Chris DeMuth's State of the Markets May 2023 (Podcast #169)
It's time to welcome back Chris DeMuth for his monthly state of the markets. For this May 2023 edition, Chris shares his thoughts on the government suing to block the Horizon Therapeutics sale to Amgen, government's history of antitrust cases, the Amazon / iRobot deal, evaluating judges in antitrust cases, banking sector and more!
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Transcript begins below
Andrew Walker: All right. Hello. Welcome to Yet Another Value Podcast. I'm your host, Andrew Walker. And if you like this podcast, it would mean a lot if you could subscribe, rate, follow, review it wherever you're watching, listening to it. With me today, I'm happy to have on, my friend and the founder of Rangeley Capital, Chris DeMuth. Chris, how's it going?
Chris DeMuth: Going well, Andrew. Thanks for having me on.
Andrew: Chris, I think it was a couple of months ago, where we came on and you and I both had beards and then we both shaved our beards. I have him [inaudible] the same day you came on, and we got tons of emails that said, "What's going on with the beard? Where's the beard gang?" And I'm trying to bring the beard back today, and you have gone the exact opposite way.
Chris: Yeah, kind of summer. We've been having some outside CrossFit days, so spring cleaning, plus temperature. It'll come back in the fall, I believe.
Andrew: Nice. Well, it's the end of May 2023, We've got a lot to talk about. But before we get there, I'll just give a quick disclaimer. The same thing I do at the start of every podcast. Nothing on this podcast is investing advice. That's always true, but particularly true today, we're going to touch on a bunch of different situations, so we'll mention a lot of stock. Please remember, not financial advice, consult your financial advisor, everything involves risk. So, all of that out the way, Chris, I think, as we sit here, end of May 2023, there's a lot of interesting stuff happening, right?
If we had talked last week, maybe we would have talked about the debt ceiling and hopefully that's behind us, we don't have to talk about that. But that was always probably going to pass. It was scary to think about what happened if it wouldn't, but it was always probably going to pass. There are really interesting things in the market and I think the first thing that jumps out to us is this month, The Horizon Therapeutics. Their deal, which I think when it got announced at the end of 2022, people said, hey this is a very clean Pharma[?] deal, clean [inaudible] engines [inaudible] them, basically no overlap in the products, clean deal, this is done type [inaudible]. Surprise, surprise, here we are in mid-May. The government sued to block the Horizon, Amgen deal. I think they are taking a very novel approach to trying to block the deal. I've rambled on a lot there. I'll turn it over to you. What do you think is going on with Horizon and Amgen?
Chris: Liz Warren had mentioned this one by name, as one of the deals that she opposed. Although I do think ChatGPT could do a great job of just kind of running through a Liz Warren complaint and pretty much every deal that's announced. But she's mentioned this one by name, and there is a radical administration effort on antitrust. It is not a precedented type of case. If this theory gets endorsed by judges, it would make it almost impossible to do MNA in this whole sector. It's just a theory. It's just kind of academic...
Andrew: This is a really interesting one because again, when this came out, most things especially in Pharma, this Pharma biotech deal. You get blocked because I company, A, own the best cancer drug for treating prostate cancer. I'm going to buy company B, who has another prostate cancer drug that's either the number two player or maybe it's in phase three trials, and if it gets approved it will be a better cancer drug. I try to buy them and the government blocks and says "No, you can't buy your biggest competitor or your biggest potential competitor in the space. We're going to block it. That's a monopoly ground." This is not that. Again, these guys did not have product [inaudible]. So why don't you walk through what the government is trying to block and why it's kind of unprecedented, it would be problematic for deals going forward. Why, I think, most people think the government is likely not guaranteed, but likely to lose in court.
Chris: Sure. So the most conventionally understandable antitrust is a horizontal case. You and I have railroads that go from and to the same place and we meet up over cocktails late at night, once a year and we fix prices. And you can do that with or without a merger, we could fix prices without the deal, or you could buy me, I could buy you. But we could have the goal ultimately of not just having, but having and abusing monopoly power. So that's antitrust. Verticals take is more complicated perhaps, where you have a supply chain, and there is a customer-vendor relationship, and that that would be something that would also distort markets, also be an abuse of pricing power because we have this vertical relationship.
Andrew: So this would be a car manufacturer going in and buying their a tire manufacturer, right?
Andrew: So you vertically integrate. You go by your suppliers, basically.
Chris: And I always kind of trip over myself in explaining this because in modern markets, it implies a very low level of dynamism when there's often a very high level of dynamism. Even setting aside the law and setting aside ethics. We have some hypothetical case, where you and I were able to work around those two constraints. I just don't think this is the kind of thing that works that much. I think that in the railroad case you have these physical things that had incredibly high fixed costs and had no technological alternatives and unbelievably high barriers to entry. And that was the mental model that most people started thinking about antitrust with.
And most modern markets have none of those characteristics, and you have eight billion people on the lot. Some decent number of them are smart and capitalized and you never know who they are, but somebody's out there trying to take... They like money too. And they're out there trying to take share and they have some plan that we don't know. The government seems to be generally, not particularly open-minded about how just market dynamism is working in ways that you and I couldn't possibly be knowable. People are often keeping it a secret when they're about to enter a market. But in any event, in this case...
