot of cash sitting in savings accounts and looking for assets to buy. Perhaps some investors feel it’s better to invest it with a company that actually makes something or provides real services than, say, a cryptocurrency started as a joke. 

The more important question perhaps isn’t whether this is a bubble that will pop soon but rather what are the consequences of this era of free-flowing cash. It prevents the dissolution of businesses that perhaps shouldn’t exist, creating so-called zombie companies. And it leaves corporations leveraged to old economies, paying back debt incurred in a past era when they perhaps would rather invest in new technologies amid a quickly changing world.

This debt buildup makes central bankers’ jobs both more difficult and easier in the years to come. It makes it harder because any withdrawal of stimulus, or raising of rates, would be exponentially more painful given the amount of corporate leverage. But it also makes it less likely that conditions will require Federal Reserve officials to raise rates all that much going forward. More debt will pressure longer-term growth and inflation. It reduces economic dynamism. 

We are essentially skipping the clean-up phase during a down-cycle. A normal recession leads to the liquidation and closure of businesses, thus opening up opportunities for the healthy ones to benefit from their better business models and healthier balance sheets. It also is going to make higher rates even more painful, so we may have just delayed the inevitable in some cases.

Worst Boss Ever

An investigation of producer Scott Rudin by the New York Times showed what a brutal boss he was to his employees. Scott is one of only 16 people who have won an EGOT, which is winning at least one Emmy, Grammy, Oscar, and Tony.

Former employees said he threw things at walls, at windows, at the ground, and, occasionally, toward subordinates.

In 2018 he sent a glass bowl airborne, shattering it against a conference room wall, according to several people who were there; another time he smashed a computer on an employee’s hand, several ex-employees said. A former assistant, Jonathan Bogush, said he saw Mr. Rudin hurl a plateful of chicken salad into another assistant’s face when he worked there in 2003.

Sometimes frightened assistants hid in the kitchen or a closet to escape his wrath.

Some assistants kept spare phones to replace those that got destroyed when thrown by Mr. Rudin. There were also extra laptops — to replace those he broke — and his contact list was backed up to a master computer nicknamed the Dragon.

His behavior prompted outrage after it was described earlier this month in The Hollywood Reporter. It had also been described, to less effect, in multiple other accounts over the years.

Mr. Rudin offered both an apology and a bit of pushback to the stories being told about him as a boss. “While I believe some of the stories that have been made public recently are not accurate, I am aware of how inappropriate certain of my behaviors have been and the effects of those behaviors on other people,” he said. “I am not proud of these actions.”

“He’s had a bad temper,” said the billionaire David Geffen, who alongside his fellow mogul Barry Diller has been co-producing Mr. Rudin’s recent Broadway shows, “and he clearly needs to do anger management or something like that.”

Somehow this behavior went on for years, and no other executive, colleague, financier mandated anger-management training? Fortunately, Mr. Rudin is finally getting his long overdue comeuppance.

Conversations about Banking: An Interview with Jon Winick-Bank BCLP

The BAN Report 3/25/21

The BAN Report: SBA Update / What? Me No Worry, Says Fed on Deficit / Travel Update / Microsoft Re-Opens Offices

SBA Update

With the PPP deadline approaching next Wednesday, the US Senate appears very close to extending the program through May 31, as seven Republicans have signed on to the plan.

Seven Republicans have signed on to a Senate bill that would extend the Paycheck Protection Program for two months, putting Democrats closer to the necessary 60 votes on a measure that Majority Leader Charles E. Schumer said must pass this week.

If the Senate’s 50 Democrats and the seven Republicans support the bill, they would need only three more votes to prevent a potential filibuster. The House passed its bill by a 415-3 vote on March 16. 

We think its nearly a fait-accompli that PPP will get extended.    The SBA also announced that it was expanding the EIDL program, increasing the maximum loan amount.

The U.S. Small Business Administration is increasing the maximum amount small businesses and non-profit organizations can borrow through its COVID-19 Economic Injury Disaster Loan (EIDL) program. Starting the week of April 6, 2021, the SBA is raising the loan limit for the COVID-19 EIDL program from 6-months of economic injury with a maximum loan amount of $150,000 to up to 24-months of economic injury with a maximum loan amount of $500,000.

Businesses that receive a loan subject to the current limits do not need to submit a request for an increase at this time.  SBA will reach out directly via email and provide more details about how businesses can request an increase closer to the April 6 implementation date.  Any new loan applications and any loans in process when the new loan limits are implemented will automatically be considered for loans covering 24 months of economic injury up to a maximum of $500,000.

This new relief builds on SBA’s previous March 12, 2021 announcement that the agency would extend deferment periods for all disaster loans, including COVID-19 EIDLs, until 2022 to offer more time for businesses to build back. In order to shift all EIDL payments to 2022, SBA will extend the first payment due date for disaster loans made in 2020 to 24-months from the date of the note and to 18-months from the date of the note for all loans made in the calendar year 2021.

While they will begin accepting applications for the shuttered venue operators grant program on April 8, details on the implementation of the $28 billion Restaurant Revitalization Fund are a few weeks out.

Patrick Kelley, associate administrator for the SBA’s Office of Capital Access, told committee members that the SBA is working on developing a technology solution capable of deploying hundreds of thousands of grants to restaurants, bars, and other eligible providers of food and drink.

“We are focused like a laser on starting it up as quickly as possible,” he said.

The SBA is aiming to work with the White House Office of Management and Budget (OMB) to build a platform scaled in a way that it can leverage partners such as point-of-sale vendors, which can provide relevant sales data, Kelley said. The new platform could use that information to help automate parts of the application and grant calculation process.

“By drafting off (the point-of-sale vendors) and posting our own web application, we believe we can reach the broadest market segment fast,” Kelley said.

Ideally, he said, the SBA would be able over the next seven to 10 days to begin posting RRF information, such as guidance and required documentation, relevant to potential applicants. The program would then move to a pilot phase, in which the program would begin accepting applications based on prioritization established in the American Rescue Plan Act, which sets aside $5 billion for the smallest applicants ($500,000 or less in 2019 gross receipts) and requires that during the first 21 days of the grants, the SBA will prioritize applications from restaurants owned and operated or controlled by women, veterans, or socially and economically disadvantaged individuals.

