Daybreak Holiday: Bank Earnings, Taxes and Candy

0:02Hi, everybody, and thanks so much for joining us for this special edition of Bloomberg Daybreak. I'm John Tucker. The U.S. stock market closed for the Good Friday holiday. Coming up this hour, it's April. Have you done your taxes yet? Well, the deadline less than two weeks away, and we're going to explore a few interesting tax-related stories. We'll see how doge cuts may impact the IRS this tax season. Plus, we're going to tell you why some of the nation's wealthiest corporations owe far less to the government. as a result of President Trump's overhaul tax code and attention chocolate lovers' candy sales.

0:35They're on the decline this Easter holiday. But first, this is right around the corner, the next batch of earnings. Big banks will help kick it all off. And joining us for this preview, Bloomberg Intelligence Senior U.S. Bank Analyst Herman Chan and Bloomberg Intelligence Financials Analyst Neil Sipes. Hey guys, this should be a pretty simple model. I'm a bank. I take in deposits, give the depositors one rate. Then I loan their money out at another rate, and I make up the difference, and that's how I make money as a bank. That's right. Is it that simple? That's right. You're talking about that's the net interest margin, which is like a big bank metric that everybody focuses on.

1:14And that is, in essence, the core of banking. You make loans, you take in deposits, and you generate fees from areas like wealth and capital markets. Neil, it's not that simple, is it? Because they have all these other different lines of businesses that they've added over the years, investment banking, etc., so forth, consumer and all sorts of other business divisions, right? That's right. And when you look at some of the largest banks that we're expecting reports from in the next couple of weeks, like Goldman Sachs or Morgan Stanley, these are much more fee-oriented type banks. businesses, like you mentioned, investment banking, trading, asset and wealth management, many of which can be steadier type of fee-based income streams.

2:00And when we look at things like capital markets, which are key inputs, economic growth, which are key inputs to the investment banking type business, I mean, that's one we're expecting a rebound going forward. We had the Fed that was easing. Of course, there's questions around where we're going from here with recent volatility, but the broad expectation is there's still an investment banking rebound on the horizon. We'll have to sort of reassess and listen in on how those businesses are performing, particularly in the month of March and into early April when we get these results, as that's sort of a key tailwind for a lot of these names, particularly at Goldman and Morgan Stanley, as we roll through 2026.

2:39Yeah, and Herman Chan, who stands out in one particular area as opposed to the other banks, whether it be investment banking, the fees generated there or what other business they're in? Yeah, sure. So for my banks, they're more fixed income oriented. So given their large balance sheets, their trillion dollar balance sheets on the asset side, they have just more - Just remind us the banks that you covered for us. So that's right. That would be JP Morgan, Bank of America, Citi, Wells Fargo on the larger side. So typically those banks have more fixed income focus, whereas Niels Banks, which have a smaller balance sheet like a Goldman and Morgan Stanley are more equity focused.

3:19That being said, Goldman and Morgan Stanley also have more M &A fee generation capabilities just because of their historical strength in that particular business. Yeah, you mentioned that. And on the Bloomberg Terminal that everybody looks at, one of the most popular pages is something called the League Tables. Who's leading whom in terms of mergers and acquisitions and the fees they collect? Who's on the top of that league table, Neil? Yeah, so for quite a while you've seen Goldman at the top and Morgan Stanley and J.P. Morgan join them as long-standing top three. It's more important like brackets for the NCAA.

3:57Yeah, it's very closely followed. And so we're always monitoring those trends. And, you know, again, when you think about M &A fees, which is small in the in the world of Herman's much more diversified banks, for Goldman and Morgan Stanley, it's much more impactful. And that's one of the businesses that are, you know, within the capital markets universe is really expected to see the big step up in 2026. And so, you know, we actually got a nice early read from one of the smaller peers, Jeffries, whose quarter I'll note ends at the end of February. So it's going to exclude most of the volatility and the sort of trends that we've seen so far in March, which are going to be most pertinent with 1Q results in the next couple of weeks.

