Prof G Markets: The FDIC Limit, the Coinbase Lawsuit, and the Business of Formula 1

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1:27This week's number 15. That's how many times bigger Buckingham Palace is than the White House. True story, when you turn 100 in the United Kingdom, you get a letter from the Queen. When you turn 16, you get a text from Prince Andrew.

1:51Welcome to Prop G Markets. Today, we're discussing more trouble in regional banking, Coinbase's shareholder lawsuit, and the Miami Formula One Grand Prix. Here with the news is Prop G media analyst Ed Elson. And I couldn't decide. I was trying to end the joke. I was trying to figure out a way to call Harry and Meghan those Instagram loving bitches. What I can't wrap my head around is why every single joke has to be a sex joke about. I mean, what was last week was last week was a sex joke about dead people. Is that right? Yeah. The more. Also, Scott, you have told that joke before, I will say. I know, but you got to recycle the good stuff.

2:29You got to recycle the good stuff. Anyways, enough of this. Enough of heckling from the cheap seats from the 22-year-olds. I don't know if you guys know this, but you should look at who signs the front of your checks. His name is Dawg. That's true. D-A-W-G. Anyways, Ed, break down the headlines. Okay, let's start with our weekly review of Market Vitals.

2:55The S &P 500 posted a week of losses. The dollar also fell. Bitcoin climbed, and the yield on 10-year treasuries slid through the week before surging on the latest jobs data. Shifting to the headlines, US unemployment fell in April to a 50-year low at 3.4%, signaling continued strength in the labor market. The Fed raised rates by 25 basis points to a 16-year high and signaled again that a pause could be imminent. Johnson & Johnson's consumer health unit Kenview made its debut on the public markets. We previewed that on last week's show. The stock surged 22 % to value the company around$50 billion.

3:36That makes it the biggest US IPO in over a year. Apple posted its second straight quarter of declining revenue, but the stock still rose 4 % on the company's strong iPhone sales, particularly in emerging markets like India. Meanwhile, Apple's high-yield savings account, which we covered a few weeks ago, that brought in nearly$1 billion in deposits in its first four days. The launch day alone netted$400 million. Vice, the edgy media startup once valued at$5.7 billion, is headed for bankruptcy. The company is searching for a buyer willing to pay a fraction of that to avoid going out of business.

4:14Shares of edtech company Chegg were cut in half after the company said ChatGPT is starting to hurt its customer growth rate. Other companies in the sector also took a beating, with Pearson, 2U, and Duolingo down more than 10%. And finally, Hindenburg Research released its latest short-seller report on Icahn Enterprises. That's Carl Icahn's investment firm. Shares of the company declined 20%. That's the largest one-day drop on record. And Hindenburg's report claims Icahn Enterprises is overvalued by 75%. And it also questions the legitimacy of its 15.8 % dividend yield. Scott, where shall we start?

4:56So let's be honest, these Hindenburg folks are total ballers. I mean, everyone, generally speaking, I advised a bunch of hedge funds in a previous life. Everyone was scared to death of Carl, as in Carl Icahn, because he's known as being very litigious, very angry, and well-resourced. He's not afraid to just try and sue people into oblivion. So for them to target Icon Enterprises is just a ballsy move. And the notion that a 16 % dividend yield based on your trust that they were such great investors, that in itself feels strange. And I think, aren't they claiming that he's taking new investment money and pooling it and then using that, co-mainling those funds with what goes out to meet that 16 % dividend, which is literally the equivalent of a Ponzi scheme as far as I understand it.

5:46And the ed tech stuff, essentially what we're going to have is if you read about AI, they say, okay, this will hurt paralegals, replace teachers, replace lawyers. So one by one, the market is going to find industries that are vulnerable. I think they screwed up here. I think the Czech should have just said AI over and over and over in the earnings call and basically said how AI is going to make them a much better company. but this entire sector is getting taken to the woodshed. I also think we're going to find out that a lot of short sellers have millions and millions of bots. They load up on a short position and then they start circulating these negative stories.

6:26I would argue it's even happening right now with some of the other regional banks that seem to be on more solid footing, but the media loves to find the next target. Vice should have died sooner. You're young. Do you watch anything from Vice except for my show, which was a hugely underappreciated show. Yeah. What happened with that show? Did you get fired or did it just, was it a dud? What happened? I'll tell you what happened. So it was COVID and they said, we want to do a show with you. And they did a show with me, Anand Girdidas, another thought leader, so to speak, smart guy, great hair, by the way.

6:59They picked like three or four of us to do shows. And the first show that aired. It was COVID. We did it out of my garage. Drew literally pulled a rabbit out of the hat. And I just hated everything about it. And then we screened it in my house and my partner started crying about halfway through it. Like, what does this mean for us and our children? It was just so bad. She was literally worried about my career. Because it was so unhinged or what? It was like watching an old man have an epileptic seizure. They tried to make it really young and cool and what they want flashing lights ever. It was just, it really was, it was awful.

