Morning Brew Daily - UBS $3B Credit Suisse rescue, U.S. Banking Latest, Seaweed to invade FL

Episode Date: March 20, 2023

Episode 20: Neal and Toby explain the deal that led to UBS taking over Credit Suisse for over $3 billion. Calm down global markets! They also take a look at the latest banking news in the U.S. including First Republic's stock struggles, and why Warren Buffett may be getting involved. Also a bed of seaweed twice the size of America is heading to Florida. Plus, what we are keeping an eye on this week. Learn more about our sponsor, Fidelity: https://fidelity.com/stocksbytheslice Learn more about our sponsor, Huel: https://huel.com/dailyshow Listen Here: https://www.mbdailyshow.com/ Watch Here: https://www.youtube.com/@MorningBrewDailyShow Learn more about your ad choices. Visit megaphone.fm/adchoices

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Good morning brew daily show. I am Neil Fryman. And I'm Toby Howell. Welcome back, Toby. I know, thank you. I'm a little... Some people call it sun burned. I call it sun-kissed.

But yeah, if you're watching on YouTube, you might notice I got some sun over the weekend. I was in the Bahamas. And yeah, it was a good time. It was a good time. It's also the first day of spring. I know. I saw that in the newsletter today. It doesn't feel like it.

It was 29 degrees when I woke up, so... It is freezing. Also known as the Vernal Equinox. That's a good stat. I never knew that that was a thing. Or March equinox. Yeah. Yeah, I'm big into astronomy.

Not astrology, more astronomy. We are doing, so March Madness has been going on in college basketball world. We are running our own greatest logo of all time bracket across our socials, and it was a crazy region. Big, big week for Morning Brew itself. We are the 16 seed in the sports and entertainment bracket, and we took down the number one seed New York Yankees by the finest of margins. It was 50.1% versus 49.9%. So huge Cinearillo story. We are the Fairley Dickinson of the logos.

But there seemed to be a lot of hate voting going on because the Cowboys, Yankees, Notre Dame, Bulls, and Packers went down. Mighty Ducks is looking like a real contender at the 6-SEed and 3-C-90s MTV. I'm excited for 90s. They could roll into the elite eight. Yeah. And then this today, right after the podcast, we're going to put out the tech bracket. So some of the matchups there are the new Instagram logo versus the old Instagram logo, which is going to be a bar and burner for sure. And then also the old YouTube logo versus the anonymous Armadillo on Google Doc.

So a lot of good matchups to look forward to today. Yes. I'm excited for that. Head to our socials to vote. We have some business news to talk about another busy weekend. We will talk about a $1 million Bitcoin bet. There's a seaweed blob heading for Florida. We'll find out what the heck that is, and then we'll preview the week ahead to close it out.

But first, to Credit Suisse, yesterday I felt like I was having deja vu all over again, because for the second straight Sunday, regulators were racing to engineer a deal to prevent a failing bank from cascading into a financial crisis. Swiss regulators on Sunday put together a shotgun wedding, basically, in which Swiss banking giant UBS took over its small arrival for a three-party. $3.2 billion. Credit Suisse, as we've been talking about on this podcast and in our newsletter, was teetering on failure, and the Swiss government did not want it to be hanging out on its own when markets opened on Monday morning this morning. The Swiss president himself said there'd be

incalculable consequences for the country in the international financial system if Credit Suisse collapsed. So this is a huge deal. This is one of the most significant banking events in years, for sure, and the first tie-up of what they call systemically important banks. There are only 30 of these. These are the two big-to-fail banks, and this is the first time they've had a merger since the financial crisis. Yeah, you called it a shotgun wedding, which I think is a good way of describing it. To me, this situation reminded of you reminded me of when we were kids, your parents would sometimes set up a play date with another kid that you didn't really like because they wanted to hang out with the parents. And so in this example, like UBS and Credit Suisse are the two kids who don't really like each other.

while the Swiss and the U.S. government were the parents who wanted to hang out. Because, yeah, this is not a marriage that – it's a marriage by force, not really a marriage by any that UBS or Credit Suisse wanted. So I've been seeing some questions around this just from doing some reading and doing some research. One was why it was the price so low, because even though Credit Suisse has been dropping like a rock, it was still worth $7 billion at the end of last week, and yet the merger price was $3 billion. So big delta there between what it was and what it actually sold for. And then also, why did the authorities feel the need to sweeten the deal so much with this

$100 billion credit line as well? Like, if the deal was a good deal, they wouldn't need to toss in this $100 billion sweetener for UBS. This was not a good deal. Right. It's not a good deal at all. They even change the laws that suspended a shareholder vote. So usually when mergers happen, you have to get shareholder approval.

