Big Banks Made Bank

Plus: Pandemic-era wage gains may have been a blip for lower-wage workers. ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌

November 13, 2023

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TOGETHER WITH

Good morning and happy Monday.

Millionaires see themselves as just ordinary middle-class folks, at least when they don't identify as poor, which a few of them really do.

In a survey of 3,000 millionaire Americans released last week by Ameriprise Financial, 31% of respondents classified themselves as "middle class," with another 60% self-identifying as "upper middle class." Eight percent of the respondents considered themselves wealthy, while, somehow, 1% considered themselves poor or very poor. As for what it takes to reach what the rest of us still consider the top, a full 13% of respondents cited "luck." At least wait till you finish the newsletter before running off to buy a lottery ticket.

Morning Brief

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Big banks score a big payday.

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Gains then pains for low-wage workers.

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Ex-FTX execs just can't quit the crypto business.

Banking

Banking's Fantastic Four Grab a Bigger Share of Industry Profits

They're too big to fail — or even have a bad quarter.

Of the roughly 4,400 operating banks in the US, nearly half of all banking profits in the third quarter came from a cadre of just four — JPMorgan, Citigroup, Wells Fargo, and Bank of America — according to data from BankRegData and reported by the Financial Times this weekend. Thank inflation, Jerome Powell, and this spring's run on regional banks.

The Big Get Bigger

Banking industry profits dipped 5% in the most recent quarter compared to a year ago, due in part to inflation-related macroeconomic headwinds like rising interest costs and a dip in bond markets. But take away banking's Big Four, all of which have assets under management of more than $1 trillion, and that 5% drop becomes nearly 20%. The slowdown corresponds with the four banks' increasing grip on the industry, hoovering up 45% of all industry profits, up from just 35% a year ago and more than the average 39% over the past decade.

And there's a reason why: Thanks to the high-profile implosion of Silicon Valley Bank and subsequent failures of Signature Bank and First Republic Bank, depositors grew far more aware — and wary — of the risks of banking outside the perceived safety of the Big Four. Meanwhile, rising interest rates have created a rat race among small banks to offer higher payouts to keep depositors from fleeing. Unsurprisingly, banking's top dogs have seized on that opportunity:

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While smaller banks paid an average of 3% per year on interest-paying accounts in the third quarter, the big four banks paid an average of just 2%. In addition, at regional banks, some 40% of accounts are interest-paying, compared to just 30% among the big-league sluggers.

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"The biggest banks have not had that much deposit pressure," Alexander Yokum, Equity Research Analyst at CFRA, told the FT. "You see the net interest margins of the smaller banks have been hit much harder than the big banks."

Reality Check: And that's hardly the worst for the little leaguers. According to a Goldman Sachs note published earlier this year, US banks hold over half of the $5.6 trillion in outstanding commercial loans — and small and regional banks hold more than half of it. Worse, Morgan Stanley analysts predict that valuations of office and retail properties could drop by as much as 40%, which risks triggering a high rate of defaults. That's why small banks are reserving more as a percentage of their loans for potential losses. Let's just hope the industry learned its lessons since SVB went belly up.

- Brian Boyle

Inflation & Prices

Low-Wage Workers Are Losing Their Leverage

The rare party for low-wage workers may be coming to an end.

Thanks to high demand for low-paying jobs in recent years, those workers had plenty of leverage for bigger salaries and better perks, but now, in a world of high interest rates and burdensome inflation, that leverage is waning, The Wall Street Journal reported.

I Need a Dollar

After covid infection rates started to subside and the US economy re-opened for business, consumers desperately wanted to get back out in the world — drinking at bars, eating at restaurants, and spending weekends at lavish hotels. And employers wanting to meet that demand were willing to offer competitive salaries and incentives like sign-on bonuses. Low-wage workers — most of whom work in the service, hospitality, and caregiving industries — experienced some of their largest pay gains since before the pandemic.

But in a post-post-pandemic world, wage gains are slowing and perks are no longer a standard welcome:

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The Federal Reserve Bank of Atlanta reported the average worker in the bottom quarter of wage distribution received a 7.2% raise in January, but just a 5.9% bump in October. Similarly, at the start of 2023, average hourly wages in leisure and hospitality were up 7% year-over-year, according to the Labor Department. By October, the increase had dropped to 4.5%.

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Many low-wage workers also benefited from stimulus checks, unemployment payments, and pauses on student loans and rent during the pandemic. Americans accumulated more than $2 trillion in excess savings. But student-debt payments are back, and the excess savings have likely been depleted, according to a Federal Reserve Bank of San Francisco study.

Money is Getting Tight: A resulting slowdown in consumer spending may have already started. McDonald's CEO Chris Kempczinski said on a recent earnings call that traffic from low-income consumers was down in the third quarter compared to a year earlier. Footlocker, Gap, Old Navy, and a few budget airlines also noticed a consumer pullback, the WSJ reported.

But American consumers aren't giving up so easily. The US Department of Commerce said consumer spending accelerated 0.7% in September, driven by food and beverages, new car purchases, and travel. However, some economists fear that the holiday season may come just as consumers pull back their spending as prices stay higher for longer.

- Griffin Kelly

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Blockchain

Former FTX Execs Hope You Forget Their Old Employer

(Photo Credit: Traxer/Unsplash)

Here's a startup with a founder's story you don't see every day.

A group of former FTX employees, who were key witnesses against Sam Bankman-Fried during his fraud trial, are planning to launch a new crypto exchange, The Wall Street Journal reported. Hopefully this time, the person at the top won't try to steal nearly $10 billion of investors' money.

Hands Off My Crypto

FTX founder Sam Bankman-Fried was never the best at covering his tracks, as former FTX General Counsel Can Sun attested to in court. When SBF started moving billions of dollars in customer money to his failing trading firm, Alameda Research, he asked Sun to come up with a legal rationale. Outraged, Sun left the company the next day.

Now, he and a handful of other ex-employees from FTX are moving forward with a new crypto exchange, one with the goal of protecting customer funds:

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The new venture, Trek Labs, is a Dubai-based startup that received a license from the United Arab Emirates' crypto regulator in October and will be doing business under the name of its partner company, Backpack Exchange.

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Backpack, which designs and operates digital wallets, will allow customers to hold funds in their own "self-custody" account, meaning the exchange itself won't be able to unilaterally access it, the WSJ reported.

"In a post-FTX world, you need trust and transparency to create a true alternative to the other players," Sun told the WSJ.

Comeback Story: SBF's folly may prove to have been a mere blip for the overall crypto market. Bitcoin is up roughly 125% this year, sitting at $37,000 for one coin. Ethereum is up 71%, and even Dogecoin is up 10% — though one coin isn't even worth 8 cents. Now, if only crypto firms could win back some of that awesome venture capital money, they'd really be in business.

- Griffin Kelly

Extra Upside

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Superhero fatigue: 'The Marvels' has the MCU's worst-performing opening weekend, even lower than 2008's 'The Incredible Hulk.'

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Houston, we have a problem: Musk really wants to get to Mars, but SpaceX workers keep getting injured.

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