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The BAN Report: Loan Growth Surges / Facebook Plummets / Was PPP a Mistake? / Were Lockdowns a Mistake? / Is Crypto the New Subprime? 

Loan Growth Surges

Investment bank DA Davidson surveyed 493 banks that have reported earnings so far. And here is the recap so far (comments by Bill Herrell):

  • Loan growth still in the 1.4-1.5% range but seeing better growth with the larger banks - 2.7%.

  • Core PTPP earnings now showing a lower median change of (6.3%) as we see greater provisioning among the larger banks and their relatively larger loan growth.

  • NIM declining by a 9bps median with (unfortunately) a larger share of that decline at the smaller banks, but the smaller banks are responding more aggressively with expense savings.

  • Efficiency ratio up for banks >$1Bn – sign of wage pressures that disproportionately impact expenses?


Loan growth surged in the fourth quarter and there is no reason that strong loan growth won’t continue throughout this year. Since the pandemic, many borrowers had little need for traditional bank loans, as they exhausted the free and subsidized money available through PPP, EIDL, and other programs. Moreover, some of that cash was used to pay down existing loans. Now that we are moving on from those lending programs, loan demand is picking up. Additionally, banks are loosening credit standards, especially to business borrowers.

Bank loans to businesses are on the upswing as competition intensifies to replace the government-backed debt that lenders accrued during the depths of the COVID-19 pandemic.

During the fourth quarter, a net 21.7% of bank loan officers reported higher demand for commercial and industrial loans, up from a net 7.6% who said the same three months prior, according to a recent Federal Reserve survey.

The results represent a bounce-back from the low point of the pandemic in late 2020, when a net 35.3% of loan officers reported that demand was falling.

During fourth-quarter earnings calls, bank CEOs repeatedly offered brighter — if still somewhat cautious — forecasts for overall loan growth this year, largely on the back of rebounding demand for business loans.

Bill Rogers, CEO of Truist Financial in Charlotte, North Carolina, said during a Jan. 18 call that business clients are borrowing again. Companies want to be prepared to build inventory once supply chain issues are resolved and the recent rise in infections from the omicron variant recedes, he said.

“People are just making the decisions to move forward,” Rogers said.

Other banks that rely heavily on business lending reported rosier outlooks for 2022 on the heels of a busier fourth quarter. William Demchak, CEO of the $560 billion-asset PNC Financial Services Group, said during a Jan. 18 call that commercial and industrial lending “has accelerated for the last bunch of months” across just about every industry type.

Underwriting loans in 2022 is easier than 2021, as you no longer have to discount a weak prior year due to COVID. Since 2021 was such a strong year, some lenders are still a little cautious and have told us that it won’t be until 2023 that you will have a normalized year. 

Facebook Plummets

After reporting disappointing earnings and guidance last night, Meta Platforms Inc., the parent of Facebook, is down over 25%, wiping out over $230 billion in market value. Analysts are concerned that the growth story of Facebook is coming to an end.

The report marks a dramatic turnaround for a company that has posted share gains in every year but one since its 2012 initial public offering, stoking concern that Meta Platforms’ flagship product and core advertising moneymaker has plateaued after years of consistent gains. 

“These cuts run deep,” wrote Michael Nathanson, an analyst at brokerage Moffett Nathanson, who titled his note “Facebook: The Beginning of the End?” The results were “a headline grabber and not in a good way.” 

The misses come at a critical juncture for the company, which is fighting regulatory battles on multiple fronts and also trying to justify a costly shift in corporate strategy to bet on the metaverse, Zuckerberg’s vision for an immersive internet that may take years to realize. For the better part of a decade, it has seemed like Facebook would never stop growing. Now young users -- the future consumers of its advertising -- are choosing platforms like TikTok and Google’s YouTube for entertainment and community instead.

Rarely, if ever, has Meta been confronted by so many substantial threats at the same time. Aside from user growth woes and intensifying competition, Meta is also contending with a crackdown on targeted advertising by Apple Inc., which it said may trim $10 billion in revenue this year, and cutbacks by advertisers that are paring budgets because of rising costs and supply chain disruptions.

Anyone who owns an iPhone is now asked if they want to be tracked. While this scored points with Apple users, it was painful for the rest of the tech industry.    

Apple introduced the changes last April, altering its iPhone software to require apps to ask users whether they want to be tracked. The move seriously limited the ability to gather data through apps that is used to target digital ads and drove advertisers to alter spending patterns. Meta had said previously that the Apple move was hurting its ad business, but it hadn’t given an estimate for how much.

Meta “was impacted significantly and it’s going to be a continuous problem,” Daniel Newman, a principal analyst at Futurum Research, said Wednesday.

Forcing users to “opt-in” versus “opt-out” changes the dynamic. Every time I’m asked the question, I say no, but would I care enough to notify Apple that I wish to opt out? Probably not.

Was PPP a Mistake?

While PPP certainly worked, some researchers are questioning whether it was a good use of taxpayer money.

One new analysis found that only about a quarter of the money spent by the program paid wages that would have otherwise been lost, partly because the government steadily loosened the rules for how businesses could use the money as the pandemic dragged on. And because many businesses remained healthy enough to survive without the program, another analysis found, the looser rules meant the Paycheck Protection Program ended up subsidizing business owners more than their workers.

“Jobs and businesses are two separate things,” said David Autor, an economics professor at the Massachusetts Institute of Technology who led a 10-member team that studied the program. “We tried to figure out, ‘Where did the money go?’ — and it turns out it didn’t primarily go to workers who would have lost jobs. It went to business owners and their shareholders and their creditors.”

But Michael Dalton, a research economist for the Bureau of Labor Statistics who drew on extensive wage records collected by the government that other researchers did not have access to, said it had performed better than he expected.

