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The BAN Report: Fed Cuts and Trims / Zelle to Challenge Visa & Mastercard? / LTGTR for Auto Dealers / Leisure Travelers Boost Hotels / RTO Resistance / The 8MM Performing Commercial Portfolio

Fed Cuts and Trims

Yesterday, the Fed minutes from last month showed their intention to consider rate increases at 50 basis point increments and a plan to trim their balance sheet.

Federal Reserve officials laid out a long-awaited plan to shrink their balance sheet by more than $1 trillion a year while raising interest rates “expeditiously” to counter the hottest inflation in four decades.

The roadmap for reducing the assets they bought during the pandemic was spelled out on Wednesday in minutes of their March meeting, when officials raised rates by a quarter point. They debated going bigger but chose caution in light of the uncertainty caused by Russia’s invasion of Ukraine, the record of their discussion showed.

In addition, “many” who attended the March 15-16 Federal Open Market Committee meeting viewed one or more half-point increases as possibly appropriate going forward if price pressures fail to moderate. 

Analysts saw this as evidence that officials now fear that they should have acted sooner against inflation and are now in a hurry to get their main rate -- currently in a target range of 0.25% to 0.5% -- up to neutral, the theoretical level that neither speeds up the economy or slows it down.

The effort to reduce the balance sheet will extend a sharp pivot toward fighting inflation, as the Fed was buying bonds as recently as last month as it attempted a smooth wind-down of pandemic support. The FOMC is expected to approve the balance-sheet reduction at its next gathering on May 3-4. The plan for shrinking the balance sheet came via a staff presentation to officials.

Officials proposed shrinking the Fed’s balance sheet at a maximum monthly pace of $60 billion in Treasuries and $35 billion in mortgage-backed securities -- in line with market expectations and nearly double the peak rate of $50 billion a month the last time the Fed trimmed its balance sheet from 2017 to 2019. 

Larry Summers, taken a victory lap after being right about the risks of inflation, argued that a soft landing is very unlikely.   

There is a first time for everything, but over the past 75 years, every time inflation has exceeded 4 percent and unemployment has been below 5 percent, the U.S. economy has gone into recession within two years. Today, inflation is north of 6 percent and unemployment is south of 4 percent.

The neutral interest rate, in which the Fed is neither accommodative not restrictive, is estimated to be 2.4%. So we have roughly 200 basis points before break-even. With only 8 scheduled meetings per year, the FOMC has to do more than 25 basis point increases to make much of a difference. History may be unkind to Chairman Powell, who not only denied inflation for a year and a half, but also kept encouraging stimulus from Congress.  Larry Summers, on the other hand, called the $1.9 trillion stimulus bill “the least responsible macroeconomic policy we’ve had in the last 40 years.” Let’s cross our fingers that the Fed can engineer a soft landing.

Zelle to Challenge Visa & Mastercard?

As Zelle’s popularity increased during the pandemic, its ownership group comprised of several large banks is considering expanding Zelle as a payment option, thus creating a head-to-head fight with Visa & Mastercard.    

The money-transfer service boomed during the pandemic, when people avoided ATMs and replaced cash and checks with digital money transfers. Zelle recorded some 1.8 billion transactions in 2021 totaling $490 billion, both more than double their prepandemic levels.

That growth has opened up new possibilities for Zelle and sparked a disagreement among the banks that own it—a group that includes JPMorgan Chase & Co., Bank of America Corp., and Wells Fargo  & Co. At the center of the debate is whether it is in the banks’ best interest to promote a payment option that competes with card networks Visa Inc. and Mastercard Inc., according to people familiar with the matter.

Banks collectively earn billions of dollars each year from fees merchants pay when shoppers use credit and debit cards. A payment option that moves funds directly between shoppers’ and merchants’ bank accounts could chip away at that. But Visa and Mastercard set the fees and take some for themselves, and sidestepping the card networks would allow banks to set rules and fees on their own. Zelle’s newfound popularity has some bank executives asking if the service could be the way to do that.

Wells Fargo and Bank of America are in favor of expanding the service to retail payments, according to people familiar with the matter, eyeing the popularity of such offerings in Asia. Bank of America customers made more Zelle transactions than wrote paper checks for the first time ever last year.

Executives at JPMorgan, America’s largest bank, aren’t convinced it is the right time for a Zelle expansion and are urging first more focus on protecting consumers from fraud, the people said. U.S. Bancorp and Capital One Financial Corp. are undecided, they said.

