Connect with us

Uncategorized

JPM CEO Says “System Is Very, Very Sound” After Second Largest US Bank Failure In History

JPM CEO Says "System Is Very, Very Sound" After Second Largest US Bank Failure In History

Update (0835ET):  After another massive bank failure…

Published

5 months ago

on

JPM CEO Says "System Is Very, Very Sound" After Second Largest US Bank Failure In History

Update (0835ET):  After another massive bank failure - and taxpayer-funded bailout - JPMorgan CEO Jamie Dimon told listeners on an investor call this morning that "The system is very, very sound."

Doesn't seem like it Jamie, old chap?

But hey, whatever you say now as the CEO of a bank that holds over 10% of America's deposits.

"We need large, successful banks in the largest economy," Dimon continued, proclaiming that "this is nothing like '08 or '09." 

Well he is right, in so much as this is far larger... and we really don't know where the CRE holes on bank balance sheets are (even as Charlie Munger warns they are everywhere).

The good news, Dimon declares regarding bank failures, "this is getting near the end of it." Thought how he would know that is hard to comprehend?

Finally, the too-biggest-to-fail bank CEO warned, "we are clearly gong to see some reduction in bank lending," implying JPMorgan will be doing "God's work" for The Fed by contracting credit without the need for rate-hikes.

For now, it's clear what the market thinks of JPM's state-sponsored buyout of FRC assets...

*  *  *

Heading into the weekend, US regulators were facing a dilemma over the fate of First Republic Bank: either let the insolvent California bank fail and bail-in some (or all) of the $30 billion in uninsured rescue deposits given to the bank by a consortium of banks including JPMorgan, BofA, Goldman and others so as not to appear like the Biden admin is bailing-out big, bad banks again a la 2008, but in the process restarting the bank run panic as an impairment of all bank depositors would reverse Janet Yellen's vow not to do just that in the aftermath of the SVB collapse, or bail out FRC including all of its depositors, both retail and institutional, insured and uninsured, and spark a fresh political crisis where republicans accuse democrats of rescuing Jamie Dimon and his banker pals.

In the end, early on Monday morning, the US unveiled a hybrid solution - after all other attempts at a private rescue effort failed - one where the FDIC would seize the insolvent First Republic, the 14th largest US bank by assets, making it the second biggest bank failure in US history, and immediately sell the bulk of its assets and all of its deposits to JPMorgan after a sham but "highly competitive bidding process" had taken place over the weekend (one in which virtually nobody wanted to participate as nobody would buy FRC without explicit government backstops, which in the end is precisely what they ended up getting on FRC's IO and CRE loan portfolio) while keeping FRC's toxic Interest-only mortgages to Hamptons' billionaires.

According to the FDIC announcement, JPMorgan would assume all of First Republic’s $92 billion in deposits — insured and uninsured, including the $5 billion in deposits gived by JPM to First Republic on March 16. It is also buying most of the bank’s assets, including about $173 billion in loans and $30 billion in securities.

As part of the agreement, the Federal Deposit Insurance Corp. will share losses with JPMorgan on First Republic’s loans. The agency estimated that its insurance fund would take a hit of $13 billion in the deal, which is precisely the hole that prevented a private sector solution from being reached. JPMorgan also said it would receive $50 billion in financing from the FDIC to consummate the deal.

More importantly, the FDIC and JPMorgan also entered into a "loss-share transaction on single family, residential and commercial loans it purchased of the former First Republic Bank."  As part of this transaction, the FDIC as receiver and JPMorgan will share in the losses and potential recoveries on the loans covered by the loss-share agreement. 

The loss-share transaction, the FDIC said, is projected to maximize recoveries on the assets by keeping them in the private sector, and "is also expected to minimize disruptions for loan customers.  In addition, JPMorgan Chase Bank, National Association, will assume all Qualified Financial Contracts."

The second largest US bank failure in history become a fact after the San Francisco-based First Republic lost $100 billion in deposits in a March run following the collapse of fellow Bay Area lender Silicon Valley Bank, a testament to the catastrophic supervision of the Mary Daly-led San Fran Fed, which was more worried about rainbow flags and DEI than making sure banks in its regions were, you know, solvent. It limped along for weeks after a group of America’s biggest banks came to its rescue with a $30 billion deposit. Those deposits will be repaid after the deal closes, JPMorgan said.