4:40But what Jeffrey showed us was at least the first two months of 2026 were pretty strong across trading, particularly in equities, as well as M &A and ECM fueled by IPOs. What's ECM? You're doing jargon now, Neil. Equity capital markets. So when you think about companies going public or issuing stock, that's the business that we're looking at. And typically what drives that is robust equity markets. And so prior to, again, the past month, we've really seen equities near all-time highs. The IPO calendar was starting to funnel through. So again, it's really going to be the incremental change of what we've seen over the past month that's going to be of biggest focus for the capital markets world with 1Q results.

5:24All right, Herman, let's start with your bank. JPMorgan Chase, give us the overview. Yeah, so we're expecting a really strong quarter. JPMorgan had just mentioned in February, they had a company update where they brought in a bunch of analysts and investors coming in to hear management speak. And they talked about mid-teen growth in capital markets and in investment banking. So really strong results there. On the lending side from industry data, we're seeing really robust growth across commercial lending is really the standouts. And that's not only your typical smaller middle market, but also large corporate, and then something called lending to non-bank financial institutions, which has been a big focus for the industry these days.

6:13So all three areas from a commercial lending standpoint have been really strong. That being said, there will be some slowdown in credit cards given seasonality in the first quarter. But overall, we're expecting a really solid result for them. You're listening to Bloomberg Daybreak, a special edition. I'm John Tucker, and we're talking banks with Bloomberg Intelligence Senior U.S. Bank Analyst Herman Chan and Bloomberg Intelligence Financials Analyst Neil Sipes. Neil, you mentioned volatility, and certainly we've seen a great deal of volatility. Is volatility good or bad? for the banks. I guess it depends on which particular business you're talking about.

6:53It certainly does. And so Herman mentioned the guidance from some of the biggest peers like JP Morgan calling for mid-teens revenue growth in the capital market side of the business. That bodes well, particularly for Goldman, who earns about half of revenue from trading, the remainder from investment banking and asset and wealth management. So when you think about volatility. Volatility tends to be positive for the trading businesses. You've seen that across equities and fixed income products in the first quarter. When you have that volatility, though, it's typically associated with uncertainty, right?

7:28And so there's been sort of a darker cloud cast over 2026 in terms of economic growth, where the Fed is heading. When you have a wide dispersion of potential outcomes and scenarios, that tends to bode well for institutional clients repositioning and driving that trading business. When you think about the capital market side, the issuance, the capital raising, the M &A, the mergers and acquisitions, the uncertainty can sort of drive clients to perhaps take a pause, reassess their business operations, whether or not they want to pursue those types of transactions. So in a period like this, you could see a potential slowdown.

8:08And we've actually seen a bit of a divergence in terms of expectations for 2026, where, again, trading is getting the boost from volatility. And that's more than offsetting the potential headwinds that could come down the road for investment banking fees. Herman, with your JPMorgan Chase, the CEO there, Jamie Dimon, has referred to cockroaches. That's right. Well, what did he mean, first of all? Explain it to everybody. Sure. So cockroaches, that comment was in relation to some fraud-related activity that happened in the third quarter of last year. You think of certain companies like First Brands, an automotive parts company, Tricolor, which was a company that lent to subprime auto borrowers.

8:51So those are the issues that popped up in the third quarter that related to fraud. There was another one that popped up here in the first quarter in the UK named MFS. that is related to residential lending. But Jamie was worried about these loans going sour and that it could spread through the industry. Do I have that right? He's saying that these were fraudulent loans and there might be more lurking in private credit and bank balance sheets. So does a bank like – do the other banks have to worry about this spreading? The lesson learned in the third quarter was that banks really scrubbed their balance sheets to see what they really had, if there were any similar type exposures.

9:35And so far, we haven't seen any other than this MFS issue that popped up in the first quarter. So that being said, there's much more scrutiny surrounding private credit. So that's one of the main focuses of concern within the markets these days, is what are sort of the connections between private credit and potential problems there within the broader banking industry. Neil, I want to ask you, how is, just a very broad question, how is technology today changing the banking industry? Yeah, I think you're seeing it particularly pervasive in headlines and headline risk that's been associated with the banks and wealth managers alike, particularly in the first quarter as new AI products are rolled out from a broad lens threatened to at least disrupt, if not disintermediate, at least in the more draconian scenario, some of the traditional processes that we see across banks.

