PacWest sinks as banking troubles spread
The regional banking sector is reeling again, with PacWest shares tumbling more than 35 percent in premarket trading, despite Fed Chairman Jay Powell’s assessment that the worst is over.
The Los Angeles-based lender confirmed it was talk to potential investors following reports that he was exploring a sale. Investors may be feeling déjà vu after witnessing two major bank failures, and billions in market value wiped out, since Silicon Valley Bank’s collapse in March.
It’s not just PacWest in free fall. Shares of Western Alliance, Comerica and Zions Bancorp also fell sharply, even as S&P 500 futures fell only slightly after the Fed signaled it may stop raising interest rates.
News of a possible sale of PacWest, first reported by Bloomberg — and confirmed by DealBook — came just hours after Powell declared the banking system “sound and resilient.”
Despite Powell’s assurances, big question marks remain. Among them: Can regional banks like PacWest find a private sector solution? Or will regulators have to step in again?
The solution is complicated, as became clear during the First Republic’s month-long search for a savior. JPMorgan Chase bought the lender alone after had been seized by the FDIC PacWest appears healthy, with deposits, 75 percent of which are insured, rising since the end of March. But you need to raise capital, and fast.
Selling its depressed shares would be expensive for PacWest. That could further scare depositors and investors, and favor short sellers targeting the sector. Meanwhile, a forced sale of assets, including loans (the bank’s $2.7 billion lender-financing loan portfolio is on the block) and securities tied to low interest rates, may not yield much. Finally, the sale itself could be difficult, and not just because the pool of potential buyers has shrunk significantly since the JPMorgan-First Republic deal.
Criticism of the Fed and calls for regulatory action are growing. Mohamed El-Erian, an economist and adviser to Allianz, accused Powell of misleading the markets by saying that the sector’s problems had been largely contained by the sale of First Republic. AND bill ackman, the billionaire investor, has called on regulators to modernize the deposit insurance system to restore public confidence in regional lenders. (He added that his hedge fund was neither long nor short in the banking sector.)
Below for the markets: The European Central Bank is expected to raise interest rates on Thursday, but whether it will do so by a quarter or a half point is an open question.
THIS IS WHAT IS HAPPENING
Oil prices turned around in volatile trade. Benchmarks for Crude pink thursday, but not enough to offset yesterday’s decline, which was driven by investor concerns about slowing global demand. Meanwhile, shell reported Better-than-expected earnings, as lower costs and strong business results offset lower oil and gas prices.
Jamie Dimon could reportedly testify about Jeffrey Epstein later this month. TO Deposition of JPMorgan Chase CEO, as part of two lawsuits over the bank’s ties to the convicted sex offender, is scheduled for May 26 and 27, according to CNBC. Meanwhile, The Wall Street Journal reports that Mr. Epstein had previously unreported meetings with Larry Summers and LinkedIn co-founder Reid Hoffman, and Epstein’s Private Islands sold for $60 million.
Goldman Sachs is reportedly seeking to settle a discrimination lawsuit. The Wall Street bank has held talks about the payment several hundred million dollars to resolve allegations of systematic discrimination against female employees, The Wall Street Journal reports. A trial in the case is set for next month.
The UAW retains an endorsement of President Biden. The United Auto Workers, one of the most powerful unions in the United States, said it was concerned about the White House’s plans for an “electric vehicle transition,” though it did not rule out endorsing it later in the 2024 race. It’s a sign of how Biden’s climate change policies may cost him the support of a key constituency.
The FTC and the Meta clash
Meta and the FTC have stepped up their fight over how the social media giant handles its users’ data. Meta accused the agency and its president, Lina Khan, of pulling a “political stunt” after it moved to impose “a blanket ban” on the company’s collection of personal data from young people.
The agency has harshly criticized Meta before for its handling of user data. In 2020, it imposed a $5 billion consent order and forced Meta, which owns Facebook and Instagram, to review its privacy practices. The FTC said yesterday that the company had not done so, accusing it of “recklessness” and putting “young users” at risk.
The potential penalties are stiff. Meta would be prohibited from profiting from the data it collects from users under 18, and regulators want that extended to 18-year-olds, a move that would limit how the company targets ads to young people.