Within one month of being approved, companies that got loans had an average head count 8 percent higher than comparable businesses that didn’t. After seven months, their work forces were still 4 percent larger, maintaining a lead even as hiring nationwide began to bounce back.

And some ventures that would have been forced out of business stayed alive. Businesses that received a loan from the program were 5.8 percent less likely to be closed one month after receiving the money, and 3.5 percent less likely to be shut down after seven months, Dr. Dalton found.

But overall, the Paycheck Protection Program was extremely inefficient. For every $1 in wages that it prevented from being lost, it handed out $3.13 that went somewhere else, Dr. Dalton found. The analysis by Dr. Autor’s group, circulated for comment last month by the National Bureau of Economic Research, put the cost of saving a job for a year at $169,300 — far more than the $58,200 average compensation for those jobs, according to the group’s calculations.

So where did the rest of the money go? Into deeper pockets.

Seventy-two percent of the program’s relief money ended up in the hands of those whose household income is in America’s top 20 percent, Dr. Autor’s group found. That’s because the relief effort’s shifting goals ultimately put less of a premium on worker pay.

Keep in mind that PPP was conceived with unanimous bipartisan support during a time of great uncertainty and a desire to get the money out as fast as possible.  While it may have been inefficient from the standpoint of creating jobs, researchers need to look closer at other factors, including what it did to keep borrowers from defaulting on their loans. Without PPP, there would have been a significant increase in defaults, which would have resulted in some painful liquidations. Nevertheless, the jury is still out on PPP.

Were Lockdowns a Mistake?

According to researchers from the John Hopkins Institute for Applied Economics, the lockdowns of 2020 did little to save lives.

Lockdowns had “little to no effect” on saving lives during the pandemic — and “should be rejected out of hand as a pandemic policy,” according to economists in a new meta-analysis of dozens of studies.

A group led by the head of Johns Hopkins Institute for Applied Economics analyzed studies from the first surge of the pandemic to investigate widely pushed claims that stringent restrictions would limit deaths.

Instead, the meta-analysis concluded that lockdowns across the US and Europe had only “reduced COVID-19 mortality by 0.2% on average.”

Worse, some of the studies even suggested that limiting gatherings in safe outdoor spots may have been “counterproductive and increased” the death rate, the authors noted.

“While this meta-analysis concludes that lockdowns have had little to no public health effects, they have imposed enormous economic and social costs where they have been adopted,” the professors wrote in the journal Studies in Applied Economics.

Attached is the complete study. As with PPP, we are still relatively early in evaluating the impact of various government policies and their effectiveness. In March 2020, there was broad support from diverse sides to lockdown the economy until we could get our arms around COVID-19. At the time, some were skeptical and worried about the economic repercussions, but the consensus was overwhelming.   Now, the pendulum has swung strongly against lockdowns. Moreover, the latest Monmouth University Poll shows that 70% of Americans want to move on from COVID, despite still high daily infection counts.

Fully 7 in 10 Americans (70%) agree with the sentiment that “it’s time we accept that Covid is here to stay and we just need to get on with our lives” – including 78% of those who report having gotten Covid and 65% of those who say they have not been infected.

The public is still on board with face mask and social distancing guidelines in their home state (52%). Truly defeating COVID seems unrealistic, especially since the public is divided on many of the measures. But, while the Omicron surge is slowing (a 49% decline), the daily average is still nearly 400,000. Meanwhile, the UK just lifted most COVID restrictions, although they are further along in the reduction of daily cases.  

Is Crypto the New Subprime?

New York Times economist Paul Krugman argues that Crypto is the new Subprime.  

Crypto has become a pretty big asset class (and yielded huge capital gains to many buyers); by last fall the combined market value of cryptocurrencies had reached almost $3 trillion.

Since then, however, prices have crashed, wiping out around $1.3 trillion in market capitalization. As of Thursday morning, Bitcoin’s price was almost halfway down from its November peak. So who is being hurt by this crash, and what might it do to the economy?

Well, I’m seeing uncomfortable parallels with the subprime crisis of the 2000s. No, crypto doesn’t threaten the financial system — the numbers aren’t big enough to do that. But there’s growing evidence that the risks of crypto are falling disproportionately on people who don’t know what they are getting into and are poorly positioned to handle the downside.

Ned Gramlich, a Federal Reserve official who famously warned in vain about the growing financial dangers, asked, “Why are the most risky loan products sold to the least sophisticated borrowers?” He then declared, “The question answers itself.” Homeownership dropped sharply once the bubble burst.

And cryptocurrencies, with their huge price fluctuations seemingly unrelated to fundamentals, are about as risky as an asset class can get.

Now, maybe those of us who still can’t see what cryptocurrencies are good for other than money laundering and tax evasion are just missing the picture. Maybe the rising valuation (although not use) of Bitcoin and its rivals represents something more than a bubble, in which people buy an asset simply because other people have made money off that asset in the past. And it’s OK for investors to bet against the skeptics.

But these investors should be people who are both well equipped to make that judgment and financially secure enough to bear the losses if it turns out that the skeptics are right.

Unfortunately, that’s not what is happening. And if you ask me, regulators have made the same mistake they made on subprime: They failed to protect the public against financial products nobody understood, and many vulnerable families may end up paying the price.

According to a recent survey, 44% of crypto investors are nonwhite, and 55% do not have a college degree. So, if crypto collapses, it will disproportionately hurt more vulnerable populations. While all that is true, how should the government intervene? If the Fed bans it or comes up with its own digital currency, it will wipe out an awful lot of wealth. Mr. Krugman raises a good argument, but it might be too late to do anything meaningful.

