The earnings are rolling in this week and while I don’t try to do deep dives on most of them I do pay attention on a macro level—and most of them are pretty damned good. I was surprised, in particular, how strong McDonald’s (MCD) revenue and earnings came out–just from a personal perspective we don’t stop there much anymore, but I guess many don’t agree with our assessment. General Motors (GM) had stellar earnings-Mary Barra has been and is one of the best CEO’s in the country in my opinion. If we are near a recession most company’s didn’t get the message.
First Republic (FRC) is tumbling this morning after their earnings release late yesterday–the banker has plenty of challenges as they lost 40% of their deposits last quarter. It will be many quarters before preferred dividends are paid on their preferred stock issues–if they ever are paid. In recent years it seems that it has become more acceptable to screw preferred holders and being non cumulative will FRC ever feel compelled to pay preferred dividends?
Today we have housing related economic news on tap. We will have the Case Shiller Price Index and FHFA price index both being released at 8 a.m. (central). Then we have new home sales and consumer confidence at 9 a.m. My own observations on the housing market is that everything being built is being sold – no huge subdivisions of unsold properties at this point in time. It will take a substantial jump in unemployment to shut down housing–everyone has a job who wants one.
Yesterday, as has become typical for me, I didn’t open my accounts at all – will do that before markets open, but obviously I didn’t buy or sell anything yesterday. Honestly I want to add to my regional bank preferred holdings–great current yields are available in the 7-8% area, but I am resisting at this point in time. As Tex the 2nd reminds us any bank can been seized by the FDIC in an instance–all it takes is a Twitter and Facebook fueled bank run–and I need to wrap my mind around this fact and determine the correct level of commitment to this sector.
Well let’s get this market rolling–yesterday was another day of ‘paint drying’–will today be a day with market movement or will be have another enjoyable day watching paint dry?
The strong McDonald’s numbers do not surprise me. People these days have gotten comfortable with having someone else make their meal for them. Or put another way, are too lazy to cook for themselves (or can’t cook). You may lose some low end customers but as budgets get squeezed many just drop down the food chain .. from nice restaurants to chain restaurants to fast food. Same with the coffee addicts. McDonalds is a lot more affordable than most coffee chains.
I agree, MCD does a great job with their coffee in my opinion. Of the chains, it’s a top three over Dunkin, Starbucks, etc.
MCD…
…good coffee.
I’m not going to touch that subject.
A new academic paper just came out documenting how social media, mainly Twitter, led to the bank run at Silicon Valley Bank. A new factor that Janet/Jay/FIDC did NOT previously consider. Main point from the paper:
“Given the increasingly pervasive nature of social communication on and off Twitter, we do not expect this risk to go away, but rather, it is likely to influence other outcomes, as well. ”
T2 comment: Aside from some banks that arguably should fail, this is a blueprint for short sellers to target any non-TBTF bank to cause a bank run. Unknowable which ones might be targeted.
FRC common down about 25%, preferreds down about 15% in the pre-market. Gonna take a Michael Jordan buzzer beater, half court shot to save them.
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Social Media as a Bank Run Catalyst
Social media fueled a bank run on Silicon Valley Bank (SVB), and the effects were felt broadly in the U.S. banking industry. We employ comprehensive Twitter data to show that preexisting exposure to social media predicts bank stock market losses in the run period even after controlling for bank characteristics related to run risk (i.e., mark-to-market losses and uninsured deposits). Moreover, we show that social media amplifies these bank run risk factors. During the run period, we find the intensity of Twitter conversation about a bank predicts stock market losses at the hourly frequency. This effect is stronger for banks with bank run risk factors. At even higher frequency, tweets in the run period with negative sentiment translate into immediate stock market losses. These high frequency effects are stronger when tweets are authored by members of the Twitter startup community (who are likely depositors) and contain keywords related to contagion. These results are consistent with depositors using Twitter to communicate in real time during the bank run.
. . .
The effect that we uncover − though a modern phenomenon linked to rapid communication over social media − is one that is classically rooted in bank run models, going back to Diamond and Dybvig (1983). These models have always posited that communication and coordination pose a risk to banks, especially when many of the deposits in the bank are uninsured. Increasingly, in today’s society, social media provides a means for individuals to coordinate and communicate beyond what older technologies allow. The amplification of bank run risk via Twitter conversations is a unique opportunity to observe communication and coordination that shapes a critically important economic outcome − distress in banks. Given the increasingly pervasive nature of social communication on and off Twitter, we do not expect this risk to go away, but rather, it is likely to influence other outcomes, as well.
