Power Lunch - Regional Bank Crisis, and Big Tech On Deck 5/4/23

Episode Date: May 4, 2023

We’re watching everything going on in the regional bank crisis. PacWest and Western Alliance are getting crushed.PacWest says it’s weighing a possible sale, while Western Alliance claims it’s not. We’ll cover all of the angle for you.Plus, Apple is set to report earnings after the bell. We’ll get you set for one of the biggest reports on Wall Street. Hosted by Simplecast, an AdsWizz company. See pcm.adswizz.com for information about our collection and use of personal data for advertising.

Welcome to Power Lunch. I'm Dominic Chu alongside Kelly Evans filling in for Tyler Matheson today. We are watching everything going on in the regional bank prices today. Pack West, Western Alliance, as you can see, they're just getting absolutely crushed. Pack West says it's weighing a possible sale or at least sale of assets. Western Alliance says it is not, absolutely not, Kel. Both of those stocks down big, as you can see. And Apple down fractionally, its earnings are after the bell. We'll get you ready for that big report.

as we take a look at the broader markets, which despite the turmoil, Don mentioned, have moved off of the lows. What was the low point here today? We're down 40 plus points in the S&P. We're down 20 right now, so we have the losses at the lows of the session. So let's get right into the latest leg of this banking crisis. Joining us now is Leslie, I think what's the state of play is the best question? Because at this point, there are so many statements, which is, I guess, good that these banks are getting out on the record and saying something. Yeah, it's definitely welcome for reporters.

like us, Dom, but there is a lot to unpack in the regional banking space today. The news just keeps coming. We'll start with Western Alliance off its lows, but still steeply lower after putting out a statement saying it's not for sale. It hasn't hired advisors. And an FT report suggesting otherwise is false. Pack West has a separate statement out this morning, reiterating our reporting from last night that it has hired advisors to explore strategic options, including a sale. I'm told those advisors are Piper, Sandler, and Stevens, and that they've had conversations with potential partners largely on the investor side rather than a strategic acquirer, but all options are currently on the table. The situation, of course, is fluid there and quickly changing

as its stock price plummets as well, down about 44 percent right now. First Horizon also sharply lowered today after the bank announced this morning that their $13 billion merger agreement with TD Bank was terminated over a lack of regulatory timeline for approval in the U.S. And speaking with sources close to this one, it's my understanding that TD has not communicated to First Horizons, the nature of the regulatory holdup. But reports in March suggested that investors had been pressuring TD to abandon the tie-up amid the bank crisis that highlighted vulnerabilities in the industry. So the regulatory issues there could be potentially a welcome coincidence for them. As one analyst, though, summed up this week's regional bank trading activity,

the stock is not the bank. In other words, deposits appear to be largely stable as are loan to deposit ratios, which is a measure of liquidity. Bank C-suits and prime brokers believe short sellers are behind the recent bout of volatility. But I think, you know, we'll see once the dust settles exactly how this all transpired and what's left, guys. Leslie, stay with us. What is the next step in this crisis? Many are claiming the Fed is in way over its head, unable to remedy this situation alone. as a matter of fact. Former FDIC chair Sheila Baer telling us last hour that regional banks should have a temporary unlimited guarantee for transaction accounts. And she's calling on Congress to take action. Let's bring in Aaron Klein, Economic Studies Fellow at the Brookings Institution. Also,

Hugh Sun is banking reporter for CNBC.com. Aaron, I'll turn to you first. I mean, a mid-myriad other things, you think they should definitely take bank supervision away from the Fed. Yeah, look, any organization could only have one number one priority. The ancient Greeks used to call it their telos. And for the Federal Reserve, that's monetary. policy and that is as it always will be bank regulation is going to fight to be second fiddle at the fed and the fed's own report on SVB found that its culture of consensus created problems that let regulators unable or unwilling to challenge bank CEOs when they were taking on this massive interest rate risk look how many more regulatory failures under the fed's watch

should we have before we question whether or not the Fed is right for this job now Hugh this is opened up a lot of concern about what the health of the overall regional banking sector is. We know that there are those who believe that the regional banking crisis now is not about deposits. It is very much about the market and short sellers. Is there any way that the banks can win in this kind of a situation, even if they put up their strong numbers, stable deposit bases, are short sellers just able to assail them no matter what the fundamentals are. are. Hey, Dom, great to be with you. So the market has divorced itself from the fundamentals. And how do we know that? You know, SVB, First Republic, both banks that failed, because as we