The BAN Report: 1982 / Peloton's Bumpy Ride / States Lift COVID Measures / Return to Office Update / The Bleisure Traveler / NFL Embraces Gambling


40 years ago, Michael Jackson’s Thriller was released, ET was a major box office hit, and AT&T was broken up. More importantly, it was the last time inflation was this high. Today, the Labor Department reported that the inflation rate for 2021 was 7.5%.

Consumer prices surged more than expected over the past 12 months, indicating a worsening outlook for inflation and cementing the likelihood of substantial interest rate hikes this year.

The consumer price index for January, which measures the costs of dozens of everyday consumer goods, rose 7.5% compared to a year ago, the Labor Department reported Thursday.

That compared to Dow Jones estimates of 7.2% for the closely watched inflation gauge. It was the highest reading since February 1982.

Stripping out volatile gas and grocery costs, the CPI increased 6%, compared to the estimate of 5.9%. Core inflation rose at its fastest level since August 1982.

The monthly CPI rates also came in hotter than expected, with headline and core CPI both rising 0.6%, compared to the estimates for a 0.4% increase on both measures.

Stock market futures declined following the report, with rate-sensitive tech stocks hit especially hard. Government bond yields rose sharply, with the benchmark 10-year Treasury note touching 2%, its highest since August 2019.

Back in 1982 the Fed Chairman was Paul Volcker. It took a Fed Funds Rate of 20% to get inflation under control. I am skeptical that the Fed can get high single-digit inflation under control with modest 25 basis point increases every few months. To Chairman Powell’s credit, he has acknowledged his mistakes, but the Fed has a lot of work to do. Now that the 10-year has broken through 2%, the Fed will have to accelerate their inflation mitigation efforts, especially with a strong job market.

Peloton’s Bumpy Ride

After two quarters of disappointing growth, alarming cash burn, and reduced guidance, Peloton announced a 20% reduction in its workforce, and the hiring of a new CEO, Barry McCarthy this week. This came after weekend reports that Amazon and Nike were considering an offer on the company. So, what went wrong here? The New York Times gave a good account of Peloton’s bumpy ride.

It was May 2020, just a couple of months into the pandemic’s shelter-in-place orders. With gyms locked down, people had started panic-buying Peloton’s $2,245 internet-connected exercise bikes for their homes. Revenue from the systems soared 66 percent from a year earlier, and more than one million people had signed up for the company’s online exercise classes. A backlog of orders piled up.

“It’s kind of awesome, obviously, knowing that we can provide this service to communities and families,” Mr. Foley said in an interview at the time. “The demand is through the roof.”

It was a moment of triumph — and one that led to Peloton’s downfall. To meet that surging demand, the New York company aggressively ramped up production. When orders waned as gyms and fitness studios reopened, it suddenly had a glut of machines. In recent months, Peloton temporarily halted production of its bikes and treadmills. Its losses deepened.

Those issues — compounded by a recall of its treadmills, the appearance of an activist investor and a spate of negative television portrayals — culminated on Tuesday when Mr. Foley, 51, announced that he would step down as chief executive and become executive chairman. Peloton said it was restructuring itself, laying off 2,800 workers, or 20 percent of its work force. Barry McCarthy, 68, a former chief financial officer of Spotify, was named chief executive and president.

Activist investor Blackwells Capital put out a 65-page presentation, outlining the companies missteps, and called for a new CEO and for the company to be sold. The market reacted positively to the CEO change, the layoffs, and the interest from potential suitors, sending the stock up well over 60 percent in less than a week.

Peloton’s new CEO, Barry McCarthy, a former CFO at Spotify and Netflix, summed up the Company’s problems well in his first email to the staff.

“We have to be willing to confront the world as it is, not as we want it to be if we’re going to be successful…. And now that the reset button has been pushed, the challenge ahead of us is this…do we squander the opportunity in front of us or do we engineer the great comeback story of the post-Covid era?”

As a user of the product and sometimes investor in the company, I have some insight on the topic. Here are a few additional takeaways:

The prior management team (#2 executive William Lynch stepped down as well) did a great job in creating a product that people love. Peloton enjoys an extremely low churn rate (more than 5X better than traditional gyms), over 3 million loyal and engaged subscribers, and a very high net promoter score. But they were pretty awful at everything but sales, marketing, and product development.

They dramatically overinvested in manufacturing capability, buying Precor for $420MM to boost US manufacturing, and then making plans to build a $400MM factory in Ohio. They spent $100MM in expedited shipping to help reduce their months of shipping delays. Additionally, they grew their headcount by over 20x in four years. They made these decisions when they were growing at over 100% a year but didn’t see the end of COVID impacting demand. Finally, they bundled a safety issue with their treadmills, first fighting with the CFPB, and then agreeing to a recall a few weeks later.  

Unlike most tech companies, Peloton did not bring in enough professional outsiders to work alongside the founder. In fact, of the 5 founders of Peloton, four are still with the company and have key roles, including CEO, CTO, Chief Legal Officer, Chief Product Officer. This is highly unusual. For example, of the five founders of Facebook, only Mark Zuckerberg stayed at the company after the IPO.  

What happens next will be very interesting. Does Peloton sell itself in the next few weeks at no better than 50% of its all-time high? Or do they stay independent, fix their problems, and begin to grow at levels they saw pre-COVID? If you really believe in the growth possibilities for Peloton, they are probably better off staying independent, at least for long enough for the new CEO to right the ship.

States Lift COVID Measures

As daily COVID cases retreat from their Omicron highs of early January with a 63% decline in the daily averages, states are moving to reduce their COVID restrictions.   

Nine states this week announced plans to roll back requirements that people wear masks at indoor venues, including businesses and, in some cases, schools, as Covid-19 case numbers decline and pressure to return to normal life rises.