And with the collapse of FRC, three of the four largest-ever U.S. bank failures have occurred in the past two months. First Republic, with some $233 billion in assets at the end of the first quarter, ranks just behind the 2008 collapse of Washington Mutual. Rounding out the top four are Silicon Valley Bank and Signature Bank, a New York-based lender that also failed in March.

Meanwhile, just as we said a month ago when we joked that the regional bank crisis is meant to make JPM even bigger and more systematically important than ever, as it pays just 0.01% on its deposits as it remains the only truly "safe" bank for US depositors, in effect collecting a $90 billion annual subsidy courtesy of its TBTF status...

... both First Republic and Washington Mutual are now substantially owned by JPMorgan. The nation’s largest bank, it has been known to step in during banking crises. Chief Executive Officer Jamie Dimon was pivotal in earlier efforts to rescue First Republic.

“Our government invited us and others to step up, and we did,” Dimon said Monday.

Following the transaction, First Republic’s 84 branches will reopen as part of JPMorgan Monday during normal business hours, and customers will have full access to their deposits, the FDIC said.

As the WSJ notes, First Republic’s failure seems unlikely to spur another crisis of confidence in the Main Street lenders that serve a large chunk of America’s businesses and consumers. Regional lenders uniformly lost deposits during the first quarter, but the declines were modest compared with First Republic’s $100 billion outflow.

“This is the last stages of that initial panic. First Republic’s problems started as a result of SVB and Signature,” said Steven Kelly, a senior researcher at the Yale Program on Financial Stability. “This isn’t the story of 2008, where one bank went down and investors focused on the next biggest bank, which would wobble.”

Actually, it is, because only now does the solvency crisis courtesy of trillions in commercial real estate on bank books start to manifest itself, as we also warned it will. But it will take a while for that to trickle down to the rest of the population.

As for the immediate cause of First Republic’s collapse, just like in the case of Silicon Valley Bank, was a smartphone-enabled exodus of panicked depositors with big uninsured balances, but the bank’s problems were rooted in a wrong-way bet on interest rates. A focus on America’s coastal elite helped First Republic become one of the most valuable U.S. banking franchises. Big deposits from customers with lots of cash funded low-rate jumbo mortgages to wealthy home buyers in both California and New York. Ultralow interest rates and a pandemic savings boom supercharged the bank’s growth.

When the Fed began raising interest rates last year to cool inflation, customers began demanding higher yields to keep their money at First Republic. Rising rates also dented the value of loans the bank made when rates were near zero.

The chronic problem turned into an acute one in March, when the collapse of Silicon Valley Bank sparked fears about the overlooked risks lurking in the banking system. Investors and customers were especially worried about banks, such as First Republic, that relied heavily on uninsured deposits and had large unrealized losses in their loan and securities portfolios due to rising rates.

“It was a run on the business model,” Kelly said.

First Republic’s badly damaged balance sheet left it with few good options.  In a dismal quarterly-earnings report last week, the bank disclosed the extent of the deposit run and said it had filled the hole on its balance sheet with expensive loans from the Federal Reserve and Federal Home Loan Bank. An untenable future, in which it earned less on its loans than it paid on liabilities, appeared all but certain. The earnings report sent the bank’s stock down nearly 50% in one day. First Republic shares ended the week at $3.51. They closed at $115 on March 8, the day before SVB’s disastrous run. They traded around $1.9 in the premarket following news of the FDIC seizure which effectively wipes out the equity.

As the WSJ notes, while some employees started jumping ship after SVB’s collapse, many stayed and watched the bank’s stock crater last week and frantically texted friends about how they feared the bank would go under soon. Some said they wished management had provided clearer communication about where the bank was headed.

Business had grown quieter since the banking turmoil started, current and former employees said. First Republic bankers who previously focused on luring in deposits found there was little they could do to reverse the tide when customers started pulling cash. Pay took a hit too: Bankers were compensated in part by how much in customer deposits they brought to the bank.