While it seems obvious for the banks to challenge the monopoly of Visa and Mastercard, the benefit to consumers who can use their debit cards anyway is unclear. Several banks are launching a pilot to allow consumers to pay their rent payments with Zelle, which seems beneficial since most landlords don’t accept credit cards without a processing fee. At any rate, it seems obvious that Zelle will increasingly become a rival to Visa and Mastercard. Zelle is owned by seven banks and around 1,450 financial institutions offer it to their customers.

LTGTR for Auto Dealers

After the pandemic initially reeled the auto dealers, they rebounded strongly and are now enjoying record profits.

“Dealers are making a lot of money,” said David Rosenberg, president of DSR Motor Group and former owner of Prime Automotive, one of the nation’s largest dealership groups, who today owns seven New England car dealerships. “The average Toyota dealer in the Boston region in the best years made between $2 and $2.2 million. Last year, the average net profit was $6 million.”

Though not a lot in absolute terms, stimulus money was crucial, said Steve Greenfield, chief executive of Automotive Ventures, an investment advisory firm in Atlanta. The government aid was “enough psychologically for people to feel like they could still spend through that,” Mr. Greenfield said.

“Supply of both new and used cars was so limited that when consumers found a car, they seized upon it, and they were totally price insensitive,” he continued. “The dealers parlayed that into more profit on the back end, with finance and insurance and extras, and, for whatever reason, consumers were so desperate that when they found a car, they would pay anything for it.”

Still, as I wandered the vast floors of the Las Vegas Convention Center and neighboring hotel suites, there were plenty of concerns. For one thing, with supplies limited and prices rising, customers get angry at dealers.

“If I now have 15 to 20 cars in stock per dealership,” Mr. Bendell said, “I normally have 200 to 300. Nowadays when a truck comes in with eight cars, by the time they hit the cement pavement, I’m lucky to have one left.”

His stores have even resorted to brokers. “I’m paying $2,000 over sticker price, as a dealer in the Bronx,” he said. “Then the car gets sold 30 seconds later. So we’re paying over list just to get inventory, yet customers blame the dealers for high prices.”

While Tesla is challenging the business model of the auto dealers, they are doing just fine right now.

Leisure Travelers Boost Hotels

Leisure travelers, anxious to spend money after the pandemic, are paying up for hotel rooms. 

Vacationers, flush with cash and eager to hit the road after two years of pandemic living, are paying up at resorts, roadside hotels, and even urban properties – at least in cities with tourism appeal. Those free-spending consumers are filling hotels on weekends, making up for the  lack corporate travelers, who typically book rooms during the workweek.   

“The pandemic has reminded people that life is short,” said Jan Freitag, senior vice president at lodging analytics company STR. “They want to splurge, and they have a lot of pent-up savings. If a market has a leisure appeal, then the hotels in that market are doing well.”

Rising prices aren’t scaring off leisure travelers. The average daily hotel rate rose to $149.38 last week, according to STR. That was the third-highest mark ever, behind the week ending March 19 and the week after Christmas in 2021. 

For example, the cheapest hotel on Marriott in South Beach this weekend is $744 / night, while the W will set you back $3,365 / night. If you want to try Las Vegas, even the Fairfield Inn is $341 / night. Business travel is still weak, but consumer demand is at peak levels.

RTO Resistance

Companies that are pushing return to the office are experiencing lots of resistance from their employees. Take Apple for one.  

Apple’s return-to-office policy is far stricter than other big tech companies — and some employees say they plan to quit in protest. 

While Meta, Google and Amazon are letting at least some employees work remotely forever, Apple CEO Tim Cook is ordering all corporate employees back into the office at least one day per week beginning on April 11. The mandate ratchets up to two days per week on May 2 and three days per week on May 23. 

“I’m going to go in to say hello and meet everyone since I haven’t since I started and then sending in my resignation when I get home,” the employee wrote. “I already know I won’t be able to deal with the commute and sitting around for 8 hours.” 

Goldman is putting pressure on its managers to make sure their employees show up to the office 5 days a week.   

Junior bankers at Goldman Sachs are threatening to quit over demands that they show up to the office five days a week as the pandemic wanes — and some gripe that their bosses have been quietly checking attendance.

