What to do about short selling?
As shares of another regional bank plummeted on Thursday, Jamie Dimon, head of JPMorgan Chase, increased pressure on regulators to “end” the crisis for small and medium-sized lenders, and joined the chorus calling for an investigation into short sellers as part of any solution.
Short sellers are reaping huge returns on regional bank stocks. These traders, who profit from falling stock prices of the companies they target, earned more than $7.5 billion in 2023 by going after smaller lenders, according to S3 Partners, a provider of financial data. They likely added to that tally on Thursday, when shares of PacWest, the top-selling regional bank, closed nearly 23 percent lower after announcing a new flood of deposits last week.
Dimon wants regulators to step up their scrutiny. The bank’s head has been at the center of efforts to resolve the crisis, and JPMorgan bought troubled First Republic this month. “The SEC has the ability to oversee what people are nominally doing in options, derivatives, short sales,” he told Bloomberg. “If someone is doing something wrong, people are in cahoots or are losing money and then tweeting about a bank, they should go after them and vigorously,” added Dimon.
His intervention echoes calls from the American Banking Association, a trade group, which asked the Securities and Exchange Commission to take action against “market manipulation and other abusive short selling practices.”
The SEC does not plan to ban short selling. But DealBook hears there is growing pressure on the regulator to implement short selling rules required by the Dodd Frank Act. Section 929X of the law requires the SEC to adopt rules on the disclosure of short positions. The SEC has never fully complied with this mandate, and there is some debate over whether that means disclosing individual short positions or aggregate investments.
Proponents say this would add much-needed transparency to the market, because other investors, target company management, and policymakers need to understand what’s really going on when a stock is under attack.
Opponents say short sellers are not the real problem. They say disclosing who was selling a stock would give companies a reason to avoid communicating with those investors, preventing important conversations. “There was always a concern that if there was disclosure of short selling, companies would use that as a weapon to not talk to people,” Jay Clayton, former head of the SEC, told DealBook.
And, critics say, disappearing deposits are the real problem with the current crisis.
“Asset values decline when buyers are not willing to pay as much as they were previously willing to pay for an asset,” Chester Spatt, professor of finance at Carnegie Mellon’s Tepper School of Business, told DealBook. “This argument does not depend on whether short selling is permitted or disclosed.”
Even Dimon admitted that his call was at odds with his own bank’s research. JPMorgan analysts say that short selling is not to blame for the stock’s slump. “I think they might be partially wrong,” he said.
HERE’S WHAT’S HAPPENING
Ron DeSantis blocks his travel logs from public view. Florida’s governor passed a law on Thursday that prohibits state agencies from sharing safety and travel information. Critics say the measure is aimed at preventing damaging information about his travels from being revealed when he joins the Republican presidential race.
The Biden administration warns migrants who want to cross the US-Mexico border. Alejandro Mayorkas, Secretary of Homeland Security, reiterated that the “border is not open” after Title 42, A pandemic-era policy that allowed the government to expel migrants before they could apply for asylum expired on Thursday.
Senior US and Chinese officials have rare conversations. Jake Sullivan, the national security adviser, met Wang Yi, China’s top foreign affairs official, in Vienna this week in a bid to restore high-level contacts between Washington and Beijing. The discussions follow a period of limited senior communication after the US shot down an alleged Chinese spy balloon.
SoftBank is launching an IPO worth up to $10 billion for Arm. The Japanese tech conglomerate is testing investor interest for a New York listing on the chip designer that could be the biggest globally this year, according to Bloomberg.
Musk says he will finally replace himself on Twitter
Elon Musk made good on his promise to answer the big succession question looming over Twitter, saying on Thursday that his social media platform would have a new CEO to replace it in a matter of weeks.
There are still many questions about what this means for the company, its profit prospects and the regulatory challenges it faces. But the announcement was met with huge relief in another corner of Musk’s business empire: Tesla’s shares surged as jaded investors hoped the move would free him to spend more time running the electric vehicle maker.
Who is the mysterious CEO? Linda Yaccarino, head of publicity at NBCUniversal, is Musk’s choice, The Wall Street Journal reported. The two have been in discussions for weeks, according to The Times. An additional twist: Mrs. Yaccarino interviewed Musk onstage at an industry event in Miami last month.