learned later, 60 to 80 percent of their deposit base had fled in a very short amount of time. Now, you take a look at Pack West's. In the one queue, they lost about 17 percent of their deposit base, and they gained some of that in the intervening weeks. So their deposit base, you know, is relatively stable compared to those other situations. What does that tell you? It tells you that if this situation right now that we're going through with PAC West and a few other banks has nothing to do with fundamentals, what's going to make it stop? And, you know, from my conversations with analysts and investors, the two things they point out, the way to, you know, put the fire out in regional banks is to do one of two things. One, you know, FDIC insurance blanket, either

expand it vastly or have a much higher limit than today. or two, a ban on short selling. And, you know, there doesn't seem to be that much indication that either is imminent. And so we are in a situation where we're going to see this happen. The play for short sales is very clear. You know, push a bank to the brink. Profiting from that and find another rinse and repeat, Dom. Well, and to that point, Aaron, let me turn to you as well.

On that policy question, there's kind of two things in the air right now. There's the idea of raising deposit insurance, maybe for just transaction accounts, maybe not. And the question of whether banning short selling is going to be the next move here. So raising the deposit insurance cap is the wrong move. Look, 98% of ordinary Americans have every dollar in their bank account insured. Raising the number from 250 to 500 or a million isn't going to really stop this issue of the uninsured, which are often very large companies. Look, SVB didn't bank people.

It's called a regional bank. It had four branches. Most of these have about 1,000. It banked giant tech firms, Roku, circle, et cetera. That's not going to be solved. Now, a blanket lien on all transaction accounts of any size. That's a pretty big thing. That requires an act of Congress.

Congress could consider that, which is raising the deposit insurance limit, I think, is the wrong move. Ultimately, that's paid back and higher fees by you and I in ordinary Americans in bank accounts. Just to jump in here for a second, it is what Sheila Baer called for last hour. And I'm curious, you know, we understand there'd be a cost. associated with it, but the argument is that if you don't do that, then you're going to continue to kind of worsen the fortunes of small and regional banks across America and leave only the biggest who are perceived as being safe. So I'm not entirely sure I agree with that that outcome. Look, America has over 4,000 banks, and we've talked about the failure of four or five of them.

Banks that were poorly managed, banks that took on interest rate risk went well over their skis, like First Republic and Silicon Valley Bank. And so, you know, a temporary guarantee of that, to the extent that these are divorced from fundamentals, I'm beginning to try to wonder why this act of Congress in temporary guarantee would solve this problem if it is just a question, divorced from fundamentals. But look, I mean, Congress ought to consider it.

We rewrote the law in 2010 to say that Congress gets a vote in this. So, you know, let's see where the votes are. So, Leslie, you came back from a leave and to a banking crisis to a beat in banks that has now seen some of the biggest turmoil since the great financial crisis. You've been working the phones a lot. I know you because this is what you do covering these banks. What's the general sense about which way the winds are blowing right now? Is there a feeling like these CEOs at Western United States regional banks are able to kind of fight off the barbarians at the gate? or are the hedge funds and short sellers on that kind of verge of being able to really get some momentum behind them?

Yeah, well, thank you, Dom, also, for covering while I was out. You know, in talking with the CEOs at regional banks right now, they pretty much unanimously pinpoint short sellers is contributing, at least, to the pressure that their shares are under, given kind of the events that transpired this week with regard to First Republic, J.P. Morgan, where equity holders were wiped out, short sellers made a lot of money on that trade. And so, therefore, they've seen this as a profitable trade to get into, and they're piling into other areas as well.

We've seen short interest take up. We've got some massive put options expiring tomorrow in Pack West, which could also contribute to some of the volatility there. So that's the CEO camp. On the investor side of things, you know, a lot of the investor, I don't want to say all of them, but a lot of investors I talk to do really see a bare case here. in a world where there is a credit crunch, in a world where, you know, there's too many regional banks.

There could be some consolidation. There could be additional failures. You know, it's hard to say which one ultimately pans out, but there is a clear bifurcation based on who you talk to right now, you know, in kind of that expert community. We'll leave it there. Can I just move in? Quick last word, Aaron, like 20 seconds.

Go ahead. Yeah, sure. First Republic was a zombie bank and a dead man walking for weeks. its deposit base was shockingly sticky that you thought about billions of uninsured deposits sticking around. And short sellers saw the zombie and attacked. That's how markets work. That's capitalism.