As bonuses across Wall Street hit record highs, underlings at Goldman — headed by hard-charging Chief Executive David Solomon — are nevertheless stepping up complaints of “hellhole” working conditions that have notoriously included 100-hour weeks.

Most recently, some junior Goldmanites claim that they are being “bullied” into showing up in person “5-0” — meaning five days working in the office, zero from home — and that the bullying is being orchestrated by top managers armed with spreadsheets.

RTO will be a big story in the second quarter as companies finally fully return to their offices and assess whether they move to hybrid, fully return to their offices, or embrace remote work. Employees seem to have the upper hand at the moment with a tight job market and other employers embracing remote work.  

The 8MM Performing Commercial Portfolio

Clark Street Capital’s Bank Asset Network (“BAN”) proudly presents: “The $8MM Performing Commercial Portfolio.” This exclusively offered portfolio is offered for sale by one institution (“Seller”). Highlights include:

  • A total outstanding balance of $7,625,000 comprised of two loans

  • The loans are secured by first mortgages on two retail buildings, located in Chicago, IL and Bakersfield, CA

  • The Chicago loan is eligible for Community Reinvestment Act ("CRA") purposes

  • The portfolio has a weighted average coupon of 4.453%, a weighted average LTV of 72.0% and both loans have prepayment penalties

  • All loans include full personal guarantees with strong guarantor financial support

  • The portfolio will trade for a premium and any bids under par will not be entertained

Files are scanned and available in a secure deal room and organized by credit, collateral, legal, and correspondence with an Asset Summary Report, financial statements, and collateral information. Based on the information presented, a buyer should be able to complete the vast majority of their due diligence remotely.


  • Sale announcement: Thursday, March 31, 2022

  • Due diligence materials available online: Tuesday, April 5, 2022

  • Indicative bid date: Tuesday, April 19, 2022

  • Closing date: Friday, April 29, 2022

Please click here for more information on the portfolio. You will be able to execute the confidentiality agreement electronically.

The BAN Report: Big 4 Bank Earnings / Downside of Higher Rates / Adieu Masks / Musk Goes Hostile

Big 4 Bank Earnings

The largest 4 banks have reported earnings. A few highlights:

Bank of America

Bank of America exceeded expectations on both revenue and profit, as it made 80 cents a share on $23.33 billion in revenue.  

Bank of America said that a run of strong credit at the second-biggest U.S. lender by assets continued into the first quarter. Net loan charge-offs, an industry term for what happens when borrowers fall behind on their payments, dropped 52% from a year earlier to $392 million. That was less than half of the $848.7 million StreetAccount estimate.

The bank posted a mere $30 million provision for credit losses, which is tied to management’s view of potential future losses, far less than the $468 million expected by analysts. It also released $362 million in reserves the bank had previously set aside for expected defaults.

“The BAC story is about Main St. banking (strong) vs. Wall St. banking (weak),” banking analyst Mike Mayo of Wells Fargo said Monday in a research note. The company beat expectations “largely from credit” as loan losses were close to a record low, he added.

Bank of America had little exposure to Russia, compared to the other large banks. They showed strong loan growth in the 1st quarter, which even exceeded the loan growth in the four quarter.   Finally, margins increased slightly as their net interest yield improved by 2 basis points.

Wells Fargo

Wells Fargo exceeded estimates on earnings, but fell slightly short on revenue, due to a drop in mortgage lending.   

Slowing mortgage demand weighed on results as the Federal Reserve hikes interest rates to fight inflation and mortgage rates climb. Wells Fargo reported home lending fell 33% from the year prior.

“The Federal Reserve has made it clear that it will take actions necessary to reduce inflation and this will certainly reduce economic growth,” CEO Charlie Scharf said in a statement.

Wells Fargo’s first-quarter results also come as Russia’s invasion of Ukraine has injected volatility into financial markets and has raised concerns about global economic growth.

“The war in Ukraine adds additional risk to the downside,” Scharf added.

The bank’s first-quarter earnings were helped by a decrease of $1.1 billion in allowances for credit losses. The reduction added 21 cents of profit per share, Wells Fargo said.

Despite releasing reserves, Wells said they did expect an increase in credit losses from historical lows due to higher rates, although they said they would be a net beneficiary to higher rates. The mortgage drop-off was significant and represented the largest quarterly decline at Wells since 2003.