The Restaurant Revitalization Fund will be oversubscribed. The restaurant industry did roughly $200 billion less in 2020 versus 2019, so a $28 billion fund will only cover a percentage of the lost revenue in 2020.

What, me worry, says Fed on Deficit

While Federal Debt has doubled since 2011, and is up nearly 20% since 2019, Fed Chair Jerome Powell does believe one should worry about it right now, although it should be addressed in the future.

Federal Reserve Chairman Jerome Powell said that the federal government can manage its debt at current levels but that fiscal-policy makers should seek to slow its growth once the economy is stronger.

“Given the low level of interest rates, there’s no issue about the United States being able to service its debt at this time or in the foreseeable future,” Mr. Powell said Thursday in an interview with National Public Radio. “Nonetheless, there will come a time—and that time will be when the economy is back to full employment, and taxes are rolling in, and we’re in a strong economy again—when it will be appropriate to return to the issue of getting back on a sustainable fiscal path.”

Fed officials voted unanimously at their March 16-17 meeting to maintain overnight interest rates near zero and continue purchasing at least $120 billion a month of Treasury debt and mortgage-backed securities.

In a series of public appearances this week, Mr. Powell and his colleagues have reiterated that they don’t anticipate changing the central bank’s easy-money policies soon.

A more immediate concern for the Fed will be what to do later this year if the economy begins to overheat, and inflation escalates. Adding $1.9 trillion in stimulus (and a proposed $3 trillion infrastructure program) while GDP growth is in the high single-digits could require a swift increase in interest rates.

But, how do we know when the economy is overheating?  The New York Times had an interesting debate amongst economists between the worriers and the Alfred E. Neuman camp.

As the economy reopens and Americans spend their stimulus checks and the money they saved during the pandemic, demand for certain goods and services will outstrip supply, driving up prices. That is now pretty much an inevitability.

The Biden administration and its allies are betting this will be a one-time event: that prices will recalibrate, industries will adjust and unemployment will fall. By next year they expect a booming economy with inflation back at low, stable levels.

The overheating worriers, who include prominent Clinton-era policymakers and many conservatives, believe there is a more substantial chance that one of two more pessimistic scenarios will come true. As vast federal spending keeps coursing through the economy, they fear that high inflation will come to be seen as the new normal and that behavior will adjust accordingly.

If people believe we are entering a more inflationary era — after more than a decade when inflation has been persistently low — they could alter their behavior in self-fulfilling ways. Businesses would be quicker to raise prices and workers to demand raises. The purchasing power of a dollar would fall, and the bond investors who lend to the government would demand higher interest rates, making financing the budget deficit trickier.

“I don’t think anyone will be too surprised to see massive airfare inflation” in the short term, for example, as the economy reopens, said Wendy Edelberg, director of the Hamilton Project at the Brookings Institution. “Instead, I worry if we start to see signs that people, businesses and financial markets are responding to the level of overheating as if it were permanent.”

That situation would leave policymakers, especially at the Federal Reserve, faced with two bad choices: Allow inflation to take off in an upward spiral, or stop it by raising interest rates and quite possibly causing a recession.

The over-heating risk is real, as it could happen later this year. After unprecedented levels of stimulus, the Fed could be forced to raise rates abruptly while many of these stimulus efforts wear off, thus creating a potentially severe shock to the economy. But, does anyone really know anything given the uniqueness of the present?

Travel Update

On Sunday, the total TSA checkpoint number exceeded 1.5MM for the first time since March 15, 2020, representing 69% of the prior period. On most days, TSA is showing about 50-60% of travel compared to 2019. While TSA doesn’t break down business versus consumer travel, we suspect this is mostly leisure travel with a high concentration of young people enjoying spring break. Overly enthusiastic spring breakers have overwhelmed Miami Beach, for example, causing 8 PM curfews. Meanwhile, the cruise industry is worried that this could be another lost summer.

Other countries including Singapore, Italy and the U.K. have authorized cruises or set a clear target date for them to set sail. Almost 400,000 passengers have sailed since some countries first began allowing cruises in July 2020, according to the industry’s trade group.

But to get started in the U.S., the cruise industry needs direction from the Centers for Disease Control and Prevention.

The CDC lifted its no-sail order in October and replaced it with a conditional set of rules; industry officials say the 40 pages of rules are either indecipherable or impractical, such as a measure requiring cruise lines to conduct “simulated voyages” with volunteer passengers.

“I refer to it as the ‘impossible-to-sail order’ because no business could operate profitably,” Capt. John Murray, Port Canaveral’s chief executive officer, said.

The CDC said guidance is coming soon. “Future orders and technical instructions will address additional activities to help cruise lines prepare for and return to passenger operations in a manner that mitigates Covid-19 risk among passengers, crew members,” spokesman Jason McDonald said in a statement, declining to comment further.

Until the CDC provides its updated guidance, the cruise industry is basically on hold. It would seem that with rapid testing, limited to no disembarkment, and vaccines increasingly available, cruise ships could operate safely. While the cruise industry employs 178K people, they have not received federal support, but all three major carriers have been able to raise sufficient debt and equity to survive. The airline industry has been the biggest beneficiary of federal support, receiving $50 billion in grants. Andrew Ross Sorkin argues that the airline bailouts were not necessary.

The good news is that the rescue money likely saved as many as 75,000 jobs, most remaining at full pay. And that money also kept the airlines from filing for bankruptcy, and in a position to ferry passengers all over the country to jump start economic growth as the health crisis subsides.

The bad news is that it is also likely that taxpayers massively overpaid: The original grant of $25 billion in April meant that each of the 75,000 jobs saved cost the equivalent of more than $300,000. And with each additional round of bailout money, that price has grown.

Sorkin makes a compelling argument.    Does anyone seriously believe that the US airline industry, which has effectively used the US bankruptcy system in the past to restructure, was at risk of being completely shuttered? Nevertheless, business travel has been anemic since the pandemic. Business travel represents about 30% of all travel spending, but 75% of the profits for the airline industry.

