Student Loans, bank earnings, Sixth Street Partners, and more
Student loans, a large insurance firm acquisition, big bank earnings, the London Metal Exchange, and recent economic data
Today we will talk about: student loans, a large insurance firm acquisition, big bank earnings, the London Metal Exchange, and recent economic data
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The Week’s Briefing:
M&A
Sixth Street Partners agreed to buy life insurance firm, Talcott Resolution for $2.2Bn
UK brokerage firm IG Group is to buy U.S. options trading firm, Tastytrade for $1Bn
TowerBrook Capital Partners and private-equity firm Further Global Capital Management have agreed to acquire specialty insurance company, ProSight Global Inc. in an all-cash $586MM deal.
Banking, Insurance & Regulation
Capital One was fined $290MM for ‘wilful’ anti-money laundering failures
Katie Porter loses her seat on the House Financial Services Committee
CEO of Citizens Financial says they are open to bank acquisitions
Under a new rule, a top bank regulator completed just before stepping down, banks would be prohibited from refusing to lend to entire industries - mainly directed at the oil & gas industry
US Bancorp permanently shut nearly 400 branches, mostly in Q4 last year, moving further towards online/digital banking
US Bancorp’s CFO, Terry Dolan, said they are open to acquiring a smaller bank or a technology/payments company.
An ECB survey found that Eurozone banks tightened lending conditions late last year, fearing bad loans.
Total Hedge fund industry assets surge to a record $3.6 trillion
After 15 years, Paul Singer’s hedge fund, Elliott Management, closes its Hong Kong office, redirecting its staff to London and Tokyo.
After 144 years, the London Metal Exchange trading floor, “the Ring”, is set to close, under new proposals the LME laid out.
The LSE-Refinitiv deal is set to close on the 29th of January
Deutsche Bank board member, Alexander Schütz dumps his stake in the bank.
Economics & Markets
ECB is to cap yield curves, but refuses to call it yield curve control. The ECB is buying bonds to limit the differences between yields for the strongest and weakest economies in the euro zone. Unlike the Bank of Japan or Australia, the ECB has not made clear what bond levels they are targeting.
U.S. existing-home sales increased (unexpectedly) in December, and had its best year since 2006
According to a number of economists, the FED is to taper asset purchases in 2022, and are expecting the FOMC to announce no changes to their bond-buying program until next year.
Jobless claims fell slightly, last week, and the Philadelphia Fed index rose to 26.5
PMI’s stayed strong, with the manufacturing sector expanding in December
Next week: Q4 ‘20 GDP numbers are set to be released, as well as durable goods, consumer sentiment, CPI and new home sales data.
General Market and Economic Observations
Economic summary:
Philadelphia Fed index (Jan): 26.5, prev. 9.1
Building permits (Dec): 1.709 million, prev. 1.635 million
Housing starts (Dec): 1,669k, prev. 1,547k
Existing home sales (Dec): 6,760k, prev. 6,710k
Jobless claims (Jan. 14): 900k, prev. 920k
Continuing claims (Jan. 7): 5,050k, prev. 5,180k
Markit manufacturing PMI - flash (Jan): 59.1, prev. 57.1
Markit services PMI - flash (Jan): 57.5, prev. 54.8
The housing market was very strong last month, with permits, and existing home sales at the highest since 2006.
The manufacturing sector continued to expand, with PMI’s coming in stronger than before.
The Philadelphia Fed index, which measures regional manufacturing growth covering Pennsylvania, New Jersey and Delaware, was very strong coming in at 26.5, further supporting the fact that the manufacturing side of the economy remained strong, despite an uptick in Covid cases, further restrictions, and general supply chain disruption.
Equity markets rallied to new all time highs, led by a strong rotation out of the value trade back into mega-cap tech names, such as Amazon and Google.
Inflation expectations continued to rise, with the 10-year breakeven rate at the highest levels since late 2018.
Biggest stories of the week:
Sixth Street Partners agreed to buy life insurance firm, Talcott Resolution for $2.2Bn
$50Bn investment firm Sixth Street Partners has agreed to buy annuities company Talcott Resolution for $2 billion, from a group of investors, including Cornell Capital LLC, Global Atlantic Financial Group, Atlas Merchant Capital LLC, and a group of HNWI Family Offices.
Talcott Resolution has over $90 billion in liabilities and surplus for its ~900,000 customers.
Since the 2008 GFC, asset managers and private equity funds have been buying up large numbers of life-insurance policies and annuities, and even entire operating units. This is because insurance firms have been narrowing their focus and divesting product lines to streamline their businesses in an ultra-low interest rate world.
Sixth Street recently amassed one of the biggest pools of private capital on record, where it raised $12Bn for Tao, its flagship fund, last year, bringing the total to $25Bn raised.
After 15 years, Paul Singer’s hedge fund, Elliott Management, closes its Hong Kong office
The activist fund, Elliot Management, run by Peter Singer, has had a Hong Kong presence for 15 years. It will now close its offices in Hong Kong and shift their staff to its London and Tokyo offices. Its Tokyo office will become the fund’s only presence in Asia.
Elliot’s largest Asian campaigns include a $2.5Bn stake in Soft Bank, a Japanese conglomerate run by Masayoshi Son, and a 6-year long activist campaign with the Bank of East Asia.