Officials in New York, Illinois, Massachusetts and Rhode Island said Wednesday that rules requiring masks or proof of vaccinations intended to curb the spread of the Covid-19 pandemic would end by March. Earlier in the week, California, Oregon, New Jersey, Connecticut and Delaware officials announced similar rollbacks. 

All of those states, which voted for President Biden in the 2020 election, now aren’t following recommendations from the Centers for Disease Control and Prevention after previously hewing to federal guidance to continue requiring face covering indoors and in schools.

“The Covid clouds are parting,” New York Gov. Kathy Hochul, a Democrat, said after announcing requirements to wear masks in restaurants and offices would lapse on Thursday.

Federal public-health officials, meanwhile, said Wednesday that they are considering changes, but continue to recommend mask-wearing in public indoor settings in much of the country.

“We want to ensure that public-health guidance we’re providing meets the moment we’re in,” White House press secretary Jen Psaki said at a briefing. “We recognize people are tired of the pandemic. They’re tired of wearing masks.”

In just a few weeks, there has been a remarkable turnaround. At CREFC in Miami (1/9 – 1/12), 75% of the attendees canceled or switched to in-person. At Acquire or be Acquired last week in Arizona, the cancellation rate was less than 10%. As Ms. Psaki said, people are just tired of COVID measures and we are moving towards accepting and learning to manage COVID, not trying to eliminate it.  

Return to Office Update

As COVID restrictions are lifted, the long-delayed return to the offices is expected to begin this spring. Wells Fargo announced this week that they will bring employees back in mid-March.

Wells Fargo & Co. is planning to bring employees back to the office in mid-March, after the firm’s return plans were repeatedly upended last year due to Covid-19 surges. 

Most groups, including customer-facing employees and those in enterprise functions, will return under a “hybrid flexible model” beginning March 14 regardless of vaccination status, according to a memo Wednesday from Chief Operating Officer Scott Powell. Operations and contact-center employees will start their return following staff employees. 

“When we start returning to the office it’s going to be a lot of flexibility, way more flexibility than we had before the pandemic,” Powell said in an interview, adding that in most cases that means three days a week in the office. “We will adapt the model as we go forward, as we know more.”

Wells Fargo, which had 249,435 employees at the end of last year, originally set a September return for staff working from home. That plan was delayed multiple times, first by the delta variant and then the omicron variant, and in December the firm postponed return-to-office indefinitely. As of Wednesday, the bank is allowing some fully vaccinated staff to voluntarily return, as well as resume business meetings, travel and client visits, according to the memo. 

While some CEOs will let their employees work wherever they want, we will finally see to what extent office life returns to normal. The hybrid flexible model that Wells is using seems to be the norm for many companies. According to a survey by Lululemon, returning to office is good for your health.

The athleisure retailer surveyed 10,000 people in 10 markets across the world, including U.S., Canada and the UK, and found that well-being is higher among those who have returned to the workplace compared with those who expect to return full-time, part-time, or will not return to the workplace at all.

Employees also have higher expectations of their employers and want long-term changes implemented. Forty-eight percent of employees are looking for more flexibility in working hours and location, followed closely by increased mental and physical health support.

Employers will want their employees back in the office, but employees will balk and we think employers will buckle. For example, a database of laid-off Peloton employees included a field for Work Mode Preference. Only 20 of 275 preferred on-site only. If employers want to retain talent, they can’t overplay their hand.  


The Bleisure Traveler

The rise of remote work is creating a new class in the travel industry, known as “bleisure” (business + leisure). This emerging segment is helping the travel industry mitigate the loss of traditional business travelers.

It was the first glimmer of hope for the beleaguered travel industry in 2020 when locked-down citizens started doing something new amid the pandemic: not working from home, but working from anywhere. Off they’d go for weeks or months at a time, to any locale with good surf and better Wi-Fi, to show off a new Zoom background after early morning swims.

Today the era of decamping from your hometown might seem as far in the rearview mirror as a five-day, in-person workweek might appear on the horizon. But a new version of the trend is emerging—and it could prove a serious boon for the travel industry.

The ability to work from home is profoundly, and permanently, changing the way we travel. More lenient office policies mean many workers can travel anytime, even during busy workweeks, as long as they can hit deadlines from far afield. That, in turn, has made it easier for people to travel more frequently and for longer amounts of time, sometimes unlocking farther-flung destinations. The mixing of work and play, which some industry insiders (annoyingly) refer to as “bleisure” (business + leisure) travel, has greatly helped airlines make up for lost traffic.

According to a 2022 travel industry outlook from Deloitte, people with the intent to fit work into their journeys also planned to travel twice as often as those who sought time to unplug. “Laptop luggers,” as Deloitte refers to them, will take two to four trips a year, compared with one to two for “disconnectors,” and 75% of them will add extra time to their vacation. (Only 6% will extend by several weeks, but a majority—38%—will add from three to six days.)

“It’s a benefit for the industry,” says Eileen Crowley, Deloitte’s travel leader. “These work-from-home travelers are spending more. There’s more potential there. They also fared a bit better financially during the pandemic, so they can increase their travel budgets as well.”

Kayak Chief Executive Officer Steve Hafner agrees. At a Skift conference previewing the megatrends that will shape travel in 2022, he said, “When you work from anywhere, that means more leisure travel. If you’re liberated from an office, you can go to a lot of other places.”

While home rentals appear better suited for these types of travelers, hotels are adapting, improving business centers, adding home offices, and providing discounts to long-term travelers. Extended stay hotels seem to be best positioned to capture these travelers. Additionally, this development is good news for coworking providers like WeWork and Regus.  

NFL Embraces Gambling

In just a few years, the availability of sports betting has exploded and now more than 100 million Americans live in places where they can legally bet on the Super Bowl.

