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Wall Street Week: Latest Bank Crisis Is Really About Real Estate

Sheila Bair Speaking
Thought Leader: Sheila Bair
February 10, 2024
Source: Bloomberg

Welcome to the Wall Street Week newsletter, where the best minds on Global Wall Street give you some investing food for thought from our conversations on Bloomberg Television. I’m David Westin, and this week we talked with former FDIC Chair Sheila Bair on regional banks; with Scott Bessent of Key Square Capital on the Trump rally we’re already seeing; and with Jonathan Karp of Simon & Schuster and Pete Stavros of KKR on investing in books. If you’re not yet a subscriber, sign up here for this newsletter and for daily markets analysis from Bloomberg Surveillance.

‘They’ll Need To Get Those Reserves Up’

The regional banking world was rocked again this week when New York Community Bancorp stock fell to its lowest in almost 30 years and the lender searched for ways to repair its balance sheet.

“It’s really more about commercial real estate than New York Community Bank,” former FDIC Chair Sheila Bair told us, and “it says something about the commercial real estate markets, especially in urban areas.”

Hybrid work is curbing demand for office space and creating high vacancy rates, according to Bair.

“Other banks may be under-reserved,’’ she said. “They’ll have to get those reserves up, and that’s going to cut into earnings.”

Bair said she doesn’t see what’s happening with regional banks and commercial real estate as a reason for US regulators to hold back on new capital requirements they’re proposing.

‘Trump Rally in Two Parts’

Global Wall Street is trying to get its arms around the US presidential election — discounting not just who is likely to win, but also what it could mean for investors. Scott Bessent of Key Square Capital said we don’t need to wait until November: We’re already seeing the Trump effect in the markets.

“The market crashed on election eve” back when Donald Trump won in 2016, “then took off for 34 weeks after that” and “had a big run,’’ Bessent said. Investors are keying off of a repeat of that performance, particularly focused on “market-friendly policies.”

But it’s not just anticipation of the policy direction of a Trump 2.0. Bessent said that the “Trump rally is in two parts” — the anticipation, and what he believes the Biden administration is already doing to stoke the economy for political reasons. “The economic apparatus in the White House is pumping away,” said Bessent, who isn’t so sure that this political influence doesn’t extend even to a supposedly non-political Fed.

‘Unloved Gem of a Business’

Simon & Schuster is an icon of American publishing that has been in the hands of one conglomerate or another since Gulf & Western acquired it in 1975. That ended last year when KKR bought it from Paramount for $1.6 billion after it was on the market for three years. Pete Stavros, co-head of global private equity at KKR, calls it an “unloved gem” that hasn’t had the care and attention that can turn it into a bigger success. For his part, S&S President and CEO Jonathan Karp said the new ownership has already energized his company by “giving all of the employees a piece of the action,” which “got all of us rowing together,” while giving Karp the ability to “hire some new, marquee editors” who “are going to be able to attract the authors.”

But that doesn’t answer the question of why book publishing is a good business to be in, no matter the motivation. Stavros and Karp have little doubt at this point.

We couldn’t let Karp go without giving us some recommended reading. He pointed us to Burn Book, a memoir by media tech expert Kara Swisher that’s coming out at the end of the month. And he also recommends the upcoming Cultures of Growth by social psychologist Mary Murphy, of Stanford and Indiana University, who “has been studying how mind-set affects the performance of companies and individuals at companies.”

Checking in on the Elves

The S&P 500 closed at a record 5,027, which is already 1.6% higher than the median year-end estimate of 4,950 in a survey of the Bloomberg Wall Street Elves — with almost 11 months left to go in 2024.

S&P 500 Rockets Past 5,000

The index has posted five straight weekly gains

Source: Bloomberg

One More (Second) Thought

Sometimes markets aren’t so efficient. At least right away.

This weekend two star-studded teams square off in Las Vegas in Superbowl LVIII. The Kansas Chiefs and San Francisco 49ers have dominated the NFL for the past five seasons, with the reigning champion Chiefs going for their third title in that span. The 49ers lost to the Chiefs four years ago and played for the NFC Championship in 2022 and again in 2023.

Both have all the talent you’d imagine on both offense and defense (including, of course, the formidable tight end Travis Kelce, cheered on by Taylor Swift). But there’s one position at which there’s a big mismatch: quarterback. No, not in how good they are (Brock Purdy of the 49ers actually has a higher passer rating than Patrick Mahomes this year). The mismatch is in pay: Mahomes earned almost $60 million during the regular season, while Purdy’s total compensation of less than $900,000 made him the 67th-highest-paid quarterback in the league and 1,406th among all players.

So, what’s wrong with this marketplace? Well, no one really knew what kind of quarterback Mr. Purdy would turn out to be. He was picked dead last in the draft two years ago, giving him the traditional moniker of “Mr. Irrelevant.”

But to say markets sometimes get it wrong for a time isn’t to say they fail to correct themselves. When I ran the ABC Television network, my bosses Tom Murphy and Dan Burke would say that the network business was a “bad business.” So I tried to figure out why. I took one of the biggest hit shows at the time and did an analysis of what it had returned to the network over its eight-year life. For the first three years, it made us a lot of money, because we’d license these shows with a three-year option based on a relatively modest budget for talent (actors and writers alike). But come the fourth year, the studio and the agents representing that talent showed up to demand (mostly politely) that the price of renewal would basically claw back for them most or all of the profit we’d made. And they typically had it down to the penny.

All of which underscored something else Tom always said: “Sooner or later, all the money goes to the talent.” So, Brock Purdy, have no fear. Sooner or later the market will make sure a lot more of the money gets to you.

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