Meta swore to fight. “Despite three years of ongoing engagement with the FTC around our settlement, they failed to provide an opportunity to discuss this totally unprecedented new theory,” the company said in a statement, adding that Ms. Khan’s “insistence to use any measure, however unfounded, to antagonize corporate America has hit a new low.” The company has 30 days to appeal.
Congress also takes aim at social media. Senator Edward Markey, D-Massachusetts, and Senator Bill Cassidy, R-Louisiana, yesterday reintroduced a bill to update the Children’s Online Privacy Protection Act. Lawmakers said in a statement that sought to ban “ads directed at children and prevent all online platforms, not just Meta and other companies under FTC consent decrees, from profiting through the exploitation of an entire generation.”
What to watch for in Apple’s earnings
Tech giants like Alphabet, Amazon, Meta and Microsoft have all beaten expectations this earnings season. Apple is next and will report after the closing bell on Thursday. Here are some of the most important things to keep in mind.
Repurchase of shares: Investors hope Apple, which has spent more money on share buybacks than any other company, will continue to do so. The consensus number for this quarter is $90 billion.
Porcelain: Nearly 25 percent of Apple’s revenue comes from China, and supply chain disruptions there led to expensive shortage. As the Chinese economy reopens after Covid, the iPhone maker’s sales should continue to pick up, and Tim Cook, Apple’s boss, has said production problems have eased. But some analysts worry the company will continue excessively dependent on China.
Artificial intelligence: Tech leaders have spent a lot of time on their earnings calls touting their progress in adding ChatGPT-like features to their products. Apple has been criticized for not being able to keep up with the latest advances. Investors will be eager to see if Cook presents an expansive vision for the technology.
Governments step up AI oversight
Leaders of companies working on artificial intelligence, including Alphabet, Microsoft and OpenAI, will meet with Vice President Kamala Harris on Thursday, after the White House announced new initiatives to rein in the fast-growing technology.
It’s the latest sign that governments seek to tame AI as the tech world rushes to harness the power of products like ChatGPT, with critics warning that the technology threatens to reshape society in potentially negative ways.
White House officials have pledged to release draft guidelines for the use of AI in government, to safeguard “the rights and safety of the American people.” The announcement comes a day after Lina Khan, chairwoman of the FTC, called for stricter regulation of the technology.
International regulators are also taking action. The head of Britain’s competition watchdog told The Financial Times that the agency I would review the AI market, with an eye on potential guardrails to protect consumers and smaller businesses. That follows the plans of the European Union for some of the countries of the world. more radical legislation to regulate the AI
In other AI news:
HSBC braces for investor showdown over China
At HSBC’s annual meeting on Friday in Birmingham, England, the focus will be on one issue: whether to break up the bank, which is Europe’s largest. HSBC management argues that the lender benefits from its integrated global operation. But the firm’s biggest shareholder, Chinese insurer Ping An, wants HSBC to spin out of its main Asian operations.
Although a shareholder initiative to force HSBC to periodically review its structure may fail on Friday, the pressure on the bank to reconsider its future will not abate any time soon.
HSBC’s China-oriented business accounts for nearly half of its revenue – but Ping An says the division has been held back by having to subsidize its slower-growing Western operations. Asian investors were also angered by a 2020 edict from the Bank of England that British banks would stop paying quarterly dividends. (HSBC said this week it would restart those payments.)
Last month, Ping An responded to management objections by suggesting the less drastic step of giving the Hong Kong-based Asian company its own public listing.
HSBC remains unconvinced. Executives have said a breakup risks disrupting what is a well-performing business and pointed to their efforts to divest non-core operations such as retail banking in North America. TO better than expected earnings report on Tuesday helped bolster his arguments.
The fight will likely extend beyond Friday. Although HSBC is expected to win the vote on the shareholder proposal, analysts admit that HSBC will face increasing pressure from worsening tensions between Beijing and the West.
With Ping An showing no desire to leave, expect the fight for HSBC’s future to continue.
“Why are Republican presidential hopefuls stay out of Dispute over the US debt ceiling” (Reuters)
Ajay Banga, chosen by President Biden to lead the World Bank, was confirmed for the post yesterday. (NY)
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