Yet Another Value Podcast - Chris DeMuth's State of the Markets May 2023

Episode Date: June 1, 2023

It's time to welcome back Chris DeMuth for his monthly state of the markets. For this May 2023 edition, Chris shares his thoughts on the government suing to block the Horizon Therapeutics sale to Amgen, government's history of antitrust cases, Amazon / iRobot deal, evaluating judges in antitrust cases, banking sector and more! For more information about Rangeley Capital, please visit: http://www.rangeleycapital.com/ Chapters: [0:00] Introduction + Episode sponsor: Stream by Alphasense [1:58] What's on Chris' mind for May 2023 starting with government suing to block the Horizon Therapeutics sale to Amgen and government history of antitrust cases [9:22] Amazon / iRobot deal [13:23] What is the government arguing in the Amgen / Horizon case [16:39] Evaluating antitrust cases, judges in particular + Amgen / Horizon case cont'd [29:09] Banking sector: update on regional banks and how Chris thinks about the space right now [39:15] Closing thoughts Today's episode is sponsored by: Stream by Alphasense Are traditional expert calls in the investment world becoming obsolete? According to Stream, they are, and you can access primary research easily and efficiently through their platform. With Stream, you'll have the right insights at your fingertips to make the best investment decisions. They offer a vast library of over 26,000 expert transcripts, powered by AI search technology. Plus, they provide competitive rates on expert call services, and you can even have an experienced buy-side analyst conduct the calls for you. But that's not all. Stream also provides the ability to engage with experts 1-on-1 and get your calls transcribed free-of-charge—all for 40% less than you would pay for 20 calls in a traditional expert network model. So, if you're looking to optimize your research process and increase ROI on investment research spend, Stream has the solution for you. Head over to their website at streamrg.com to learn more. Thanks for listening, and we'll catch you next time. For more information: https://www.streamrg.com/

Are traditional expert calls in the investment world becoming obsolete? According to Stream, they are, and you can access primary research easily and efficiently through their platform. With Stream, you'll have the right insights at your fingertips to make the best investment decisions. They offer a vast library of over 26,000 expert transcripts powered by AI search technology. Plus, they provide competitive rates on expert call services, and you can even have an experienced by side analysts conduct the calls for you. But that's not all. Stream also provides the ability to engage with experts one-on-one and get your calls transcribed free of charge, all for 40% less

than you would pay for 20 calls and a traditional expert network model. So if you're looking to optimize your research process and increase ROI on investment research spend, Stream has the solution for you. Head over to their website at streamrg.com to learn more. Thanks for listening, and we'll catch you next time. All right, hello, welcome to yet another value podcast. I'm your Andrew Walker. And if you like this podcast, it would mean a lot if you could subscribe, rate, follow, review it wherever you're watching, listening to it. With me today, I'm happy to have on, my friend and the founder of Ranging Capital, Chris and youth. Chris, how's it going? Going well. Andrew, thanks for having me on. Chris, you know, I think it was a couple months ago

where we came on and you and I both had beards and then we both shaved our beers like I have them staying the same day and came on. And we got tons of emails that said, what's going on with the beard? Where's the beard game? And I'm trying to bring the beard back today. And you have, you have gone the exact opposite way. yeah kind of summer you know we've been having some outside crossfit days so uh spring cleaning plus temperature it'll come back in the fall i believe nice well well it's uh the end of may 2023 you've got a lot to talk about before we get there i'll just give a quick disclaimer the same thing i do at the start of every podcast nothing on this podcast is investing advice we that's

always true but particularly true today we're going to touch on a bunch of different situations so we'll mention a lot of stocks please remember not financial advice consult a financial advisor uh everything involves risk. So all of that out the way, Chris, I think as we sit here, end of May 2023, there's a lot of interesting stuff happening. If we had talked about the debt ceiling, hopefully that's behind us. We don't have to talk about that. But, you know, that was always probably going to pass. It was scary to think about what happened if it wouldn't, but it was always probably going to cast. There are really interesting things in the market. I think the first thing that jumps out to us is this month, the Horizon Therapeutics, their deal, which I think when it got

announced at the end of 2022, people said, hey, this is a very clean pharma deal, clean buyer, Amgen's buying them, not a ton of overlap, basically no overlap in the products, clean deal, this is done, tight merger arb spread. Surprise, surprise, here we are in mid-May, the government sued to block the Horizon Amgen deal. I think they are taking a very novel approach to trying to block the deal. So I've kind of rambled on a lot there. I'll turn it over to you. What do you think is going on with Horizon and Amgen?

