The Lex newsletter: US banking eats itself, tail first

Dear reader,

The scaly creature in this week’s illustration is an ouroboros, a mythical animal that swallows itself, tail first. It epitomizes the paradox and is a good emblem for US banks at the moment.

Autocannibalism is not something anyone should experience at home. But it’s a habit U.S. banks would become more prone to, assuming deposit insurance is expanded from the current $250,000 limit per depositor.

How did we get here? The sequence of events, reflected this week in JPMorgan Chase‘S acquire From Bank of the First Republic goes something like this.

• Rates go up again.

• Depositors with access to the fabric of lies, half-truths and occasional realities that is social media are scared by the fear of deposit flight and/or the possibility of their bank losing money on bond investments.

• Stocks plummet.

• Depositors start withdrawing funds fast. This gives pundits a chance to write zeitgeist pieces about the speed at which everything happens these days, while blissfully ignoring the speed of some bank runs in small, interconnected communities in the 19th century.

• The bank issues a statement saying everything is fine.

• This is widely read as an adverse indicator.

• The shares are still down.

• Federal Deposit Insurance Corporation bails out the bank

• The FDIC sells the assets so cheaply that the buyer has considerable margin to absorb any unexpected losses.

• Costs are socialized via a levy on FDIC-backed institutions that they pass on to customers.

• Rinse and repeat with the next regional bank people are feeling anxious about, perhaps PacWest or Zions Bancorp.

The former calculated that JPMorgan is getting an $18 billion discount on $168 billion of First Republic assets. This is worth $500 million a year, in exchange for a $10 billion cash payment. Nice job if you can catch it.

They were alternative asset groups curiously absent from FDIC asset sales so far. They have a lot of experience in distressed debt. Lex pondered whether they could provide financing for private investment in public stock or simply buy out entire smaller banks.

Some people wondered if the deal with the First Republic made JPMorgan too big. It’s like worrying that you’ve made an elephant obese by feeding it a single peanut. JPMorgan has total assets of $3.74 trillion.

The assimilation of troubled lenders by stable rivals might just be ordinary consolidation. Where it could become a value-destroying paradox, like our ouroboros friend, is through the deposit insurance scheme.

The bigwigs in US finance have proposed raising the cap. This would increase moral hazard: the tendency of state or mutual underwriting to encourage risky lending.

Bank bosses looking to make a quick buck for themselves would further undervalue loans to get business from more sober rivals. Other collapsed institutions would then be sucked into bargain hunters with everyone paying the collective price, as with the savings and loan crisis of the 1980s.

US guarantees are already very generous, covering more than 50% of deposits with institutions with assets of $23 trillion

But the scheme hasn’t prevented much panic of late. And the FDIC’s ability to identify risk hardly reflects on this chart, given recent events:

Pragmatists argue that there is simply a mismatch between deposit insurance for US regional banks and their light regulation. European challenger banks already have to meet stricter requirements. May not fit, UK ones Virgin money Tthere’s £144m in loan write-downs this week, for example, but they’re not even collapsing.

Meanwhile, if you like investing in institutions that accept deposits, you could give Starbucks a look. The US-based chain of coffee shops customer’s cash held of $1.8 billion as of April 2 through its wildly popular rewards program. If Starbucks were a bank, that would make it larger than 90% of the FDIC-covered institutions.

All on the basis

Location, location, location. That’s what home buyers say if they don’t care if their home has rising damp or leaking pipes.

The stories of HSBC’s headquarters moving to Hong Kong are perennial. Now HSBC extension shareholders rejected a motion supported by the Chinese insurer Ping An execute a partial demerger into an Asian company and a “rest of the world” grouping. The former he was against the move. In our view, the dissynergies, particularly in international wealth management and commercial banking, have outweighed the benefits.

We also suspect that Ping An has received quiet approval from the Communist Party of China for his high-profile campaign. An HSBC Asia heavily exposed to Hong Kong and China would make it easier for the CCP to bend to his will. The destabilizing impact of CCP interventions on valuations of other stocks will be familiar to Lex readers.

Pinduoduo it may try to appear less exposed to the excessive reach of the Chinese government. The parent company of the Chinese e-commerce giant has moved its headquarters to Ireland. She has high hopes for her Temu discount shopping app in Europe and the United States. But, like HSBC, Pinduoduo risks getting caught in the crossfire of East-West political polarization.

CATL, another Chinese group, is more likely to have industrial efficiency in mind than politics in liking Thailand. The manufacturer of batteries and electric vehicles is in talks to build factories There.

Lex thinks he’s smart. The Southeast Asian nation has a decent automotive manufacturing base, tolerable infrastructure, and some minerals that are useful to battery makers. Thailand is expected to attract more domestic investment from EV companies.

Finder of the blind

The purpose of investing is to make rational decisions based on accurate data. An extra layer of difficulty is added by the weakness of our own cognition.

This week, three notes from Lex illustrated aspects of this problem.

First, partial data prevents a clear judgment. US tech companies, for example, are whores in what they want and will not reveal. Half it does not publish metaverse users by app or quantify their engagement. Apple it does not provide subscriber numbers for its streaming service. Amazonia it now discloses its advertising sales, though not the profits on them.

Second, a person’s cognitive ability is variable throughout his or her lifetime. A smart octogenarian should make better investment choices than a low-wattage 30-year-old. But, on average, the ability to make good financial decisions decreases with advancing old age.

Third, everyone thinks they are smarter than average. Carl Icahn’s extremely lucrative career as a Wall Street raider is clear evidence of his intelligence. But even he is not infallible. The main listed business of him, Icahn Enterprises L.Pit is under attack by short sellers Hindenburg. The stock has dropped questioning the sustainability of a dividend financed by the sale of shares.

Things I liked this week

I was shocked and intrigued by the colleague from FT Christina Criddle’s story of how she was spied on by Tick ​​tock employees. i was moved Eartha film directed by Robin Wright and available on Netflix, about a grieving woman trying to live off the grid in Wyoming.

Anyone who has ever watched their last match vanish while trying to light a damp log fire in a weekend cottage will sympathize.

Enjoy your weekend, wherever you spend it,

Jonathan Gutri
Lex’s boss

lexfeedback@ft.com