With 2024 approaching, it's time to look back at the year in banking and finance. It was a big one. Plenty of scares. Let's jump right in.
M&A
Dealmakers Fall Short of Decade-long Standard
It's the art of deals not getting done.
For the first time in exactly 10 years, Wall Street dealmakers will fall short of facilitating at least $3 trillion worth of mergers and acquisitions, according to a recent Bloomberg analysis, completing roughly just $2.7 trillion of transactions instead. Deal flow, in other words, has slowed to a trickle.
Dealer Busts
A constant churn of geopolitical crises (Ukraine, Israel's war on Hamas, etc.) has placed markets on uneasy ground. And, unlike the early pandemic years in which dealmaking soared to record highs because of the default mantra that striking deals during a downturn tends to deliver solid results, high-interest rates placed roadblocks on securing oft-needed debt financing.
Despite the completion of one of the biggest acquisitions in tech industry history — Microsoft's roughly $70 billion purchase of marquee video game maker Activision/Blizzard — dealmakers still came up a day late and some $300 billion short of their usual mark. Still, a late-season flurry of major deals came close to making up for the shortfall:
Like energy firms, many healthcare and biotech giants still own a pandemic-era war chest, and the sector spent the year putting some of that money into M&A. Pfizer acquired cancer-treatment player Seagan for $43 billion this spring; Roche, meanwhile, dropped over $3 billion earlier this month for promising weight-loss drug developer Carmot Therapeutics and spent $7 billion in October for Talavant.
End of an Era? Sadly, the uptick may not last long. Earlier this month, the Department of Justice and the Federal Trade Commission dropped new guidelines for M&A cases, doubling down on existing law to create a far more scrutinous environment. Biotech giant Illumina dropped its attempted acquisition of cancer-treatment maker Grail following an FTC challenge, and Adobe just trashed its planned $20 billion acquisition of upstart competitor Figma, citing regulatory probes. In other words, major mergers may soon become… an acquired taste.
BANKING
The Implosion of Silicon Valley Bank Still Looms Large
The bank run scene in It's a Wonderful Life may have felt a little more pertinent than usual this holiday season.
This year's biggest story in banking and finance was undoubtedly the collapse of Silicon Valley Bank and the subsequent contagion that sunk Signature Bank, First Republic Bank, and Credit Suisse.
Your Money's Not Here, It's in a VC Fund for NFT Startups
As with many things in Silicon Valley, it all started with Peter Thiel — and low-interest rates. Early this year, Thiel's Founders Fund VC firm spotted red flags at SVB, where it did most of its banking, and moved nearly all of its capital to several bigger banks (per an Axios report, Thiel was not directly involved in the decision).
The firm subsequently encouraged many of its portfolio companies to similarly abandon ship, sparking panic across many unrelated firms that banked at SVB, roughly 95% of whom had accounts worth well more than the $250,000 insurance limit guaranteed by the FDIC, thus creating a bank run so quick that it effectively ended SVB in just a matter of days (how envious evil Mr. Potter would've been).
For starters, an earnings call in January revealed that SVB's held-to-maturity securities had mark-to-market losses of nearly $16 billion in the most recent quarter, compared to just $11.5 billion of tangible common equity. In other words, the bank would collapse if forced to liquidate all its losses; in February, it began exploring a share sale to raise capital.
Underlying everything was the impact of sudden interest rate hikes at the Fed, and while most financial institutions adapted to the newly-regular occurrence, the hikes pummeled the portfolios heavily exposed to bonds and other government-backed securities that SVB poured funds into during the era of ultra-low rates. (Another, possibly related, red flag: SVB failed to hire a chief risk officer for nine months between April 2022 and January 2023).
New Rules: For a hellish few days in March, with insolvency risk spreading, every time a bell rang, a regional or mid-sized bank went belly-up. Runs ensued at Signature Bank, First Republic Bank, and Credit Suisse, each of which were exposed to similar pressures. Regulators rushed in a series of new rules and safeguards, beefing up capital requirements and modernizing stress tests among other changes, many of which were simply reheated solutions from the last great financial crisis. Panicked depositors, meanwhile, poured funds into bigger and presumably safer institutions like JPMorgan and Citibank, propping up their bottom lines. And somehow, out of all of this, the US seems to have successfully completed the so-called soft-landing — raising interest rates to stamp out inflation all without sending the economy into a recession. It truly is a wonderful life. At least, if your name is Jamie Dimon.
BANKING
Big Banks Rethink Business Divisions New and Old
One reason Wall Street is so in love with weight-loss drugs in 2023 may be its own efforts to slim down.
Like many industries, finance scaled back its pandemic-era ambition, slashing headcounts and culling entire enterprises, both new and longstanding.
Consumer Blues
For all their differences, Wall Street and Silicon Valley had the same reaction to economic headwinds: layoffs. High-interest rates blowing up the mortgage industry and a dearth of dealmaking has its costs, and most big banks responded by handing out pink slips. Through the first three quarters of the year, big banks laid off a combined 20,000 employees, according to regulatory filings. That's after most major players boosted headcounts by as much as 20% during the pandemic.
And it wasn't just workers. At both Goldman Sachs and Citibank, entire units got the ax:
It didn't take long for Goldman to realize its golden touch wasn't translating into a common touch – and it learned the lesson over and over. Goldman spent the year slowly but surely unwinding its consumer practice, and it's now in the midst of an ugly early exit from its credit card deal with Apple.
Citibank, meanwhile, is looking back even further. Earlier this month, the firm announced that it will exit the municipal market by early next year, meaning it will no longer underwrite or trade state and local government debt — a roughly $4 trillion market it once dominated. It also plans to exit the distressed debt trading business.
Chase Your Dreams: The industry outlier: JPMorgan, which remains the only major bank to add headcount through at least the first nine months of the year, according to regulatory filings (and Q4 has brought no news of layoffs, either). It seems CEO Jamie Dimon is still enjoying being "America's Banker," even if this year brought a few headaches along the way. Goldman CEO David Solomon, meanwhile, is still trying to convince everyone that his DJing hobby is not a distraction.
When Deiya Pernas (an executive at a $3.5 billion fund) and Dean Pernas (a trained chemical engineer) left their jobs to start an equities research firm, transparency was at the core of their mission and mantra. Since inception, they have achieved a 23.92% gross annualized return, vs. 11.59% for the S&P 500 (you can see the audit here). For now, their best ideas are available at no-cost to subscribers of their newsletter. Sign up here to get a new idea on the 1st of every month.
Extra Upside
Oh, Canada: Royal Bank of Canada gains approval for $10 billion takeover of HSBC's Canada unit, the largest transaction in domestic banking history.
Bosses beware: Wells Fargo branch workers form first-ever union for a megabank.
End of an Era? Sadly, the uptick may not last long. Earlier this month, the Department of Justice and the Federal Trade Commission dropped new guidelines for M&A cases, doubling down on existing law to create a far more scrutinous environment. Biotech giant Illumina 
Comments
Post a Comment