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In today’s edition, we look at PacWest and other U.S. regional lenders under pressure, and how a ban͏‌  ͏‌  ͏‌  ͏‌  ͏‌  ͏‌ 
 
thunderstorms Beverly Hills
sunny Washington, D.C.
thunderstorms Oklahoma City
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May 4, 2023
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Liz Hoffman
Liz Hoffman

Hi and welcome back to Semafor Business, a twice-weekly look at the world of big money from me and Bradley Saacks.

I’m still in Los Angeles, where the Milken Institute’s annual conference wrapped up yesterday on a gloomier note than it began. I can’t say I saw any buyout titans staring morosely into their berry parfaits, but I did spot Ashton Kutcher looking beyond bored at a lunch meeting at the Waldorf and Sen. Joe Manchin looking like he’d rather be anywhere but in the Hilton lobby surrounded by a gaggle of moneymen.

More generally, I felt a lot of nerves. I won’t rehash Tuesday’s dispatch, but credit worries dominated the discussions. The disappearance of three regional banks (with potentially more to come) will sap a significant source of loans for small businesses, construction projects, and investment portfolios. And higher interest costs and slower growth will test a mountain of corporate and buyout debt extended loosely over the past few years.

In today’s newsletter: The ongoing banking crisis might have started with nervous depositors, but it’s being fueled by stockholders. With First Republic seized and sold, investors are taking their nerves (and their profit-seeking; short-sellers have made $7.4 billion betting against regional bank stocks over the past two months) to the next weakest link, fundamentals be damned. I look at whether it might be time to call a time-out.

Plus: Bradley texts with the winner of the $1 million bitcoin Twitter bet, who delivers a perfect crypto burn: “fiat currency is an incredible innovation.”

Buy/Sell
U.S. Federal Reserve chair Jerome Powell
Reuters/Kevin Lamarque

➚ BUY: One and done. U.S. Federal Reserve Chair Jerome Powell indicated that the central bank’s quarter-point increase in interest rates could be its last. The European Central Bank, too, raised by a quarter-point this morning, slowing its pace of hikes.

➘ SELL: Fun in the sun. The Milken mood was darkened by turmoil at Beverly Hills’ own regional bank, PacWest, and Arizona-based Western Alliance looks to be next (more on that below). First Republic isn’t the firebreak regulators had hoped.

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Semafor Stat

What each new job at an Amazon warehouse costs local governments in tax subsidies, more than the $32,000 the average job pays annually, according to new research from conservative economist Ike Brannon and University of Wisconsin-Whitewater professor Matthew Winden.

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Liz Hoffman

Should we ban bank short-selling?

Reuters/Mike Blake

THE NEWS

California lender Pacific Western’s shares are tanking, just days after regulators hoped to end the turmoil by selling rival First Republic to JPMorgan.

PacWest’s stock fell 60% this morning, following a pattern that has emerged since the collapse of Silicon Valley Bank in March as investors move from one ailing firm to the next.

Lenders have shored up their deposits, but investors don’t care. PacWest and Western Alliance, another bank under pressure, both said in recent days that about three-quarters of their deposits are now backed by FDIC insurance.

LIZ’S VIEW

In September 2008, U.S. and U.K. regulators temporarily banned investors from selling short financial stocks. “Unbridled short selling is contributing to the recent, sudden price declines,” then-SEC Chairman Chris Cox said, noting that banks (at the time, investment banks were the problem) are uniquely vulnerable to “panic selling because they depend on the confidence of their trading counterparties in the conduct of their core business.”

Swap depositors for counterparties and you’ve pretty well got the current problem. And investors seem to be getting ahead of customers in their rush for the exits. PacWest and Western Alliance actually added deposits in April, after the collapse of SVB and Signature. Fed Chair Jerome Powell said yesterday that the deposit outflows at regional banks had stabilized.

