☀☕ Trustbusters take flight! “The Spirit Effect”

Happy Thursday!

It’s the 101st MoneyFitt Morning on LinkedIn Newsletters🎉

Market Roundup 📊 09-Mar-23

US large-cap S&P 500 closed 0.14% UP ▲
Tech-heavy Nasdaq Composite closed 0.4% UP ▲
Pan European STOXX Europe 600 closed 0.12% UP ▲
HK’s Hang Seng Index closed 2.35% DOWN 🔻🔻
Japan’s Nikkei 225 closed 0.48% UP ▲

— The MoneyFitt Morning (@MoneyFitt)
Mar 9, 2023

📝 Focus

Trustbusters take flight! “The Spirit Effect” 

📊 In the Markets

Silvergate heads to the Pearly Gates (also SVB)

📖 MoneyFitt Explains

🎓️ Antitrust and Monopolies

📝 Focus

Trustbusters take flight! “The Spirit Effect”

Spirit Airlines, the ultra low-cost carrier (stock symbol SAVE) and gift-that-keeps-on-giving to American comedians, closed up 4.5% overnight as news broke that the Justice Department is flexing its trust busting 🎓 muscle and filing an antitrust lawsuit to block rival JetBlue’s US$3.8 billion takeover of Spirit to create the fifth-largest US airline. The suit claims the acquisition would raise fares for consumers and decrease options in an industry that in the last 15 years consolidated from 9 large carriers to just 4 (American, Delta, United and Southwest) which together fly 80% of US air traffic.

► And it would also eliminate the “Spirit Effect”, where even if a consumer never ever flies super-low-fare Spirit, they benefit from its existence as rivals still need to compete on pricing. The DOJ says that when Spirit starts flying a given route, average fares drop by 17% but (on JetBlue’s own estimates) when it stops a route, average fares shoot up 30%.

“This acquisition would combine two especially close and fierce head-to-head competitors (with) such large combined market shares that the transaction is presumptively illegal” 

the US DOJ, DC and the states of NY and Massachusetts.

► JetBlue’s pushback is that the merger would create a more powerful competitor to the Big Four. This would bring down fares overall, particularly since JetBlue and Spirit mostly don’t directly compete with one another and hence it wouldn’t significantly decrease competition. Unfortunately, in Spirit’s initial defence to the hostile bid last year (before it caved in when the bid was raised in July) it said “a JetBlue-Spirit combination will result in a higher cost, higher fare airline that would eliminate a lower cost, lower fare airline and eliminate about half of lower cost capacity in the United States”… basically exactly what the Justice Dept is saying.

Passenger paying for a printed Spirit Airlines boarding pass at the airport
– Image credit: Our Gang (Little Rascals) / Hal Roach, WBD via Tenor

► Spirit offers basically the lowest cost flights in the US with pretty much everything but the (narrow, non-reclining) seat charged extra –including carry-on luggage, and even printed boarding passes– hence the endless ridicule (also known as free advertising.) But in fact it ranks overall in the middle of the pack. Of 11 US airlines, Delta ranked #1 with Spirit at #5, above suitor JetBlue at #9 and also ahead of American and United, with Southwest sitting at the very bottom, even before its disastrous December meltdown. (There are endless airline rankings out there, but the one from WalletHub uses 2021 Dept of Transport data for 16 metrics across four main categories.)

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📊 In the Markets

US markets had a little rally in the final half hour to close little changed on Wednesday, as Fed Chair Jerome Powell delivered his second day of semi-annual monetary policy testimony, this time before the House Financial Services Committee. “Higher-and-(MAYBE)-FASTER-for-longer” was the message the Street took away from the previous session, while today Wall Street’s Finest chewed over the word MAYBE.

“I stress that no decision has been made on this,”

Jay Powell, US central bank chief

The number of job openings in the US workers fell by less than expected in January compared to December, but at 10.8 million vacancies reflected a still red-hot labour market. All eyes on Friday morning’s February Non-Farm Payrolls number. Wall Street’s Finest are expecting a slowdown to just 200,000 new jobs created in the month and unemployment unchanged at 3.4%. This would be a massive slowdown from January’s blowout figure of 517,000. (On the other hand, those same highly-paid experts had been expecting 187,000 for January, so watch this space.)

Citi, one of the largest issuers of credit cards in the US, has started to see signs of weakness in consumer debt servicing. Unsurprisingly, borrowers with lower credit scores are leading an uptick in credit losses amid a general increase in US consumers slowing down or being unable to repay their credit card debts.