Along with the durability of the remote work phenomenon, the recovery of business travel has broad implications for major cities, downtowns, and the businesses that support. The good news is that business travel is starting to come back.   We asked our friends at Bank Director, who switched their largest event in January to online-only, about their next in-person event, and they are scheduling one in mid-September. We expect to see some conferences do a combination of in-person and online in order to accommodate their clients preferences.

We are interested in your attitudes towards business travel today and in the future. Please fill out this 5-minute survey and we will share the results next week.

Microsoft Re-Opens Offices

Microsoft is welcoming its employees back to the office next week, as it embraces a hybrid-work model.

Microsoft’s Redmond, Wash., headquarters and nearby campuses will start shifting to a hybrid-work approach on March 29, with some employees returning to office desks while others work from home, the company said Monday.

“Our goal is to give employees further flexibility, allowing people to work where they feel most productive and comfortable, while also encouraging employees to work from home as the virus and related variants remain concerning,” Microsoft said in a blog post.

The software company’s office locations spanning 21 countries will be ready to accommodate additional workers in compliance with guidance from local authorities, the company said. The initial guidance affects roughly 20% of Microsoft’s more than 160,000 employees, the company said.

Microsoft said it doesn’t expect to recall all employees soon. Once the pandemic is no longer a significant threat to communities, Microsoft said, the company expects a partial work-from-home schedule to be routine for many of its jobs. The company previously has said it would allow some workers to work remotely on a permanent basis with their manager’s approval.

Microsoft’s blog gives some additional color on its evolving hybrid philosophy.    It seems as people are getting tired of zoom calls! Citigroup banned them on Friday’s.

Citigroup CEO Jane Fraser told staff that she is banning internal video calls on Fridays, encouraging staff to set boundaries for a healthier work-life balance and instituting a firmwide holiday called Citi Reset Day as Covid pandemic fatigue takes a toll on employees.

Fraser, who took over for predecessor Mike Corbat this month, told staff of the changes in a memo sent Monday afternoon to her 210,000 employees around the world, according to a person with knowledge of the matter.

The blurring of lines between home and work and the relentlessness of the pandemic workday have taken a toll on our well-being,” Fraser said in the memo. “It’s simply not sustainable. Since a return to any kind of new normal is still a few months away for many of us, we need to reset some of our working practices.”

How companies handle the delicate issues of returning to their offices, allowing some or all workers to work remotely, and the degree to which they induce inoculation are some of the biggest HR challenges in decades.

The BAN Report 3/11/21

The BAN Report: Stimulus Bill Passes / PPP Update / Cash-Out Refinance Boom / $4 Gas This Summer? / RIP GE Capital-3/11/21

Stimulus Bill Passes

President Biden is expected to sign into a law Friday another $1.9 trillion in stimulus. The final package is a boon for American businesses, who will benefit from stimulating the consumer while the economy is re-opening and will not be forced to raise wages.

The legislation, expected to be signed into law by President Biden on Friday, includes $1,400 checks to many Americans and an extension of a $300 weekly unemployment-aid supplement. It doesn’t include a proposed increase in the minimum wage to $15 over four years, meaning retailers, restaurants and others don’t have to worry about higher payrolls for now.

Executives and economists said that unlike the last round of stimulus payments, which came in the midst of lockdowns and heightened economic uncertainty, these checks are more likely to flow into the economy as families face fewer financial constraints, more people are vaccinated and restrictions on travel, dining and other activity are lifted.

The Business Roundtable, which counts the chief executive officers of dozens of the biggest U.S. companies as members, said Wednesday, “While we advocated for a more targeted approach, enactment of this package will help deliver urgent resources to strengthen the public health response and provide assistance for individuals and small businesses hardest hit by the pandemic.”

The U.S. Chamber of Commerce also said it would have preferred a narrower bill. Economic data already points to building strength, the Chamber said in a statement last week, while the current bill “means less money for other priorities, including infrastructure and education.”

The $1.9 trillion package includes $360 billion in aid to state and local governments, $410 billion for $1,400 stimulus checks, $123 billion for COVID-19 (mostly vaccine and testing), $246 billion in expanded unemployment with another $300 / week through September 6, $143 billion in expanded tax credits, $176 billion for education, and $59 billion for small businesses, including $25 billion in grants to restaurants and bars that lost revenue during the pandemic. 

The $25 billion Restaurant Revitalization Fund, administered by the SBA, will be of high interest by banks and lenders. A presentation from the National Restaurant Association had some great details. 

A restaurant may receive a grant equal to the amount of its Pandemic-Related Revenue Loss by subtracting its 2020 gross receipts from its 2019 gross receipts.

Any PPP loans will be deducted from the grants. So, a business that was down 50% in revenue from 2020 ($600K in revenue versus $1.2MM in 2019) would be eligible for $400K in grants, assuming they received $200K in PPP loans.  

With GDP projected at nearly 10% for the first quarter, the risk is we end up with an overheated economy, thus forcing the Fed to put the brakes on the economy later this year.   

“It’s unprecedented,” Oxford Economics chief U.S. economist Gregory Daco said of the fiscal response to the pandemic. He expects the latest legislation to add 3 percentage points to U.S. GDP growth this year, and between 3 million and 3.5 million jobs.

At least in the short-run, the economy looks like its heading into a period of unprecedented growth.  

PPP Update

With the PPP program ending at the end of the month, lenders are having difficulty adapting to the President Biden’s recent overhaul two weeks ago.

President Biden announced an abrupt overhaul two weeks ago to funnel more money to very small companies, some of which qualified for loans as small as $1 under the old guidelines. But the Small Business Administration updated its systems only on Friday, and with just three weeks before the program is set to expire, some lenders say there just isn’t enough time to adapt to the changes.

The result has been gridlock and uncertainty that have left tens of thousands of self-employed people frantic to find lenders willing to issue the more generous loans before the program ends on March 31.

JPMorgan Chase, the program’s largest lender this year in terms of dollars disbursed, doesn’t plan to act on the new loan formula before it stops accepting applications on March 19. Bank of America, the second-biggest lender, opted against updating its loan application and said it would contact self-employed applicants to manually sort out their applications — but stopped accepting new ones on Tuesday.

“We have 30,000 applications in process and want to allow enough time to complete the work and get each client’s application through the S.B.A. process,” said Bill Halldin, a Bank of America spokesman.