In a pair of emails late Friday and Saturday morning, CEO Michael Roffler and Executive Chairman Jim Herbert thanked First Republic employees for staying focused during the turmoil.

“Throughout our history and in these past weeks, we have done what we always do—serve our clients, support our communities, and take care of one another,” Roffler wrote. “When we come in next week, we will continue to do the same.”

Hoping that the bank crisis is over now that First Republic has been tucked away, the US Treasury issued a statement on Monday morning after the deal was announced, saying that the US banking system remains sound, resilient, and with the ability “to fulfill its essential function of providing credit to businesses and families." 

The good news is that we will very soon test just how resilient the banking system is after the full extent of the CRE crisis become evident over the coming year.

As for the biggest winner from the FRC bank failure and the regional banking crisis in general, it should be quite clear to all who that is by now.

In a presentation published by JPMorgan laying out the transaction details, the bank explained just how it would clean up the various odds and ends from the failed March rescue: it will repay $25B of deposits from large U.S. banks and eliminate a $5B deposit from JPMorgan Chase on consolidation. It will also make a $10.6 billion payment to the FDIC, while the FDIC will provide a new $50B five-year fixed-rate term financing which will take the place of FRC's existing deposits.

Additionally, as noted above, the FDIC will provide loss share agreements with respect to most acquired loans: Single family residential mortgages: 80% loss coverage for seven years; Commercial loans, including CRE: 80% loss coverage for five years.

JPM also disclosed that it would take a one-time gain of $2.6B post-tax at closing, not including expected restructuring costs of $2.0B over the course of 2023 and 2024; and perhaps more importantly the fair value marks on acquired loans is ~$22B, with an average loan mark of 87%, while the FDIC's loss sharing deal reduces risk weighting on covered loans, with an average risk weighting of ~25%.

As for the deal rationale, well... JPM didn't have to include this slide - after all the rationale was all about taxpayers getting stuck with FRC's toxic sludge while JPM getting all the good assets at pennies on the dollar - but it did anyway, so here you are: 20% IRR courtesy of taxpayers.

Finally, all of FRC's high net worth clients in California and New York now belong to JPM.

For those wondering, this is the reason why one month ago we changed JPMorgan's name to JPMega.

The full JPM First Republic integration slideshow is below (pdf link).

Tyler Durden Mon, 05/01/2023 - 07:33

Read More

Related Topics:
Continue Reading

Uncategorized

Generative AI’s growing impact on businesses

Over recent years, artificial intelligence (AI) has gained considerable traction. And on the back of the resultant excitement, price-earnings (P/E) ratios…

Published

31 mins ago

on

September 24, 2023

By

Over recent years, artificial intelligence (AI) has gained considerable traction. And on the back of the resultant excitement, price-earnings (P/E) ratios for stocks even remotely related have soared. Is the excitement premature?

McKinsey recently  published an article titled The State of AI in 2023: Generative AI’s Breakout year, draws on the results of six years of consistent surveying and reveals some compelling findings. My takeaway is that service providers are buying the chips and working furiously to offer AI-enhanced solutions, but corporate customers are still some way off embedding those solutions in their own workflows. There exists a lack of understanding, necessitating more education.

The highest-performing organisations however, as showcased in the research, are already adopting a comprehensive approach to AI, emphasising not just its potential but also the requisite strategies to harness its full value.

Irrespective of the industry, and of whether they are service organisations or manufacturers, the most successful industry leaders strategically chart significant AI opportunities across their operational domains. McKinsey’s findings suggest that despite the buzz surrounding the innovations in generative AI (gen AI), a substantial portion of potential business value originates from AI solutions that don’t even involve gen AI. This reflects a disciplined and value-focused (cost) perspective adopted by even top-tier companies.

One of the critical takeaways from McKinsey’s research is the integration of AI in strategic planning and capability building. For instance, in areas like technology and data management, leading firms emphasise the functionalities essential for capturing the value AI promises. They are capitalising on large language models’ (LLM) prowess to analyse company and industry-specific data. Moreover, these companies are diligently assessing the merits of using prevailing AI services, termed by McKinsey as the “taker” approach. In parallel, many are working on refining their AI models, a strategy McKinsey labels the “shaper” approach, where firms train these models using proprietary data to build a competitive edge.