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4422754
What percentage of depositors need all their deposits at one time?
If the feds or the banks put a weekly or monthly limit on withdrawals or even a penalty capped at a certain amount if funds are withdrawn over that amount? Yes, this may create an initial panic but to keep the lemmings from rushing over the cliff you build a fence to slow them down enough to think straight.
I don’t need all my funds at one time and if I had a government promise my funds will be there but I can only withdraw a limited amount per month I’m fine with not having the twit’s flash panicking the crowd
The notion that government or the banks themselves would impose limits or penalties on people accessing their own bank deposits is guaranteed to create a run on any institution that tried to impose it.
Citadel, four New York Federal Reserve Bank economists wrote a paper this month that essentially called for gating/limiting bank withdrawals to prevent a bank run. The paper is NOT an official position paper from the Fed, but I think we can assume the Fed is discussing policies like this. None of them might have understood the risk that Twitter tweets could spur a bank run, but they got it now. All III’ers know that banks being fractional reserve creatures are at risk of a run. It might not be highly probable the Fed would put in a rule like this, but the odds are certainly above zero.
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Mitigating the Risk of Runs on Uninsured Deposits: the Minimum Balance at Risk
A similar mechanism could be applied to uninsured depositors: a small fraction of each depositor’s uninsured deposit, which we call the minimum balance at risk, would be available for withdrawal only with a delay
https://libertystreeteconomics.newyorkfed.org/2023/04/mitigating-the-risk-of-runs-on-uninsured-deposits-the-minimum-balance-at-risk/
> If the feds or the banks put a weekly or monthly limit on withdrawals or even a penalty capped at a certain amount if funds are withdrawn over that amount?
It can’t really work that way. They’re called “demand deposits” for a reason… if people and companies can’t actually withdraw their money on demand they’ll move their money from banks to some other money business (maybe brokers).
And if you create withdrawal caps in times of stress you actually ENCOURAGE bank runs, because there’s now an incentive to pull your cash before the cap takes effect.
From some reading I did last month (can’t point to it at the moment), it seemed that the vast majority of depositors over the FDIC limits were companies, not individuals. Its just not practical for most companies of any size to stay below the limits because it would require the company to manage potentially hundreds accounts at different banks. I think this is one reason that bank deposits have been dropping and money market funds have been swelling (there was some reporting after SVB failed, but I can’t point to it right now either).
I don’t think a fee/limit would achieve the goal you want.
Withdrawal limits are used in some “interesting” countries when they have financial panics/crises. Probably not the message anyone wants to send to the general US public. It would panic a lot of individual depositors (even/especially those who are under the FDIC limit and who shouldn’t have any real reason to worry) – and corporate depositors would just go to another type of institution, which would hurt banks even more.
Checking accounts are “on demand”. However, if banks incentivized depositors with higher rates to place some of their funds in time deposits (CDs) that did not have loopholes for earlier withdrawal, that would slow runs and give the banks some time to get their acts together. I understand that start ups may have substantial cash on hand after raising funds, but surely they plan on spending some of those next year not this. I would like to see a better analysis of these runs in the press so we can all understand these better.
Jimbo,
Leaving start-ups aside (which can be enormously complicated) —
Depending on the type of business, many companies have money they could put in CDs, bonds, etc. (Last I looked, Apple held a staggering amount of US Treasury paper – IIRC, over $150B). You get hammered in CFO school to be prudent with cash, so big cash is rarely just sitting in a bank.
I suspect the bigger challenge for many companies is operational cash. Every company has “ins and outs” – receivables from customers, payroll, payables to suppliers, etc. etc. – plus, banks like to see some cushion (esp. the bank that is providing a credit line) – so a company’s bank balance will move a lot, but it isn’t that unusual for a decent sized company to have millions in a bank on any given day. Companies generally have sweeps on accounts, but the money us usually swept into some product from the same bank. Somebody with more recent corporate treasury experience can probably give us chapter and verse.
Here is a crazy idea (off the top of my head):
Maybe some of these mid-sized banks should come up with a new product where they can automate account “spreading” so biggish chunks of customers’ deposits are swept into other banks (looks to customer like it is all in a single bank, but in reality it is spread across dozens of “allied” banks to get FDIC coverage).