Liz Warren had mentioned this one by name as one of the deals that she opposed, although I do think chat GPT could do a great job of just kind of running through a Liz Warren complaint on pretty much every deal that's announced. But she had mentioned this one by name. And there is a radical administration effort on antitrust. It is not a precedented type of case. If this theory gets endorsed by judges, it would make it almost impossible to do M&A in this whole sector. It's just a theory. It's just kind of academic. Why don't you, this is a really interesting one, because again, when this came out, most things get most things, especially in pharma, this is a pharma biotech deal, you get blocked because I, Company A, own the best cancer drug for treating prostate cancer. I'm going to buy company B who has another prostate cancer drug that's either the number two player or maybe it's in phase three trials. And if it gets approved, it'll be a better cancer drug. I try to buy them

and the government blocks and says, no, like you can't buy your biggest competitor or your biggest potential competitor in the space. We're going to block it. That's a monopoly ground. This is not that. Again, these guys did not have product product. So why don't you walk through what the government is trying to block and why that, you know, it's kind of unprecedented. It would be problematic for deals going forward, why I think most people think the government is likely, not guaranteed, but likely to lose in court? Sure. So the most conventionally understandable antitrust is a horizontal case.

You and I have, you know, railroads that go from and to the same place, and we meet up over cocktails late at night once a year, and we fix prices. We're going to, and you can do that with or without a merger, we could fix prices without the deal or you could buy me i could buy you but we could have the goal ultimately of not just having but having and abusing monopoly power so that's antitrust verticals a tick more complicated perhaps where you have a supply chain and there is a kind of customer vendor relationship and that that would be something that would also distort markets also be a abuse of pricing power because we have this vertical relationship.

So this would be a car manufacturer going and buying, you know, their tire maker, their tire manufacturer, right? So you vertically integrate. You go buy your suppliers, basically. And I always kind of trip over myself in explaining these because in modern markets implies a very low level of dynamism when there's often a very high level of dynamism. Like even setting aside the law and setting aside ethics, if we had some hypothetical case where you and I were able to work around those two constraints, I just don't think this is

the kind of thing that works that much. I mean, I think that in the railroad case, you had these physical things that had incredibly high fixed costs and had no technological alternatives and unbelievably high barriers to entry and that was kind of the mental model that most people started thinking about antitrust with and most modern markets have none of those characteristics and

you have 8 billion people and a lot some decent number of them are smart and capitalized and you never know who they are but somebody's out there trying to take they like money too and they're out there trying to take share and they have some plan that we don't know the government seems to be

generally not particularly open-minded about how just market dynamism is working in ways that you and I couldn't possibly be knowable. I mean, people are often keeping it a secret when they're about to enter a market. But in any event, in this case, let me just pause. So as you said, the dynamism, like the fact is most companies try to get rid of their suppliers, right? Like the car manufacturers, they don't own their tire makers anymore. They figured, hey, if we sell the tire manufacturers and then we just RFP, who can give us tires the cheapest, that's actually better than owning it ourselves, because when we own it ourselves, it gets sloppy, it gets inefficient, we can go buy

from whoever wants, that's one, and B, the government's history in vertical cases, recent history, I'm sure you can think of more examples, but it is not good, right? AT&C Time Warner, which is one way back in the range of capital podcast days, we talked about all the time, because the government was suing in 18C's argument was, we're a fiber provider, we'll go buy our content, and I think most people said that's a pretty stupid strategy, but you're an economic player, you can go try it if you want. government sued to block it, I think probably because Donald Trump didn't like CNN, but the court basically laughed them out of court, right? They said, hey, they can buy it. You know, there's no

foreclosure here anyway. There's certainly other examples, but that has been a big hang up, a big case where government has brought cases and I'd say lost every time. Correct. I would say both the government has failed on the antitrust legal case and perhaps for similar reasons the companies have failed on the financial business case, right? So in both cases, you know, as, let me say this very carefully, but pricing power is one of these things that you don't want to get an A plus on avoiding. You know, you want to get kind of, you don't want to get an F on it, but you want to get like a D minus on being accused of having pricing power. You know, maybe, you know, you want the government to look at you and then kind of say, no, we're not going to sue.