But the number of organisations doing so are relatively few (Figure 1.)

Figure 1. Gen AI is mostly used in marketing, sales, product and service development

Figure 1 Gen AI is mostly used in marketing, sales, product and service development

Nevertheless, the latest McKinsey global survey reveals the burgeoning influence of gen AI tools is unmistakably evident. A mere year after their debut, a striking one-third of respondents disclosed that their companies consistently integrate gen AI in specific business functions. The implications of AI stretch far beyond its technological aspects, capturing the strategic focus of top-tier leadership. McKinsey quotes, “Nearly one-quarter of surveyed C-suite executives say they are personally using gen AI tools for work,” signalling the mainstreaming of AI in executive deliberations.

In other words, however, a common finding is individuals are using gen AI personally, but their organisation have yet to formally incorporate it into daily processes and workflows. This, despite the “three-quarters of all respondents expect[ing] gen AI to cause significant or disruptive change in the nature of their industry’s competition in the next three years.”

As an aside, AI’s disruptive impact is expected to vary by industry.

McKinsey notes, “Industries relying most heavily on knowledge work are likely to see more disruption—and potentially reap more value. While our estimates suggest that tech companies, unsurprisingly, are poised to see the highest impact from gen AI—adding value equivalent to as much as 9 per cent of global industry revenue—knowledge-based industries such as banking (up to 5 per cent), pharmaceuticals and medical products (also up to 5 per cent), and education (up to 4 per cent) could experience significant effects as well. By contrast, manufacturing-based industries, such as aerospace, automotive, and advanced electronics, could experience less disruptive effects. This stands in contrast to the impact of previous technology waves that affected manufacturing the most and is due to gen AI’s strengths in language-based activities, as opposed to those requiring physical labour.”

Moreover, the journey with AI isn’t devoid of challenges. McKinsey’s findings highlight a significant area of concern: risk management related to gen AI. Many organisations appear unprepared to address gen AI-associated risks, with under half of the respondents indicating measures to mitigate what they perceive as the most pressing risk – inaccuracy.

Drawing from McKinsey’s comprehensive survey, it’s evident that while the realm of AI, particularly gen AI, presents immense potential, it’s a domain still in its very early stages. Many organisations are on the brink of leveraging its power, but there’s still a considerable journey ahead in terms of risk management, strategic adoption, and capability building. As the landscape continues to evolve, McKinsey’s research offers a crucial ‘Give Way’ sign in the roadmap for businesses to navigate the AI frontier.

And that means there is every possibility the boom in AI-related stocks is a bubble. Stock market investors are notoriously impatient and if the benefits (measured in dollars) aren’t coming through investors will recalibrate their expectations. There is every possibility AI is as transformative for the world as promised, but the stock market’s journey is likely to be rocky, inevitably rewinding premature expectations ahead of more sober assessments.  Think, ‘fits and starts’.

As a result, investors should have ample opportunity to invest in the transformative impact of AI at reasonable prices again and shouldn’t feel compelled to pay bubble-like prices amid a fear of missing out.

The full McKinsey article can be read here

Read More

Continue Reading

Uncategorized

Lights Out for Stocks and Bonds? Not So Fast.

The stock market suddenly has the look of a wounded prize fighter. And the bond market is bordering on being dysfunctional.  In a word, the market is…

Published

2 hours ago

on

September 24, 2023

By

The stock market suddenly has the look of a wounded prize fighter. And the bond market is bordering on being dysfunctional.  In a word, the market is disoriented. Disorientation leads to mistakes.

Don't be fooled. From an investment standpoint, this is one of those periods where those who stay vigilant and pay attention to developments will be in better shape than those who remain confused by circumstances.

As I noted last week: "The relationship between interest rates and stocks is about to be tested, perhaps in a big way. Observe the tightening of the volatility bands (Bollinger Bands) around the New York Stock Exchange Advance Decline line ($NYAD) and the major indexes. This type of technical development reliably predicts big moves. The real arbiter may be the US Treasury bond market. And the place where a lot of the action may take place once bonds decide what to do next may be the large-cap tech stocks. Think QQQ."