You have votes from stockholders. and they completely nix that. And we saw this from U.S. regulators, too. It's kind of like, we need to do something now. We are going to suspend all of the laws that we have on the books and, like, what they did with backstopping depositors. It's like, okay, FDIC insurance doesn't really exist up to $250,000. It basically extends until infinity.

And then there's this other thing where they wiped out $17 billion of these additional tier one bonds. And people who are holding these bonds are like, what the hell? are you doing? Like, this is insane. Yeah. No, that was my third point. People were like, where did these bonds go? So, yeah, definitely some warning flags in that. To me, my biggest takeaway from this story is that it is a truly global effort at this point, because another thing that happened was some central bankers came together, and they're expanding a dollar swap line, which basically allows banks to borrow dollars and convert it to their currency in their

country. So this is a global banking crisis. SBB was, again, it was its own situation, but the ripple effects are rippling. They are rippling. We are truly in like everyone on board, all global bankers on deck, trying to stabilize everything. So let's talk about Credit Suisse. It is 166 years old, has $575 billion in global assets. It fell from its peak in 2007, a 99% stock drop to where it was sold for. And a little game I like to play is what is worth more than Credit Suisse. Oh, yeah.

So I looked up some companies that are worth more than Credit Suisse. Crocs is worth two times as much as Credit Suisse. Celsius, the energy drink, is worth more than Credit Suisse. Dutch Brothers Coffee, which is that chain out west. GameStop is almost twice as much as Credit Suisse.

And then finally Bumble and Under Armour. So this massive banking giant has truly crumbled. Honestly, to be less than Bumble. No, it should be worth more. Those companies deserve to be worth more than credit suites at this point. That's a good way of putting it. Thank you for kind of contextualizing it that way.

Okay, Neil, so obviously things in Europe are still looking a little tenuous, but so is the banking sector here in the U.S. So we have a ton to cover when it comes to the U.S. banking sector. So I'm going to do just a quick roundup real quick. Up first is First Republic Bank, whose stock is still getting hammered. It was down 18% in pre-market trading before we jumped into the studio. Who knows how it's doing right now? Bringing it down to over 80% on the year.

It's skittish. Every investor is reacting to any little bit of news about it. So last week, a group of major banks agreed to deposit $30 billion in First Republic to kind of shore up confidence. Didn't really work, obviously. People are still not confident. and part of that was because first Republic Bank said, we only have $30 billion of cash on hand. So regional banks still a little tenuous right now.

Yeah, so who do you call when the banking sector gets a little jittery? Warren Buffett. Warren Buffett. Yes, Biden administration officials have reportedly, according to Bloomberg, gotten on the phone with the Oracle of Omaha himself to maybe provide a lifeline for some of these struggling regional lenders who've been caught up in the SVB collapse.

And so he is actually a very strong. track record of coming to the rescue when banks are failing. The most notable of that was in 2008 when he gave $5 billion to Goldman Sachs in the wake of the financial crisis. But even before that, there was this financial crisis in 1987, and he plowed $700 million into Solomon Brothers. And then in 2011, he also gave a lifeline to Bank of America. So when your banking system is collapsing, you call it Buffett and he comes to the rescue. But it's more than just the money. It's a sign of confidence, right? When Warren Buffett gives money, it's assigned to everybody, including you and I and every other depositor, that your money is safe. We have stability. Yeah. And then also, he's just a

wealth of advice, too. Like, they're not just going to him for money. They want his opinion on how to navigate this crisis. So, yeah, it is, he's Batman. He's- What do you think he's doing? He's just in Omaha just watching this all happen, not on Twitter. But no, yeah, yeah, truly. Yeah, he's not the white, He's not the white knight. He's the silver-haired night. So, yeah, good for Warren Buffett for getting involved. Okay, and then our final little bit of U.S. banking news is the FDIC, which has kind of been the main character throughout this U.S. banking saga. The new debate is whether U.S. lawmakers should raise the FDIC insurance cap from the existing $250,000.