In this case, the fact that there are really dumb cases often in some ways make it imply that they were really dumb deals, right? Because it's like if you have no pricing power whatsoever, if the government is crazy to think, you think like, well, then why are we doing this? Because you can always contract. I mean, the thing about so many M&A rationales and so many things where you overstate the significance of the lines of the firm. And what you really want to do is be super efficient on costs and rational, but everything else you can contract. So if it's a good idea, just do it. Back to AT&T Time Warner case, like, yeah, AT&T went and bought, you know, spent $90 billion doing this. T-Mobile just, they've got to deal with Netflix, right?

When you sign up for T-Mobile, you get Netflix for free for a year. Or Verizon had you sign up for a rise and you get Disney free for a year. Like you can just go do, as you said, do a contract. It's funny that they stopped that. Oh, you know, the other one, and I haven't done much work on it. We talked previous about it. The one that is interesting to me is I robot Amazon. I think both you and I are terrified of the downside there, which is why we haven't really focused.

on it, but that is an interesting one where Amazon is buying iRobot who makes like Roombuz and everything and the government is suing to block. That's kind of an interesting one just because Amazon's a marketplace. As you said, bad government cases tend to be bad deals. I have no clue why Amazon wants to buy I robot because it seems like a very competitive space. But if the government does suit a block, I don't think they brought the suit yet, but the rumor is they're going to. If they do suit a block, I think it will be a very tough case for them to win. Yeah. So I don't, I don't, own any, and I have a hard time coming up with how I could get comfortable with the regulatory risk. There's all, like, even if I, certainly would have nothing to do with me doing kind

of clean room analysis of the antitrust issue. I think it's quite likely I could come up with a good thesis that it shouldn't be blocked. But that has not had, that has not been very dispositive recently, has had no predictive power in terms of what gets blocked. I think it's quite likely that a suit is brought. And then, what do I own? Like, I'm not that excited about being an irobot shareholder i'm certainly not excited by being an i robot shareholder in a world where this kind of deal isn't allowed and uh and certainly not in a world where this kind of deal isn't allowed for i robot but apparently amazon wants that kind of business because uh in terms of barriers to entry uh amazon could just um probably beat them in the marketplace if this is just an isolated orphan

company that's not allowed to get bought. So, you know, spread's gotten wider. This would have been a really, really, really good short when the deal was announced, and I was just stupid to not be, I knew I wanted to be at zero, and I should have, whenever I'm that convinced I want to be at zero. I should really question whether I want to be smaller than zero, especially because of how definitive merger arms spreads work where there's not a likely overbid or other buyer. It's structurally, it's a really good time to put a lot of money to work on the short side. In any of it, the thing that both of these have and then back to Horizon for a second is it would be transformative of their place in the market if you're not allowed to do this kind of deal. Horizon is a tying case. It would

be new to say there's not a, there's not really a horizontal or vertical connection between the two companies' products as much as could the buyer with existing pricing power in certain areas, use that to tie and bring new products into abusive pricing relationships. So it really does also show that what the government cares about isn't that deal related. They just want to, you know, this is a buyer that they have a beef against. And that also makes me even less comfortable with anything that Amazon wants to do because these are people on the regulatory side. And now, a quick word from our sponsor. Our traditional expert coals in the in the investment world becoming obsolete?

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streamrg.com to learn more. Thanks for listening and we'll catch you next time. I can't quite see Penny, but I can see this chair shifting and then she's, it's really cute and funny. There she is. Let's just go. So the government brings their case and they're suing to block because, as you said, they've got, they're suing about essentially because they think Amgen could bundle Horizons products with their products and maybe raise prices or shut out other products out of the market and stuff. But it does seem to be more a case of Amgen has had, has bundled in the past and the government doesn't like it. And whether you like bundling or not, like if you bundle your products that you already

own together, that's certainly not illegal as long as, you know, there's not bribes under the table or something going on. But can you walk through, I think Amgen's response was, hey, like, these, I'll just give it to you. Like, what is the government arguing specifically with Amgen Horizon and walk through Amgen's response? Because I thought that was interesting as well. Sure.

Excuse me. So, and we've seen the whole formal complaint from the government. So there's a lot from Amgen that we've only seen, can we've seen, they've seen. they've press released out, they've kind of, kind of, and they clearly knew this was coming because they had kind of a rapid response, but we haven't seen their whole legal case yet. But, of course, at this point, it's the government's burden. So it's not like Amazon, it's not like Amgen has to bring this. So government filed the case.