Yeah, buddy!

Bond Yields Trade Outside Normal Megatrend Boundaries

Big things are happening in the bond market, which could have lasting effects on stocks and the US economy.

I've been expecting a big move in bond yields, noting recently that yields on the 10-Year US Treasury Yield Index ($TNX) were "on the verge of breaking above long-term resistance," while adding that if such a move took place, it "would likely be meaningful for all markets; stocks, commodities, and currencies."

Well, it happened; after the FOMC meeting and Powell's post-mortem (uh, press conference), TNX blew out all expectations and broke above the 4.4% yield area in a big way, marking their highest point since 2007.  It was such a big move that it may be an intermediate-term top.  At one point in overnight trading on September 21, 2023, TNX hit the 4.5% level. But the current selling in bonds is way overdone, which means that at least a temporary drop in yields is on the cards.

Here's what I mean. The price chart above portrays the relationship between TNX and its 200-day moving average and its corresponding Bollinger Bands. As I noted in my recent video on Bollinger Bands, this is a crucial indicator for pointing out trends that have gone too far and are ripe for a reversal.

In this case, TNX blew out above the upper Bollinger Band, which is two standard deviations above the 200-day moving average. That move is the magnitude of a Category 5 hurricane on steroids and amphetamines. It's also unlikely to remain in place for long unless the market is completely broken.

The price chart suggests we may see a similar situation to what we saw in October 2022 when TNX made a similar move before delivering a nifty fall in yields, which also marked the bottom for stocks.

Meanwhile, as described below, the S&P 500 ($SPX) is reaching oversold levels not seen since the October 2022 and the March 2023 market bottoms.

Stay awake.

Oil Holds Up Better Than QQQ For Now

A great way to regroup after a tough trading period is to first look for areas of the market that are exhibiting relative strength. Currently, the oil sector fits the bill. Second, it pays to look for beaten-up sectors where recoveries are happening the fastest. At this point, it's still early for that part of the equation to develop, as too many traders are still shell-shocked.

Starting with a look at West Texas Intermediate Crude ($WTIC), prices are holding above $90 as the supply for diesel and fuel is well below the five-year average.  And yes, U.S. oil supplies continue to tighten while the weekly rig count falls.

The NYSE Oil Index ($XOI), home to the big oil companies such as Chevron Texaco (CVX), had a mild reaction to the heavy selling we saw in the rest of the market. XOI looks set to test its 50-day simple moving average in what looks to be a short-term pullback.

Chevron's shares barely budged earlier in the week despite an ongoing, albeit short-lived strike by natural gas workers at its Australian facilities. That's a strong showing of relative strength. You can see that short sellers are trying to knock the stock down (falling Accumulation/Distribution line), but buyers are not budging as the On Balance Volume (OBV) line is holding steady.

On the other hand, the very popular trading vehicle the Invesco QQQ Trust (QQQ) broke below the key support level offered by the $370 price point and its 20 and 50-day simple moving averages. This is an area that I highlighted here last week as being critical support. It now faces a test of the support area at $355. A break below that would likely take QQQ and the rest of the market lower.

An encouraging development is that the RSI for QQQ is nearing 30, which means it's oversold. Let's see what happens next. You can also see a similar pattern in the ADI/OBV indicators to what's evident in CVX above, which suggests that when the shorts get squeezed, it could be an impressive move up.

Join the smart money at Joe Duarte in the Money Options.com.  You can have a look at my latest recommendations FREE with a two-week trial subscription.

And for frequent updates on the technicals for the big stocks in QQQ, click here.

The Market's Breadth Breaks Down and Heads to Oversold Territory

The NYSE Advance Decline line ($NYAD) finally broke below its 20 and 50-day simple moving averages and is headed toward an oversold reading on the RSI, which is approaching the 30 area.

The Nasdaq 100 Index ($NDX) followed and is not testing the 14500–14750 support area. ADI is falling, but OBV is holding up, which means we will likely see a clash between short sellers and buyers at some point in the future.