10:35And things like wealth management have really been in the crosshairs here, which is a huge business for Morgan Stanley. So bankers could be replaced by robots. Is that what you're saying? No, and frankly, our view is much more of a human plus AI end state, a human that's empowered by AI. And I think that's what you're already seeing at the investment banks today is, you know, the bankers and the employees are using AI tools, whether third party or in-house, to help boost their productivity, to serve more clients, to generate more revenue, and ultimately boost the fundamental business that we know is traditional to banks.

11:13So ultimately, we think it's going to be a net positive. But I think right now it's a lot of digestion of how this is going to shake out, what we're going to allow AI to actually disrupt, and where it's actually going to come into these businesses. So staying tuned to what's being rolled out. But from the broad strokes, it feels positive to business production. Herman, what's the landscape today that's driving banks to consolidate? We've got about a minute left. Sure. So it's all about scale. We have banks like JP Morgan, Bank of America with trillion dollar balance sheets, and we have about 4 ,000 banks in the United States.

11:53So how do you compete with the likes of JP Morgan? How do you compete with the likes of fintech companies and others that are encroaching in the traditional bank space? You need scale to compete to invest in technology and compliance issues. So that's what we're seeing today, an increase in M &A and just the smaller industry overall. Guys, thanks very much. Appreciate it. Our thanks to Bloomberg Intelligence's Herman Chan and Neil Sipes. And up next, we'll tell you why Amazon and Walmart are paying less taxes because of President Trump's overhauled tax code. It's 20 minutes past the hour. This is Bloomberg.

12:37As markets move and headlines break, what matters most is context. A Bloomberg subscription gives you unmatched reporting, sharp analysis, and powerful tools that help you connect the dots. Visit Bloomberg.com slash podcast offer to learn more. Welcome back to this special edition of Bloomberg Daybreak. I'm John Tucker. The U.S. stock market closed for the Good Friday holiday. You have less than two weeks to get those taxes in. So we thought it would be a good time to explore a couple of tax-related stories. A year after Elon Musk set up to slash jobs at the IRS, the agency is struggling to meet demands amid a busy filing season.

13:18For more, we are pleased to welcome Bloomberg Law Reporter Erin Sloey. So, Erin, if I got a question for the IRS, I haven't filed yet, maybe I'm a small business owner, can I get in touch with them? You should be able to get in touch with them, but I try and get in touch with them as soon as possible and not wait till that April 15 deadline when everyone's rushing to file because they are low in staff after kind of the Doge cuts from this last year. Well, what kind of shape is the IRS in? First of all, explain to me why Doge targeted the IRS, which, if I'm not mistaken, collects revenue for the government.

13:55And it wasn't even an IRS targeting. It was just a federal government abroad targeting. They offered a resignation offer and more people at the IRS, about 25 % of the IRS took it. So it was a lot more than people expected. And there were huge holes that were left. And now the IRS, they also had to deal with the US government shutdown, longest one in history. So they had a lot to recover from at the start of the season. And some of the people they tried to hire, they couldn't. And training wasn't up to date up until that point. and people are getting moved from other divisions to kind of help out with this season.

14:27So how much of a backlog are they facing right now because of this? They're certainly not, it doesn't sound like they're up to full staff at this point, right? They're not up to the staff that they were in earlier in 2025. The perfect level of staffing is kind of a debatable thing. I think the IRS CEO will say that they're at the perfect level right now. But a big thing that we're thinking about is kind of the moving of employees to different sectors and what kind of impact that will have on the backlog, which is in the millions with the accounts management, which basically that means any question that you have for the IRS, it gets kind of put in that bucket.

15:04And before the government shut down, that was projected to be past pandemic levels. And so I imagine with the government shutdown, it's going to be potentially even worse. So as an individual taxpayer, a filer, am I going to have to wait before I get my refund? I think it's going to depend on the type of filer that you are. If you're relatively a simple filer, you file before the April 15 deadline, I think you should probably be in the clear. For the people who have more complicated returns that usually file for extension or there's any errors on the returns that you do file, we'll start to see those impacts in the summer.

15:41And as people start to get phased out that we're seasonal workers, like I think we'll really start to see the impact then too. Is the IRS up to speed in terms of adopting technology that will, you know, help the process along? No, the IRS is not up to date. It's been historically underfunded. And that's something with Doge coming in, I think a lot of people had hoped that they'd bring in their private sector experience, which I think they are still doing in some respects. It just takes time. And so a big thing of what Doge talked about was cutting the workforce and that tech would replace it, but they cut the workforce before the tech was in place.