Right, but Aaron, which of the... Capitalism involves people losing money. Which of the banks now... So are we then to presume that the share price declines all reflect an accurate assessment of the viability of all of these small and regional banks? Not at all. No more than the fact that Silicon Valley Bank

was trading at 200 bucks a share a week before it failed. Equity markets are not, you know, knowing all things. They trade on fundamental, on momentum and other things like that. My point is the short sellers saw a zombie bank in First Republic whose problems had been known for weeks, and they attacked it. And that's what happens when you allow zombie banks to live. These other ones aren't necessarily zombie banks, but First Republic was. If you're right about that, then the buyers better come in in force here. Otherwise, it's a similar

story to the one we've already been watching. Thank you everybody today. Aaron Klein, Hugh Sun, Leslie Picker. I'm trying to figure out which floors. 30 Rock, yes. I think Leslie's a little higher. Maybe a couple floors. Thank you all. We really appreciate it. We just want to draw your attention to a shot right outside the White House right now

where Vice President Harris just wrapped up a meeting on artificial intelligence. A bunch of high-profile Cemetery, including AI CEO Sam Altman, Alphabet Sunder Pichai, MicrosoftSatian and Adele. You can see him exiting. President Biden did make a brief appearance at the meeting. Sam Altman will be on Squawk Box tomorrow morning at 8 a.m. Eastern. You definitely won't want to miss it. Chat, GPT, man. Well, the dominoes keep following in the regional bank space.

Seemingly one of one of them, by one of them, by one of them. We see history repeating itself. We've got signs of struggle here. Stock declines in a rescue package happening. So is there a pattern emerging and does it go beyond just the simple deposit flight story? Chris Maranac is director of research at January, Montgomery, Scott. Janie is one of those firms that kind of looks at these things, Chris, from a more holistic and detailed point of view. Kelly had a great question in this past segment about whether or not there are banks out there

whose prospects are being foretold by their stock price because it looks terrible for every single regional bank out there. Well, I disagree with that narrative, and I disagree with a lot of the narratives that have come out, particularly the past 24 hours. I really think the banks are far better in terms of making money this quarter, tangible book value growing in the second quarter, and banks having higher liquidity today. it did in early March. So the idea that the stocks are foretelling something, I think, is incorrect.

We have banks being used as weapons of destruction right now, and it's sad. It's disgusting, but it's where we are. And the information flow from the banks has been wide open. I think the information that PAC West and Western Alliance issued overnight was very helpful, and it's honest. And it's where these companies are. They're stable. Their deposits aren't running. yet the short sale marketplace and negativity is driving the idea that there are going to be outflows happening. That hasn't happened. We did see outflows at First Republic. That was a very real point of wealth management clients buying treasuries and leaving the bank. That didn't this intermediation actually happened, and it took the company down. It's a much different story at Pact West and Western Alliance.

Those companies are far more stable in deposits than folks understand, and their capital levels are strong enough not only for them to survive, but to continue to work forward on their strategic plan. And PAC West had a game plan in place long before Silicon Valley was ever known to be a failing bank. So, so, Chris, I'm going to, I want to extend this conversation only because I was the one at CNBC staffed with covering Western Alliance Bank and PAC West and First Republic on earnings. I remember, First Republic aside, let's focus on PAC West and Western Alliance. I was the one who kind of went into the earnings reports. And I talked to people in the wake of them, and they all thought that the worst was over for Pact West and Western Alliance, and then we just saw the last 48 hours happen.

How exactly then do you describe this? And is there a fear now that what we didn't think would happen in West First Republic, happened to First Republic? Could that also happen to a Western Alliance for a Pact West? Well, sure, there's a fear. And I would say never say never. Anything is possible. I put it at less than 10 percent only because these companies have raised a lot of liquidity to handle uninsured deposit. to handle the surprises that are around the corner, and this clearly is a surprise.

I think that depositors are a lot calmer than folks understand, and that's true for the entire industry, let alone Western Alliance and Pack West. Chris, as we leave it here, people are trying to figure out to the point we're just making what's going to kind of contain this. Do you think raising the deposit cap, for instance, on transactional accounts like Sheila-Barre mentioned, would that even stop the problems at this point? Well, the tag program was put into place in November 2008. That worked out quite well.

I think dusting it off and bringing it back would make sense. It certainly would give confidence on this transaction account. It did back then. I think the short sale ban that the SEC did in September 2008 should also be dusted off. That was helpful. It's unfortunate that we're here, but we are. And we really should consider changing gears because it's really unfortunate to have the industry that provides credit and liquidity to businesses and households be damaged in this way.

I'll just say, you know, there are those out there, Chris, say a short ban will cause a near-term short squeeze or kind of a day or two of reprieve, but we'll do nothing in the long term. Is that right? I disagree because the fundamentals are way better. Banks have less leverage today. We're lending on 55, 60 cents on the dollar, where we're lending all day at 100 to 110 cents of a dollar in 2008. So the loss content is dramatically different today. There are losses in the banking industry. We have problems. Every bank needs to deal with them. But the earnings and cash flow the banks have can cover 500, 600 points of losses, which is plenty the next two years.