Who is Mrs. Yaccarino? She played a key role in launching Peacock, NBCUniversal’s fast-growing streaming service, and specializes in data-driven advertising — long seen as a shortcoming at Twitter.
Winning over advertisers is the number one job for any Twitter boss. Big brands have abandoned the platform since Musk took Twitter private in a $44 billion deal, and the digital advertising market is slumping amid a slowing economy. (When Twitter was a publicly traded company, about 90% of its revenue came from selling ads.)
Regulators, cash flow and debt payments remain a big focus. The company’s content moderation operation, which Musk cut to cut costs, faces regulatory scrutiny on both sides of the Atlantic. And getting the company cash flow positive again is key, with Musk facing $1.5 billion in interest payments on the debt he raised to buy Twitter. He said he expects to hit that milestone this quarter.
No one expects the outspoken Mr. Musk take a backseat. He said he will become “executive chairman and CTO” – presumably chief technology officer – “overseeing products, software and sysops”. Musk had said for months that he would step down as CEO because running the company had become “painful,” punctuated by occasional nights sleeping on his office couch.
NBCUniversal faces its own succession issues. The company is still seeking a permanent replacement for Jeff Shell, the chief executive who was fired last month after an internal investigation found he used his position to pressure a CNBC anchor for sex.
“People have woken up and they know what’s at stake in this election in a way they didn’t the day before. And if anyone was going to ask the tough questions and have that confusing conversation, they should be on CNN.”
— chris lightthe president of CNN, defending the network’s decision to broadcast live on Wednesday a town hall event with Donald Trump, in which the former president unloaded a new torrent of election lies.
A glimmer of hope in debt ceiling talks
Stock futures were gaining on Friday on some good news out of Washington: signs that talks over the debt ceiling stalemate had taken a positive turn.
The official news doesn’t look like much. President Biden and key congressional leaders postponed a planned second meeting for today. The reason: Senior White House officials and congressional aides found common ground.
“The last 48 hours have given us more reason to be hopeful,” said Rep. Dusty Johnson, a South Dakota Republican and leader of the Main Street Caucus, an influential group of traditional conservatives who have championed the spending cuts.
A breakthrough in energy permits could be the key to a deal. Negotiators are close to a proposal that would accelerate the production of fossil fuels It is clean energy projects, pleasing Republicans and Democrats alike, according to Bloomberg. An aide to House Speaker Kevin McCarthy sees chances “better than 50/50” that this will be part of a deal. Progress has also been made in recovering unspent Covid-19 funds.
Wall Street is worried about the prospect of a no-deal scenario. Jamie Dimon said on Thursday that a default would be “potentially catastrophic”, echoing the assessment made in recent days by Treasury Secretary Janet Yellen. “The closer you get to that, you panic” in stock and Treasury markets, she added. “It could affect other markets around the world.”
By 7:30 AM ET, S&P 500 futures were up nearly 0.4 percent, and European equities were also up. On Thursday, the benchmark index fell as investors continued to fear a crisis involving regional banks and a slowing economy. Investors are hoping some progress emerges before June 1, Yellen’s “Date X” prediction for when the country will run out of cash to pay its bills.
“We pursued a last-minute deal, but not without significant drama, resulting in further market and economic volatility,” John Lynch, chief investment officer at Comerica Wealth Management, wrote in an investor note this week.
THE SPEED OF READING
Offers
Takeover talks between Apollo and THG, the struggling online retailer, broke down, sending THG shares plunging on Friday. (Bloomberg)
Carl Icahn’s holding company has authorized the purchase of up to $500 million in shares as the company tries to fend off a short selling campaign that sent its shares into a precipitous plunge. (Bloomberg)
Policy
“An Arrogant Clean Energy Pioneer With $400 Billion to Distribute” (NYT)
A federal judge has declared laws that prohibit licensed firearms dealers from selling guns to customers aged 18 to 20 unconstitutional. (WaPo)
Citigroup is reportedly in talks with Texas officials about allowing the bank to resume selling municipal bonds there after a 2021 state law against “waking” companies excluded it from the market. (Fox Business)
best of the rest
Foreign travelers bound for the US no longer need to prove they are vaccinated against Covid to enter the country. (NYT)
New records show that an organization led by Leonard Leo, the conservative activist, spent heavily on various right-wing groups and causes. (NYT)
“Workers are happier than they have been in decades” (WSJ)
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