Banks Pass Stress Tests and Prepare for a Return to Normal

Successfully clearing their latest Fed stress tests will free them to resume huge stock buybacks.

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The Fed cleared big banks to return more money to shareholders.Credit…Stefani Reynolds for The New York Times

Banks capitalize on their healthy pandemic

Nearly two dozen of the nation’s largest lenders, including Bank of America and JPMorgan Chase, yesterday passed the Fed’s annual test of whether they could survive a severe economic downturn. Last year, during the height of the pandemic, Wall Street’s six largest banks earned a collective $81 billion. They can clearly survive, and thrive, through some pretty significant stress. That is good news — but the risk is that it leads to lenders and policymakers letting their guards down as conditions improve.

The main reason the biggest banks fared so well during the pandemic was the financial crisis. Back in 2009, the first year the Fed ran its stress tests, four of those six banks failed, falling $55 billion short of what regulators said the lenders would need to survive another severe recession. Now, after more than a decade of rule changes, cajoling and public shaming, those same six banks have $500 billion more than is required to cover bad loans, negative trades or other losses. The hard lesson learned after Lehman Brothers failed was that the best way to avoid another crisis like the subprime meltdown was to be prepared for one.

That lesson may be slipping away. Fearing the effects of the pandemic, last year regulators told banks to preserve capital by suspending dividends and stock buybacks. Now that the banks have weathered the pandemic and passed this year’s stress test, these restrictions will be removed. Next week, lenders will begin submitting their capital plans for approval. An analyst at Barclays predicts that banks will pay out as much as $200 billion to shareholders in the next year.

Shortly after the stress test results came out, the Financial Services Forum, an industry lobbying group, released a statement that said allowing banks to pay out their excess capital to shareholders would make the economy stronger.

The ire of the public and politicians these days is just as likely to be focused on Big Tech as on Wall Street. Billionaire tax avoidance now overshadows banker bonuses as the source of America’s inequality. It took aggressive efforts from policymakers to steady the markets and bolster the economy during the worst of the pandemic, but banks were not at the center of the crisis, like they were during the previous meltdown. And so, if the seeds of the next crisis are sowed in the current one, when it comes to the financial system the soil is fertile right now.

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HERE’S WHAT’S HAPPENING

Antitrust bills targeting Big Tech pass their first test. The House Judiciary Committee approved all six proposals to rein in Silicon Valley, including the so-called breakup bill that could force tech titans to shed some of their businesses. But the hard part comes next, including winning passage from the full House and, more important, the Senate.

Shareholders oust Toshiba’s chairman. The rejection of Osamu Nagayama, after revelations that the Japanese industrial giant colluded with the government to inappropriately pressure investors, is a landmark in Japanese corporate governance and a big win for foreign activist funds.

Teamsters approve a plan to help organize workers at Amazon. Union delegates overwhelmingly voted to “supply all resources necessary” to help unionization campaigns at the e-commerce giant, and eventually create a special team for the effort. The Teamsters didn’t elaborate on how much money it would spend, nor a timeline for the plan.

Google delays a key software privacy change. The company said it would begin blocking the tracking software known as cookies from its Chrome browser in 2023, a year later than expected. The move follows concerns by rivals and regulators that Google was removing a tool used by competing ad companies — though other web browsers have taken a similar step.

SPACs take another step into the mainstream. When the Russell 3000 stock index is overhauled today, a number of new entrants will include companies that went public by merging with blank-check funds, like DraftKings, Lordstown and Nikola.

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Biden’s big infrastructure compromise

President Biden yesterday celebrated an agreement on infrastructure spending with a bipartisan group of senators. The hope is that the deal will result in a bill more palatable to members of Congress who balked at Biden’s more expansive spending agenda.

“We have a deal,” Biden said about the agreement on $579 billion in new spending on construction, repairs and infrastructure upgrades. “I think it’s really important we’ve all agreed that none of us got all that we wanted.” The deal still faces hurdles, but the basics are sorted. Phased in over eight years, the proposed legislation, which would be paid for by repurposing previously borrowed funds and stepped-up tax collection, will include:

$201 billion in water, sewer, power and environmental projects

$109 billion in road and bridge projects

$66 billion in rail projects and $49 billion for public transit

$65 billion for broadband infrastructure

$47 billion for “resilience” projects to cope with climate change

A bunch of stuff was cut. The agreement left out some of Democrats’ prized proposals, which means Biden won’t be able to make good on some campaign promises. The deal does not include:

New taxes on the wealthy or on corporations

Major funding for housing

Biden’s big “human infrastructure” plan for child care and education

There’s a giant caveat. Biden said a bipartisan bill on infrastructure, which would need support from at least 60 senators, could advance only in tandem with a much larger bill that covers the things cut out of the compromise proposal. With little support from Republicans for the bigger bill, it would likely need to pass via reconciliation, a process in which all 50 Democratic senators (if they remain united) could overcome a filibuster. Democratic leaders hope for this all to come together by the fall.