So there is precedent for this. Back in the 2008 financial crisis, it was bumped from $100,000 up to the existing $250,000. and it is today. But now we're seeing numbers from $1 million all the up to maybe $10 million should be insured. It's a debate, though. It's a debate because they want to make sure that depositors feel confident that they can access their money. What struck me was that it was kind of both sides of the aisle. Senator Elizabeth Warren, a Democrat who has hammered the banking sector, floated the possibility,

and then two Republicans also did on the Sunday TV shows. So we'll see what happens. It seems like it's a long road ahead. you have to get congressional approval and all of the basically the financial authorities of the country need to come together and say, let's do this. But it would seem to be like a very emergency situation to do something like this. Right, for sure. And then there's also, even though there is some bipartisan support, people are saying this is maybe a bad idea because it incentivizes more risky behavior from the banks because if there is a bigger backstop, then they can be, yeah, even more riskier with their balance sheets. Right.

It'll be interesting. I don't think it's going to happen personally. Let's go to, I mean, we're staying in the banking realm, but we have this high-stakes wager going on on Twitter around Bitcoin, and it's sparking a lot of talk about hyperinflation and the Fed's role in this banking crisis. So it all started when this Twitter account, James Medlock, not his real name, tweeted, all bet anyone $1 million that the U.S. does not enter hyperinflation. And that's tongue-in-cheek. That's a joke, because $1 million would be worth a lot less if hyperinflation. inflation did happen. But there's this guy, Balaji Srinivasa, who's a former Coinbase exec, big tweeter, big tech investor, talks a lot about Bitcoin. He chimes into this tweet,

and he thinks we're going to enter hyperinflation. So he takes up this wager. So here he says, he'd bet Medlock $1 million that Bitcoin would spike from $28,000, where it is currently, to $1 million in the next 90 days. And Balagie has this digital gold hypothesis of Bitcoin that we've hearing about for years. The idea is that the Fed's interest rate hikes have made essentially all U.S. banks insolvent, which is what happened to SVB, because it hammered their long-dated U.S. Treasuries. And then when banks start teetering, the Fed will print all this money to shore up the sector. Panicked people will take out all of their deposits from banks and put in Bitcoin, and then within 90 days, Bitcoin will reach a million dollars. So we got this bet going on.

That was well laid out, Neil. So I just want to touch on this specifics of the bet. real quick. Everyone was kind of looking at this, and we're like, wait a second, Valii G loses no matter what. Because if you truly think that Bitcoin is going to a million, the trade is not to hold on to a Bitcoin. It's to buy as many Bitcoins as you can. So even if Bitcoin, he wins the bet and Bitcoin goes to a million, he's technically leaving around $36 million on the table because he gave up the opportunity to buy around 37 Bitcoins with that million dollars that he's leaving an escrow. And then, of course, a Bitcoin does go to $1 million, he loses the million dollars he put in escrow, and of course, Bitcoin

is not at a million dollars. So yeah, everyone is looking at it saying it's not even a risky bet because it's a lose-lose no matter what. Right. And economists are saying all those arguments aside that when banks fail, it causes deflation, not inflation. So that's what we should expect right now. And if the Fed needs to print money, they probably won't do it because they know of the

they know, like, they're not so dumb that they wouldn't create hyperinflation out of the governor. So, obviously, it's a little, the one caveat, too, I do want to put is if you want to take a cynical view, people know that Apology is long on Bitcoin. He owns a lot of Bitcoin. So he might be engaging in a little bit of market manipulation by saying, oh, I'm betting on a million dollars. Even if Bitcoin goes up a little bit, he's probably going to make his million dollars

back very shortly. So, yeah, that's what's been gripping financial Twitter. If you're not in financial Twitter, good for you. But that's what's been going down. It sparked a lot of interesting conversation about the Fed and the Fed's role. These guys, Bologi and other Bitcoin maximalists, you know, really hate the Fed and don't like what it's been doing over the course of the past few years. But Bitcoin has been honestly on a tear. It just had its best week since January 2021.