Incidentally, we have a judge. We have a Republican. and, you know, spoken at the Federalist Society appointed by Trump, looks like he would be somebody who wouldn't have kind of casual deference to the government. You know, you can see by background. Some people will just, like, have a huge deference to administrative agencies on their beats. And so in this case, with antitrust, it would be a harder case to bring in front of a very progressive judge. So you have a Trump appointee and you have somebody with no antitrust background.

So the two things you tend to look for is, is this somebody who is maybe very smart and ideological who one way or the other wants to go way out on the limb and maybe wants to kind of establish some new precedent and is going to write some blazing case for the ages? It's not that common, but that's kind of one thing you'd look for. That is not the case here based on his background. you know if you don't know about some area of law and you're a smart judge and you can write well the one thing you can always do is like if you claim up go back to precedent and say just bring me the case this is identical as i can run a the source over the last guy's decision and just

point to the statute and say on the law here's where it is and the facts here it is and then just do a very cautious decision that's not going to be appealed and you're not going to look stupid um that would certainly uh benefit the companies in this case and then you could say, hey, is he can do something zany, unless he was kind of undercover and a Trump mistake. And of all the things that Trump did that were zany, he was very well advised on a lot of these judge picks. So I don't think it was somebody who's going to be surprising or surprisingly arrest. Because I do know, and I agree, like, whenever a case gets assigned to a judge, like the first thing every, every R, anybody's interested in the case goes, does they look at who was the

judge appointed by what's their background, what's their historical precedent. And that absolutely is the case. And obviously, on both sides, there are some crazy judges. You know, you can think of, like, the judge in Texas who rules against the federal government for anything. And I think there's probably a few judges out west who rule for the federal government for everything. And all those cases always go to the Supreme Court or whatever. But I would just say on antitrust, like a lot of, a lot of sweat equity gets put into reading the judges things. And I have just personally found, in general, on the antitrust cases, like the judges, even people who, you know, I've seen people have the Trump judges or the Obama judges, like they do seem to rule antitrust pretty down the middle,

right? Like they go, they read it. Because I do think the judges are worried about, hey, as you said, setting like super novel precedent. And if they do that, it can get appealed and they can get overturned and it'll be pretty embarrassing to get overturned. It's very easy to just go read the precedent, see what's happened and rule. and yeah i i just i definitely hear you on the judge but i think it gets so played up and i just haven't seen judges come out with like super crazy antitrust rulings because it's pretty down the

middle and you will get overturned if you go too crazy and the whole history of antitrust has been a fairly amicable and bipartisan one up until this administration i mean there uh have been good relationships and and probably less partisanship than almost any other administrative type agency issue, it breaks down a little bit when it's very consumer facing, right? So, you know, we saw recently in the Spectrum Brands case a kind of categorized as progressive, but a very young new judge. So it was a little hard to categorize her while a judge appointed by Biden, who, while she didn't get to make a final decision, because the company settled with the government seemed to be very sympathetic and fact-specific about the whole

thing. That was exactly one of the cases I was thinking because I think a lot of people when the judge, if I remember correctly, there was an old judge and they got replaced by a new judge and there was a lot of ink spilt, oh my God, this is an Obama appointee or Biden appointee. They're going to be crazy. They're going to listen to everything the government says. They're down, down with capitalism. And, you know, listening to the trial and you listen much more me, but the judge was very down the book. She was asking interesting questions. I think she was really tipping her hand to the government, hey, this isn't going to go well for you. I think the government got the signal from that because the government settled the whole thing, right? So

again, it's just a case where so much ink was spilled, but I think these cases are, not that they're completely cut and dried, but there's so much backlog. There's so much historical precedent. I think it's really tough for a judge to bring like a lot of political views into this unless it's very much on the margin. Yeah. And in spectrum, we're talking about, you know, high-end door locks and smart locks. There was, there was really not a lot to pull at one's heartstrings. There was not a lot kind of ideological about it. It was fairly fact-specific. Here you are talking about rare diseases and stuff. So I guess there's up the poll. But again, this would be a wholly novel new case. And I think you're going to have the pharma industry.