So I think the banks can handle their own issues. And honestly, I think the marketplace just has not been reading the wide disclosures and the deep details that banks are giving, which is way better today than it was 15 years ago. Chris, thanks for joining us today. Appreciate all your time. Thank you as well. Chris Marinac with Janney Montgomery, Scott. Still to come on Power Lunch, we'll talk more about the crisis in regional banks with J.P. Morgan buying First Republic. Did it open Pandora? box. If Diamond can get a deposit waiver, can any big bank? As the whole situation put small banks at risk of disappearing altogether. We'll speak to former Wells Fargo CEO, Dick Kovosovich.

Plus, outside of the banks, Apple, arguably the most important stock in the market, is on deck for earnings later on tonight. So far, tech earnings have been fairly positive this season, even amid the darkening macro outlook. We'll discuss what to expect with Apple earnings after the bill. And first, the White House announcing executive actions to balance growing threats from artificial intelligence. We just saw those key AI tech CEOs leaving their meeting with Vice President Harris. Details coming up in Tech Check. Power Lunch will be back right after this. Welcome back, everybody, the CEOs of Alphabet, Microsoft and more meeting with Vice President Harris at the White House today to discuss AI. But the president dropped in. I want to know all

about this drop-in. Dear Gibosa has more. Like, is it the nature of his drop? Does he say something in passing? Why did they even have this summit, Dear Dr. Kelly, I wish I knew to be a fly. on the wall of that meeting, right? I mean, for the morning, we saw those arrivals. From some of the biggest names in tech, you named two of them, there was CEO, Alphabet, C.O., Senator Pichai, Microsoft, Satinadella. And remember, those companies,

they are essentially facing off against each other for the AI zeitgeist lead. There was also Sam Altman, founder of OpenAI and ChatGyPT, the guy that kicked off all this frenzy. Now, Vice President Kamala Harris, she hosted them in the Roosevelt Room, and yes, we did hear that the president dropped by as well. Why? Well, the stakes are so high here. If generative AI is the biggest platform shift since mobile, since cloud, or as Senator Pichai puts it, more important than fire or electricity, Washington had better get on it. Time and time again, guys, we have seen technology develop faster than government policy. So now the White House is trying to take early action and address the alarms that are already being sounded by holding this meeting. And ahead of it, remember, too, the White House announced a number of actions around AI, including research hubs.

new guidance. The VP put a statement out after the meeting this morning in part reading. The private sector has an ethical, moral, and legal responsibility to ensure the safety and security of their products. And you know, guys, the private sector probably pointing the finger right back at the government saying that they have this responsibility as well. They're all trying to figure it out as it moves so very quickly, something I think I say every single day on this program. Well, and Lena Khan had that op-ed maybe New York Times. Where was it the last couple of days? So if you had to guess as we read through her comments, there's this meeting at the White House. This is all pointing in the direction of some kind of platform legislation that seems to be coming. I think in this

case, they realize they kind of have to get ahead of it because it's already, you know, growing so quickly. They got to get ahead of it because of so many missed opportunities in the past on areas like social media. I'm skeptical and I think many are skeptical. Maybe that's warranted because the technology just developed so, so quickly, and public policy takes so much longer to develop. But maybe encouragement, perhaps, that this meeting happened today. You could point to the fact that players like Apple, Amazon, and Vida, they weren't there.

They're going to be part of this platform shift, no doubt. But at least the government is doing something. At least they're putting money into it and looking for these guidelines and asking for feedback from the public as well and from the companies. So perhaps this is a much better chance, and we've seen in the past. And some of the CEOs and biggest players in the space will say, hey, look, at least the alarm is being sounded now.

So that is a positive development. I wonder if there's any awkwardness where you have kind of, you know, the Google guy saying that he's the problem. Like, they're the problem. Like, they started it or they shouldn't have let this out of the bag. You know, it's crazy about that. I mean, this is the perfect way to bring it up, Kelly, because the biggest balance sheet of all of them,

and Deirdre mentioned is not there. And that's Apple. They got reports out. They report after the bell today. Deirdre, I wonder, is there a scuttle butt out there in the, in the valley in the Bay Area about Apple and its AI ambitions, what it could look like, what it could manifest itself at in the coming months and quarters and years? I don't think that anyone doubts that Apple is going to be a player here.

You had Tim Cook a few years ago referring to its secret car project saying it's the mother of all AI projects that's even developing its own artificial intelligence chip. Why it wasn't there today? I mean, they focused on the generative AI platforms, the four players that actually have products being used today. like Bard and Chat GPT, Microsoft's Bing. So maybe there's a good reason that some of the other guys weren't there, but certainly you're going to want to watch tonight what Apple,

what Tim Cook has to say about their efforts. I think it was only mentioned five times on the last earnings call, but you can bet it's going to be mentioned a lot more tonight. I think it was mentioned dozens of times between Microsoft and Alphabet during their earnings calls. Dozens and dozens. Deirdre Bosa with Tech Check, thank you very much. We'll see you soon.

