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The BAN Report: BB&T & SunTrust Merger Approved / Paulson Sounds Alarm on US & China Relations / 98% Decline! / Is the Wealth Tax Constitutional? / The 30MM RV Loan Portfolio 11/19/19


BB&T & SunTrust Merger Approved

This week, the Federal Reserve and FDIC have approved the merger between BB&T & SunTrust, the biggest bank merger in at least 15 years.   The American Banker had an outstanding analysis of its implications, arguing that the limited resistance to the merger will encourage more consolidation between large banks.

While some conditions were imposed, including a consent order tied to deceptive practices at SunTrust, regulators were far from overbearing during the approval process. And there was minimal resistance from outsiders; 90% of the comment letters about the merger were supportive of it.

The speculation about what happens next will heat up. The relatively smooth approval process could embolden other deal-minded banks, though their window of opportunity may close quickly depending on the outcome of the presidential and congressional elections next year.

The article identified three important takeaways. One, the process could encourage other mergers.  Two, the 2020 election could become a deadline for dealmakers. Finally, the “too big to fail” discussion will intensify.

We concur that further combinations of already large banks are likely. If two enormous banks (the combined bank will be $450 billion in assets) believe they need more scale to compete on technology with the Big 4 (Citi, Chase, Wells, and B of A) and others, it must create pressure from others. It is inarguable that the technology gap between the largest banks and others is shifting the competitive landscape in the favor of the largest banks.   Smaller banks must be better at finding retail deposits from consumers under the age of 50.

On a side note, Jamie Dimon’s interview on 60 Minutes earlier this month shows a confident CEO, looking to expand and grow his bank.

Paulson Sounds Alarm on US & China Relations

Former Treasury Secretary Hank Paulson is warning that, while the trade dispute is likely to be settled, US and China relations are likely to get worse.  Mr. Paulson is a China expert.

The United States and China will eventually settle their differences over tariffs — maybe even reach a deal that allows both sides to say they won.

But don’t be fooled. Even if the world’s two biggest economies reach a truce, their relationship is likely to get worse.

That’s the bold warning that Henry M. Paulson Jr., the former Treasury secretary, plans to make to many of the world’s top business and political leaders on Thursday at a Bloomberg L.P. event on the economy in Beijing. During an interview with me this week, he shared a copy of the speech, previewing some of what he will say.

Mr. Paulson has spent a career trying to work with China, starting as a banker at Goldman Sachs, where China represented an enormous business opportunity, and later as Treasury secretary. His think tank, the Paulson Institute, focuses on China. He has close ties to senior officials in both countries and is often consulted by both sides — so the alarm bells he is ringing are likely to sound loudly in corner offices around the globe.

The danger, Mr. Paulson said, is that the animosity between the two countries has merged “military prisms and ideas into economic policies.”

“It should concern every one of us who cares about the state of the global economy that the positive-sum metaphors of healthy economic competition are giving way to the zero-sum metaphors of military competition,” he is planning to say.

Then, he addressed what virtually no United States policymaker has been willing to acknowledge aloud: If the relationship between the countries deteriorates further, China could decide to sell — or at least not buy — as many Treasury bonds, potentially sending their value down and pushing interest rates much higher. That would undoubtedly hurt China, but it could be tremendously damaging to us, an idea this column raised last year.

Opposition to China is bipartisan and virtually every Democratic Presidential candidate is hostile to China.   Moreover, China is becoming even more autocratic, as evidenced by the current crackdown in Hong Kong. We would like to see a “soft landing” in the trade dispute, but it seems increasingly likely that Mr. Paulson is on to something.

98% Decline!

In perhaps one of the worst trading days in the history of a singular stock, ArtGo Holdings Limited, which trades on the Hong Kong stock exchange, lost a whopping 98% yesterday.

ArtGo Holdings Ltd., which had soared almost 3,800% this year for the world’s biggest gain among companies with a market capitalization of at least $1 billion, erased nearly all of that advance within minutes on Thursday as investors reacted to MSCI’s decision. The stock wiped out more than $5.7 billion of value before trading was suspended.

MSCI, which had announced its intention to include ArtGo just two weeks ago, said in statement on Wednesday that it would no longer do so after “further analysis and feedback from market participants on investability.” An ArtGo representative said the company, a marble producer that has been expanding into other businesses like real estate, couldn’t immediately comment.

ArtGo’s rally had flummoxed local market veterans, with prominent activist investor David Webb warning in September that the stock was a “bubble.” Its surge was the latest in series of extreme, unexplained swings in Hong Kong that have cast the city’s financial markets in an unflattering light and led some observers to argue that MSCI and its peers should prevent such stocks from entering indexes that guide investments worth trillions of dollars.

There’s been some good research on how including a stock in an index or removing it can be directly correlated to its performance.   This is a stunning example of what can happen if a stock is removed from an index.

Is the Wealth Tax Constitutional?

Earlier this month, two tax law professors, who identify as liberal Democrats, questioned whether the wealth tax is constitutional in a New York Times Op-Ed.

The constitutional objection to wealth taxation is based on two clauses that require any “direct tax” to be apportioned among the states based on population. So, since 12 percent of the population lives in California, Californians must pay 12 percent of any direct tax.