Like I think you'll have a lot of pharma industry writing into the judge and be like, hey, if you do this, you're going to destroy pharma. It's going to have huge ramifications for all of pharma because, you know, a small cap, they generally go invest in drugs with the hope that they get acquired by a big cap. If you rule against them, there's not going to be an exit on the end. So there's going to be a lot less investment into drug discovery. So do you want to destroy the entire drug discovery business? Because that's what a ruling here could do. Maybe that's a little too hyperbolic. But I do think you'll see a lot of letters or into the court alongside that. And it's such a novel case. It's not clear. I mean, I think one of the big interesting

things Amgen is going to have to do is to decide how much of a case they want to make because sometimes making more and more points implies it's your burden to convince the judge of those points. And I think there's very little as of now that they have to defend here. I mean, they have said categorically in terms of their response, we treat different diseases. We treat different populations of patients. this is not a traditional antitrust issue. And this bundling of medicines, you know, multi-product discounts, a couple things.

You know, it is speculative. It is just something the government's saying. There is, I have no reason based on public information to believe that there are hot docs or that there is a wah-haha behind the scenes. We're going to do this and we're going to jack up prices in these new pricing bundles. Amgen, having already responded to say that they have no plans to do so, presumably they're not going to get embarrassed and embarrass us in this view where in court, you know, the government pulls out,

here's the hot dock saying this was the plan the whole time. They say it does not reflect real world competitive dynamics. Then there's also this issue of rare diseases. How are they supposed to be funded? But if you can't do deals, you know, and you have this very, very lengthy process between discovery and commercialization, you know, years and often billions of dollars, the funny thing about pharma and antitrust is the reason why the industries as concentrated as it is is the government. The government forces these lengthy, expensive processes, largely through the FDA, that only very few entities can possibly make it through. And then they're scandalized that there's very few entities. Well, okay, you know, that's kind of a natural reaction to the government.

I also think even though it's a hypothetical case and a weak one, maybe you just want to litigate based on that and say it's hypothetical and weak, or maybe you want to come up with a very explicit contractual fix to the government. And you say, hey, here's this contractual fix. You know, if that was the rest of the industry, I would really be rooting for Amgen just to fight this and win clean versus having this as a kind of backdoor new regulatory friend for the government to say, hey, we want to get in the nuts and bolts of all of your pricing, including rare diseases.

I mean, the problem with rare diseases is if there's no tying whatsoever, at some point it becomes very hard to finance anything that is very expensive to study and has a very limited market. And I don't even mean tying product to product just to say, look, you know, maybe this will have a broader label. Maybe this area of science will have different ways to monetize down the line. And it's a broader commercial effort. But it can be really hard. And it's not clear that we want to discourage this kind of thing. And I think Amgen is going to be able to come and say, like, this is really important. And we're looking to put more money into this and more research effort into this, not

less. I want to move to banking, but I do just want to quickly wrap it. I think when this when the story of this getting the government suing to Blockbrook, there were two rumors that I heard that are pretty interesting. They're not rumors, speculation. One was speculation that the government

was suing here to prove a point, but that there was absolutely just going off what you last said, the government knows this is going to be a really bad case and they're absolutely going to like just try to take a settlement and get something, you know, hey, we will not, a promise not to monitor or something, and that there is no way the government's going to let this at the court steps because this is that bad a case. Do you have any thoughts on that? I think this is, it really rhymes with spectrum in that my understanding, in both cases from the buyer's perspective,

they thought it was a trivial issue or a non-issue that even though it was trivial, they were happy to solve 100% of what the government said they were talking about. And the government, government wouldn't take yes for an answer. So I think that there is kind of histrionics on the government side and just a desire to position themselves in a way that amongst other things follows through with the Liz Warren complaints about this deal. And kind of with both the DOJ and FTC angling for being more progressive, they're not trying to solve the problems that they say they have with this deal or with spectrum or with deals generally. They're used. using it. They're weaponizing it and they're trying to go beyond the four corners of the

deal to solve other things that they see as problems with the buyers. The other question I was going to ask is a lot. I heard some people said, so Pfizer is buying Cgen in a 40 billion-ish dollar big deal in the cancer space. And that is trading about 50 or 60 percent implied to get through and the government hasn't even sued to block it. And a lot of people based on this and how the government's treated, you know, as we've talked about, deals, think the government will sue to block that. I heard some people saying, hey, you actually want to buy Cgen on this because here's what happened.

The government started looking at Cgen-F Pfizer, this huge $40 billion deal, and they really wanted to sue to block, and they just could not find a hook to suit a block there. So they did this instead, just to kind of put out there, hey, we're, yes, Liz Warren, we are stopping big deals in pharma. but the fact that they brought this instead of Cgen shows that they're not going to bring a case against Cgen. Do you have any thoughts on that kind of line of thinking? No, it's an interesting theory. It's an interesting theory.