Since May 2018, when the U.S. Supreme Court overturned the ban Goodell once favored, sports betting has been legalized in more than two dozen states, plus Washington, D.C. More than 100 million Americans now live in places where they can legally wager on the Feb. 13 Super Bowl. What’s on offer isn’t just the usual bets about who will win or by how many points. Heavily marketed apps such as DraftKings and FanDuel will let Super Bowl viewers bet, during the game, on a nacho platter of options—things like whether Cincinnati Bengals quarterback Joe Burrow’s first pass will be complete or incomplete, which player will commit the first turnover, and what color of Gatorade will be poured on the winning coach’s head.

The speed with which the NFL—along with every major American professional league and the National Collegiate Athletic Association—has embraced activities it previously shunned has been breathtaking. Major League Baseball, an early investor in DraftKings Inc., is talking up the potential for in-game bets to drive fan engagement. Major colleges are entering into marketing partnerships with sportsbooks. An email last month from the Louisiana State University athletics department to supporters, including students, urged them to download the Caesars Sportsbook app. “Your App is Ready, Louisiana,” the email said, providing a link to a promotional code that offered a $300 one-time bonus after an initial bet of $20.

Whatever Goodell’s initial skepticism, the NFL is now all in. Dallas Cowboys owner Jerry Jones and New England Patriots owner Robert Kraft both invested in DraftKings. Celebrities like Ben Affleck and Jamie Foxx headline betting ads shown during games. At a half-dozen NFL stadiums, fans can watch the action—and bet on their phones—from lounges sponsored by the apps. Alas, in California, where the Los Angeles Rams will meet the Bengals at SoFi Stadium in Inglewood in Super Bowl LVI, a November ballot fight looms and online sports betting has yet to be legalized.

So far, the US sports leagues have avoided any wagering scandals in which players or officials take bribes, like the men’s basketball team of Boston College did in the late 70s. Given how close the last two playoff rounds were, it’s hard not to take Cincinnati (+4) and the points!

The BAN Report: The Fed's Delicate Job / LTGTR / Bank OZK / SNC Report / 4 Beds, 3 Bath, and No Garage Door?

The Fed’s Delicate Job

After downplaying the risk of inflation, Fed Chair Jerome Powell has a delicate job of taming inflation while preventing a shock to the economy.  

In some ways, Mr. Powell’s challenge is thornier than it was at the outset of the pandemic. No Fed chairman since Paul Volcker in the early 1980s has had to grapple with inflation this high. The risk for Mr. Powell and the nation is that his fight against inflation will cause a new recession, as Mr. Volcker’s did. Historically, the Fed hasn’t been able to push down inflation without a recession.

Exactly how Mr. Powell intends to tighten policy represents an additional challenge. The Fed has both the traditional lever of short-term interest rates and a newfangled one: shrinking its vast holdings of Treasury and mortgage-backed securities. This could be especially treacherous for markets accustomed to a central bank that for the past two decades mostly used just interest rates, and tried to telegraph how fast it would raise them.

Fed officials warn they can’t provide that same predictability this time. For markets “it could be a bumpy time,” said Esther George, president of the Kansas City Fed.

In August 2020, Mr. Powell led his colleagues to adopt a policy framework designed to address a problem that had long dogged the Fed and other central banks, and that the pandemic threatened to worsen: inflation running persistently below the 2% target.

Under the Fed’s old framework, it would raise interest rates pre-emptively. Rather than wait until inflation was above 2%, it would act when unemployment was falling, to prevent inflation from exceeding 2%.

The new framework rejected pre-emptive strikes on inflation. To put this new framework into action, they pledged in September 2020 to maintain rates near zero until labor-market conditions were consistent with maximum employment—which wasn’t fully defined but generally corresponds with historically low levels of unemployment—and until inflation reached 2% and headed higher.

Taming inflation without causing a recession is very difficult. Nouriel Roubini described the conundrum for the Fed, albeit he is known for being an alarmist.

When former Fed chair Paul Volcker increased rates to tackle inflation in 1980-82, the result was a severe double-dip recession in the US and a debt crisis and lost decade for Latin America. But now that global debt ratios are almost three times higher than in the early 1970s, any anti-inflationary policy would lead to a depression rather than a severe recession.

Under these conditions, central banks will be damned if they do and damned if they don’t, and many governments will be semi-insolvent and thus unable to bail out banks, corporations and households. The doom loop of sovereigns and banks in the eurozone after the global financial crisis will be repeated worldwide, sucking in households, corporations and shadow banks as well.

The good news for the Fed is the economy is extremely strong. Retail sales rose 3.8% in January and the consumer is ready to come out of their COVID-19 shell and spend their cash. The Fed needs to act quickly and decisively when the economy is strong.


Now that the Omicron wave is behind us, Americans are eager to spend money on experiences, according to executives from several large companies.

With daily new Covid-19 cases falling, restrictions easing and the strongest consumer finances in recent history, Americans are finally emerging from the pandemic eager to splurge on everything from travel and sports events to restaurants, cruises and theme parks, executives say.

Companies including Marriott International Inc., Expedia Group Inc.,  Coca-Cola Co. and MGM Resorts International told analysts recently that business is already improving from an Omicron dip and indications point to an American public eager to live large.

“Premium customers, who after being cooped up for 2020 and the first part of 2021, are traveling and spending again with a vengeance,” Wynn Resorts Ltd. Chief Executive Craig Billings said Tuesday of the latest quarter.

As more Americans travel, Marriott is seeing greater demand for its high-end properties, CEO Anthony Capuano said on a conference call with analysts Tuesday.

At Walt Disney Co. ’s theme parks, business came roaring back in the most recent quarter, with revenue from both domestic and international parks more than doubling year-over-year. Attendance is still short of pre-pandemic levels, but those who are showing up are spending as much as 40% more per capita than in 2019, Chief Financial Officer Christine McCarthy said last week.