16:18So the IRS has a lot of work to do, but they know it and they really need the funding to help do it. Are they getting it? They are not getting it. They had about 80 billion in funding, extra funding to help modernize from a couple of years ago. And each year that has been clawed back bit by bit. So now they have a lot less. It was$80 billion. Now it's about under$25 billion, I think, at this point. And annual funding is also getting cut as well, which I think we should know more about this next year's funding shortly, too. The IRS has something called the Zero Paper Initiative. Can you tell us more about that?

16:51And how is that going? So the IRS wants to get rid of as much paper as possible. I went to an IRS facility in Austin a couple years ago, and like the amount of paper and they hand type in each return. So it takes a lot of time and effort and people to get those paper returns in. So they're trying to digitize across the board. And that's been a bipartisan theme. Now the Trump administration has its own spin on it. And they're relying heavily on government contractors to do that too. And so when a new administration comes in, they kind of start from scratch sometimes in some cases. So that was kind of something that hindered this zero paper initiative when the Biden administration had made some progress, they're kind of starting over a little bit now that the Trump administration is in the IRS.

17:37Have you been able to sort of take the temperature of the employees there? What is morale like at the IRS these days? Morale is low, especially at the lower levels, especially for the people that were involuntarily moved to work on help process tax returns. Some of those people are very highly paid in terms of government salaries and they're doing entry level work. And so those people, there's low morale. This past year was, I think, really tough. And they're having to like manage multiple workloads. I think at the top levels, I think people are feeling really good about the IRS CEO and his competency.

18:11I think they wish they had him full time because he's also the Social Security Administration Commissioner. So it's a little bit mixed depending on where you fall in the hierarchy. But for the people at the lowest levels of the IRS, which make up most of it, I think that's pretty low morale. Does this necessarily mean that less likely to be audited? The IRS would like to tell you that that is not the case, but I think something we talked a lot about last year was, are people going to play the lottery this year, knowing that there's less people to audit you potentially? And so I think the IRS is going to, they say they're going to rely a lot more on tech, but I think only time will tell.

18:48And I think it'll be a couple of years before we know how much people are actually avoiding paying their taxes. Great. Thanks a lot. I appreciate it. Our thanks to Bloomberg Law reporter Aaron Slowly. While some may be struggling with higher taxes, a different story for some of the country's wealthiest companies. And for more, we are pleased to welcome Bloomberg reporter Caitlin Riley. Caitlin, thanks for being with us this morning. How has President Trump's one big beautiful bill changed the tax landscape, especially for the big guys, the big companies? Well, we saw corporate revenues drop last year by about$65 billion following passage of the big, beautiful bill over the summer.

19:29A lot of the business tax breaks were retroactive to the start or earlier in the year. And so we saw the corporate tax revenues Treasury brought in drop quite a bit. If you compare that to what they were expected to collect in 2025, it's likely that tax cut is even greater than the$65 billion we saw revenue drop from 2024. Are some companies better off than others in terms of the treatment that they get with the new tax regulations? Yes. So the law left the 21 % corporate rate in place, but it sped up some crucial deductions that particularly benefit companies that either spend a lot on research and development or on capital.

20:22And so we saw big companies in particular benefit as well as companies in tech and pharma, manufacturing, all of these industries where you're seeing a lot invested in machinery and equipment or research. Some of the companies we saw that paid a lot less in cash taxes last year compared to 2024 included Amazon and Meta, Walmart, Home Depot, Eli Lilly. The list goes on. Timing has a lot to do with this. Can you talk about that for us? So the two biggest changes we saw or the most lucrative changes we saw that took effect last year were to allow companies to speed up deductions for investments they're making into research and development here in the U .S.

21:15Before this law was passed, they had to spread those out over five years. Now they can take that full deduction in the year they make those investments. Likewise, the bill also sped up the deductions for purchases like equipment, machinery, office furniture, computers, some software, that sort of thing. Otherwise, the cost of those purchases would have had to have been deducted over many years. And so what we are seeing is a big increase in the tax breaks companies are able to take this year or this past year, this year and forward. But as those companies move those deductions up rather than spreading them out over several years, we would expect some of these tax cuts to kind of lessen and level out as you get farther away from the law's passage as a lot of this tax cut is front-loaded.