The S&P 500 ($SPX) is in deeper trouble as it has broken below the key support at 4350 and its 20 and 50-day moving averages. On the other hand, SPX closed below its lower Bollinger Band on September 22, 2023, and is nearing an oversold level on RSI.  Still, the selling pressure was solid as ADI and OBV broke down.

VIX Remains Below 20  

The Cboe Volatility Index ($VIX) is still below the 20 area but is rising. A move above 20 would be very negative.

When VIX rises, stocks tend to fall as it signifies that traders are buying puts. Rising put volume is a sign that market makers are selling stock index futures in order to hedge their put sales to the public. A fall in VIX is bullish as it means less put option buying, and it eventually leads to call buying, which causes market makers to hedge by buying stock index futures, raising the odds of higher stock prices.

Liquidity is Tightening Some

Liquidity is tightening.  The Secured Overnight Financing Rate (SOFR) is an approximate sign of the market's liquidity. It remains near its recent high in response to the Fed's move and the rise in bond yields. A move below 5 would be bullish. A move above 5.5% would signal that monetary conditions are tightening beyond the Fed's intentions. That would be very bearish. 

To get the latest information on options trading, check out Options Trading for Dummies, now in its 4th Edition—Get Your Copy Now! Now also available in Audible audiobook format!

#1 New Release on Options Trading!

Good news! I've made my NYAD-Complexity - Chaos chart (featured on my YD5 videos) and a few other favorites public. You can find them here.


Joe Duarte

In The Money Options

Joe Duarte is a former money manager, an active trader, and a widely recognized independent stock market analyst since 1987. He is author of eight investment books, including the best-selling Trading Options for Dummies, rated a TOP Options Book for 2018 by Benzinga.com and now in its third edition, plus The Everything Investing in Your 20s and 30s Book and six other trading books.

The Everything Investing in Your 20s and 30s Book is available at Amazon and Barnes and Noble. It has also been recommended as a Washington Post Color of Money Book of the Month.

To receive Joe's exclusive stock, option and ETF recommendations, in your mailbox every week visit https://joeduarteinthemoneyoptions.com/secure/order_email.asp.

Read More

Continue Reading

Uncategorized

Bitcoin Mining Can Reduce Up To 8% Of Global Emissions: Report

Bitcoin Mining Can Reduce Up To 8% Of Global Emissions: Report

Authored by Ezra Reguerra via CoinTelegraph.com,

A paper published by the…

Published

2 hours ago

on

September 24, 2023

By

Bitcoin Mining Can Reduce Up To 8% Of Global Emissions: Report

Authored by Ezra Reguerra via CoinTelegraph.com,

A paper published by the Institute of Risk Management (IRM) concluded that Bitcoin has the potential to be a catalyst for a global energy transition. 

IRM Energy and Renewables Group members Dylan Campbell and Alexander Larsen published a report titled “Bitcoin and the Energy Transition: From Risk to Opportunity.”

The paper argued that while BTC was perceived as a risk because of its energy consumption, it can also catalyze energy transition and lead to new solutions for energy challenges worldwide.

Within the report, the authors also highlighted the important function of energy and the increasing need for reliable, clean and more affordable energy sources.

Despite the criticisms of Bitcoin’s energy intensity, the study provided a more balanced view of Bitcoin by showing the potential benefits BTC can bring to the energy industry.

Amount of vented methane that can be used in Bitcoin mining. Source: IRM

According to the report, Bitcoin mining can reduce global emissions by up to 8% by 2030. This can be done by converting the world’s wasted methane emissions into less harmful emissions. The report cited a theoretical case saying that using captured methane to power Bitcoin mining operations can reduce the amount of methane vented into the atmosphere. 

The paper also presented other opportunities for Bitcoin to contribute to the energy sector.

“We have shown that while Bitcoin is a consumer of electricity, this does not translate to it being a high emitter of carbon dioxide and other atmospheric pollutants. Bitcoin can be the catalyst to a cleaner, more energy-abundant future for all,” the authors wrote.

According to the report, Bitcoin can contribute to energy efficiency through electricity grid management by using Bitcoin miners and transferring heat from miners to greenhouses.

Tyler Durden Sun, 09/24/2023 - 13:50

Read More

Continue Reading

Trending