Citigroup surprisingly beat both earnings and revenue by considerable margins, earnings $2.02 / share versus $1.55 expected and generating over a billion in additional revenue than expected.   Surprisingly, the volatility created by the Ukraine war benefited the trading business.However, Citi had already lowered expectations for this quarter, so they did lower the bar.

The bank said Thursday that earnings fell 46% to $4.3 billion, or $2.02 a share, on higher expenses and credit costs and lower revenue. While companywide revenue slipped 2% to $19.19 billion, that was $1 billion more than analysts surveyed by Refinitiv expected.

“In markets, our traders navigated the environment quite well, aided by our mix, with strong gains in [foreign exchange] and commodities,” CEO Jane Fraser said in the release. “However, the current macro backdrop impacted investment banking as we saw a contraction in capital market activity.”

Citigroup results tracked those of JPMorgan Chase, Goldman Sachs and Morgan Stanley, all rivals in the Wall Street arena of fixed-income and equities trading. Each of the firms topped lowered expectations for trading results in the quarter, after the Ukraine conflict set off upheaval in markets around the world. Before this week, it was unclear if that would benefit or hurt investment banks.

Citigroup, the most-global of big U.S. banks with operations in more than 100 countries, likely has the most significant exposure to the Ukraine conflict. Analysts will be keen to understand the various impacts of the war on the firm, including on its planned sale of a Russian consumer banking unit.

On Thursday, Citigroup said it set aside $1.9 billion for potential loan losses tied to Russia and the war in Ukraine.

It seems self-evident that the less-global banks will out-perform over the next few quarters, as they are not directly impacted by Russia’s invasion of Ukraine.

JP Morgan Chase

JP Morgan Chase had the most downbeat earnings report, as CEO Jamie Dimon took steps to prepare for a potential downturn.   JP Morgan Chase missed earning estimates by 7 cents but exceeded revenue estimates.  

JPMorgan Chase & Co.’s pandemic boom ended with a 42% drop in profits and a warning: Rising inflation and the war in Ukraine pose big threats to the U.S. economy.

Chief Executive Jamie Dimon said the economy is strong and growing, citing double-digit growth in card spending, low delinquencies and healthy household and consumer balance sheets. But the bank surprised Wall Street by setting aside $900 million in new funds to prepare for economic turmoil; a year ago, it freed up $5.2 billion it had reserved for potential loan losses in the pandemic’s early months.

Those extra funds could cushion the bank if the economy tips into recession, sending loan defaults higher. Mr. Dimon said that risk remains remote but has grown following Russia’s invasion of Ukraine and as inflation has hit its highest level in 40 years.

“Those are very powerful forces, and those things are going to collide at one point,” Mr. Dimon said. “No one knows what’s going to turn out.”

A recession, he said, is far from a sure thing. “Is it possible? Absolutely,” he said.

While Wells and Bank of America released reserves, JP Morgan Chase added $900 million, of which only 1/3 was related to Russia.  

Downside of Higher Rates

While we believe that banks will benefit mostly from higher rates, there is a downside. For example, the dramatic decline in mortgage origination by Wells Fargo is one. Another is increased credit costs. The Wall Street Journal pointed out that banks today are over-invested in securities, which causes losses in their investment portfolios.

Earnings have highlighted a key difference from the prior cycle: Banks are much more heavily invested in securities that will decline in value as rates rise, like U.S. Treasurys. Treasurys as a percentage of U.S. commercial bank assets are around 8%—almost double the share at the end of 2015, according to Federal Reserve data. Mortgage-backed securities are at nearly 15% versus under 12% in 2015.

As deposits surged during the pandemic, many banks shifted some cash earning virtually nothing on deposit at the Fed into securities. This was welcome relief for net interest income when these earnings were under so much pressure, and was one factor powering a 35% rally in the KBW Nasdaq Bank Index last year—but now some of the downsides of those moves are coming into view.

The declines in on-paper value of banks’ available-for-sale holdings aren’t reflected in net income, but in accumulated other comprehensive income, or AOCI. Under current banking regulations, AOCI can then flow through to banks’ capital calculations. When rates were plunging, many banks got a vital bump to capital levels as bond values rose. Now that rates are rising, AOCI is a drag. Banks including Citigroup, JPMorgan Chase, State Street and Wells Fargo called out the negative effect of AOCI on key capital ratios.