It's now above 28,000 and it is up more than 70% of the year. So in the past year or two, it's been trading like a $1,000. tech stock, but right now it's really leaving them the dust. I think the NASDAQ is up 10, 11% for the year, and Bitcoin is surging ahead. So it's finally acting as everyone thought it would eventually act in a moment like this. So we'll be keeping a close eye on that. But before we jump into the next story, we are going to take a quick break. It's time to refresh your yard during spring backyard days at the Home Depot. Get low prices guaranteed on propane grills, starting at 179. like the next grill three burner gas grill or get $50 off a select Weber Spirit grill

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prizes and secure a spot in the finale May 29th. Don't pass go and own it all. Only at Yamava, celebrating its 40th anniversary. You win? Details at Yamava.com must be 21-20. Please gamble responsibly. Monopoly is a trademark of Hasbro. Hasbro is not a sponsor of this promotion. All right, Neil, we've touched on banks. We've touched on Bitcoin. Now let's get into blobs, specifically seaweed blobs. So there is this mass of seaweed called the Great Atlantic Sargassum Belt that is drifting ominously towards the Gulf of Mexico right now. So scientists say that the seaweed is likely to come ashore by this summer,

which is a huge problem if you don't like your beaches smelling like rotting eggs. So just some quick background on what Sargasum is. It's this type of seaweed that's actually really good when it's in the water, it kind of provides shades, provides habitat for marine organisms. but when it washes a shore, it rots. And then that admits a smell that smells like rotten eggs. It's actually hydrogen sulfide. And this is a problem because this is expected to be the biggest blob, pretty much ever.

And not good if you rely on tourism. You don't want your beaches smelling like crap. Yeah. Have you seen this? You're from Florida. Have you seen this? I have some stuff. Okay.

So I've definitely seen it on beaches. I always conflated it a little bit with red tide, which is another type of marine organism. So, yeah, I've definitely seen this on the beaches, but I don't think I've gotten close enough to really smell it. Okay, I'm glad. I don't really go to the beach, so I don't have this problem. But it seems like the Caribbean islands have been dealing with this for years. I saw last year, Barbados had to employ 1,600 dump trucks a day just to remove this from beaches to clear them. And then in the Dominican Republic, the largest power company was actually forced to scale down operations because the seaweed was getting stuck.

That's crazy. It is a huge seaweed belt. You can see it from space, basically, because the bloom is so big. What's interesting is that it's only got, it seems like there was an inflection point in 2011 when people started seeing this and be like, what the heck is going on? This is getting so big. And they still don't know why these blobs are getting to the size that they are. This one is twice the size of the contiguous United States, 5,500 miles across.

And they think it's because of all the fertilizer we're pumping into agriculture. It's running off into water. and then going into the ocean where it's feeding the beast of this sargassum blob. And, yeah, it's heading to Florida. I think it's already showed up on some Fort Lauderdale beaches on Key West. But honestly, the first thing that I thought when I was reading the story was, I'm not particularly entrepreneurial, but I was like, there's got to be a business opportunity. Yeah, we've already seen some business angles popping up.

Some people are trying to turn it into fertilizer, which sounds because it's an organic material, so it has some properties that make it a good fertilizer. but the critics are saying it contains arsenic, which is not necessarily good. You don't want to pass that through the food chain. But yeah. I'm down to go rent a boat with you, and then we just pick up some of the seaweed. I mean, how many local government contracts are going to be handed out right now to clean up or all of the really rich people with beaches on, you know, private beaches on the western coast

of Florida who need all this seaweed to be cleaned up? I'm happy to go rent a boat and grab some of this stuff and figure out what to do with it. I can just see it now, like a TikToker saying, Sargassum seaweed blend for your face or for your hair or something. I've already seen there's this thing called sea moss I've been seeing, which is apparently this super, I don't know, ointment. So, yeah, definitely some entrepreneurial angles. Let us know if you have any ideas. Actually, the University of West Indies held a full day, like, hackathon.