“We’ve got really strong domestic demand,” CEO Bob Chapek told analysts.

As more Americans venture out, some venues are dropping mask requirements. Disney said that starting Thursday, masks will be optional for fully vaccinated visitors at Disney’s outdoor and indoor locations, except for enclosed transportation.

Oddly, the University of Michigan’s consumer sentiment index hit its lowest levels in a decade earlier this month, but consumers are spending anyway and this divergence has persisted for a while. Cases and restrictions dropping early in the year gives people time to plan events and trips. And large events are being scheduled. For example, the New Orleans Jazz Fest is back early this May after being canceled the last two years.

Bank OZK

Increasingly, mid-size banks are doing a large share of CRE construction loans, while the largest banks are often on the sidelines. The WSJ had a good profile of Bank OZK, which is one of the largest CRE construction lenders in the country.

The most prolific lender to Manhattan property developers isn’t Wells Fargo & Co. or Citigroup Inc. or any of the other big global banks. It is Bank OZK, which not that long ago was an obscure lender from Little Rock, Ark.

The bank has become one of the country’s most aggressive financiers of skyscraper construction. OZK’s chief executive, George Gleason, said on a recent earnings call that the lender could issue its biggest ever construction mortgages in 2022.

OZK is nearing a deal to issue a $410 million loan to Rabina, the developer of a roughly 1,000-foot-tall Manhattan office and luxury residential tower on Fifth Avenue, which would be one of its largest loans, the bank said.

The lender is one of a group of regional banks and debt funds that are propelling the recent surge in commercial real-estate development. Proposed New York City construction in the fourth quarter, for instance, totaled nearly 32 million square feet, according to the Real Estate Board of New York, the city’s most for a single quarter since 2014, the trade association said.

Seven years ago these, midsize banks held less construction debt than the largest banks. Now they hold far more, Federal Deposit Insurance Corp. data shows. Others fueling the boom include Centennial Bank in Conway, Ark.; Los Angeles-based Pacific Western Bank; and Laredo, Texas-based International Bank of Commerce, where construction loans account for 25% of its loans.

They are helping fill a void left by the biggest banks, which often shy away from development loans because these projects tend to be among the riskiest loans. Projects can take years to complete and don’t produce any income in the meantime.

OZK’s $7.7 billion in construction and land development loans made up 42% of all loans on its balance sheet as of September. That is the highest percentage for any bank with more than $5 billion in assets, and more than 10 times the weighted industry average. The Little Rock lender holds more construction debt than Citibank, which is about 65 times as large, in terms of assets.

Unlike bigger banks, OZK doesn’t usually ask borrowers to pledge their personal wealth as collateral, and it doesn’t sell off parts of a loan to other lenders, according to brokers who have worked with the bank. That helps it win business, but it also means OZK has more exposure in the event of a default.

OZK said it can minimize that risk by funding about half a project’s cost on average, leaving the rest to other investors, as well as by backing experienced developers and insisting that it gets paid first in the event of a default. Only 0.2% of the bank’s loans were nonperforming as of December. Last year, the bank’s profits hit a record, company filings show.

Bank OZK has its detractors, including other banks and short-sellers, but they are clearly experts in the construction lending space. I’ve heard their investor presentation on a couple of occasions, and they certainly know their book.CEO George Gleason argues these are the best loans in their entire bank’s portfolio. Moreover, nationwide lending can be trickier, but doesn’t that provide diversification?

SNC Report

The OCC released its semiannual report on Shared National Credits and their findings showed continued improvement in credit. SNCs represent $5.2 trillion of loan commitments, so it’s a good overview of large corporate credits.

SNC credit risk improved modestly in 2021 but remains high largely due to the impact of COVID19. SNC commitments with the lowest supervisory ratings1 (special mention and classified) have decreased from 12.4 percent in 2020 to 10.6 percent in 2021. The lower level of special mention and classified SNC commitments is driven by the recovery in commodity prices and the resulting improvement in the oil and gas sector. Improvement in oil and gas is partially offset by year-over-year weakening in commercial real estate (CRE), particularly in the hotel, office, and retail sub sectors.

SNC commitments rated special mention and classified continue to be concentrated in transactions that agent banks identified and reported as leveraged loans. Risk in leveraged loans is magnified when the obligor operates in COVID-19 impacted industries.2 Although U.S. and foreign banks own the largest share of SNC commitments, including the majority of SNC commitments to borrowers in the COVID-19 impacted industries, nonbanks hold the largest share of special mention and classified loans.

The direction of risk in 2022 will be impacted by the continued success in managing the COVID-19 pandemic. Other current concerns include inflation, supply chain imbalance, labor challenges, high debt levels, and vulnerability to rising rates that could negatively impact the financial performance and repayment capacity of borrowers in a wide variety of industries.

Non-banks hold 56% of loans Classified or rated Special Mention. There was also a doubling of special mention and classified loans from 2019 in COVID-19 impacted industries.

4 Beds, 3 Bath, and No Garage Door?

Homebuilders are struggling to finish homes due to a severe shortage of garage doors.

“Garage doors are a nightmare,” said Rick Palacios Jr., the director of research at John Burns Real Estate Consulting. If you had to rank the headaches homebuilders face, he said, “garage doors are the worst right now.”

The home-building industry is having the most difficult time in decades meeting demand, the sum of many pandemic complications. But this moment reaches peak absurdity with garage doors.

Few people had a problem getting them before. Now everyone seems to have that problem. Prices have doubled or tripled in the last year. Lead times have stretched from weeks to months. Homebuilders who would once order garage doors several weeks before finishing a house are now ordering them before the foundation is poured.