In other contexts, moves in capital measures might be just a footnote. But a surge of deposits in recent years has bloated banks’ balance sheets, already straining their capital constraints. So these seemingly arcane things can matter to shareholders. As banks run closer to their minimum capital requirements, one thing many may do is slow their return of capital to shareholders in the form of buybacks. Plus, big banks that have reported earnings so far, tracked by Autonomous Research, had an average 5% decline in tangible book value from the fourth quarter to the first quarter.

This isn’t a permanent effect. Bonds eventually mature, and bond prices can also start rising again. Plus, banks often buy shorter-term securities, so they aren’t stuck with low-yielding paper forever, and can then reinvest at higher yields. Another offset is banks adding capital through rising earnings via higher net interest income. Volatility in rates has also been good for Wall Street trading desks. On balance, the math of higher rates can still be positive.

This is precisely why loan growth today is so important, as loans can be originated at higher yields, thus boosting margins.

Adieu Masks

On Monday, a Florida federal judge voided the CSC mask mandate for planes, trains, and buses. Immediately, the major airlines dropped their mask requirements.

Following the judge’s ruling, United Airlines, Delta Air Lines, Southwest Airlines and American Airlines all relaxed their mask policies for customers, crew, and workers.

“Feels good to be flying the moment the mask mandate was lifted. People are literally celebrating at this airport,” Darrin Smith tweeted Monday night.

United and Delta lifted the mask requirement for all domestic flights. United also said the change in policy would apply to “select international flights” while Delta said masks would also be optional on “most international flights.”

Southwest and American Airlines also nixed the mask requirement for travelers and employees, but did not specify if the switch extended to international flights.

Airports such as Raleigh-Durham, Miami and Portland have confirmed that they will no longer be enforcing mask requirements per local TSA directives, but San Francisco Airport said it “will continue to comply with the current TSA security directive on masks until we hear otherwise from TSA.”

Uber and Lyft dropped their mask requirements. LaGuardia and JFK have kept their mask requirements, but passengers flying into Newark will not need one. So, someone visiting New York City from Dallas will not need to wear a mask until they arrive at JFK or LaGuardia. They will then need a mask to use the subway. If they use a taxi, they will need one, but not if they use Lyft or Uber. If you’re flying to Philadelphia, you will need to wear a mask indoors. The ruling is expected to be appealed by the Biden Administration, providing the CDC recommends extending the mask mandate.

Dropping the mask requirement drew cheers from passengers.

“’Ladies and gentlemen, this is your pilot speaking. This is the most important announcement I’ve ever made. The federal mask mandate is over. Take off your mask if you choose!’” Dietderich quoted the pilot as saying.

Musk Goes Hostile

After initially assembling a large position in Twitter, Elon Musk disclosed his stake and agreed to join the board of Twitter. However, when he realized that he would be prohibited from owning more than 14.9% of the shares, he rejected the board seat and made an offer to buy the whole company last week. The company then adopted a poison pill to avert a Musk takeover. Musk then hired Morgan Stanley to consider a leveraged buyout. Today, Musk announced that he has secured funding for his bid.

Musk himself has committed to put up $33.5 billion, which will include $21 billion of equity and $12.5 billion of margin loans against some of his Tesla Inc. shares to finance the transaction. He is chief executive officer of automotive company Tesla.

A spokesperson for Twitter acknowledged receipt of Musk's proposal.

"As previously announced and communicated to Mr. Musk directly, the board is committed to conducting a careful, comprehensive and deliberate review to determine the course of action that it believes is in the best interest of the company and all Twitter stockholders," the Twitter representative said in a statement.

"I suspect it will put pressure on Twitter’s board to either find a White Knight, which is unlikely, or negotiate with Musk to obtain a higher value and remove the poison pill," said Josh White, assistant professor of finance at Vanderbilt University and a former financial economist for the Securities and Exchange Commission.

Twitter’s stock price was at $46.72 before today’s open, a significant discount to Musk’s offer at $54.20, as the market is skeptical that a deal will happen. It was at $39 before Musk revealed his stake. While the Board is under pressure to respond, the stock was in the 70s last year and they could argue that current management will bring better long-term value to the shareholders.    Elon Musk remains the most interesting person in American business today.