The two-week exclusivity period for borrowers with less than 20 employees expired on Tuesday. The new rules make it easier for independent contractors to qualify for larger loans. Even though the SBA did increase the fees to make smaller loans, banks have difficulty originating and processing these smaller loans, especially under a short time window. Banks are pushing to extend the deadline.

Banks and other businesses are pressing the Biden administration and Congress to keep the government’s largest small business aid program running beyond its March 31 expiration date, warning that struggling employers need more time to obtain the economic lifeline.

“They don’t have any answers,” Consumer Bankers Association general counsel David Pommerehn said. “They’re preparing for the worst-case scenario, and that is the program shuts down completely on March 31 at 11:59.”

The uncertainty marks the latest drama around the massive Covid-19 relief program, which has provided nearly 7.6 million loans to employers since its creation in March 2020. The loans are popular because they can be forgiven if employers agree to keep paying employees. But since its inception, PPP has been a roller coaster for borrowers and lenders alike because of ever-changing rules and shifting deadlines.

Even though demand for PPP loans has been more muted, it does seem sensible to allow lenders to finish meeting the demand, especially after some new rules were established just a week ago.  

Cash-Out Refinance Boom

American consumers extracted more home equity via cash-out refinances in 2020 than any year since the financial crisis. 

U.S. homeowners cashed out $152.7 billion in home equity last year, a 42% increase from 2019 and the most since 2007, according to mortgage-finance giant Freddie Mac. It was a blockbuster year for mortgage originations in general as well: Lenders churned out more mortgages than ever in 2020, fueled by about $2.8 trillion in refis, according to mortgage-data firm Black Knight Inc.

Some borrowers viewed cash-out refis as a way to cushion themselves against an uncertain economy last year. Others wanted to build and redecorate, and being stuck at home gave them the time to do the paperwork. Homeowners also had more equity available to tap: Though home prices tend to fall during economic downturns, they jumped during the Covid-19 recession.

“The support coming from home equity is unparalleled in helping smooth out the degradations from Covid,” said Susan Wachter, an economist and professor at the University of Pennsylvania. “For those who are in the position to refinance, it’s a major source of support.”

The median credit score of new refis last year approached 800, near the top of the scoring range, according to the Federal Reserve Bank of New York. That includes refis in which the borrower didn’t take cash out.

Todd Kennedy lowered the mortgage interest rate on his North Texas home by almost a percentage point when he refinanced late last year. Mr. Kennedy, who has a credit score around 780, also cashed out about $30,000 in equity to pay for home improvements including repairs to his home’s foundation and new flooring.

So, how worried should we be about this? We believe this is a modest risk.   For one thing, most of these are cash-out long-term fixed rate loans, which are typically sold to one of the GSEs.    HELOC volume has been modest, as most banks have not regained their appetite for HELOCs since the financial crisis.

As of the most recent Quarterly Banking Profile, total HELOCs on banks’ balance sheets stood at $300 billion. At the end of 2015, HELOC balances stood at $465 billion. At the end of 2018, they stood at $667 billion. So, rather than taking out HELOCs and using the loans when they need them, consumers are getting larger lump-sum payments. Perhaps, banks should be doing more HELOCs, so that consumers would only pay interest when they need the money.  

$4 Gas This Summer?

Oil and gas producers, humbled by 2020 and their lenders, are being cautious in their drilling efforts, which could lead to much higher oil prices later this year.

The oil industry is predictably cyclical: When oil prices climb, producers race to drill — until the world is swimming in petroleum and prices fall. Then, energy companies that overextended themselves tumble into bankruptcy.

That wash-rinse-repeat cycle has played out repeatedly over the last century, three times in the last 14 years alone. But, at least for the moment, oil and gas companies are not following those old stage directions.

An accelerating rollout of vaccines in the United States is expected to turbocharge the American economy this spring and summer, encouraging people to travel, shop and commute. In addition, President Biden’s coronavirus relief package will put more money in the pockets of consumers, especially those who are still out of work.

Even before Congress approved that legislation, oil and gasoline prices were rebounding after last year’s collapse in fuel demand and prices. Gas prices have risen about 35 cents a gallon on average over the last month, according to the AAA motor club, and could reach $4 a gallon in some states by summer. While overall inflation remains subdued, some economists are worried that prices, especially for fuel, could rise faster this year than they have in some time. That would hurt working-class families more because they tend to drive older, less efficient vehicles and spend a higher share of their income on fuel.

In recent weeks oil prices have surged to over $65 a barrel, a level that would have seemed impossible only a year ago, when some traders were forced to pay buyers to take oil off their hands. Oil prices fell by more than $50 a barrel in a single day last April, to less than zero.

That bizarre day seems to have become seared into the memories of oil executives. The industry was forced to idle hundreds of rigs and throttle many wells shut, some for good. Roughly 120,000 American oil and gas workers lost their jobs over the last year or so, and companies are expected to lay off 10,000 workers this year, according to Rystad Energy, a consulting firm.

The events of last April were so extraordinary that it will take a while before oil producers regain their mojo. In the meantime, higher oil prices seem inevitable. 

RIP GE Capital

At its peak GE Capital stood at 637 billion in assets, nearly $100 billion larger than say US Bank today and twice as large as Washington Mutual when it failed in 2008. With its latest deal, in which GE is ultimately divesting out of the aircraft leasing business, GE Capital will no longer be a stand-alone division within GE, as it will only have $21 billion in assets remaining, largely a headache legacy insurance unit with some toxic long-term-care policies.

On Wednesday, GE agreed to combine its jet-leasing unit, GE Capital Aviation Services, with rival AerCap Holdings NV in a deal worth more than $30 billion. It will create a leasing giant with more than 2,000 aircraft at a time when global travel has been hobbled by the Covid-19 pandemic. The Wall Street Journal reported Sunday that the two companies were near a deal.

GE will get about $24 billion in cash and 46% ownership in the new merged company, a stake it valued at about $6 billion. It will transfer about $34 billion in net assets to AerCap along with more than 400 workers. The deal is expected to close in nine to 12 months.