“It used to take us 20 weeks to build a house,” said Adrian Foley, the president, and C.E.O. of the Brookfield Properties development group, which develops thousands of single-family homes annually in North America. “And now it takes us 20 weeks to get a set of garage doors.”

Many frustrations that builders face today aren’t entirely novel. Tariffs and natural disasters have rattled supply chains before. Skilled labor has been an issue for years. Zoning rules have long stymied construction. Rather, what is unique, with an American twist, is a problem like this: Homebuilders are struggling to complete new homes amid a housing shortage because they must first complete the thing designed to house our cars.

In most parts of the country, a builder can’t pass final inspection for a home that is otherwise perfectly complete — but that is missing its garage door. That means builders don’t get paid and home buyers can’t move in.

Some homebuilders are getting COs with plywood or using cheap temporary garage doors in order to complete the sale and allow the homeowner to move in. With garage doors available in multiple sizes and colors, wait times of almost a year are not uncommon.


The BAN Report: The 13MM Chicago Resi Portfolio / Ukraine Implications for US Economy / Banks Keep Deposit Rates Low / Miami Least Affordable Housing Market / Execs Quitting / Ongoing Employee Reviews / The 2MM Chicago Commercial Portfolio

The 13MM Chicago Resi Portfolio

Clark Street Capital’s Bank Asset Network (“BAN”) proudly presents: “The $13MM Chicago Resi Portfolio.” This exclusively offered portfolio is offered for sale by one institution (“Seller”). Highlights include:

  • A total outstanding balance of $12,566,260 comprised of 55 loans

  • The consumer loans are secured predominantly by Single Family Residences (97%)

  • The portfolio is located predominantly in the Chicago MSA (83%)

  • The portfolio is comprised of two pools, a performing pool ($7,428,180) and an NPL pool ($5,138,080)

  • The performing pool has a weighted LTV of 74% and the NPL pool has a weighted LTV of 76%

  • Each pool is all-or-none and will be sold to a single buyer

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: Friday, February 25, 2022

  • Due diligence materials available online: Tuesday, March 1, 2022

  • Indicative bid date: Thursday, March 17, 2022

  • Closing date: Monday, March 28, 2022

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

Ukraine Implications for US Economy

While the geopolitical implications of Russia’s invasion of Ukraine are profound, the impact to the US economy is uncertain.   

Russia is a major producer of oil and natural gas, and the brewing geopolitical conflict has sent prices of both sharply higher in recent weeks. It is also the world’s largest wheat exporter, and is a major food supplier to Europe.

The United States imports relatively little directly from Russia, but a commodities crunch caused by a conflict could have knock-on effects that at least temporarily drive up prices for raw materials and finished goods when much of the world, including the United States, is experiencing rapid inflation.

Global unrest could also spook American consumers, prompting them to cut back on spending and other economic activity. If the slowdown were to become severe, it could make it harder for the Federal Reserve, which is planning to raise interest rates in March, to decide how quickly and how aggressively to increase borrowing costs. Central bankers noted in minutes from their most recent meeting that geopolitical risks “could cause increases in global energy prices or exacerbate global supply shortages,” but also that they were a risk to the outlook for growth.

A major and immediate economic implication of a showdown in Eastern Europe ties back to oil and gas. Russia produces 10 million barrels of oil a day, roughly 10 percent of global demand, and is Europe’s largest supplier of natural gas, which is used to fuel power plants and provide heat to homes and businesses.

The United States imports comparatively little Russian oil, but energy commodity markets are global, meaning a change in prices in one part of the world influences how much people pay for energy elsewhere.

It is unclear how much a conflict would push up prices, but energy markets have already been jittery — and fuel prices have risen sharply — on the prospect of an invasion.

If oil increases to $120 per barrel by the end of February, past the $95 mark it hovered around last week, inflation as measured by the Consumer Price Index could climb close to 9 percent in the next couple months, instead of a currently projected peak of a little below 8 percent, said Alan Detmeister, an economist at UBS who formerly led the prices and wages section at the Fed.

“It becomes a question of: How long do oil prices, natural gas wholesale prices stay elevated?” he said. “That’s anybody’s guess.”

The US imports $30 billion a year from Russia and exports $6 billion, so the impact is negligible. The crisis though does pour gasoline on the inflation fire and may speed-up rate increases even further.   On the other hand, the consumer may become skittish and spend less, so its hard to predict at this point.

Banks Keep Deposit Rates Low

Rates may be on the way up, but banks are expected to keep deposit rates low for a while, as banks are still flush with deposits.

The Federal Reserve’s looming interest rate hikes won’t find their way into depositors’ pockets right away, with banks expected to keep deposit rates low for at least a few months.

Banks remain flooded with liquidity, so the industry’s current predicament is trying to grow loans, not attract deposits. Until that picture starts to shift, analysts say banks will have little incentive to lure depositors or retain existing ones by offering them higher rates.

“With all this excess cash on bank balance sheets, there's not a lot of pressure at least for the first two or three rate hikes to increase deposit costs,” said Peter Winter, a bank analyst at Wedbush Securities.

Mike Mayo, a bank analyst at Wells Fargo Securities, wrote in a note to clients that a major theme for the industry will be “NII to the sky.” He expects net interest income to rise at the fastest pace since the mid-1980s.

The vast amount of deposits currently sitting at banks should reduce the need for “deposit battles” where banks compete with each other by offering higher rates, Mayo wrote. He also pointed to banks’ efforts over the years to lower their reliance on the types of deposits that are more prone to respond to rate increases — and instead, focus on stickier and less rate-sensitive “core deposits.”

Some banks balance sheets will shrink, but there will be no rush to compete for deposits for several quarters. New data shows that consumers are sitting on $2.6 trillion in excess savings.