7:37And the interesting thing that gives you insight into Hollywood is the guy who ran TV at the time for vice called me and said, I've got great news. Your show's doing well. We want to order another eight or 12 episodes. And I said, no, I just want to get through the last two. And then I never want to speak to you again. And I never want to utter the word vice unless it's me, you know, taking Molly and explaining why I take Molly. Anyways, that's neither here nor there. And they were so shocked. My agent called, the production company called, and then I went on to do Bloomberg, then, you know, then CNN.

8:11Yeah. You did two after that. It might kind of been that awful, right? Well, I'm the COVID-19 of TV networks. I take weak TV networks and I put them on a ventilator and then I kill them. So Vice, they should have known it was the beginning and the end when they had me do a show. But Vice has never, in my opinion, I've never understood how Vice makes money. I've just never understood how they spend all this money. And I never see it in the news. I never see it as part of the cultural zeitgeist. They've been trying to sell this thing for parts for two years. So to me, it's not, the question isn't why are they going out of business?

8:47The question is why it took so long. We predicted with Apple that this was going to be a winner. I'm shocked it's not more. A billion dollars is real, but I would bet by the end of 2024, if not sooner, maybe by the end of this year, they will be bigger than the majority of the regional banks that almost caused a banking crisis that have been in the news every day. Just want to talk about Chegg, which is it got cut in half because ChatGPT is threatening the business. The question that I would pose to you is, it feels like that is a dramatic over-punishment of the stock, considering that Chegg is actually planning on implementing GPT-4 to create its own AI product.

9:32I'm wondering if you would agree with that, and if you would agree with the notion that 50 % reduction in the stock is far too low. The market is bipolar. The market is either manic about a stock and has an outsized, we can do no wrong, ignore the risks. The pendulum is never at the very bottom when it comes to a market's impression of the stock. So yeah, has it been overpunished? Yes. But does that mean it can't go down more? Because the communications and a narrative has momentum. And now the narrative around the ed tech space is that AI is going to And every media report and cover education will look for evidence to validate that thesis.

10:17There will be the mother of all confirmation bias and anything that shows that people are using chat GPT to create their own curriculum or it's a great tutor is going to take these stocks down further and further. And also online education, and I know this having started an online education company, we got huge wind in our sales through COVID. Our revenues quadrupled in two quarters. And we knew that we had unfair advantage through COVID. What we didn't realize was how much the business would drop off post-COVID. And this has happened across the entire sector. People do not want to be in their home staring at a screen learning statistics.

10:53So the market was looking for an excuse to take these companies down, and it got it with this acknowledgement that ChatGPT might be damaging the whole ed tech sector. The more interesting question is what is the next sector that everyone will identify? is the sector vulnerable to AI. Yeah. And then I just want to pivot finally to the Hindenburg report. You know, in our last discussion of a Hindenburg report, my first glance review was that the report didn't really have much to say. It was about Square and it was criticizing that people use Cash App to do illegal things. And the reality is that there are things that are illegal in the world and people use money to get them done.

11:34This one feels different. I mean, this feels legitimate to me. The question to me is, as you point out, how is Carl Icahn going to respond? And do people, considering Carl Icahn's legendary status, do people trust him more? Or are they willing to buy Hindenburg at this point? Because Hindenburg appears to be making its own legacy name for itself. The stock's down 20 % just because they released this report. As you were saying the other day, they can seriously move markets, which to me signals that Hindenburg may be becoming the next big legacy firm that can really influence the way people think about finance?

12:12My vote for financial services or investor of the year is Hindenburg. It just strikes me that they have done, they bring such incredibly robust work, whether they're right or wrong, you could argue with, but they are moving markets. I think the most interesting thing, if I were the head of Hindenburg Research, one, I would be doing champagne and cocaine in St. Barts because I'd be much richer than I am. But the second thing I would do is I would say, all right, let's really test our skills here. Let's go find a company that's undervalued. Because they're trying to find asymmetry in the market.

12:43They're trying to find businesses that don't justify the valuation, which arguably should be the same, or at least some of the same skills you use to find a company whose valuation doesn't reflect the strength of the underlying cash flows in the business. So I think the way they kind of starts their hat wide, if they're even interested, because there's something about short selling where you sort of put on an error regulator and turn into the dark lord of, you know, the Sith Lord or whatever it is. I'm trying to say you become Darth Vader. The way they would become sort of the iconic, if you will, investor of this decade would be if they made a couple extraordinary long calls.

13:22We'll be right back after the break with a look at the latest trouble in the banking sector.

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15:57We're back with PropG Markets. It appears the banking turmoil is not as ring-fenced as we'd hoped. After JP Morgan took over First Republic last Monday to save it from failure, several other regional banks started to quake. Metropolitan Bank and First Horizon were down 50%, Western Alliance down 60%, and PacWest shares fell as low as 70%, and the company said it was exploring a sale. They've all recovered slightly, and who knows what will happen by the time we air this. But my question to you, Scott, is, what could we have done to prevent this, and what can we do now? My solution would be to dramatically increase the level of FDIC, the cap?