Mr. Culp will use the proceeds from the AerCap deal to pay down debts and fold the rest of GE Capital into the company’s corporate operations. GE will take a $3 billion charge in the first quarter and cease to report GE Capital as a stand-alone business segment. The company maintained its financial forecasts for 2021.

“This really does mark the transformation of GE into a more focused, simpler, stronger company,” Mr. Culp said in an interview. GE will essentially return to being a manufacturer of power turbines, jet engines, wind turbines and hospital equipment.

The jet-leasing Gecas unit was the biggest remaining piece of GE Capital, accounting for more than half of the unit’s $7.25 billion of revenue in 2020. The remainder is a legacy insurance business that has plagued the company and a small equipment-leasing operation that helps finance purchases of GE power turbines and wind turbines.

The dismantling of GE Capital is one of the biggest casualties of the financial crisis. While other non-bank lenders like CIT pivoted successfully to become part of depository institutions, GE Capital was dismantled in parts, often by selling the best assets and keeping the toughest assets, including the long-term care policies, which have already required over $20 billion in additional reserves. No one should read former CEO Jeff Immelt’s book, who at least blamed mostly himself for GE’s demise.   

Another misstep came in 2004, when GE spun off its Genworth insurance business but kept a large batch of money-losing policies, forcing GE in 2018 to take a $6.2 billion charge and set aside $15 billion in reserves.

Immelt said he saw “zero” fraud in the insurance business when he was there. “There’s a difference between being wrong and being wrong on purpose.” He added that GE “spent lots of time to make sure we got things right.”

To put it simply, Jack Welch chose the wrong CEO, hiring someone who didn’t understand GE Capital, which could have been successfully re-positioned and de-risked by the right leader. It’s ironic that Welch chose the tall marketing guy who crushed PowerPoint presentations, instead of the two other grittier candidates. Beware sometimes of the person that looks the part!

The BAN Report 2/11/21

The BAN Report: PPP Update / Loan Growth? / Remote for Much of 2021? / Remote Boomtown / The Peloton Story / The 9MM Brooklyn Multi-Family Relationship-2/11/21

PPP Update

Through Sunday, about $101 billion in PPP loans have been approved for PPP Round 2. The SBA’s presentation had a few noteworthy highlights:

A hurdle so far for lenders has been error codes, which prevent banks from processing PPP loans. These error codes have been the result of efforts to root out some of the fraudulent loans originated last year.

The Small Business Administration has announced a series of steps to address a nagging problem with error codes that Paycheck Protection Program lenders claim are needlessly delaying the approval of thousands of loans.

In perhaps its biggest step to remedy an issue that has dogged the program for weeks, the SBA said on Wednesday that it would permit lenders to certify borrowers whose loans are impacted by validation errors to hasten their receipt of funds.

The agency also said it would allow lenders to upload supporting documents for loans hit by the error messages.

Relief can’t come soon enough for many PPP lenders.

Error codes emerged as a leading bone of contention for shortly after lending resumed on Jan. 12. In the weeks immediately following the program’s relaunch, the codes interrupted the processing of as many as 30% of the loans submitted for approval.

Attached is the new SBA procedural notice to address the issues with error codes.

Loan Growth?

2020 was a bad year for loan growth at banks, as loan growth shrank for the first time in a decade and just the second decline in 28 years.

Large U.S. lenders saw their loan books shrink in 2020 for the first time in more than a decade, according to an analysis of Federal Reserve data by Jason Goldberg, a banking analyst at Barclays. The 0.5% drop was just the second decline in 28 years.

Bank of America Corp.’s loans and leases dropped by 5.7%. Citigroup Inc.’s loans dropped by 3.4% and Wells Fargo & Co.’s shrank by 7.8%. Among the biggest four banks, only JPMorgan Chase  & Co. had more loans at the end of the year than the start.

Lenders are flush with cash that they want to put to use, and executives say they are hopeful loan growth will pick up in 2021. Brisk lending typically suggests there is enough momentum in the economy to give companies and consumers the confidence to borrow. But the current weakness suggests questions remain about the vigor of the economic recovery.

For banks, this weighed on profit. Net interest income, the spread between what banks charge borrowers and pay depositors, fell 5% across the industry last year—a consequence of shrinking loan portfolios and near-zero interest rates. It was the biggest drop in more than 80 years of record-keeping, according to research by Mike Mayo, a banking analyst at Wells Fargo.

At the start of last year, it didn’t look like this would happen. When the pandemic first hit, big companies rushed to draw down credit lines from their banks, fearful they wouldn’t be able to raise money from investors in the bond market. The loans on bank balance sheets spiked.

Loan books would have shrunk more if not for government support for small businesses. Banks doled out hundreds of billions of dollars in loans through the Paycheck Protection Program. Those loans have stacked up on bank balance sheets, but are slowly being whittled away as the government forgives them.

For the regional and community banks, a disproportionate of loan growth came from PPP, much of which will have run off by the end of the year as these loans eventually get forgiven. Banks are flush with cash, but how do you prudently underwrite new loans in this environment when so many borrowers had choppy 2020s and would be struggling if it were not for unprecedented government intervention? The bond market seems to be picking up the slack.

The average yield on U.S. junk bonds dropped below 4% for the first time ever as investors seeking a haven from ultra-low interest rates keep piling into an asset class historically known for its high yields.

The measure for the Bloomberg Barclays U.S. Corporate High-Yield index dipped to 3.96% on Monday evening, making it six straight sessions of declines.

Yield-hungry investors have been gobbling up junk bonds as an alternative to the meager income offered in less-risky bond markets. Demand for the debt has outweighed supply by so much that some money managers are even calling companies to press them to borrow instead of waiting for deals to come their way. A majority of new issues, even those rated in the riskiest CCC tier of junk, have been hugely oversubscribed.

Banks are simply acting more prudently than their Wall Street brethren, who seem to be able to issue debt for any company, even those with the worst financial prospects. If AMC can issue debt despite as poor prospects as any public company, anyone can.   Chesapeake Energy, after emerging from bankruptcy recently, issued bonds this week at 5.875% with yields in the mid-4s with over $2 billion in orders before its $1 billion launch Tuesday. Perhaps, banks are better off accepting limited loan growth than chasing loan growth.

Remote for Much of 2021?

The long-delayed return to offices keeps getting pushed further back, and some are now seeing returns in the late summer / early fall.