They called it Sargassum hack where everyone pitched ideas for what to do. Yeah, chat, CBT, is gone. It's all about Sargassum blob right now. That's where all the VC money is headed. Okay, finally, let's preview the week ahead. It's going to be super busy, and the highlight is definitely this Fed meeting on Wednesday. The central bank's plan to continue raising interest rights like it had been, has been completely upended by this banking turmoil. Experts say there's a chance the Fed will pause its rate hikes to shield the banking sector from further chaos.

We'll see what happens. I don't know what Bollagie wants to happen. Right. I know. But if gut check right now, do you think they raise rates or not? Yes, I think a quarter of a percentage point. I think that seems to be the consensus because, yeah, I think it would be weird if they did truly stop raising rates because then that would freak people out even more and say, like, wow, something is really going on if they are pausing their rate hike. So, yeah.

It'll be interesting. We usually if had meetings, you know kind of what they're doing ahead of time, and that is planned. They signaled all this, but they haven't really had any meetings or big speeches since all this banking stuff went down. So it'll be super dramatic. Speaking of drama, President Trump said over the weekend he tweeted, or he posted, he didn't tweet on true social. He posted on true social that he expects to be arrested tomorrow. He'd be the first president ever to be charged with a crime. And this relates to hush money paid to Stormy Daniels.

And then he also called for a uprising and protests. Yeah. No, calling your own arrest is a wild move for sure. So, too, yeah, it's like calling bang shot. So, yeah, tomorrow, I guess we'll see. I don't think a spokesperson came out and said, we don't actually know this, but he maybe is reacting to news that it could happen. So Tuesday. He's laying the groundwork for protests, which is a little scary.

And then the TikTok CEO is headed to Capitol Hill on Thursday, and that's big news because there was just this ultimatum from the U.S. government that ByteDance, the Chinese owner has to sell its stake or the app will be banned. So TikTok CEO is going to have to argue that a ban would not alleviate all the national. security concerns that the U.S. has. I hope they'd do it. Just pull the Band-Aid off. Free me from my TikTok prison that I enter it because I don't want to scroll anymore. Just do it, Biden, get it done. That's a maybe more interesting bet than Bitcoin through one million.

Is how long it'll take TikTok to be banned here or whether there will be a sale. Then there's this big meeting between two geopolitical adversaries of the United States. Chinese President Xi Jinping actually arrived in Moscow today for a three-day meeting with Russian President Vladimir Putin. China has definitely tried to play it neutral around the war in Ukraine, but she and Putin are very cozy, and this meeting is very symbolic as these two countries sort of create this axis against the United States. Yeah, man, it would be a tough time to be running the country right now. You've got a banking crisis on your left. You got Russian China meeting on your right. I feel like, I don't want to be president.

Right. It's true. I feel that way. I don't want to. All right, continuing down the rundown, March Madness is rolling on. It's definitely living up to this name this year. I still have three of my final four, Marquette. I don't know what happened here, alma mater. I know. We have Ramadan, which is Islam's holiest month. That begins at sundown on Wednesday.

On Friday, Keanu Reeves returns as John Wick for the fourth installment. He's the true, he's the only action hero we have. That's not a superhero at this point. So I love John Wick. Yeah, I watched the first one. I was like, he's doing all of this for a dog? Like, and then I fell asleep. Not that I don't like dogs.

But I didn't think. He went to kind of extreme late, extreme lengths. And then finally, succession returns on Sunday, which I'm super hype about. Just finished Last of Us. HBO Sunday Night Train is absolute juggernaut. They leave one blockbuster and then go into another. They just cannot be stopped. Yeah, Sundays.

I'm excited. All right, well, we hope everyone has a great first day of spring. It definitely doesn't feel like it here, but hopefully over. Over the next few days, it'll start to feel like spring. Definitely go vote in our March Madness bracket, our greatest logo of all time bracket, and email us at Morning Brew Daily at Morningbrew.com with any of your seaweed startups. Got to give some shoutouts to our amazing crew in the back. Show's producer is editor, our show's producer and editor is Emily Milliron.

Our technical director is Justin Orlando. Our supervising producer is Bryce Belloff. Our Master of All Things Audio is Dan Bousa. Hair and makeup actually did go to Florida to create a seaweed startup, so wish them the best of luck. Devin Emery is our chief content officer. Our show is a production of Morning Brew. Great show. Great to be back, Neil, and let's run it back tomorrow.