16:42Because what you might want to say is, all right, say you took the cap to$5 million. What would that mean? Probably 96 to 98 % of all your depositors wouldn't feel the indigestion that you wake up with one morning or the fear that causes a run on the bank. Then the question becomes, well, do you create moral hazard? Do you potentially set the FDIC up for massive bailouts, but they've been covering all the deposits anyways. So I wonder if you just don't solve this by massively increasing the cap, because right now there is no cap. They're paying out anyone. They're paying out at all. If the cap had been 5 million, the majority of VC-backed companies probably would have said, we're fine.

17:26We don't need to pull our funds. We don't have more than 5 million deposited here. You'd lose some big guys, but maybe the big guys should be at J.P. Morgan. Because if J.P. Morgan has a bank run, the FDIC is Janet Yellen and Chairman Powell, who will just say to the bank, okay, the window is open. You can borrow as much money as you need from us to make sure that everybody gets their money out, that anybody who tries to withdraw their money from J.P. Morgan, it's no problem. It's no problem. So effectively, what you have is a series of banks that have unlimited insurance that are backed by the full faith and credit of the U.S.

18:03government, the banks that have become too big to fail. And then you have regional banks, which are only going to be able to attract deposits of$250 ,000 or less. And the regional banks play an important role. They have niche products, they cater to a certain type. You can bet there's regional banks in Texas that are very good at addressing the specific needs of oil and gas companies. There might be an argument that these smaller banks shouldn't be in existence, that the banking sector is too fragmented, that we need a smaller number of stronger banks. You could make that argument, but be clear, you're just going to see a massive inflow into the top eight or 10 banks by deposits from everyone else.

18:43And the downside of that, or one of the downsides of that is that when you go to buy your first house, there's going to be fewer people bidding on that mortgage and fees are going to go up slowly but surely across every product that banks offers. So the regulators have a decision to make, and that is the tension between having a more robust, diverse banking sector that is more competitive and offers people more specific differentiated service at lower fees, which is the wonderful thing about a highly competitive market versus the risk of having a bunch of banks that might be subject to some sort of run because they're seen as more vulnerable.

19:21So the FDIC has said that covering uninsured depositors will deplete the deposit insurance fund by more than$19 billion. Now, the FDIC needs to refill that fund. And the way they'll do that is by taking fees from the biggest banks based on the size of their balance sheets and the number of depositors. Smaller banks will be off the hook, but they'll still need to make their regular quarterly contributions. So, Scott, there's a lot of debate over who really ends up paying for these bank failures, whether it's the banks or the depositors or the government or the taxpayers. Ultimately, where does the burden fall here?

19:56The people that are paying for this are depositors. And that is, if you put$100 into a bank, a certain amount of it, probably, I don't know, 10, 20, 40 cents a year, it goes to the FDIC such that your deposits are insured. And if we have a weak banking system and they keep going out of business and keep having runs, then the cost to you is going to go up because the FDIC is going to have to charge richer and richer premiums. So there is some truth to the notion that premiums that depositors, and the majority of taxpayers probably deposit money in a bank, are going to have to pay higher and higher fees if we have a banking system where big banks consistently go out of business and the FDIC has to show up the same way that your insurance premium goes up in Florida when there's a lot of hurricanes and a lot of claims.

20:42The more claims, the higher the insurance premium. The question is, what is the lesser of the two evils? An increase in FDIC premiums that ultimately get passed through to depositors or the additional fees every depositors can have to pay or every bank customers can have to pay with a less robust, less competitive banking system. That's the fulcrum. That's the tension between the two that smarter people than me need to decide. Mia pointed out something interesting, which is that fintechs seem to have figured out a workaround for this FDIC insurance cap we're talking about. So SoFi, Mercury, and Crescent, all fintech companies, they all launched deposit products this month that are insured beyond the$250 ,000 cap.

21:25In other words, you can deposit $2 million with SoFi, and they'll guarantee that all of that money is protected by the FDIC's backstop. Now, the way they do that is by splitting your deposits into individual$250 ,000 sums, And then they spread those deposits across hundreds of FDIC-insured banks. Now, we wanted to find out how viable this idea actually is. So we spoke with Professor Sabrina Howell, Professor of Finance at the Stern School of Business. One of her focus areas is fintech. And as it turns out, she thinks emergent fintech companies could potentially fill the void left by regional banks if they continue to fall.

22:01I actually think they're one reason why I'm less worried about consolidation in the banking sector because these new fintechs are offering consumers new options, high-quality service at lower prices. Mercury, for example, is now the go-to bank for new startups. If you set up a business, there's no button at Wells Fargo or JPMorgan Chase to open a business account when you have zero revenue and zero operating history. It used to be Silicon Valley Bank was sort of the only game in town, but increasingly it's Mercury and a number of other new players. And they are looking to provide all of these interesting new services, including spreading cash around to insured accounts.

22:56And I think there is this sort of growing role in providing new competition, not just in banking, but think about startups like a Blue Vine providing small business loans, partnering with a charter bank that actually does the origination as sort of like a, it's almost like a utility company, bank as utility company, or you have big tech companies like Apple or Amazon providing consumers payments and banking services. And so I think, you know, I think there's actually a lot of really good reasons to encourage entry by these new players that are offering online financial services and that they can become, you know, the next iteration of what was the sort of smaller players, the regional banks, the smaller banks in the financial ecosystem.