From Silicon Valley to Tennessee to Pennsylvania, high hopes that a rapid vaccine rollout in early 2021 would send millions of workers back into offices by spring have been scuttled. Many companies are pushing workplace return dates to September—and beyond—or refusing to commit to specific dates, telling employees it will be a wait-and-see remote-work year.

The delays span industries. Qurate Retail Inc., the parent company of brands such as Ballard Designs, QVC and HSN, recently shifted its planned May return to offices in the Philadelphia area, Atlanta and other cities until September at the earliest. TechnologyAdvice, a marketing firm in Nashville, initially told employees to plan on Feb. 1 as their return date. The company then pushed the date back to August. Now, TA has decided it will begin a hybrid in-office schedule in the fall of 2021, letting workers choose whether to work remotely or come in, the company says.

Return-to-office dates have shifted so much in the past year that some companies aren’t sharing them with employees. Shipping giant United Parcel Service Inc., based in Atlanta, and financial-services firm Fidelity Investments Inc., based in Boston, haven’t announced return dates, instead telling workers signing on from home that the companies are monitoring the coronavirus pandemic and will call workers back when it is safe.

Nearly a year of makeshift work at home has weighed on employees, leaders say. While many companies say productivity is up, executives worry that creativity is suffering and say that burnout is on the rise. Even so, bosses struggle to say when things will change.

Current office-occupancy rates are highest in parts of the country where large school districts have reopened, according to data from Kastle Systems, a security firm that monitors access-card swipes in more than 2,500 office buildings, from skyscrapers to suburban office campuses.

Right now, that means Texas: In Dallas, Austin and Houston, major school districts have offered in-person learning for many months, and offices are roughly 35% full, according to Kastle. By comparison, in New York City, where schools are open part-time for in-person learning, office occupancy is less than 15%.

While we believe that some employees function well remotely, there are others it is bad for, especially young workers who are missing out in-person training and mentorship and management teams. Management teams usually function better when they see each other on a regular basis. But, visiting a downtown office building right now is like going to the airport, so many would rather work remotely until its both safe and convenient to go to the office.

Remote Boomtown

As working remote continues, many workers are fleeing to smaller cities with cheaper rents and outdoor amenities. Bozeman, Montana is one of them.

For the white-collar worker fleeing a pandemic-ravaged metropolis, Bozeman has a lot to offer. The Montana city of just under 50,000 is an hour’s drive from the award-winning Big Sky ski resort, and local businesses like the Rocking R Bar and Cactus Records radiate small-town charm. The one thing newcomers won’t be able to escape: big-city prices.

The average rent for a 2-bedroom apartment in Bozeman hit $2,050 a month in early February, a 58% surge from a year earlier, according to rental site Zumper. The cost of a home also jumped by almost 50%, fueled in part by an influx of office types who switched to remote work when cities locked down — and ultimately decided to relocate when it became clear they wouldn’t go back any time soon. “People who can afford it are buying housing sight unseen and driving the cost of housing up,” says Amanda Diehl, a Bozeman native who returned in 2018 and now runs Sky Oro, a women-focused coworking space.

For Bozeman residents, however, the frenzy has made their plight more acute. The cost of living is more than 20% higher than the national average, while the median income is  about 20% lower, limiting buying power in a market crowded with flush out-of-towners. More housing is coming: According to the city, a handful of new neighborhoods have recently broken ground and apartments are going up downtown. But locals are still getting squeezed out. 

“We have such low vacancy rates, that if they lose a rental, there’s literally no other place to go,” says Heather Grenier, who runs a local nonprofit focused on housing and poverty called the Human Resources Development Council. The Bozeman boom has fueled an “incredible increase” in the local homeless population, as well as a spate of pop-up RV communities for those who’ve been displaced, according to Grenier. “This work was challenging before, but feels impossible now.”

Of course, this is creating its own set of problems – a lack of affordable housing for one. Other places, like much of West Virginia, see an opportunity to capture from the remote trend.

The pandemic, for all its pain, has hastened a number of trends that could aid West Virginia. It has driven a shift toward telehealth, a vital tool in rural communities. It has pushed more consumers into outdoor recreation, a market West Virginia’s scenic gorges and mountain trails are primed to capture. It has boosted political will in the state to prioritize broadband. And the pandemic has sped up a move toward remote work to parts of the country with a more affordable cost of living.

This last trend, which is tied to the other three, could have broad consequences for how states think about economic development. If more workers can live anywhere, states don’t have to throw tax breaks at companies to attract them. They can try to attract workers directly.

“Making a place a good place to live becomes much more important now,” said Adam Ozimek, the chief economist at the freelance platform Upwork. “That’s also a much healthier type of competition than who’s going to give the Bass Pro outlet the biggest tax cut.”

Many people grow up in rural communities and are forced to leave to find good jobs in larger cities. If the remote work trend becomes a permanent phenomenon, it does open up the appeal of affordable places with good quality of life and abundant outdoor recreation. Due to Senator Manchin’s status as the key swing vote in a 50/50 Senate, states like West Virginia could see huge federal investments in broadband, which allows these communities to compete more effectively for remote workers.

The Peloton Story

Fortune had a great story on Peloton’s rapid ascent, as they interviewed four of their five cofounders. A key takeaway is just how difficult it can be to raise capital for a start-up.

Foley: This is important for the founder story. I had a vision and recruited these guys. Within a couple months, I was no longer involved in creating Peloton as you know it. I thought of something, and these guys took it, ran with it, and built it while I was gone. I was on the road for two or three years with a PowerPoint trying to raise money, very much ineffectively.

Cortese: The noes were all stupid. They would be things like, “Oh, well, this doesn’t fit our portfolio thesis.” Or, “No, we don’t like that you have a hardware component. We only think Facebook-style software is going to work.” It’s like, “Are you guys idiots?” Most of these pieces were things that existed in the world—the bike, video streaming. Our job was to bring them together. It’s not like we were inventing a stationary bike from scratch.

Let’s finish off with a lightning round. When was the moment you realized this thing was actually going to work?