“We’re bullish on the package itself,” a Chamber of Commerce spokesperson told DealBook, although the trade association resists linking the infrastructure bill to the bigger proposal with more of Biden’s wish list. Regardless, businesses appear to be gearing up for an influx of projects: Shares of Caterpillar, U.S. Steel and others jumped yesterday on news of the compromise deal, however uncertain its final form.

For more on the prospects for infrastructure spending, see today’s edition of our sister newsletter, The Morning.

“I bet you, I promise you: 50 percent of it can go away if people have the courage.”

— Tsedal Neeley of Harvard Business School on the modern glut of meetings, and what to do about it.

In the papers

Some of the academic research that caught our eye this week, summarized in one sentence:

Local restrictions on Airbnb listings reduce property values in areas popular with tourists. (Hans R.A. Koster, Jos van Ommeren and Nicolas Volkhausen)

For some creative tasks, the work of teams isn’t any better than what’s produced by individuals. (Uri Gneezy, Katharina Laske and Marina Schroder)

People underestimate how addicted they are to smartphones and social media. (Hunt Allcott, Matthew Gentzkow and Lena Song)

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Exclusive: A Spanx deal takes shape

Just as people are beginning to squeeze into form-fitting clothes again, shapewear brand Spanx has tapped Goldman Sachs to explore options including a sale, DealBook hears from multiple sources familiar with the situation. Any deal would likely value the brand at $1 billion or more and could allow Sara Blakely, Spanx’s founder, to keep some of her ownership in the company. Spanx generated between $300 million and $400 million in revenue over the past year, and between $50 million and $80 million in operating earnings. Spanx did not respond to multiple requests for comment.

People are ready to dress up again. Sales of women’s dresses were up 50 percent the week before Easter compared with the same week in 2019, according to NPD, which could signal a need for shapewear. But key to shapewear’s post-pandemic success will be products that maintain a level of comfort many have gotten used to while working in loose-fitting clothes over the past year and a half. And post-pandemic style trends are hard to predict, with even professional forecasters conceding befuddlement.

Like Kleenex with tissue, Spanx has become synonymous with the product it sells. But it has also spawned copycats such as Kim Kardashian’s Skims, recently valued at $1.6 billion, which distinguishes itself with modern cuts and a broader color assortment. Spanx, which was founded more than 20 years ago, has faced pushback recently for maintaining its restrictive ways amid new focus on body neutrality and rejection of the “culture of perfection.” Seeking new growth, Spanx has expanded beyond undergarments into denim, swimsuits and undershirts for men.

Spanx’s founder has long resisted selling or taking it public. But with private equity firms eager to spend idle capital and valuations on the rise, consumer brands are eyeing lofty paydays. The online fashion retailer Ssense announced the first fund-raising in its 18-year history earlier this month, which valued the company at more than 5 billion Canadian dollars ($4 billion). A slew of other brands — including Allbirds and Warby Parker — are planning I.P.O.s. As for potential buyers for Spanx, we hear a number of private equity firms are circling, including Carlyle, whose past investments in brands include Beautycounter, OGX and Supreme, and TPG, which has investments like Anastasia Beverly Hills under its belt.

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THE SPEED READ

Deals

Credit Suisse executives reportedly feel pressure to devise a strategic turnaround that may include merging with its rival, UBS. (Reuters)

Didi Chuxing, the Chinese ride-hailing giant, is reportedly aiming for a valuation of more than $70 billion in its I.P.O. (WSJ)

BuzzFeed clinched a deal to go public by merging with a SPAC at a $1.5 billion valuation, down from what it was appraised at five years ago. (NYT)

Politics and policy

President Biden formally banned the import of some Chinese solar panel components, citing the use of forced labor in their manufacturing. (NYT)

A New York State court suspended Rudy Giuliani’s law license, citing his spreading of misinformation about the 2020 presidential election results. (NYT)

Tech

The artist Beeple spurred a global fervor for NFTs by selling a collage for $69 million, but acceptance by the art world continues to elude him. (WSJ)

“The Internet Eats Up Less Energy Than You Might Think” (NYT)

Best of the rest

“Why Washington Can’t Quit Listening to Larry Summers” (NYT)

Declan Kelly, the C.E.O. of the P.R. giant Teneo, stepped down from a nonprofit’s board after allegations of drunken misconduct at a recent fund-raiser. (FT)

Chinese factories are making viral videos of their operations for TikTok. (Rest of World)

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