Today in Musk, Tesla is being investigated by the US National Highway Traffic Safety Administration for having steering wheels come off mid-drive and for complaints that Teslas can brake suddenly for no reason. Twitter broke for the sixth time this year earlier in the week, with Musk calling the code of the site “extremely brittle for no good reason”. And Musk engaged (and then backpedalled) in a Tweet battle with a disabled worker in Iceland who hadn’t been told he’d been fired and was trying to find out why he’d been locked out of his system for 9 days.

And after the US markets closed, two specialised banks hit the markets with bad news – crypto-friendly Silvergate Bank is folding and tech-friendly Silicon Valley Bank needs money. Below for more.

Silvergate heads to the Pearly Gates

Having warned last week that it may not survive, crypto-friendly bank Silvergate announced that it would have an “orderly wind down of Bank operations and a voluntary liquidation of the Bank (which) includes full repayment of all deposits” thanks to a deterioration of its capital position. The bank had been hit hard by the crypto winter and especially the bankruptcy of FTX, which is when short sellers started to really pile in. According to data from S3 Partners, short sellers have earned US$780 million during its slide 98% slide from its November 2021 peak to today’s close. The announcement came after the close and sent the stock down another 42% in after market trading.

(WARNING: Finance Nerdspace Ahead)

► There are a lot of banking industry specific details involved, but –very very roughly– the demise of Silvergate was not because it had bought tons of digital assets which then cratered. It held a lot of normal US Dollar deposits (i.e. “fiat currency”) from crypto exchanges. Those exchanges saw withdrawals by their customers after crypto melted down. Those withdrawals had to be paid back from somewhere, and that led to the exchanges taking their deposits back from Silvergate, which got that money by borrowing cash from the Federal Home Loan Bank of SF (this is normal) and selling bonds that it held, just like any other regulated bank.

► Bonds that banks hold come in two forms: “available for sale” and “held to maturity.” AFS bonds are in the bank’s books at market prices, which go up and down as traded, largely driven by interest rates. HTM bonds are in there at cost, since they’re going to be held and not supposed to be sold before maturity. This is normal, but when it had to sell out of all its AFS bonds, it had to dip into the HTM ones.

► This is where Silvergate got super unlucky: since interest rates shot up all 2022, selling those HTM bonds triggered a massive massive (“mark-to-market”) loss, which then blew up its balance sheet. And a blown up balance sheet especially at a bank (where there are tons of regulations about how strong its balance sheet needs to be) leads to more depositors running for the (silver)gates, leading to an old-fashioned (and only indirectly crypto-winter-related) “run on the bank” and the liquidation we see today.

“Barney, we’re out of bonds available-for-sale”
Image credit: Flintstones / Hanna-Barbera via Tenor

► AND THEN… also after the markets closed on Wednesday, the much larger tech-not-just-crypto-friendly Silicon Valley Bank launched a US$2.25 billion share sale. This comes after a cash crunch hit many of its tech startup and VC customers leading to similar massive losses on its portfolio of US Treasuries and mortgage-backed securities thanks to soaring interest rates (more or less the same AFS and HTM issue that Silvergate faced. But SVB didn’t help itself by putting a huge proportion of its assets into a US$91 billion HTM bond portfolio when interest rates were low, which has since piled up $15bn in losses.)

📖 MoneyFitt Explains

🎓️ Trustbusting! Antitrust, monopolies, competition and consumers (and a tiger)

While it may seem anti-capitalistic for a government agency to stop one private company from buying or merging with another on either agreed or hostile terms, there are strong reasons for it to happen!

Competition or antitrust laws exist to protect consumers from unlawful monopolies or unfair business practices which would harm them through higher prices and less competition, while benefiting certain powerful companies.

The stated mission of the US Federal Trade Commission (FTC) is to protect the public from deceptive or unfair business practices and from unfair methods of competition. The European Competition Commission and the Competition and Markets Authority in the EU and UK have similar mandates.

Preventing mergers and acquisitions from resulting in monopolies is perhaps the easiest part of the job, but firms that have become monopolies or overly concentrated market power can also be broken up.

Collusion between several companies in formal or informal cartels with practices such as price fixing is also forbidden, though proving it in court can be a lot harder.

Weird name, though.

The word “antitrust” is most often used in the US and comes from the battle with “trusts”, which were pioneered in the 1880s by oil magnate John D Rockefeller to group companies across US state lines under one controlling legal body specifically to concentrate power and reduce or eliminate competition. Thus was born the Standard Oil Trust. (S for Standard, O for Oil, hence “ESSO”.) Only in 1911 was it finally broken up and split into 34 companies.

In the US, both the Federal Trade Commission and the entirely separate Department of Justice Antitrust Division enforce federal antitrust laws, agreeing to take cases based on expertise in particular industries or markets. Perhaps just one agency would seem… monopolistic?

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