For the Warren and Sanders wealth taxes, that would be a deal breaker. To match revenue fractions to population percentages, as the Constitution’s direct tax clauses demand, we estimate that the wealth tax rate in West Virginia — the poorest state per capita — would need to be roughly 10 times the rate in more affluent California and more than 20 times the rate in prosperous Connecticut.

The Warren and Sanders wealth taxes would very likely be classified by courts as “direct taxes.” Alexander Hamilton explained in Federalist No. 36 that taxes on “houses and lands” were direct taxes. Supreme Court majorities have said on at least seven occasions that federal taxes on real property (land and buildings) are “direct taxes.” Congress enacted at least five federal property taxes in the 18th and 19th centuries and apportioned them based on state population each time.

The proposed wealth taxes would apply to real property, which would seem to make them “direct taxes.” Both plans would also tax personal property, which encompasses all assets other than land and buildings, like securities and art. Some wealth tax defenders argue that even if a tax on real property is “direct,” a tax on real plus personal property is not. The idea is that — by some feat of constitutional alchemy — combining the concededly unconstitutional tax on real property with the purportedly less problematic tax on personal property erases the flaw with the former.

The authors were sympathetic to the idea behind the wealth tax (i.e. reducing inequality) but questioned whether it would pass constitutional muster.   While there are arguments to the contrary, it does raise a question on whether this proposed source of revenue is achievable.   A few presidential candidates have been advocating the tax in order to pay for other initiatives, so this is obviously an important question.

The $30MM RV Loan Portfolio

Clark Street Capital’s Bank Asset Network (“BAN”) proudly presents: “The $30MM RV Loan Portfolio.”  This exclusively-offered portfolio is offered for sale by one institution (“Seller”). Highlights include:

  • A total unpaid principal balance of $30,031,420, comprised of 1,421 loans

  • All loans are secured by first liens on Recreational Vehicles (RVs)

  • All loans are purchase transactions (71% new) by consumers

  • 2 separate pools, a Minnesota pool ($13,960,131) and a Midwest pool

  • Midwest pool ($16,071,288) is predominantly NE, IA, SD, ND, and WI

  • All loans originated in the first half of 2019

  • Portfolio has a weighted average coupon of 7.07%

  • Fixed-rate loans with a weighted average maturity of 12 years (144 months)

  • Strong credit metrics, including a weighted average FICO score of 747 (none below 680) and an average DTI of 32

  • No loans with 30-day delinquencies or forced-place insurance

  • Servicing-retained or released

  • All pools will trade for a premium to par and any bids below par will not be entertained

    A sample of the loan files are scanned and available in a secure deal room for review.   Based on the information presented, a buyer should be able to complete their due diligence remotely.

The BAN Report: The $8MM Ag Relationship / McDonald's Fires CEO / Banks Don't Know What to Do with Their Branches / Nashville's Mayor Cool to Corporate Incentives / CA Affordable Housing Crisis-11/7/19

The $8MM Ag Relationship

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

  • A total unpaid principal balance of $8,235,158, comprised of 6 loans in one relationship

  • 100% of the loans are in Wisconsin

  • All loans are personally guaranteed

  • Loans are secured by a crop and cattle farm which includes the real estate, crops, livestock and equipment

  • 100% of the loans are performing

Files are scanned and available in a secure deal room.   Asset Summary Reports, financial statements, and collateral information will be readily available. Based on the information presented, a buyer should be able to complete the vast majority of their due diligence remotely. 



Sale Announcement 

Thursday, November 7, 2019

Due Diligence Materials Available Online

Monday, November 11, 2019

Indicative Bid Date

Monday, November 25, 2019

Closing Date

Friday, December 20, 2019

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


McDonald’s Fires CEO


Due to strict policies prohibiting relationships between executives and employees, McDonald’s was forced to fire its CEO Steve Easterbrook, even though the CEO had a strong track record.


Not many CEOs are credited with having as much impact as Steve Easterbrook had in his four years leading McDonald’s. During his tenure, the fast food giant nearly doubled its share price, and many analysts say he modernized the company when it was in danger of decline. None of that success could protect his job after he apparently violated a company-wide policy that barred supervisors from having relationships with subordinates.


Experts say the company had no choice but to enforce this policy. Especially since the start of the #MeToo movement, companies have been under increased pressure to show that they’re cracking down on all forms of sexual misconduct—and that now they need to show that no one is exempt, even successful C-suite executives.


Allowing Easterbrook to stay at the company would send the message that the company’s policies don’t matter—and that not everyone in the workforce will be treated equitably, Laurie Weingart, a professor of organizational behavior and theory at Carnegie Mellon University’s Tepper School of Business, says.


Some companies may have second thoughts about such strict policies, but the trend appears to be a black-and-white approach, which forces the hand of any company. It’s unfortunate that a highly regarded CEO must be removed, but McDonald’s had no choice in the matter.   


Banks Don’t Know What to Do with Their Branches


As branch usage declines, banks are struggling with what to do with their extensive branch networks. Some like Capital One have been particularly innovative in turning some of their branches into cafes.


