The Lex Newsletter: US banking eats itself, tail end first

Dear reader,

The scaly critter in this week’s illustration is an ouroboros, a mythical animal which swallows itself, starting with the tail. It epitomises paradox and is a pretty good emblem for US banking at the moment.

Autocannibalism is not something anyone should try at home. But it is a habit US banking would become more prone to, supposing deposit insurance is extended from the current limit of $250,000 per depositor.

How did we get here? The sequence of events, reflected this week in JPMorgan Chase’s purchase of First Republic Bank goes something like this.

• Rates go up some more.

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

• The shares fall.

• Depositors start pulling funds fast. This gives pundits a chance to write zeitgeisty pieces about how fast everything happens these days, 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 a contrary indicator.

• The shares fall some more.

• The Federal Deposit Insurance Corporation rescues the bank

• The FDIC sells the assets so cheaply that the purchaser has a hefty margin to absorb any unexpected losses.

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

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

Lex calculated that JPMorgan is garnering a discount of $18bn on $168bn of First Republic assets. This is worth $500mn annually, in return for a $10bn cash payment. Nice work if you can get it.

Alternative asset groups have been curiously absent from FDIC asset sales so far. They have plenty of expertise in distressed debt. Lex mused whether they could provide private-investment-in-public-equity funding or simply buy smaller banks whole.

Some folks wondered whether the First Republic deal made JPMorgan too big. This is like worrying that you have made an elephant obese by feeding it a single peanut. JPMorgan has total assets of $3.74tn.

The assimilation of struggling lenders by stable rivals may just be normal consolidation. Where it might become a value-destructive paradox, like our friend the ouroboros, is via the deposit insurance scheme.

US financial bigwigs have proposed increasing the upper limit. This would increase moral hazard: the tendency of state or mutualised underwriting to encourage risky lending.

Bank bosses seeking to make a fast buck for themselves would further underprice loans to take business from soberer rivals. More collapsed institutions would then be sucked up by bargain hunters with everyone paying the collective price, as per the 1980s savings and loans crisis.

US guarantees are already very generous, covering more than 50 per cent of deposits at institutions with $23tn in assets

But the scheme has not forestalled much panic of late. And the FDIC’s skill in identifying risk hardly shines out from this chart, given recent events:

Pragmatists argue that there is simply a mismatch between deposit insurance for US regional banks and light-touch regulation of them. European challenger banks already have to meet tougher requirements. They may not be doing well — the UK’s Virgin Money took £144mn in loan impairments this week, for example — but they are not collapsing either.

Meanwhile, if you like investing in deposit-taking institutions, you might give Starbucks a look. The US-based coffee shop chain held customer cash of $1.8bn as of April 2 via its hugely popular rewards programme. If Starbucks was a bank, that would make it bigger than 90 per cent of institutions covered by the FDIC.

All about the base

Location, location, location. That is what property buyers say if they do not care if their house has rising damp or leaky plumbing.

Stories about HSBC switching its headquarters to Hong Kong are perennial. Now HSBC shareholders have rejected a motion backed by Chinese insurer Ping An to execute a partial split into an Asian business and a “rest of the world” grouping. Lex has been against the move. Dis-synergies — notably in international wealth management and commercial banking — outweighed advantages, in our view.

We also suspect that Ping An received quiet Chinese Communist party approval for its high-profile campaign. An HSBC Asia heavily exposed to Hong Kong and China would be easier for the CCP to bend to its will. The destabilising impact of the CCP’s interventions on the valuations of other stocks will be familiar to Lex readers.

Pinduoduo may be attempting to appear less exposed to Chinese government over-reach. The parent company of the Chinese ecommerce giant has moved its HQ to Ireland. It has high hopes for its Temu discount shopping app in Europe and the US. But, like HSBC, Pinduoduo risks getting caught in the crossfire of east-west political polarisation.

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

Lex thinks that is smart. The south-east Asian nation has a decent automotive manufacturing base, tolerable infrastructure and some minerals useful to battery makers. Thailand should lure more inward investment from EV companies.

Blinder finder

The aim of investment 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 Lex notes illustrated aspects of this problem.

First, partial data impedes clear judgment. US tech companies, for example, are meretricious in what they will and will not disclose. Meta does not publish metaverse users by app or quantify their engagement. Apple gives no subscriber numbers for its streaming service. Amazon now reveals its ad sales, though not profits on them.

Second, a person’s cognitive ability is variable during their life. A clever octogenarian should make better investment calls than a low-wattage thirtysomething. But, on average, the ability to make good financial decisions declines with advancing old age.

Third, everyone thinks they are smarter than average. Carl Icahn’s hugely profitable career as a Wall Street raider is clear proof of his intelligence. But even he is not infallible. His main listed business, Icahn Enterprises LP, is under attack from short seller Hindenburg. The stock has dropped, calling into question the sustainability of a dividend financed by share sales.

Stuff I enjoyed this week

I was shocked and intrigued by FT colleague Cristina Criddle’s account of how she was spied on by TikTok employees. I was moved by Land, a film directed by Robin Wright and available on Netflix, about a bereaved woman trying to live off-grid in Wyoming.

Anyone who has ever watched their last match gutter out while trying to light a fire of damp logs in a weekend cottage will sympathise.

Enjoy your weekend, wherever you spend it,

Jonathan Guthrie
Head of Lex

lexfeedback@ft.com