Deja vu of the banking crisis?
The sell-off in regional bank stocks is likely to worsen on Wednesday after Moody's downgraded New York Community Bancorp's credit rating to junk bond levels.
Investors are growing concerned about the woes of the U.S. commercial real estate sector as a vital lifeline built during last year's banking crisis expires.
NYCB shares fell as much as 15% in premarket trading after the downgrade but later rebounded. Shares have plummeted about 60% in the past week since the bank said it was suffering from a downturn in its business, partly due to poor performance in commercial real estate loans.
Last year, NYCB won a bid for assets related to Signature Bank, which collapsed shortly after Silicon Valley Bank's collapse, raising the bank's assets to more than $100 billion and subjecting it to new regulations and tougher capital requirements.
Worries about banks are spreading. The KBW Nasdaq Regional Bank Index, a collection of mid-sized bank stocks, fell nearly 12 percent last week as investors worried about banks' exposure to commercial real estate loan portfolios.
A sharp drop in office occupancy and soaring interest rates are to blame: Changes in how we work after the peak of the coronavirus pandemic have upended the commercial real estate market, and lenders could face a “maturity wall” on up to $1.5 trillion in commercial real estate loans this year and next. (U.S. community banks are particularly at risk, as they provide the majority of these loans.)
Officials have acknowledged that some banks may be at risk but have downplayed concerns of a broader crisis. “Some financial institutions may be significantly stressed by this issue, but we believe they can manage,” Treasury Secretary Janet Yellen told the House Financial Services Committee on Tuesday.
Complicating matters, a funding lifeline is set to expire next month. On March 11, the Fed's Bank Term Funding Program will stop offering special low-interest loans to distressed lenders. The program was established last year amid the collapse of Silicon Valley Bank to help lenders shore up their capital at low cost and restore public confidence in the overall banking system. The stock market decline suggests investors don't believe that message.
European and Asian banks have also been hit, with shares in Japan's Aozora Bank and Switzerland's Julius Baer falling in recent weeks after the two firms disclosed risks from bad commercial real estate loans.
Meanwhile, other European banks including Banco Santander and Deutsche Bank increased their exposure to the $6 trillion U.S. real estate debt market in the first half of last year, according to S&P Global, despite fears that a tsunami of bad loans was on the way.
What's going on?
Nikki Haley came in second in the Nevada election where she had no direct competition. She lost the “don't vote for any candidate” option in Tuesday's Nevada Republican presidential primary due to troubles with Donald Trump's campaign (which she would not have participated in). It's an embarrassing result for Haley, who is banking on the South Carolina primary this month.
An Alaska Airlines 737 jet may have left a Boeing factory missing a bolt. The plane, which lost a door panel in flight last month, likely still lacked all the bolts after being repaired, according to a preliminary report from the National Transportation Safety Board. The discovery brings increased scrutiny of Boeing and its quality-control practices.
The fate of bipartisan bills on border security and aid to Ukraine has been sealed. Senate Republicans have effectively killed the immigration crackdown bill they wanted, which would have allocated billions of dollars to Kiev. This is just one sign of the paralysis of congressional Republicans, who have also rejected their own efforts to impeach the Secretary of Homeland Security and provide military aid to Israel.
Questions remain about Adam Neumann's proposed acquisition of WeWork. Dan Loeb's Third Point, despite being listed as a potential source of funding for the bid, said it had not committed any funds and had only held “exploratory” discussions with WeWork's co-founders. It is also unclear how WeWork's main creditor, SoftBank, which has significantly written down its investment in the co-working company, will respond to Neumann's efforts; a spokesman declined to comment.
Disney bets on revamping sports streaming
Ahead of their latest earnings reports on Wednesday, Disney, Fox and Warner Bros. Discovery announced new sports streaming services that could change the media landscape.
The deal is a major response to turmoil in the cable industry and comes as Disney comes under pressure from activist investor Nelson Peltz over its streaming strategy.
How this new venture works: The service will include channels like ESPN, TNT, and FS1 that air professional and college sports games (as well as content like “The Bachelor,” which also airs on those networks). The key is that the three companies will license the sports programming on a non-exclusive basis, meaning that each company will still be able to air the games on their own TV channels.
Under the venture's structure, which splits dividends based on each channel's contribution, Disney's ESPN stands to reap the biggest rewards.
Any new service carries some risks.
It won't be cheap — probably more than $40 — because the companies can't sell the channels for less than they offer to cable companies, potentially blocking some customers from buying them.