All right. Well, coming up, parameding problems. See what I did there? The shares are plummeting 25% right now, missing on both top and bottom lines for its earnings report. Is this a bad omen for the streaming industry overall? Plus, Macy's shares also lower today. The company is working on a big move away from its historic norms.

Think locations. Opening stores outside of the mall will discuss that Macy's strategy when Power Lunch returns after this commercial break. Welcome back to Power. lunch, what you're seeing right now are shares of Paramount, sinking more than 20%, about 25% at this stage. The weak results from there showing some potentially troubling signs for the streaming industry overall. So let's get out to Julia Borson with the stock down, again, nearly 25% for what exactly the story is here or what it isn't. Well, Dom, after the company missed on the top and bottom lines

and also slashed its quarterly dividend to five cents a quarter from 24 cents, Paramount shares are down about 25%. This is the company's worst day ever in terms of stock performance and nearly giving up all of this year's gains. The stock is now up just about 1% year to date. Concerns about a weak ad market, declining revenue per streaming user, content licensing shortfalls and peak streaming losses this year, outweighing the company's subscriber growth in the streaming space and also at increasing some of its 2024 subscriber goals. Now, 46% of analysts have a sell rating on Paramount, 29% have a hold, and a quarter have a buy. Now, one of those with a buy, Bank of America's Jessica Reeve Erlich, thinks that the bad news may

be good news, writing, quote, it takes the company one step closer to a further asset sale or potential total company's sales should underlying fundamentals deteriorate even further. But concerns about the broader media landscape are sending Warner Brothers, Fox, as well as Disney shares all plummeting today. You see Disney's down about 3 percent, Fox down over 4 percent. And ahead of Warner Brothers' discoveries earnings tomorrow, it's worth noting that analysts are a bit more bullish. 56 percent have a buy. Forty-one percent are a hold. So we are watching out for those earnings tomorrow morning, Dom. All right, Julia Borson, with the latest there on Paramount and streaming overall. Thank you very much. We're also watching the macro. Bond heels falling today,

especially on the shorter end of the yield curve, shorter maturity, securities. Let's get out to Rick Santelli in Chicago with the latest there. Hi, Rick. Yes, Dom, you're exactly right. As a matter of fact, short maturities led the way with yields, Dom. But now mid-the-long maturities are higher in yield on the session. Let's start with two-year notes on top of that KBW banking index. There's a one-month chart. We could obviously see what's been driving the short duration treasuries into higher prices and lower yields. It's been a bit of banking nervousness. Although it seems to at least in the last 15 or 20 minutes, we're reverting back to a more normal trade in treasuries,

probably because we have the big jobs report in the morning. Now, look at how Tuesday tens spread has been affected by that volatility in two-year note yields. We've seen a range of minus 35 to minus 50 today. Currently at minus 40, it may avoid a six-month close that would be the least inverted. Pono, and it's under 37, minus 37, 36, minus 35, those would have been the least inverted charts going back over six months. Three-month bills? Yes, that's correct. Five and a quarter is nervousness over another mogul in the Treasury complex, the debt issue.

Should they close in this zone, it would be the highest deal closed in 22 years. And what is that done to the recession spread? Look for yourself at minus 189. It's the most inverted it's ever been. Dom, back to you. All right. Thank you very much. Rick Santelli for that.

And ahead on Power Lunch. We'll have more on today's market action. The Dow, down around 300 points. Kind of muted, declines honestly. I mean, the NASDAQ sound less than a percent. We've still got an hour and a half of trading left to go, hell. We do. But, man, if you told me what the banks would be doing and then this brought action, it's, I'll call it impressive.

One key thing investors are watching or maybe waiting for. Apple earnings. They're after the bell. Will they be able to offer investors more stability in this volatile environment? And what about AI? We'll be right back with more here on Power Lunch. Welcome back to Power Lunch. The last of the big tech earnings reports are out today with Apple set to report after the closing bell. The consensus is for a drop in revenue for the second straight quarter amid falling demand for both PCs and smartphones. But the stock is up 30 percent so far this year. So how will this tech giant's earnings match with others? Let's bring. in Chris Sankar, analyst over at Cowan, covers Apple. He's probably getting ready for a very busy