U.S. banks have closed thousands of branches in recent years and poured billions of dollars into the smartphone apps that customers increasingly use for many of their daily banking needs. But customers still want the option of a physical branch, especially when they have problems that are tough to solve over a web chat.


In 2017, some 52% of people primarily used their bank’s websites or mobile apps to access their accounts, according to a Federal Deposit Insurance Corp. survey, up from about 39% in 2013. But nearly one-quarter of bank customers visited a teller more often than a bank’s website, the survey found.


“Customers want the physical and the digital,” said Tom Brown, founder and chief executive of Second Curve Capital, a hedge fund that focuses on the banking industry. “And you have to deliver both.”


Capital One Financial Corp. has about 480 branches and around three dozen cafes. It has been opening around 10 annually for the past few years, said Lia Dean, the bank’s head of bank retail and marketing. Customers can expect the full suite of banking services at both the company’s cafes and its traditional branches.


In modeling the cafes, Capital One responded to what it heard from consumers: Bank branches were intimidating and stressful. At the cafes and branches, the employee dress code is relaxed, and customers can open accounts on iPads. The cafes also host community groups and hold workshops such as “Talking Money With Your Honey,” which focuses on finances in relationships.


Ms. Dean said the customer response to the cafes has been positive, but she declined to provide details about how they are performing compared with the bank’s traditional branches.


Capital One has four of these café’s in Chicago – the only physical branches in the Chicago-area.     It’s also their strategy in California as well.   It would be interesting to see how these perform relative to their stand-alone branches, but Capital One is not disclosing this information.   


Nashville’s Mayor Cool to Corporate Incentives


Booming Nashville’s new mayor, John Cooper, also a real-estate developer, got elected partly on reducing corporate incentives.


John Cooper, a 63-year-old real-estate developer, won Nashville’s recent mayoral race by nearly 40 percentage points, promising to curb the subsidies that lure big business. Skyscrapers and luxury housing developments are everywhere, yet city leaders can’t balance a budget. A surprising deficit, reported in 2018, has given Nashville a cold shower. “People are saying, ‘We were told one story, and now we’re dealt this slap in the face,’” said John Geer, a Vanderbilt political science professor who co-wrote the study.


Justin Owen, chief executive of the Beacon Center of Tennessee, a right-leaning think tank, asked: “Why do we have to talk about the inability to pay our teachers, police and firefighters, yet we’re still announcing megadeals with Amazon and other companies?”


The city has committed big dollars to international businesses—including $56 million in long-term incentives to tire maker Bridgestone Corp., $62 million to Omni Hotels & Resorts and $17.5 million for the Amazon towers. But local and state tax structures, including no income tax and property-tax equalization policies that encourage commercial and residential property owners to appeal assessment hikes, make it hard to profit on growth.


Between 2010 and early 2017 the city awarded businesses-property tax breaks and other incentives worth more than $167 million, according to The Tennessean’s analysis of data from the Mayor’s Office of Economic & Community Development. Those companies then promised to add about 13,000 jobs and $1.2 billion in capital investments, the newspaper said.


According to a study from the Upjohn Institute, business incentives cost all levels of US government $45 billion in 2015. These incentives go largely to the largest and biggest companies, often to the detriment of their smaller competitors. Fortunately, there is a bi-partisan movement against these incentives and voters seem to be pushing back against corporate giveaways in the name of economic development.


CA Affordable Housing Crisis


Recently, Apple, Facebook, and Google committed to building affordable housing near their campuses, highlighting the massive problem California has with its housing costs. Few, though, see this as making much a difference. California simply does not build enough housing for its job growth, thus making the situation worse.


A mile from Apple’s headquarters in Cupertino lies the sun-faded carcass of the Vallco Shopping Mall. At the moment it consists of empty, buff-colored buildings, acres of black asphalt and a pile of rubble where the parking garage used to be.


About a year ago, a developer submitted a proposal to build 2,400 apartments on the site, half of them subsidized to put rents below the market rate. The city approved the plan reluctantly, and afterward a community group sued. The project is stuck in court.


Stories like that hang heavy over Apple’s $2.5 billion plan, announced Monday, to help solve the dire shortage of affordable housing that has come to dominate life and politics in the most populous state. The pledge came weeks after Facebook announced $1 billion for a similar program, and months after Google did the same. Earlier, in January, Microsoft committed $500 million for affordable housing in the Seattle area.


Consider the math. At the moment it costs about $450,000, and considerably more in high-cost areas like the Bay Area and Los Angeles, to build a single unit of subsidized affordable housing in California, according to the Terner Center. That is by far the highest of any state, and just short of twice the nation’s median home value. And it’s not as if these are houses. The $450,000 figure is for an apartment of modest dimensions in a multifamily building, with standard layouts, bargain finishes and few of the amenities of for-profit development.

City planners recommend an additional housing unit for every 1.5 jobs created. Cities like Palo Alto have ratios as high as four jobs per housing unit. Even when zoning allows dense housing, community groups stop or delay any attempt to build housing.    Moreover, large companies now are moving workers to more low-cost areas, like Austin, TX.  

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