I think a suit against that one's somewhat more likely than not, so I don't have those. I think my view is fairly conventional in that. But yeah, no, that that could make. sense. I think that's just one that's interesting. One more question on horizon and then we'll move on to, we'll move on to banking crisis. So if I, I think the best way to estimate odds, because as you said, the downside here is really difficult to estimate. So I think the best way to look at this is go pick an option month where this deal will almost, this lawsuit will almost have certainly been done everything. And you can look at what the implied there is. So, you know, if I look at the December. If I look at the December $100 calls, those last traded for, I think, sorry, I did the math yesterday. I think it was about $13. And this is a deal. So they would be worth $16.50 if the deal went through.

So you can do the math there. That implies just under an 80% chance that this deal was closed by December. And I just want to remind everyone, not investing advice, options are risky. We're just doing the math here to talk about probabilities. But if I threw out, hey, the market's kind of in the 80% range for Amgen winning this case and closing horizon, do you think that's too high, too low, or kind of Goldie locks just right? I think it's fairly Goldie locks. I've been thinking a lot about, I don't know if you listened to the Stan Drucken Miller recently when he spoke at the Stone Conference, but he had this idea about when he has a new idea, he's willing to put on big positions and then take it off if he can disprove it quickly. And I wish I did that on the horizon suit.

I thought the suit sounded very suspect, but it kind of took the time to call to speak with principles, to read the complaint to kind of understand. And it was a very expensive several-day research project because at 90 or so, I thought, in hindsight, it was a really, really good. So we set up some, but we just didn't load up. And then by the time it was really comfortable with it, had gone from 90 to 100, and 100. once you start doing that arithmetic, it kind of sounds about right. Like, I'll take the over on that contract you mentioned,

and I'll take the over on the market implied probability of the equity, as far as you can ascertain it, just from the equity side. But 90, it works a lot better at 90 than at 100. I want to move on to, I think we mentioned Spectrum. So we've mentioned it plenty of times in past, and that they settle and we don't really need to mention it. I just want to move on quickly to the banking sector. So this is where you and I followed for a long time.

I've really been focused on the past few months. But since our last podcast, our last podcast was April state of the markets, this is May. First Republic went under and got taken over by JPMorgan in between now and then. So I just want to ask, you know, regional banks in general have been feeling a lot of pain. I did a post earlier this month that showed, you know, the regional banking ETF is down like 40% over the past six months or so while the market's kind of flat. And, you know, in the global financial crisis, the regional bank ETF was down like 50% and the market was down 40%. So you're already almost to the drawdown you saw on the financial crisis, and that's with a flat market, which I say that, I say that's a opportunity or not. I just only say that to say there is a lot of panic in the space. So you just want to flip it over to you, like kind of what are you seeing and thinking about what's going on in banking these days? it's been a spectacular opportunity for the bailers like if you look at the bidders on the distressed assets they have kind of gotten a chance to dictate terms the government in a few cases had very specific delineations of who they wanted to accept bids from and then you're kind of sitting there in the seat you want to be sitting in where you're kind of deciding what you'll take what you won't take what you'll pay and the relationship with the government

the government kind of said yes to the people. So it's been so it's been triumphant for the bailor outers. I do hear that. I just, just to comment on that. So J.P. Morgan bought First Republic. That was a very big deal. But Silicon Valley Bank last week or two weeks ago, the government released the list of banks that were bidding for Silicon Valley Bank, right?

And there were like, there were at least four banks that I know of that are of decent size that have good balance sheets that were bidding. And their bids got rejected. I just keep looking at it and be like, First Citizens stock went up 100% on announcing the Silicon Valley deal, right? And I know the deal is difficult, but how did these other four banks? And all of them say, like I read all their calls, they all say they put together good packages that they thought price rate. But I just wonder, if First Citizens can have their stock go up by 100% on a deal, like none of the other banks could top that? It just, even with limited competition, it does seem like, I'm just, I'm wondering if the other people underbid or maybe the government discouraged them so much they couldn't.