afternoon. So, Chris, we largely expect that most businesses are going to have revenue declines year over year. They pretty much told us that in January. So what's going to move the needle? Yeah, hey, Don, thanks for having me. Like you mentioned, yeah, they kind of set the tone. Revenue is supposed to be down about 5% year over year in March. We are modeling, um, growth in June on a relative basis year over year. We do have it up like two and a half person year over year in June. Revenues, sequentially is going to be down. Keep in mind, June quarter tends to be the weakest quarter for them,

both in terms of iPhone units and also purging off the iPhone inventory to make way for the new model. So I think what investors are really going to be looking for is kind of like see where the guide ends up being for revenue, commentary on iPhone demand. I think FX is less of a headwind this time around versus like a quarter or two or two ago, but now it's not a real big concern. And also I would probably say kind of like at the margin, any kind of commentary on services, the new retail store in India, anything on AI on the, you know, the other, et cetera academy, I would say. We were talking about Paramount, Crish, which is having such a rough day and it's always mooded

that. Oh, maybe Apple would buy it. Maybe this, maybe that. And, you know, as Steve Kovac was pointing out, it's kind of like when people say J.P. Morgan's going to buy any ailing regional bank. you know, no, they're not. But maybe they could make a play for sports rights and for the NBA in particular. And that would probably be a big ticket purchase. You know, as we're all watching kind of what's been a fun series between a bunch of these teams in early playoffs, do you have a comment on that? I mean, would this be the deal of all deals for them to land?

Would it be worth it? You know, it's tough to say, to be completely honest. Honestly, like, you know, I mean, they have net cash up about $50 billion, you know, gross cash, like not a $150 billion. And when you have that much cash in such a strong, balance sheet, the world is your oyster. But I would probably say that, you know, where you've seen them focus, they definitely have some focus on the media side. You know, I have no idea whether they're going to make a bid or not. It's kind of like,

you know, way about whatever like that comes to heading into this earning season. But I think people have speculated Apple buying anything and everything given their robust balance sheet. So, you know, it's hard for me to speculate sitting out here. You know, it's funny, too. He's probably right not to because, you know, Apple was reportedly in the running for a Sunday. ticket for the NFL and for live sports and, you know, Alphabet got it instead. So they had the money. They didn't spend it on that stuff. There's not limitless packages, though. There is not. So I mean, so that's the thing. If Apple's going to spend their money, what is it going to be on?

Where do you deploy that cash? It's the massive balance sheet of all balance sheets. What exactly do you invest in that's going to make Apple the stock for the next, say, 10, 20 years? You know, if you look at what they've done, you know, on a relative basis of the last several years, more, I would say, risk covers. You know, you hear about, you mentioned the Sunday ticket. You hear after the fact they bid for it, they didn't go all the way. So I feel like, you know, there are a lot of options that they could go through, you know, the incremental new products that are coming up.

People talk about headsets, AR, VR, you know, maybe an auto down the road, not in the next couple of years, maybe in the future. I think there's a lot of verticals that they can get in. Health is another aspect of it. But what you've seen is they've been more, you know, doing it in a very cautiously, you know, way of approaching it and not just kind of like randomly buying every asset they could get their hands on. You know, actually, you know, talking about capital deployment, we do think they might probably increase the dividend, which they're kind of done on a pretty steady cadence every April or May

timeframe for the last several years. So I do think that there is one aspect where they want to, you know, return to their existing shareholders in the form of dividends and buybacks. And there's other aspect which is kind of like, you know, the inorganic growth opportunity. but you also seen them actually do quite a bit of investment in organic growth opportunity, whether it is like scaling up the TV Plus or whatever it might be. Well, I think you're right that capital return, shareholder return is becoming something to lean on for sure in this environment. Chris, we'll leave it there for now and thanks so much for your time. Thanks for having me.

Chris Sanker with TD Cowen. Still ahead, contagion concerns, PAC West, Western Alliance and some other regional banks plunging again as the crisis of confidence mounts. We'll discuss what's at stake with the former CEO of Wells Fargo. And as we had to break, CNBC is celebrating Asian American and Pacific Islander heritage throughout May, sharing stories of business leaders across their community. Here's Eric Tota, Mehta's head of social marketing. The Asian American community is one that is built on resilience.

But I think what makes me most proud isn't just how we've reacted to things that have happened to us, to things that we have gone through, but the way that we look forward into the future. Asian Americans contribute $1.5 trillion to the GDP. And if you look at that, we are still under leveraged. And so what makes me most proud is the line of sight that we have, that we can be so much more, that we can continue to expand, and that we can continue to bridge and build better bridges with other communities so that the business world does thrive. Welcome back. Macy's is trying to adapt to the changing retail environment moving out of shopping malls and into suburban strip centers. Melissa Repco's visited two new store designs, one in Atlanta and one in Fairfax, Virginia.