Cortese: 2013, Black Friday. Me, John, and others were standing in the Short Hills mall [in N.J.], which was supposed to be a pop-up store. We had the first six bikes we ever made. The only six bikes we had ever made. We put them in that store just to get it open. We were standing there when, all of a sudden, people started coming in. By the end of the day, I think we sold four to six bikes. We went out and celebrated like it was a million bikes. I remember thinking like, “Holy shit, people get it. We’ve got a business.”

Angela Duckworth wrote a great book called Grit, which I highly recommend, which talks about how grit, not talent, determines who succeeds and fails.    The Peloton founders had grit, and plowed on after several years of rejection and now are growing at an exponential rate since the pandemic.

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The BAN Report 2/4/21

The BAN Report: Gamestop Madness / Bezos Steps Down / Death of Cities Exaggerated / Lack of Bargains for Debt Funds / Weed Legalization? / The 9MM Brooklyn Multi-Family Relationship-2/5/21

Gamestop Madness

The most unlikely big story of the financial markets continues to grow as Treasury Secretary Janet Yellen announced today that she is going to examine that matter. Gamestop reached as high as 483 in the past week and is now trading in the low 80s.  

“We really need to make sure that our financial markets are functioning properly, efficiently and that investors are protected,” Yellen said in an interview Thursday on ABC television’s “Good Morning America” before she leads a snap meeting of top regulators later in the day. “We’re going to discuss these recent events and discuss whether or not the recent events warrant further action.”

Thursday’s meeting puts the newly installed Treasury chief in the spotlight after populist politicians from both sides of the aisle called for investigation of recent events. While the Securities and Exchange Commission is investigating for signs of fraud behind sudden surges in stocks including GameStop Corp., others have drawn attention to trading curbs that some platforms imposed for smaller, retail investors.

The session will give the administration the chance to demonstrate that it’s attuned to the complaints about potential manipulation after two congressional committees moved to hold hearings, yet it’s unclear what action – if any – will result.

The gathering will include the heads of the Federal Reserve – formerly led by Yellen – as well as the Securities and Exchange Commission, Commodity Futures Trading Commission and Federal Reserve Bank of New York, which serves as the central bank’s main monitor of Wall Street.

“This is the first test for the Biden administration in the reorientation of consumer and investor protections,” said Christopher Campbell, a former assistant secretary of the Treasury for financial institutions from 2017 to 2018. The meeting telegraphs to the market that the administration “will play an active role in maintaining or upgrading consumer protections,” he said.

One thing we can rule-out is the post-truth, twitter-led conspiracy that Robinhood was secretly doing the bidding of the Wall Street elite by shutting down the purchasing of a collection of Reddit-promoted stocks. As evidenced by a $3.4 billion capital raise in the past week, Robinhood was in over their heads with too many leveraged long bets on these stocks.

The reality is more prosaic. Robinhood and other brokers were deluged by traders looking to invest in GameStop and other shares, often with options contracts that can increase leverage and trading risk. A clearinghouse that processes and settles trades watched the volatile trading and demanded more collateral to cope with potential losses.

A margin call is not a conspiracy. A clearinghouse is an intermediary between buyers and sellers in a financial market. It “clears,” or finalizes, trades and makes sure the parties fulfill the contract and assets are delivered. It also mitigates risk by requiring that trades be backed by enough capital to reduce the chances that one of the trading parties goes bankrupt. This protects investors as well as brokers.

But, it does show the investment public that doing business with unproven firms like Robinhood carries a different set of risks than an account with E-Trade, which is owned by Morgan Stanley. But, few were prepared for this, and trader Peter Borish described last week as a “plumbing issue.”

“If I’m short options. I’m short a call, and the price starts to go up, I have to buy GameStop as it goes up to hedge the position, the more it goes up, the more I have to buy,” Borish explained. It’s a key reason behind why Robinhood was forced to restrict trades, a controversial move that unleased lawsuits and a torrent of criticism.

Borish added: “The protection of the system is Robinhood has to get money from the customer and then put it up at the clearinghouse. If [the customer] doesn’t have it, Robinhood has to put the money up at the clearinghouse.”

Dozens of lawsuits have already been filed against Robinhood and others. Clearly, by limiting purchases of Gamestop and others but allowing liquidations, the brokerage houses essentially tipped the scales to the bears. If the brokerage houses had better risk parameters, then this scenario would not have unfolded. No one wants to see the retail investors take it on the chin, so expect more heads to roll.

Bezos Steps Down

This week, Amazon CEO and the richest man in the world Jeff Bezos announced that he was stepping down as CEO, and becoming executive chairman. In recent years, Jeff has been less involved in the day-to-day decisions.

Mr. Bezos would quip that the only time he really knew all that was going on at Amazon was in its annual budget meetings.

“He’s not super involved in the day-to-day operations,” Matt Garman, a veteran of Amazon’s cloud-computing division and top lieutenant to Mr. Jassy, said of Mr. Bezos in a 2019 interview. “I met with him more in the first 18 months than I probably have since.”

In an interview on stage at the Economic Club of Washington, D.C., in 2018, Mr. Bezos emphasized his hands-off approach, saying he rarely took meetings before 10 a.m. or after 5 p.m., and focused on strategy over detail. “If I make, like, three good decisions a day, that’s enough,” he said.

He had long championed innovation and reinvention, exhorting his employees to treat Amazon as a startup long after it had become a colossus.

In that spirit of reinvention, he increasingly became fixated on projects and goals beyond Amazon. He purchased the Washington Post in 2013, and had started rocket company Blue Origin in 2000.

Founders of the tech giants have shown a penchant for taking on ambitious new projects. Bill Gates stepped aside as Microsoft CEO after 25 years and devoted himself to reinventing philanthropy. Google co-founder Larry Page, even before stepping back from his management role in 2019, had devoted his time and wealth to side projects developing flying cars.

Mr. Bezos has taken particular interest in Blue Origin, which competes with Space Exploration Technologies Corp., or SpaceX, run by Elon Musk —Mr. Bezos’s rival for the title of world’s wealthiest person.

Losing Bill Gates or Steve Jobs didn’t seem to slow down Microsoft or Apple, so Amazon is unlikely to have major difficulties, especially since Jeff will continue to be involved. And, it appears he’s found someone like him in Andy Jassy.