The BAN Report: GDP Growth Slumps / Q1 Bank Earnings Takeaways / Twitter's Board Does Right / Algos Keep Buying / $5MM Settlement for Errant Golf Balls

GDP Growth Slumps

After a robust 6.9% growth rate in the fourth quarter, GDP shrunk in the first quarter to a 1.4% annual rate, surprising predictions of modest growth.

The drop in GDP stemmed from a widening trade deficit, with the U.S. importing far more than it exports. A slower pace of inventory investment by businesses in the first quarter—compared with a rapid buildup of inventories at the end of last year—also pushed growth lower. In addition, fading government stimulus spending related to the pandemic weighed on GDP.

Despite the slip, many economists think that overall the economy remains on track to resume modest growth in the second quarter and beyond, in part because consumers and businesses are continuing to spend. Consumer spending, the economy’s main driver, rose at a 2.7% annual rate in the first quarter, a slight acceleration from the end of last year.

“It’s really hard for the economy to grow rapidly once you’ve recovered to a substantial degree,” said David Berson, chief economist for Nationwide Mutual Insurance Co.

Also weighing on growth are rising interest rates as the Federal Reserve combats inflation. Central bank officials lifted their benchmark rate in March by a quarter percentage point from near zero, and they have signaled more increases are likely to follow.

Looking ahead, economists surveyed by The Wall Street Journal estimate GDP rising 2.6% in the fourth quarter of 2022 from a year earlier, matching 2019 annual growth, but logging in well below 5.5% growth recorded last year.

Consumer spending, which is 70% of GDP, grew 2.7% in the first quarter, which means basically everything else did poorly. Rising Omicron infections and the Ukraine crisis were cited as factors. Defense spending declined by 8.5%, so that was also a major factor.

While this was disappointing, the consensus view is this was a one-quarter blip and growth should return, albeit more modestly than 2021, in the second quarter.

Q1 Bank Earnings Takeaways

As more banks have reported earnings, some of the themes we discussed last week with the largest banks have been seen in the broader population of banks reporting. American Banker did a good re-cap of those themes. One of those was an acceleration of commercial loan growth.

Throughout much of the pandemic, commercial lending remained stalled. Businesses were benefiting from government stimulus payments, and they were cautious about making new investments at a time of great economic uncertainty.

During the first quarter, the long-awaited resumption of commercial loan growth finally arrived. Inflation, increased business activity, previously deferred investments and slowing paydowns of existing debt were among the factors that contributed to the pickup, according to bankers.

At San Francisco-based Wells Fargo, average commercial loans rose by 5.3% from the fourth quarter of last year. The same metric climbed by 8% at Minneapolis-based U.S. Bancorp.

As businesses grapple with higher salary expenses and labor shortages, they are investing in technology to create efficiencies, according to U.S. Bancorp Chief Financial Officer Terry Dolan.

“At least in the near term, capital expenditure will continue to be reasonably strong,” Dolan said in an April 14 interview.

Numerous other large banks reported linked-quarter commercial loan growth, including JPMorgan Chase, Citigroup and PNC Financial Services Group.

Other themes included drops in fee income, drops in mortgage revenue, continued clean credit quality, and a split amongst banks in building loan loss reserves.

Twitter’s Board Does Right

Earlier this week, Twitter’s Board of Directors accepted Elon Musk’s offer to buy Twitter for $44MM. While they initially were cool to the offer, they used the adoption of a poison pill to improve their terms.

In early April, when Mr. Musk initially disclosed his acquisition of slightly more than 9% of the company’s shares, the board responded by offering him a seat. This elegant move acknowledged the right of a major shareholder to influence the company’s direction and also would have hindered Mr. Musk’s ability to criticize the company publicly. That he ultimately turned this offer down doesn’t mean the board was unwise to offer it.

Next, when Mr. Musk announced his offer to purchase the company at $54.20 a share, the board adopted a poison pill. This move was reasonable, given that he didn’t explain how he would finance his offer, and it pressured him to negotiate with the board instead of moving directly to a tender offer. Forcing a notoriously mercurial bidder with questionable financial capacity to deal with the board—which has the ability to negotiate deal terms that protect shareholders and others—was in line with its fiduciary responsibility.

Poison pills can be misused by intransigent boards to impede hostile acquisition offers that could be in the best interests of shareholders. In Twitter’s case, the board could have justified its opposition to Mr. Musk’s bid for various reasons: his shortsighted disregard for advertising revenue, his unworkable aversion to content regulation, or a potential exodus of valuable employees.