It just, something strikes me as a little strange there. It was a rushed process. The government excluded private equity bids. They kind of had, and if you look at the, if you look at the nature of the people who won, you have a lot of kind of like concentrated family dominated institutions where they probably internally could act very, very quickly. I think that's right. If you were the government and I was a CEO, could actually just like give you an

oral answer on some commitment where you had some side qualitative issue. And I was like, yes, I will do that. And then everybody else had to go back to their investment committee or board or something. And so I rather suspect the extreme informality and time crunch had a big qualitative difference for the people who want. I think you're probably right. And especially Silicon Valley Bank, because that happened so quick, you know, like literally hundreds of loans that you need to look through and thousands of assets worth billions of dollars. And I do think you're right, the Silicon Valley guys, they might have been able to swag it and say,

okay, like we've got a lot of margin of safety here. We can buy this. Whereas maybe some of the other banks said, hey, we need a little bit more time. We have to build in more uncertainty if we can't get a little more time to go and really research these things. So, yeah, I think that's probably right. So, yeah.

So the bailers have done very well. The two big bail banks have done well. far. I mean, we know more the positive than the negative because we don't know if there's going to be this big regulatory backlash that, you know, kind of cuts into whatever benefit. And especially in the last few weeks, there's quite a good glimmer of hope for the community banks. You know, you see the loss of deposits actually in many cases reversed and people are kind of growing deposits again. There's really, I think we're out of the panic phase of whatever this banking crisis is. And every day that goes by without another failure makes the existing failures look more anomalous.

And we hear from so many banks is just the ones that fail to have nothing to do with huge numbers of the banks out there. And it's almost a mystery if you look at the areas that are most worried about right now, kind of where the bad ones are, where the mistakes are, other than these very kind of specific cases that have failed so far, because one by one, the individual banks don't look nearly as bad to me as the generalized description of the problem, including some things that you could have always said about banks. I mean, some of the, some of the kind of breathless reporting on this is simply kind of just stating terms about what banking is and saying it kind of a, kind of a gory way to describe how bad it could be in the worst case scenario.

you know and some things like so again i think i was talking to someone and i marked down i think i've read like 60 bank 10 ks in the past couple weeks and one of the things that jumps out to me is everybody says oh commercial real estate downturn you're going to have this big commercial real estate and yeah like it is very difficult right because let's say you've got a bank that has i tell you hey four percent of their loan book is in commercial real estate right four percent of their loan book is in offices you'd say oh that's nothing but banks are generally levered about 10 to 1. So if you thought like all those office loans were a zero, that would be about 40% of their equity or something, right? So it's very difficult there. But you look at these things like

every time I talk to someone, they're like, oh, what about when we have the commercial real estate recession coming? All this. It's like these banks, like I think a lot of people think the empty office buildings in downtown New York or San Francisco are lent to by these small banks. And that's simply not the case. Most of them, if they do have office exposure, it's like the suburban office exposure or, you know, a doctor who owns his office. office or something tends to be more where their office exposure is. And yeah, I can't disprove a commercial real estate recession. But I think a lot of people seem to think this is the global financial crisis 2.0. And that was, hey, this loan that I thought was worth AAA worth a hundred

cents on the dollar come hell or high water. It's worth zero the next day. Whereas this to me has been a lot more a couple banks failed on risk control. And yes, there might be commercial real estate pain coming, but these banks have had over a year to prepare for it. They all look well-reserved. The commercial real estate they do, it's smaller, it's well-diversified. Like, I just, it's really hard for me to look at these banks and look at this panic and not think there's opportunity. Also, a lot of banking is a lot of the banks lend in areas that have not had a huge run-up. A lot of financial analysts and hedge funds and financial intermediaries are in the areas that have had a huge run-up. So you think about real estate as mid-10 Manhattan

and San Francisco and so on. And those have had big run-ups and those could be precarious. But huge swaths of the country never did. And a lot of the bankers I talk with that originated tons of lending also have offloaded a lot of them to non-bank entities, right? A lot of the more speculative credit is outside of the whole kind of traditional banking system, full stop. So I think both of those things kind of.

make the individual cases that I've looked at much more benign than the kind of thematic story, you know, stuff you talk about if you were reporting on it. I just, look, a recession can come and recession is scary, but these banks, many of them have, you know, I wasn't around, I wasn't really around for the savings and loans crisis, so I can't really speak to that. I can only speak to some of the stuff I've read, but I look at these bank balances that I say they look very well reserved for what they were seeing. All of them have spent the past year taking reserves.