Tech founders are often succeeded by their opposites, typically older executives with greater managerial experience. Mr. Bezos wanted someone more like him.

Andy Jassy, whom Mr. Bezos promoted five years ago to CEO of Amazon’s cloud business and who will take over as CEO of the company later this year, fit the bill. He started his career at Amazon in 1997, acted as Mr. Bezos’s technical assistant early on, and drove the creation of Amazon Web Services, which dominates cloud computing and accounts for the bulk of Amazon’s operating income.

Death of Cities Exaggerated

As Mark Twain famously said, “The reports of my death are greatly exaggerated.” COVID-19 has certainly battered large cities, but predicting their demise seems premature. According to an analysis today by Zillow, US housing prices rose at the same rate in both urban and suburban areas.

U.S. housing prices rose at essentially the same rate in urban and suburban areas last year, jumping 8.8% and 8.7% respectively, according to an analysis by Zillow released on Thursday.

The data complicates the narrative that workers are fleeing urban areas for the suburbs or even “Zoom towns” out West near ski resorts and national parks.

“The for-sale housing market is experiencing a pandemic-fueled surge in both urban and suburban areas,” Zillow economist Alexandra Lee said in a statement. “Homes have become more important than ever, and buyers are eager to hit the market to find their next place to live.”

In some more affordable metro areas — including Kansas City, Cleveland and Cincinnati — urban home values accelerated faster than suburban ones, according to Zillow.

The fact that home prices are increasing faster in urban areas of smaller cities makes intuitive sense.   If someone is leaving New York or Chicago for Kansas City, the suburbs may be too much of a lifestyle change, so downtowns make more sense. Another survey by the Harris Poll and the Chicago Council on Global Affairs on the six largest metro areas showed similar appeal to urban living.

Notably, big city residents are especially eager to stay in cities. Seven in 10 of the people we surveyed in metro New York, Los Angeles, Chicago, Houston, Phoenix and Philadelphia say they prefer to live in a big city; only 8% say they would prefer to live in the suburbs. By contrast, fewer suburbanites (61%) prefer suburban living, and three in 10 would choose a city — big or small — instead.  

When asked specifically how their pandemic experience has affected their preferences, half of city residents say it has not changed where they prefer to live. Another 25% say the pandemic actually makes them more likely to move to another urban area. 

A better answer is this question will be answered at a later date. Many people have left the largest cities because their isn’t a whole lot to do in Manhattan right now during a pandemic. Six months from now, they may come roaring back. And, it doesn’t hurt when housing costs drop as well. 

Lack of Bargains for Debt Funds

While distressed-debt hedge funds had a strong 2020, returning 13% on average, they are finding a limited amount of distressed credit available to purchase today.

In March, the amount of bonds and loans trading at distressed levels in the U.S. quadrupled in less than a week to almost $1 trillion, just about reaching the 2008 peak. This week, a report from S&P Global Ratings found that the U.S. distress ratio — the proportion of speculative-grade securities that yield at least 10 percentage points above Treasuries — fell to just 5% in December, the lowest since 2014.

Junk-rated U.S. companies issued about $52 billion of debt in January, the third-busiest month ever. According to Bloomberg’s Caleb Mutua, triple-C borrowers accounted for about 21% of those sales; energy represented almost one-third of the total. In a telling quote, David Knutson, head of credit research for the Americas at Schroder Investment Management, told Mutua: “The demand is driven by a desperate need for yield combined with hope.”

Howard Marks, the co-founder of Oaktree Capital Group and a legendary distressed-debt buyer, put it this way in a recent memo: “In the past, bargains could be available for the picking, based on readily observable data and basic analysis. Today it seems foolish to think that such things could be found with any level of frequency.” Effectively, the world is more efficient now, he says. “The investment industry is wildly competitive, with tens of thousands of funds managing trillions of dollars … not only is information broadly available and easily accessed, but billions of dollars are spent annually on specialized data and computer systems designed to suss out and act on any discernible dislocation in the marketplace.”

Of course, this is a function of massive stimulus and federal intervention which cannot last forever. As we are seeing in our portfolio sales, there is a favorable seller-buyer dynamic for the sellers. But, as we noted last week, if AMC can raise debt and equity, than few can argue that there isn’t plenty of liquidity in the system. 

Weed Legalization?

Earlier this week, Senate Majority Leader Chuck Schumer and other Senators spoke out in favor of ending the federal prohibition on marijuana, thus ending the conflicts between federal and state law, and possibly opening up the banking industry services to the cannabis industry.

Senate Majority Leader Chuck Schumer and two other Democratic senators said Monday that they will push to pass this year sweeping legislation that would end the federal prohibition on marijuana, which has been legalized to some degree by many states.

That reform also would provide so-called restorative justice for people who have been convicted of pot-related crimes, the senators said in a joint statement.

“The War on Drugs has been a war on people — particularly people of color,” said a statement issued by Schumer, of New York, and Sens. Cory Booker, of New Jersey, and Ron Wyden, of Oregon.

“Ending the federal marijuana prohibition is necessary to right the wrongs of this failed war and end decades of harm inflicted on communities of color across the country,” they said.

“But that alone is not enough. As states continue to legalize marijuana, we must also enact measures that will lift up people who were unfairly targeted in the War on Drugs.”

The senators said they will release “a unified discussion draft on comprehensive reform” early this year and that passing the legislation will be a priority for the Senate.

The trio also said that in addition to ending the federal pot ban and ensuring restorative justice, the legislation would “protect public health and implement responsible taxes and regulations.”

Since the federal government as not intervened as many states have legalized marijuana in both recreational and medicinal forms, ending this inconsistency seems like a logical step. For the record, our firm does have an investment in one of the cannabis stocks, so we are obviously high on the industry (pun intended). A cyclical with the growth rate of cannabis is unprecedented as people are drinking less, smoking less, but using more cannabis.  

The 9MM Brooklyn Multi-Family Portfolio

Clark Street Capital’s Bank Asset Network (“BAN”) proudly presents: “The 9MM Brooklyn Multi-Family Relationship.” This exclusively offered relationship is offered for sale by one institution (“Seller”). Highlights Include:


Please click here for more information on the portfolio. You will be able to execute the confidentiality agreement electronically. 

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