Twitter’s board, however, made clear this week it isn’t rigidly opposed to change. Once Mr. Musk disclosed that he had secured financing for his offer, and after the board heard from its own financial advisers that his offer price was attractive from a financial point of view, the board approved the deal. It did so, however, only after negotiating two significant terms: a $1 billion breakup fee—which would protect Twitter’s shareholders if Mr. Musk walks away from the deal—and cash-outs of employee stock-option grants—which presumably will be appreciated by Twitter employees who would otherwise have been left with illiquid shares of a private company whose owner may not make profitability a priority.

At the end of the day, $44 billion for a company that does $5 billion in annual revenue is a pretty good price, and Twitter’s bankers couldn’t produce any other bidder to join the fray.  

Algos Keep Buying

While Zillow exited the market last year after hundreds of millions in losses, the share of homes purchased by algorithmic house-flipping models is continuing to grow.

Despite making just under 2% of home purchases nationwide during this period, iBuyers began to play a larger, and more unpredictable, role than most, leading to calls from city leaders in Los Angeles to ban the platforms. iBuyers grow city by city; investment is tightly concentrated in a handful of locations across the Sun Belt, where the top five—Phoenix, Atlanta, Dallas, Charlotte, and Houston—accounted for more than half the total activity. Through 2021, iBuyers bought 70,400 houses nationwide. Nascent iBuyers are raising fundraising rounds in the United Kingdom, Europe, and Canada—but all are looking to the successes and failures of the stateside front-runners.

These cities form a neat growth pattern, following a “strikingly similar” trend to one seen in the trailblazer, Phoenix, according to a National Bureau of Economic Research (NBER) working paper from researchers at Stanford, Columbia, and Kellogg, who analyzed iBuying by Zillow, Opendoor, Knock, Redfin, and Offerpad between 2013 and 2018. iBuyers had roughly 1% market share in Phoenix in 2015, growing to 6% in 2018. In the frantic summer of 2021, iBuyers accounted for 10% of home buys in Phoenix. “In certain neighborhoods, 25 to 30% of current listings right now are owned by iBuyers,” says real estate tech strategist Mike DelPrete.

Today Opendoor, the market leader, is operating in 44 markets. iBuyers are intervening in super-hot housing markets by harnessing big data and artificial intelligence to create a one-sided advantage over regular folks. Where house buying was once a “dogfight” between individuals, “now we’re in the age of guided missiles,” says DelPrete, with data-driven buyers claiming a big edge.

To date, these ventures have all lost money. Much of tech these days reminds me of the Japanese dumping cars in the US in the 1980s. Spend a bunch of money and disrupt an industry. While they usually succeed in disrupting an industry, they often don’t ever make money themselves. Between iBuying and the increased institutional ownership of Single-Family Homes, it’s becoming harder and harder for the first-time home buyer.

$5MM Settlement for Errant Golf Balls

A Massachusetts family received a $5MM award from a country club after too many golf balls damaged their house. While the award seems ridiculous on the surface, the backstory provides some better perspective.

Galvin went on to say, “The amount of mental distress damages is significant in this case and I am not privy to the jury deliberations but my assumption is that they recognized that this young couple was basically unable to safely use their yard, deck or even sit safely in their own home for 4.5 years. The jury and judge hear them testify sincerely and honestly about their feelings and mental state. They are a wonderful nice couple that was literally begging the course to help them because only the course could solve the issue by either erecting a barrier at the tee, altering the location of the tee, or altering the hole – all of which they refused to do even though the impact and the safety issue was well known.

“This was most importantly never about the money, we didn’t sue for $5M. We didn’t even quantify or ask for any specific figure of mental distress damages only property damages with the jury. We simply asked a Plymouth County jury who heard the evidence to award them what they felt was fair and equitable and they came back with $3.5 million (with statutory interest it’s $4.9 million). After trial, the course asked the judge to reduce the verdict about 2 months later. The judge who heard all the evidence refused to substitute his judgment for that of the jury I suspect because he also heard the evidence and how sincere this family was in their explanation of the impacts to them.”

In March, lawyers for the country club filed a notice that it would seek to appeal the case.

Buying a home for $700K and then getting a $5MM settlement is a nice windfall. But the case does show how badly a defendant can do if they are reckless and poorly advised by counsel.

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