The fund’s departure comes after after China increased its power in Hong Kong, and imposed national security laws there. A move against the U.S. and the Europe.
Katie Porter loses her seat on the House Financial Services Committee
The California Democratic Rep. Katie Porter lost her seat on the House Financial Services Committee after she requested to be seated first on two other committees.
The former law professor was known for her sharp questioning of executives and Trump administration officials, with white boards and visual aids (here’s a well-known video of her questioning Wells Fargo CEO, Charlie Scharf, and JPMorgan CEO, Jamie Dimon).
Porter asked instead to be considered for seats on the Oversight and Reform Committee and the Natural Resources Committee.
London Metal Exchange trading floor, “the Ring”, is set to close after 144 years
The London Metal Exchange has proposed to permanently shut its “Ring” trading floor, where commodities and metals have been traded since 1877.
The move comes after the floor was closed for much of last year due to the pandemic
The red sofa ring (it literally has a round, red sofa) is the last open-outcry trading floor in Europe, where traders communicate through shouting and hand movements.
The LME plans to move the in-person trading online, and is not the first trading floor to close in favour of electronic-trading - the New York Mercantile Exchange’s last traders left in 2016.
The LME is known for its strict, sharp dress code and conduct. Prices for metals and commodities are set in frantic 5-minute trading sessions by traders, who shout and move their hands to convey information.
“It's a piece of history that sadly will be going, but at the end of the day we’ve all managed very well, it’s electronic, it’s a fair representation — I haven’t heard one customer complain about it. The one loss is the sense of the LME Ring as a community.”
- Malcom Freeman, a director at Kingdom Futures, who started his career working on the Ring in 1974.
Today’s discussion
Student loan debt
Student loan debt has been growing, almost linearly, for the past 17 years to $1.5tn. This trend has fuelled a national debate about student loans, leading to many members of the democratic party, such as Elizabeth Warren and Bernie Sanders, calling for it to be ‘forgiven’.
The high costs have left young Americans saddled with immense debt burdens, and this can almost be proven: declining homeownership rates, fewer small businesses, young people delaying marriage and putting off having children.
However, the real picture shows a slightly different story. Although the growth has been rising, it has recently been rising for different reasons.
Moody’s Investors Service said in a report last week that the amount of new student-loan borrowing declined 8% since its peak in 2012 at $115Bn, including a sharp 24% reduction in borrowing among undergraduate students.
According to Moody’s, from 2010 to 2018, the number of undergraduate students fell by more than 1 million, for mostly good reasons. Due to a strong U.S. economy, community college enrolment is down, and those who do still borrow have “greater potential for increased earnings.” - according to Moody’s.
This leads to the question, why then is student debt still rising?
The answer simply is that student borrowers aren’t repaying what they owe, or, at least, not with the expected urgency.
For example, almost half the student borrowers who were in school during the financial crisis made little effort in reducing their debt balance’s after 5 years. A similar report by the Federal Reserve Bank of New York said the same thing, which found that just 36% of borrowers who were current in their loans in the second quarter made little changes in their balance over the previous year. Over the past decade, the existing balance dropped each year by an average of just 3%.
3% is lower than the current fixed interest rates on federal loans of 4.53% for undergraduates and 6.08% for those attending graduate school. This shows that borrowers as a whole are not struggling as much as it seems.
Part of the reason the repayment rate is so low is because it’s intentional.
This is because many graduates are using ‘income-driven repayment options’ (IDR payments), which grew in popularity after the 2008 GFC, as a way to help people manage their heavy student-loan debt. Generally, they cap the required monthly payments based on a percentage of ones discretionary income. Moody’s said that 4 out of the 5 programs include outright debt forgiveness after 20-25 years of payments.
The fact that borrowers can pay less than the actual interest rate on their loans, directly impacts holders of student-loan asset backed securities. Billions of dollars in student-loan bonds wouldn’t be able to be paid off in time, so issuers have extended many of the maturities by decades to avoid downgrades (see this WSJ article).
Because IDR payments are often below the actual monthly interest accruals, it often results in loan balances growing even as borrowers make their required payments.
To summarise the WSJ article (linked above), it starts with a 50 year old who owed $250,000 in student loans. She entered an IDR program, and the bonds backed by a pool of loans (including hers) were on the verge of a downgrade by Moody’s. The issuer of the ABS and the investors agreed, as a result, to extend the maturity dates by a few decades to keep the top ratings on the ABS’s. The Consumer Financial Protection Bureau recently had been concerned with SLABS (student loan ABS’s), which may mislead borrowers because of the investors’ incentive to prop up credit ratings. All in all, that person now has a student-loan that will mature when she is 114 years old.
It is hard to make the case that student loans should be forgiven given that:
- College costs are now moving in line with inflation - the inflation-adjusted cost of getting an undergraduate degree is now mostly steady relative to household income.
- Many borrowers are intentionally slowing down their repayments, often to the point that their outstanding balance grows even though they make their required repayments.
Not to mention that you can’t just “forgive” loans, they don’t just disappear, someone has to pay for them, and $1.5 trillion is a lot of money that has to be paid by the government, especially at a time where the U.S. is running record deficits and is printing trillions of dollars as though there will be no consequences, mainly justified by low interest rates (which is misleading in itself).
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