That may raise some eyebrows in Washington, where regulators have been scrutinizing deals that aren't traditional acquisitions (though Disney, Fox and Warner Bros. Discovery would continue to operate independently, including bidding for sports rights, and games would be available in other formats).
While the deal covers about 55% of U.S. sports rights, it is not comprehensive because it does not include Paramount, NBCUniversal or the regional sports networks, according to Citigroup analysts.
The venture could help answer a big question vexing analysts: how Disney can improve margins in its direct-to-consumer business, particularly as Peltz urges Disney to move toward a Netflix-like streaming economy.
Another high-profile story broke on Tuesday: Elon Musk, still upset over Disney suspending advertising on his X social network, is funding a wrongful termination lawsuit filed against the company by actress Gina Carano, who was dropped from “The Mandalorian” TV show in 2021. “Let us know if you'd like to get involved,” she said. Musk wrote to X..
Meanwhile, Musk Supporting Peltz's Disney campaign — Posed for a photo Peltz met with the investor last weekend at the Los Angeles premiere of a film written, directed and starring one of his daughters.
Combating the backlash against DEI
Hedge fund moguls Bill Ackman and Elon Musk have been at odds in recent weeks over diversity, equity and inclusion efforts, making headlines by slamming DEI programs on social media.
Now, advocates of DEI initiatives are fighting back to defend the practice, which they say is good for the bottom line but has been “politicized by a vocal minority.”
The business case for diversity remains strong, 12 industry groups representing minority communities wrote in a letter sent Wednesday to Fortune 500 CEOs and published for the first time by DealBook. Signatories include the National Minority Supplier Development Council and the U.S. Black Chamber of Commerce, which argue that “empirical analysis shows that companies that promote diversity and inclusion outperform those that don't.”
They say companies and executives are largely supportive of DEI: A majority of senior executives who responded to a national survey conducted in December by the research group Public Private Strategies Institute said diversity efforts are critical to their company's success. Notably, 75% of self-described conservative executives said DEI efforts have led to improved business performance, compared with 89% of self-described liberal executives.
“There's a strong business case for diversity,” Inge McGuire of the nonprofit National Minority Supplier Development Council told DealBook. “We need to focus on that.”
Recent setbacks haven't undone that effort: Some companies have stopped talking publicly about DEI or changed how they do it, the Supreme Court struck down affirmative action at colleges last year, and Republican state attorneys general have stepped up scrutiny of corporate DEI programs.
“Even if you met him, or if he told you directly, I don't think you'd ever know he was the one behind Litquidity.”
— A friend of Hank Medina, a 32-year-old banker who revealed he is the man behind “Litquidity,” a finance-focused social media account with more than 800,000 followers on Instagram.
Tech giants' proposals for monitoring AI content
As governments around the world consider ways to limit the risks of artificial intelligence, one of the biggest companies in the field, Meta, has proposed a way to address one of the biggest concerns: distinguishing between what is real and what is fake online.
Meta is calling for an industry-wide standard for AI-generated content. The proposal would allow technology companies to quickly identify images, videos and audio generated by AI and label them as such.
Meta is exploring the use of a specification that relies on tags in content metadata, in the hope of unifying efforts across a range of industries.
It's an effort to address an issue that policymakers are watching closely: A bipartisan bill introduced in the Senate in October would require tech companies to adopt such standards.
Regulators are especially concerned about AI-generated content being misused in an election year. (Meta's quasi-judicial Oversight Board expressed its concerns this week, urging the company to better classify manipulated media after reviewing posts that included a fake video of President Biden.)
The outlook for the effort is unclear, especially as different companies explore different approaches to labeling AI-generated content. Nick Clegg, Meta's president of international operations, acknowledged that no system is perfect, telling The Times that “bad actors will always try to get around the standards that we create.”
Speed Read
Bargain Deals
Natural gas producers Woodside Energy and Santos have closed merger talks that could create a $57 billion energy giant. (WSJ)
Industrial conglomerate Standard Industries is said to be in talks to acquire Air Mail, a media start-up founded by Graydon Carter. (Semaphore)
policy
Beijing has replaced its top securities regulator as Xi Jinping’s government seeks to restore investor confidence amid an $8 trillion collapse in Chinese stocks. (Bloomberg)
The heads of McKinsey and the Boston Consulting Group have told the US Congress that their Saudi Arabian employees could face prison time if they make any revelations about their work without Saudi Arabia's permission. (FT)
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