Depositors are no longer panicking, but investors are. It might be time to consider another temporary ban. Never mind that short-sellers don’t actually make stocks go down, and in rational, well-functioning markets, they play a crucial role. But this is no longer a well-functioning market. Short-sellers have made $7.4 billion by betting against the regional banks since the beginning of March, according to data provider S3.

Consider another heavy-handed intervention used in times of stress: the stock market circuit-breakers. If prices plummet, trading is halted for 15 minutes to give everyone time to think about what they’re doing. While the historical evidence is mixed, they seem to have worked in March 2020, during the early panicky days of the pandemic.

ROOM FOR DISAGREEMENT

“You ban short selling when you think the market is missing something. The market isn’t missing anything here,” former SEC Chair Jay Clayton told me. Any ban would “have to be part of a comprehensive plan,” that involves getting more capital into ailing banks and lifting or suspending the $250,000 cap on insured deposits, he said. “It’s at best a temporary bridge, and what are we bridging to?”

VIEW FROM EUROPE

The collapse of Credit Suisse, which was hastily merged with Swiss rival UBS, was partly blamed on the failure of Silicon Valley Bank. But the pain hasn’t seemed to have spread to other European lenders. Italy’s UniCredit on Tuesday raised its financial targets for the year. Germany’s Deutsche Bank reported solid first-quarter results and its stock is up 10% since late March.

NOTABLE

  • The 2008 short-selling ban may have bought troubled banks some time, but it increased trading costs by an estimated $500 million, according to a 2012 paper from the New York Fed.
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Evidence

Private markets, where shares of unicorns like Stripe and SpaceX trade, are a black box. To add some transparency, secondary marketplace Forge Global rolled out its new index today made up of 75 of the biggest startups, collectively valued at $350 billion. An exchange-traded fund using the index may be coming next. Read here for Bradley’s take on it.

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Read This

My boss, Ben Smith, has a new book that details the inside story of two online media rivals, Jonah Peretti of HuffPost and BuzzFeed and Nick Denton of Gawker Media, whose delirious pursuit of attention released the dark forces that would overtake the internet and American society. I read it, it’s great, and you can order it here.

Penguin
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Watchdogs
A Bud Light delivery truck makes a delivery
Anheuser-Busch

Oklahoma banned 13 banks and asset managers, including BlackRock and JPMorgan, from doing business with the state. It was the latest and one of the most aggressive actions by Republican officials around the U.S. to punish companies deemed hostile to the oil industry or otherwise taking progressive stances on social issues.

These bans may score political points but they are expensive: A study last fall found that a similar move by Texas cost taxpayers there as much as $532 million in extra interest when big banks stopped bidding for bond deals.

Elsewhere in ESG, Anheuser-Busch this morning tried to quell a backlash after a transgender influencer posted on Instagram a personalized can of Bud Light the company had sent her. It was “one influencer, one post, and not a campaign,” CEO Michel Doukeris said, promising to boost marketing spending on Bud Light to help distributors taking the brunt of boycotts.

A new memo from law firms Woolery & Co. and Kaplan Hecker & Fink looks at the cost to companies for misguided policies, and I talked to partner Jim Woolery about the Bud Light mess. “ESG cannot be a corporate side hustle,” he said.

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One Good Text

In March, Balaji Srinivasan, a former Coinbase executive and Andreessen Horowitz partner, bet a pseudonymous Twitter user that bitcoin would hit $1 million in 90 days as inflation spiraled out of control and the U.S. dollar became meaningless.

Srinivasan was wrong — the dollar is still here — and paid off the $1 million he owed early, plus another $500,000 to bitcoin developers.

James Medlock is the name used by a prolific tweeter and self-described “social democratic policy wonk.”

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What We’re Tracking

Revelations about the late Jeffrey Epstein’s well-heeled contacts keep growing. The Wall Street Journal’s unveiling of personal schedules and correspondence has exposed a new set of big names — Reid Hoffman, Larry Summers, and Woody Allen, among others — who met Epstein after his 2008 conviction.

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See you Tuesday.

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— Liz and Bradley

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