Texting may be how we talk to one another every day, but try telling that to the Securities and Exchange Commission. The top US finance regulator said Tuesday it will collect $289 million in fines from 11 top Wall Street firms for violating electronic communications record-keeping requirements due to employees chatting with clients and colleagues via personal texts or platforms like WhatsApp. Top of the list: Wells Fargo, which agreed to pay a $125 million penalty. Considering the bank coughed up nearly $4 billion to settle charges of home loan and mortgage misdeeds last year, a nine-figure fine seems like progress.
Morning Brief
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Regional lenders just can’t catch a break.
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SoftBank learns AI can’t do everything.
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The satellite business is clumping up.
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Banking
Too Many Regional Banks Are Looking a Lot Like SVB
Remember when America’s regional banks would be the death of us? We survived, but they’re still a mess.
Moody’s downgraded the credit ratings of 10 small-to-mid-sized US lenders as the week began, while putting six other larger institutions under review. As if the bank runs and crashes this past spring weren’t already enough to endure.
It’s Spreading
Earlier this year saw the collapse of Signature Bank, First Republic Bank, and Silicon Valley Bank, due to plenty of contributing factors — sharply rising interest rates, devalued commercial real estate assets, and little cash on hand. And no matter how much Washington tried to restore confidence in the sector, nervous customers withdrew deposits and sought out bigger, more established lenders as a new home for their money. Now Moody’s says another crop of regional banks are suffering from the same problems.
Moody’s downgraded the ratings of lenders including Commerce Bancshares, BOK Financial, M&T Bank, and Old National Bancorp. Half a dozen bigger banks were placed under review for a downgrade, including Bank of New York Mellon and US Bancorp. Moody’s cited the increasing risks to profitability due to weakening economic conditions, specifically their impact on commercial real estate portfolios.
So what will change for loyal customers?
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The normal transactions that have been tough since the pandemic and the onset of rising interest rates — securing a loan, getting approved for a credit card, making large purchases — could get even tougher.
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Financial advisor Ted Jenkin told The New York Post that there is “a potential sell off in the treasury markets, higher interest rates on mortgages and credit cards, a mild recession in 2024, and companies may have to tighten their belt leading to higher unemployment.”
America (You’re Freaking Me Out): Just last week, the US government faced its own financial downgrade, after Fitch lowered its credit rating to a grade of AA+, citing a “steady deterioration in standards of governance.” The move got pushback from federal officials and others on Wall Street who have argued the rating is based on old data and doesn’t reflect a recent bipartisan agreement to raise the debt ceiling and avert a crippling default. But if you’re still nervous about the stability of US financial institutions, the mattress industry has yet to be downgraded.
–Griffin Kelly
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Markets
SoftBank’s AI Bets Can’t Offset Big Company Loss
Even the AI hype train can’t move SoftBank out of the red.
On Tuesday, the Japanese conglomerate which used to bankroll Silicon Valley announced a quarterly loss of 477.6 billion yen ($3.3 billion). That came as a shock to Wall Street, which had been expecting a profit of around 75 billion yen ($520 million) partly due to CEO Masayoshi Son plowing investment into anything that has ‘AI’ in the name.
The Son Also Rises
SoftBank rose to glory off the back of its Vision Fund investing, which backed tech darlings including Uber. Unfortunately, some of those starlets, like WeWork, suffered pretty spectacular falls from grace, and for the last five quarters the fund has been a money-loser as high inflation has harshed tech’s growth-obsessed mellow. Not a great look, especially considering Son owes SoftBank $5 billion.
In June, however, Son said the Vision Fund would boldly follow the pack and go all in on AI. He termed the splurge on AI a tech “counter-offensive,” but Tuesday’s results suggest heavy casualties:
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The Vision Fund notched its first gain in five quarters with 159.8 billion yen ($1.1 billion), but the total still wasn’t enough to eclipse the company’s overall losses.
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SoftBank CFO Yoshimitsu Goto said on the company’s earnings call that it hasn’t been plunging head-first into new investments, but spacing them out as it was seeing the market recover — but only slowly. “Based on this trend we also like to make a good balance between gas and brakes for resuming investment activities,” he said, per CNBC.
Arm’s Length: SoftBank may soon have a windfall coming its way, as Nikkei Asia reported on Tuesday that the long-awaited IPO for chipmaker Arm (which SoftBank originally tried to sell then backed off in the face of regulatory heat) could come as soon as September, with Apple and Samsung poised to invest. Goto did not comment on the earnings call on when to expect the IPO, but said it would contribute “a lot” to the Vision Fund. Is “a lot” a lot? Depends on the context…
– Isobel Asher Hamilton
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Billionaire Charlie Ergen is reuniting his companies Dish and EchoStar, which he spun out from one another 15 years ago. This comes a day after US private-equity group KKR agreed to a deal with German satellite manufacturer OHB to take the company private.
Ground Control to Charlie
The commercial satellite industry is heating up, spurred on by tech companies like SpaceX and Amazon launching their own constellations of satellites with the idea that they’ll beam internet down to hard-to-reach parts of the globe, capturing a niche but hungry market.
EchoStar was spun out from Dish in 2008, and while Dish has focused on broadcasting, EchoStar has been more about communication. Now, Ergen says bringing them back together just makes good business sense:
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“This is a strategically and financially compelling combination that is all about growth and building a long-term sustainable business,” Ergen said.
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Consolidation might be what various pockets of the space industry need to survive, as funding hit an 8-year low in Q1 of this year.
For OHB, that dip in investor enthusiasm made the KKR deal look a whole lot more appealing. “It’s a value creation challenge that we have in front of us now,” OHB CEO Marco Fuchs told the Financial Times, adding he thinks going private will get a better valuation for the company given the industry has a “very lumpy nature.”
Private Space: Fuchs also said the move corresponds with a broader push towards privatization within the industry. “The whole business model is changing,” he told the FT. “Government agencies used to decide what rockets would be developed and then they would use them. Now the rockets are being developed with private money and government decides which one to use.”