up, getting a little more conservative, and time is literally money when it comes to these banks, right? Because if you have a crisis happen today, that's really difficult. But if you can prepare for it for a year, you can build them reserves. You can build up your capital basis. Like that all is really helpful to them. And yeah, I just look at them. I say, maybe we don't have a recession. Or if we do, like all of them, you know, in their 10 queues, they all say, hey, we model for loan reserves based on a Moody's economic forecast. And all of them for the past year have been using the the Moody's downturn forecast. And yes, that's a lot of Excel and a lot of modeling and, you know, things can get into a syncretic, but they're already modeling in that, like,

we're going to have a recession. So I just kind of look at all that. I look at the prices and, you know, history just kind of suggests to me if you can go and buy banks at tangible book and the bank's going to earn above their cost of capital. Like, that's a really interesting proposition. And I think we've got that here and we've just got a lot of panic going on. Yeah. Makes sense. And now, a quick word from our sponsor. Are traditional expert calls in the investment world becoming obsolete? According to Stream, they are, and you can access primary research easily and efficiently through their platform.

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So if you're looking to optimize your research process and increase ROI on investment research spend, Stream has the solution for you. Head over to their website at streamrg.com to learn more. Thanks for listening, and we'll catch you next time. Anything else you want to talk about? Well, let's see. Antitrust banks. I think that's good. I love your conversation with Chance the other day. I guess, you know, AMC is the other one that's been a little bit on my mind, but I don't think I have anything to add to what you guys discussed. So in terms of entertainment value, that's a bit of an amazing situation. It'd be tough to add anything to Chance's thoughts there because she's so thorough on it. You know, I would be embarrassed if listeners could hear before the podcast how much time and mind-share space we have devoted to Mark Zuckerberg's.

Murph time. I think that would be a little embarrassed, but I know that's something that's top of mind these days. Yeah, no, so he claimed 39 minutes for Murph, which is pretty spectacular. So, yeah, he's on a huge fitness kick between Jiu-Jitsu tournaments and CrossFit. It's cool to see. 39-58 weighted, which, you know, you have to run. So it's running two miles in total. So you'd have to run two miles with a weighted best on 100 pull-ups, 200 push-ups, 300 air squats. waited. I mean, 39.58, as people are saying, that's like approaching, it's approaching professional athlete levels. And he could have, there's lots we don't know, right? He could have done a partition so you can break the pull-ups and push-ups and everything up into different orders and stuff.

But I just, I don't want to doubt his training and his workout regimen and stuff, and the running is a key there, but I just cannot believe that time. Just over five minutes off of the all-time world record, which is extremely good. And so it's just a matter of somebody kind of new to something versus somebody who has limitless resources to get coaching and so forth. That is true. That is true. If this was as stated, it would be interesting to hear his coach talk about it. And it would be great to see just a video clip of just his form on some of these things to see how he'd move that quickly. But it was an impressive.

If he did it under 40 minutes, his coach should go out marketing that because I think almost every crossheter in the world is going to sign up for his program. If you can tell us how he got Mark Zuckerberg under 40 minute, MIRF. Partitioned, unpartitioned, whatever it was, because that is a heck of a time.

And that's a heck of a coaching job if he did it. The two biggest, the two boldest Murf claims have been so far, Zuck and Donald Trump, Jr. And so I think it would be a great charity to have a Donald Jr. versus Zuck MIRF competition. People could bet on it, bet on their times, bet on who wins with a whole thing videoed with actual CrossFit judges to see. For those who don't know, Donald Trump, I think it was in 2016 or 17. He said he did

Murph and he reported at a time, like, Zucks was at least believable to the point where Chris and I could believe it. I think the time that Donald Trump reported would have been, Donald Trump Jr. reported would have been like he won, he would have won the CrossFit games. Like he would be the best murfer in the world. And, you know, age does matter a little bit in these things. So I think Donaldson Jr. was like mid-40. So he would be a mid-40 man who looks fine, but not like a professional athlete, a mid-40 man who was beating like these cross-bit, like just legends, just smoking them at it. So that was unbelievable. That was unbelievable. But, anyway, Chris, this would be great.

Summer's getting underway. I'm looking forward to catching up for our June state of the markets. And we will talk then. Absolutely. Thanks, Andrew. A quick disclaimer. Nothing on this podcast should be considered investment advice. Guests or the host may have positions in any of the stocks mentioned during this podcast. Please do your own work and consult a financial advisor. Thanks.