Charles Schwab is in a funny place right now. It’s clients seem to think that it’s a pretty safe place to keep money: in March, client assets flowing into the brokerage were at the second-highest level ever for that month, the company said Thursday.
At the same time, the stock has been hammered, falling more than 37% in the first quarter of the year, its worst performance since the financial crisis. The New York Times went so far as to write a story that mentioned Schwab and the now-defunct Silicon Valley Bank in the same breath, because Schwab is sitting on unrealized bond losses due to rising interest rates.
And that’s pretty much were the similarities end. Whereas SVB’s deposits were made up a a few whales who terrified each other in a WhatsApp group chat, Schwab’s customers are lots and lots of normal people with relatively small account balances (disclosure: including me).
And while SVB’s unrealized losses in its bond holdings meant that had negative tangible common equity, Schwab is still just in positive territory even if it had to realize 100% of its bond losses – a scenario that Schwab’s execs have been very forceful is emphasizing is not going to happen. Schwab has plenty of cash and the funny thing about unrealized losses in hold-to-maturity bonds is that if you never sell the bonds, and investors believe you will never sell the bonds and the bonds don’t default, everything is fine.
But, as the NYT article pointed out, the stock is still getting hammered. So what’s going on? Rising interest rates are making it more expensive for the company to fund itself as its depositors move money into higher yielding securities. In other words, the stock is down (a lot, to be fair) for the very basic but non-catastrophic reason that the company is likely in the short-term to earn less money.
Normally, that’s bad but not particularly scary. But normally, there isn’t the biggest banking crisis since 2008.
Closers in the News
💸 The IRS wants to increase the number of audits it does on the ultra-wealthy and complex businesses by ten fold, back to the level they were about a decade ago .
🚫 Bank of America cut an online client conference on geopolitics short after being accused of putting on a “relentlessly anti-Ukrainian” program.
⚖️ Jes Staley says allegations he helped Jeffrey Epstein are “slanderous” as he seeks to separate a suit against him from one against his former employer, JPMorgan Chase.
📰 A fascinating New York Times obituary for Bing Newcomb, who wrote the code that made E*Trade. Newcomb grew up in a small town in Oregon’s Willamette Valley. Legally blind, he was the firm person in his family to go to college. Amazingly, the first trade done with his code was place by a dentist in Michigan, a perfect indication of the kind of person who would become the median E*Trade customer.
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