So this seems very off brand. So this is the future, though. Yes, hey, Don, these stores are called Market by Macy's and called Bloominges. They're about one-fit the size of a typical Macy's store in a mall. And they have a sleeker look, a sharper assortment of brands and displays that get swapped out recently. Macy's is looking for a way to drive higher sales and excite investors as it exits dying malls and its stock performance lags. Shares have underperformed the S&P 500 and the retail focused XRT. Sales at the new smaller stores outperformed Macy's larger stores in the holiday quarter.

The company said proximity to grocers and off-priced retailers is drawing traffic. The market by Macy's really dial in more so onto discovery and to convenience. They're local, they're easy to get to. The format is simple to shop. And the retailer hopes to appeal to a new generation, including many millennials who moved to the suburbs during the pandemic. Blooming's has some special touches to attract them, including a restaurant where customers can order wine to sip while they shop. New consumers, younger consumers are not necessarily as inclined towards kind of the Fortress Mall experience as their parents may have been. So providing alternatives, you know, and that's really what Blooming's is.

The company has 10 off mall locations and plans to open five more this fiscal year. CEO Jeff Gannett told me that it will be a pivotal year for the off mall strategy as it wraps up testing and decides on expansion plans by year end. So, Melissa, I've been to Walmart neighborhood stores, the smaller format ones. This seems kind of like that same concept. But is it, can we call it the final nail in the coffin of traditional brick and mortar retail that these big shopping mall type centers are done and that we're just focused on the small stuff now? Macy said that those big anchor stores will still be a part of its future, but it will. wants to go where the action is. And a lot of that action has moved to the suburbs as millennials have bought homes and also done things like buy online, pick up in store. So it wants to be there.

The challenge that Macy's will have to strike is to be complementary rather than simply moving sales from the malls to the off mall and not really adding sales. So they've talked about how they're going to try to avoid cannibalizing by having a different mix of things and going after a newest shopper that may not shop at all at their mall stores otherwise. All right. Melissa Refco, thank you very much for the update on Macy's. And while Macy's is finding opportunity on the side of the struggling commercial reed space, office space, no such luck. Empty offices in Manhattan hitting a new record, Robert Frank, here to discuss. You know what analogy I love the best.

The empty Empire State Buildings one, right? And I don't know if you have that one still in your head. Wasn't it like 70 Empire State Buildings worth or something? It's the latest numbers. And this really matters because Manhattan is the largest commercial market in the country. Lots of eyes on the commercial market now as it relates to these regional banks and the exposure they have. So the Manhattan market, we just had numbers, 94 million square feet of empty space. That is an all-time record, and that is equal to 37 empty Empire State buildings.

And if you look at the overall vacancy rate, we're now at 17 percent. That is also a record. The number of new leases declined 44 percent in the most recent month over last year. And, you know, you look at these reed stocks, you look at SL Green, you look at Bornado, you look at Empire State Realty. They're at their 52-week lows. And, you know, they had this moment of sort of optimism last year where maybe people would come back to work. 48% is basically the limit that we've seen Manhattan for the office occupancy by workers who are back to work. We just haven't been able to get past that 50% number.

Two cross currents, if we want to call them that. On the one hand, okay, we have people who might have to come back to work now because they're forced to the labor market's cracking and maybe we can finally punch above that level. On the other hand, if you start to see broader layoffs coming in headcount reductions, then that's... Especially in banks and tech. Exactly. Great point. That can't be great for these trends either. Right.

You've seen Goldman Sachs, its expansions are all in Texas and Florida. And so whether their layoffs are not, the expansions, the marginal buying is now outside of New York City, coupled with the sort of financial issues that these buildings face, where unless you're a brand new Class A, which you're doing quite well, they're leasing. But the Class B and Class C, you're headed toward this cliff where the owners have to say, I'm either going to put a ton of money in this building to renovate it to get it rentable or just give it back to the bank. And that's why I think the next few years will be critical for especially these Class B and Class C, these older buildings, that is a lot of supply. They don't get all the attention, but a ton of supplies. No, I think we're going to see a lot of people just handing it back and defaulting and walking away. Totally, yep, totally.

Robert, thank you. Thank you. Thank you. All right, well, the regional bank ETF, the KRE, is sliding about 15% just this week. and facing and facing its worst year ever, ever in existence. One analytics firm is estimating short sellers have raked in nearly $400 million in paper profits, just betting against First Horizon, Pac-West, and Western Alliance today. Former Wells Fargo chairman and CEO Dick Avosovich insists this is all just a short squeeze,

not a systemic issue, it's a short problem. He'll explain why that thesis is his when power. lunch returns after this. Regional banks are under big pressure again today. Shares of Pac-West down around 40% on news of a potential, potential sale. And Western Alliance shares recovering a bit from session lows after denying that it was exploring a possible sale or strategic options. Earlier this week, J.P. Morgan Chase rescued First Republic.