So, for example (oversimplified), customer has $10M at Bank A. Instead of customer having $9.75M over FDIC limit, Bank A syndicates the deposits to 39 other FDIC insured banks (banks B-MM), and manages the balances so it is transparent to the customer so as the customer deposits or draws, it just looks like everything is operationally sitting in Bank A. If the syndication was balanced across participating banks (i.e. if bank A syndicates out a million in deposits, it also receives an offsetting million in deposits from other banks who are also syndicating funds), no single bank gets “siphoned” for deposits. I realize it wouldn’t stop bank runs directly, but customers might be less likely to bolt if they knew their deposits were insured (of course, with the government protecting by fiat some depositors above the FDIC limit, maybe this kind of thing is no longer necessarily?).
Might take an intermediary entity to manage things and maintain confidentiality, the agreements would be VERY complicated, and it would take some dancing with FDIC.
Anyway, just a crazy idea as I sit here waiting for the dentist with my granddaughter.
Private, what you want already exists. A software platform that automatically spreads you money to multiple banks AND keeps is under the $250k FDIC limit.
https://www.maxmyinterest.com/
We have NOT used it, so cannot vouch for anything about it other than it exits.
Dang it. someone stole my idea before I had it!
Thanks for looking. I appreciate you even thinking about one of my crazy ideas.
from just from a quick read – that product seems to balance your deposits across multiple accounts you own and manage. Ironically, from looking at their website, I actually know one of their advisors. Small world.
Anyway…
I was thinking about something more “out there” than Maxmyinterest. where you put money in one bank (i.e. you only see/deal with one bank), and the bank sends it to a lot of other banks (transparently to you – you don’t manage them or necessarily even know who they are). I was thinking of a web of trust-type relationships, but I obviously haven’t fleshed it out at all.
That is in fact how Robinhood works. They have agreements with 10 or so banks and they farm your money out to them via cash sweep to offer a total insurance up to $1.25 million.
And do we think Janet yellen is capable of that shot?
In reading this, it seems to me that the safest banks (non-TBTF) are those with primarily lower to middle-income customers that mainly have insured deposits and are too busy earning a living and taking care of their kids to spend all day on twitter. Also, they won’t care much about hypothetical mark-to-market losses since their deposits are insured.
I find it hard to understand the relationship between having the intelligence to accumulate enough wealth to have in excess of $250000 on deposit and then falling for the lies that make up so much of social media posts. Maybe I am overestimating the intelligence required to accumulate wealth!
Well DJ, its a crazy world. I am constantly reminded that everyone doesn’t have the same priorities that I (or most investors) do.
When SVB started to struggle, I sent a suggestion to a bunch of the young people here in silicon valley with whom I work/consult/mentor that they might want to check that their bank accounts were within FDIC limits.
I got some interesting responses.
A bunch of them are very sophisticated investors and kind of laughed off my suggestion – but more than a few just aren’t. Some had literally millions of dollars sitting in a single bank (a few had it all in one checking account!).
These are brilliant people who know how to amass relatively large amounts of money in just a few years working with/starting up Silicon Valley companies – but some just don’t think (focus on) what they should do with that money.
I usually don’t give personal financial advice, but I did suggest the latter group consider diversifying where they keep their money (manage FDIC limits- if they want to stay in banks) or consider putting the money to work somewhere. FWIW, the idea of laddering treasuries seemed to resonate with some of my programmer friends – especially that it can be automated.
Will (FRC) First Republic survive?? Any other banks that anyone here thinks could be done this calendar year? All thoughts are welcome 🤔
https://wolfstreet.com/2023/04/24/first-republic-discloses-its-a-zombie/
I think FRC is a goner. Too much of their business has left and they’re trying to deleverage their balance sheet by selling half of it, ie $100B worth.
1. When you have to sell $100B worth of less liquid assets and are a distressed seller, you’re going to get a bad price unless you’re selling to the Fed. Plus you have to admit to realizing those losses under MTM, and quite possibly the rest of your “held to maturity” portfolio as well.
2. When you shrink your balance sheet, your equity ratios get worse when your MTM equity is -$5-10B.
3. Many wealth managers have been leaving and taking their clients with them. Seems like every week I hear more people left and took $B’s with them. The looming 20-25% layoffs planned for Q2 surely will make everyone look to leave before they’re pushed out.
A bank without public confidence is nothing, and I expect that’s exactly what will be left for the public shareholders at the end of this saga (common and preferred).
Maybe I’m wrong and they get a bailout from the Feds, but the banking crisis seems to have been contained and if that means FRC is the last casualty, I don’t think the FDIC and the Feds will feel a great pressure to save them.