Following surprisingly strong retail sales, consumer expectations and hiring numbers, new savings data through December 2021 from the JPMorgan Chase Institute points to a rapidly thawing economy, one that could shift into even higher gear as the omicron-fueled covid-19 wave subsides and states continue to ease some covid restrictions.

Americans are sitting on $2.6 trillion in extra savings, a separate Post analysis shows, and signs abound that they are opening up their wallets on long-delayed spending on travel, dining and other experiences that have been on hold since lockdowns swept the country almost two years ago.

Some of that liquidity is expected to be deployed by consumers who are anxious to spend after two years of COVID measures, but, for the time being, banks have little incentive to compete on deposits. In short, the next couple quarters are going to be very good for banks with expanding margins and strong loan growth. 

Miami Least Affordable Housing Market

Remember when South Florida was cheap relative to high-cost northeast cities? With limited supply and strong migration, Miami is now the least affordable housing market in the US.

It’s all part of the Magic City’s red-hot housing market where homes disappear before realtors can put signs out front.

“It’s like literally crazy right now,” said Sime, a 21-year veteran of the Miami real estate market. We have so many people coming here and we don’t have any supply,” explained Sime. 

Miami is now officially the most expensive housing market in the country, according to RealtyHop, surpassing New York as many of its residents escaped to the Sunshine State during the pandemic. 

“Miami is open and is not as strict as some of the other states, (it’s) also because we don’t have state income tax,” added Sime. 

According to RealtyHop, households would need to contribute 78.71% of their income towards homeownership costs, which is up 1.55% from the prior month. This index strictly measures the cost of homeownership, so it doesn’t take into account average rents, which are still cheaper than New York City, the second least affordable city. The most affordable housing market is Wichita, KS, followed by Fort Wayne, IN and Detroit, MI.

Execs Quitting

The Great Resignation of workers quitting the workforce includes many executives as well. Many of these executives have seen their retirement accounts and personal liquidity explode in the last couple of years and no longer need to work.   

But the urge to resign is not confined to frontline workers. Chief executives, chief financial officers and other C-level executives are walking off the job, too. And while some are inevitably leaving one role to take a new one, some are dropping out altogether, at least for a bit.

Many of the executives leaving top jobs are fortunate enough to quit without having to worry about how to pay their bills, and they say their decisions aren’t driven by finances. Instead, they are propelled by a mix of needing a break, reassessing the role of work in their lives, and wanting to pursue new ventures.

As chief marketing officer for Honeywell, the industrial conglomerate, Joe Toubes, at just 48, had reached the top. He was drawing a handsome salary, living comfortably in Millburn, N.J., and leading branding for one of the biggest manufacturers in the world.

But by last year, Mr. Toubes had reached an unfamiliar and somewhat unnerving conclusion: “I started to not be happy,” he said.

Mr. Toubes decided he needed a change, and when Honeywell began moving its operations from New Jersey to Charlotte, N.C., he had the opportunity he needed. In September, he left the company.

Mr. Toubes recognizes his privilege in being able to up and quit, and said he plans to return to the work force one day. “I had the luxury to make that kind of decision because I was at a senior level and had been well rewarded for a number of years,” he said.

And what is he doing with his newfound free time?

“The day I left, I committed to taking on something that I love to do, but had never had the time to do, which was writing,” he said. “I had a passion for fiction, and I started to write a novel.”

In addition to writing, the sabbatical is giving Mr. Toubes precious time with his teenage boys. And while he said that “the act of writing is a release,” he is realistic about the commercial prospects for his novel.

Anecdotally, I know many high-level bank executives that have no desire to climb the corporate ladder anymore and are content in their current roles. Fewer people want the promotion that results in more stress and a modest pay increase.

Ongoing Employee Reviews

Companies are increasingly doing more frequent reviews of compensation, in order to retain talent, as opposed to the traditional annual review.

The demand for U.S. workers has led some manufacturers, technology firms and other employers to ditch the annual raise and switch to more frequent pay reviews as they compete for talent and keep pace with rising wages.

CoorsTek Inc., a maker of industrial ceramics, last year started doing quarterly pay reviews, primarily to ensure it could hire and retain workers for critical and hard-to-fill manufacturing roles such as production operators and maintenance mechanics. The Golden, Colo.-based company hired around 1,300 people in the U.S. last year, and bringing on new people often meant paying above its usual ranges.

“When the market is evolving in real-time and there really isn’t a leading indicator other than what you’re seeing to compete and hire, you quickly have to adjust,” said Irma Lockridge, the chief people officer at the 6,000-person company.

Full off-cycle salary reviews remain relatively rare, surveys show, and executives say companies can turn to other options, such as using one-time bonuses, expanding benefits or adding vacation days, to help retain workers without boosting wages.

With inflation in the high single digits and a tight job market, waiting to address compensation once a year may be insufficient for many companies, if they want to attract and retain talent.

The 2MM Chicago Commercial Portfolio

Clark Street Capital’s Bank Asset Network (“BAN”) proudly presents: “The $2MM Chicago Commercial Portfolio.” This exclusively offered portfolio is offered for sale by one institution (“Seller”). Highlights include:

  • A total outstanding balance of $1,966,175 comprised of 11 loans

  • 65.18% of the portfolio is sub-performing with 34.82% performing

  • 93.44% of the portfolio is located in the Chicago MSA

  • The loans have a weighted average coupon of 3.89%

  • The portfolio has an LTV of 54.61%

  • All loans include full personal recourse

  • The portfolio will be sold in its entirety to a single buyer

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: Friday, February 25, 2022

  • Due diligence materials available online: Tuesday, March 1, 2022

  • Indicative bid date: Thursday, March 17, 2022

  • Closing date: Monday, March 28, 2022

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

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