But as big banks offer lifelines to the smaller banks, beware the unintended consequences, as we know now, our next guest thinks the government needs to expand depositors, insurance to help customers of the small banks feel safer. So let's bring in former Wells Fargo CEO Dick Kovosovich. Dick, it's good to have you here. Your perspectives are always welcome because you've seen it before from a big bank perspective. So take us through the big bank, small bank dynamic right now. It's almost like, well, it's not almost like, J.P. Morgan Chase almost got a dispensation to become bigger to absorb First Republic. Big versus small. What's going to happen? Well, I think it's very unfortunate that's the case because we've had some bank failures,

particularly those that were concentrated and who didn't have a, who had a lot of depositors who were large depositors and were over the $250,000 limit, many of them at 70 to 80% of their deposits and they failed. That is not the case for most small banks in the country. They are not concentrated. They have many small depositors, and they're well capitalized. They're profitable. They have liquidity, and they don't deserve to be considered to be in any way, in my opinion, to be likely to fail. But the depositors are concerned, and so they put their money with large banks, and that's not good. We need a lot of small all banks of all shapes and sizes. So, Dick, I mean, is the banking, is this an existential enough

crisis to force the word I've been hearing so much in the last two months, which is consolidation? That is to say that many of these small and medium-sized banks will just have to get married with each other because it's the only way that they can find the size and scale to be able to survive a crisis like this. Is that the only way out? I don't think so. I think this is not a systemic problem. There's just so much publicity that's been put on the media as a result of this, and this will blow over as people see that, in fact, in most all the banks today, except for a few, the deposits have stabilized. They're doing business. Customers are coming back, and, you know, things are not nearly as bad as we see because there's a bunch of short sellers out there

collaborating and taking one bank at a time and see if they can bring it down and make some money in the interim. And that, Dick, I just want to be clear. I mean, you think that the shorts could get hurt here. I mean, last hour we had Sheila Bear on. And interestingly enough, she kind of made some of the same comments. We all think of her as the cop on the bank speed. But she thought in some cases the selling pressure was overdone and that some of the regional

banks could be a buying opportunity. So I'd like to hear more about your thoughts on that. as we debate whether short selling should be banned again. I've been buying banks all morning. Which was? Pack West. I don't think I should say that. But you have very, very good banks that P.E ratios below 10, some of them at eight, half of that of the industry.

Their yields on their dividends are five, six, and some even at seven percent. and they've been unwarrant, it's unwarranting that indeed we have this pressure. It doesn't make any sense, and I think it will blow over, and those that picked up these banks at these prices are going to have some very good gains in the future. So then do you think we need to raise deposit insurance for transaction accounts or more broadly? I mean, you have some thoughts in here about how we could raise the limit, but also give people a 20% penalty for getting their cash back right away, which I don't know, that could cause panic all over again.

Well, so the issue is that is the risk of moral hazard. And moral hazard is that if you raise the deposit insurance to such a level that no one pays attention to the risk in their bank, then we're going to have people who are, have banks to go under, a lot of them, and there's no consequence to the depositor. So we have to do, I think, two things. The first and most important thing is, particularly because of small banks, is the operating counts of businesses.

These are the counts that pay for payroll, for paying their suppliers and so on. $250,000, even in a small bank, or excuse me, a small business, needs more than $250,000 in order to be sure they have payrolls and so on, let alone large businesses who may mean $10 million. So I think we have to raise the insurance for operating accounts at no interest, checking accounts with no interest, to maybe $5 or even $10 million so that the customers of the small banks feel that they can put their operating accounts in a small bank and don't have to give them to pick banks. And in order to protect from moral hazard, we may have to raise the $250,000 to some level, but not to a high level. Sure.

And I think what we need to do is that when a bank fails and there are depositors over $250,000, you give them the option to get their money back with a 20% discount. So that the depositors are... Immediate liquidity. Are sure that they're dealing with a safe bank. Yeah, exactly. It brings into focus just what a discount that service provides. Dick, thanks for your time today. Dick Ovassovich.

We really appreciate it. Former CEO of Wells Fargo more after a break. Do not miss a special CNBC Pro Talks online event live from Omaha, Nebraska. Our own Mike Santoli will speak with legendary investor Thomas Russo ahead of this weekend's Berkshire Hathaway annual meeting. Head over to cnbc.com slash pro talks 1130 a.m. Eastern time tomorrow, Kel. That does it for power lunch, everybody. Closing bell starts right now.