22:17Suffice to say, it's really going to impact the bottom lines for these companies, right? Yeah, and we're seeing that a lot this past year. Amazon is paying billions less, paid billions less in cash taxes last year. Same with Meta. When you talk to economists and supporters of the bill, the case they make is that these breaks allow companies to reinvest that money in their business. And the hope is that you see economic growth increase as a result. The Tax Foundation, I think, estimates that this increases GDP by about 0.7 percent thanks to these deductions. And so that is the case Republicans will be making for this bill as they head into this year's midterms.

23:07Caitlin, is there some degree of difficulty tracking this and maybe some questions about the methodology behind all this? Mm-hmm. So we started from a point of knowing by how much revenue collected by the government went down. From there, it gets kind of tricky, and you're really reliant on what companies themselves choose to disclose or not. And so what we did was we went through SEC filings and earnings calls to see what companies had chosen to share about the impact of the Big Beautiful bill on their tax burden. What we still don't have is, you know, any direct attribution from these companies to like how much of their decreased cash tax payments are due to the Big Beautiful bill versus, you know, any number of other variables that go into determining how much they owe in corporate income tax each year.

24:13And so there is that kind of methodology challenge where we're very reliant on what companies choose to share. And by going through all these filings, we were able to piece a picture together, but there are still big questions and specifics, especially when it comes to total numbers that are just difficult to find. And one thing we definitely ran into was there were additional companies where we did see a drop in the cash taxes they paid last year, but without the companies themselves specifically attributing that to the big, beautiful bill, we just didn't have enough to sort of include them in the story and lump them in with this group because we're so dependent on what they decide to share.

25:00Okay, Caitlin, we'll leave it there. Great reporting, by the way. Our thanks to Bloomberg reporter Caitlin Riley. Up next, candy sales on the decline this Easter holiday. 37 minutes past the hour, and this is Bloomberg.

25:24Thank you so much for joining us for this special edition of Bloomberg Daybreak. I'm John Tucker. The U.S. stock market closed for the Good Friday holiday. We're continuing our look at tax stories as the IRS deadline approaches. Some wealthy Americans considering tax shelters to reduce their overall liability. But what are tax shelters? How do they work? Who benefits? For more, we're pleased to welcome Michael Bologna, a senior tax correspondent with Bloomberg Tax. Have you done your taxes yet? I have done my taxes, and I did one of my... That's what I would expect from you, our tax expert. Explain to us, give me the dummy's explanation, me being the dummy of a tax shelter.

26:04What is it? Well, I mean, the thing you understand about tax shelters is that there's a basic thing would be just, you know, a Roth IRA, I guess. But that's certainly an indication of a legal tax shelter, something that the IRS and the federal government blesses. But what I've really done a lot of reporting on are tax shelters, which are considered perhaps abusive on the fringes of legality and something that might require the IRS to intervene and do some enforcement on. So maybe stretching the law as much as you can to avoid paying taxes? Right, right. And getting to that, the point where we would say this something is abusive or not.

26:52It might take years for the IRS to investigate and examine. It's a process, but currently the IRS is probably investigating 40 abusive tax schemes, at least according to some reports by the GAO, and there's probably even more of them out there at any one moment. It sounds like it takes a lot of time on the part of the IRS, which has been hampered by, you know, doge layoffs to come to the determination whether a tax shelter is legal or not legal. Right, right. It's a process. You would have had to have a number of people take a particular tax position. That would have to go into audit. And then an auditor might, you know, see some real red flags in there and decide, hey, let's kick this over to the civil enforcement division or the criminal enforcement division, and then you would have to have some litigation around that, and then there'd have to be some adjudication by a court.

28:00So it's a process that can take, you know, years unless the IRS decides to sort of intervene immediately or perhaps Congress might intervene more quickly to say, hey, this is something that's just not tenable or not within our view of the law. So if I were going to play the tax shelter game, it sounds like now's the time to do it. Well, I mean, the truth of the matter is it's a very difficult tax enforcement environment at the moment. Like you said, the head count at IRS is roughly down 25 percent since President Trump returned the White House. In addition to that, the$80 billion that was set aside by Congress during the Biden years for improving IRS enforcement has been clawed back, or a lot of it's been clawed back.