Andrew: Let me just pause [inaudible]. So, as you said, the dynamism. The fact is most companies try to get rid of their suppliers, right? Like the car manufacturers, they don't own their tire makers anymore. They figured, "Hey, if we sell the tire manufacturers and then we just RFP, who can give us tires the cheapest, that's actually better than owning it ourselves. Because when we own it ourselves, it gets sloppy, it gets inefficient. We can go buy from whoever wants." That's one, and B, the government's history in vertical cases, recent history, I'm sure you can think of more examples, but it is not good, right?
Andrew: AT&T Time Warner, which is one, way back, in the Rangeley Capital podcast, says we talked about all the time, because the government was suing and AT&T's argument was, we're a fiber provider, we'll go by our content. And I think most people said that's a pretty stupid strategy, but you're an economic player, you could go try it if you want. The government sued to block it, I think, probably because Donald Trump didn't like CNN, but the court basically [inaudible] him out of court, right? They said, "Hey, they can buy it. There's no foreclosure here, anyway." There's certainly other examples, but that has been a big hang-up. Because our government has brought cases and I'd say, lost every time.
Chris: Correct. I would say both the government has failed on the antitrust legal case and perhaps for similar reasons, the companies have failed on the financial business case, right?
Chris: So in both cases, let me say this very carefully. Pricing power is one of these things that you don't want to get an A+ on avoiding. You don't want to get an F on it, but you want to get like a D- on being accused of having pricing power. Maybe you want the government to look at you and then say, "No, we're not going to sue." In this case, the fact that they're really dumb cases often, in some ways, make it imply that they were really dumb deals, right?
Because it's like, you have no pricing power whatsoever. The government is crazy to think, think like, "Well then, why are we doing this?" Because you can always contract. The thing about so many MNA rationales and so many things were you overstate the significance of the lines of the firm and what you really want to do is, be super efficient on costs and rational, but everything else, you can contract. So if it's a good idea, just do it.
Andrew: Back to AT&T Time Warner case. AT&T spent ninety billion dollars doing this. T-Mobile, they've got a deal with Netflix, right? When you sign up for T-Mobile, you get Netflix for free for a year or Verizon had, you sign up for Verizon and you get Disney free for a year. You can just, as you said do a contract, it's funny that they stopped that.
Andrew: Oh, you know the other one, and I haven't done much work on it. We talked previously about it. The one that is interesting to me, is iRobot Amazon. I think both you and I are terrified of the downside there, which is why we haven't really focused on it. But that is an interesting one where Amazon is buying iRobot, who makes Roombas and everything and the government is suing to block. That's an interesting one just because Amazon's a marketplace. As you said, bad government cases tend to be bad deals. I have no clue why Amazon survey[?] iRobot, because it seems like a very competitive space. But if the government does sue to block, I don't think they brought the suit yet, but the rumor is they're going to. If they do sue to block, I think it will be a very tough case for them to win.
Chris: Yeah. I don't own any and I have a hard time coming up with how I could get comfortable with the regulatory risk. Certainly it would have nothing to do with me doing clean-room analysis of the antitrust issue. I think it's quite likely they could come up with a good thesis that it shouldn't be blocked, but that has not been very dispositive recently. It has had no predictive power, in terms of what gets blocked.
I think it's quite likely that a suit is brought. And then, what do I own? I'm not that excited about being an iRobot shareholder. I'm certainly not excited about being an iRobot shareholder in a world where this kind of deal isn't allowed and certainly not in a world where this kind of deal isn't allowed for iRobot. But apparently, Amazon wants that kind of business because in terms of barriers to entry, Amazon could just probably beat them in the marketplace if this is just an isolated orphan company that's not allowed to get blocked[?].
So, spreads[?] gotten wider. This would have been a really, really, really good shot, when the deal was announced. I was just stupid to not be... I knew I wanted to be at zero and I should have... Whenever I'm that convinced I want to be at zero, I should really question whether I want to be smaller than zero, especially because of how definitive merger [inaudible] spreads work where there's not a likely overbid or other buyer. Structurally, it's a really good time to put a lot of money to work on the short side.
In the event, the thing that both of these have, and then back to Horizon for a second, is it would be transformative of their place in the market, if you're not allowed to do this kind of deal. Verizon is a tying case, it would be new to say, there's not really a horizontal or vertical connection between the two companies products, as much as, could the buyer, with existing pricing power in certain areas, use that to tie and bring new products into abusive pricing relationships.
So, it really does also show that what the government cares about isn't that deal related. This is a buyer that they have a beef against and that also makes me even less comfortable with anything that Amazon wants to do. Because these are people on the regulatory side. I can't quite see Penny, but I can see this chair shifting [inaudible] it's really cute and funny. There she is.
Andrew: So, the government brings their case and they're suing to block, because as you said, they've got... They're suing about essentially[?] because they think Amgen could bundle Horizon's products with their products and maybe shut it, raise prices or shut out of other products out of the market.
But it does seem to be more a case of Amgen has bundled in the past and the government doesn't like it and whether you like bundling or not, if you bundle your products that you already own together, that's certainly not illegal, as long as there's not [inaudible] under the table or something going on. I think Amgen's response was, hey, like these... I'll just give it to you, what is the government arguing, specifically with Amgen Horizon? And walk through Amgen's response, because I thought that was interesting as well.
Chris: Sure. Excuse me. We've seen the whole formal complaint from the government. So there's a lot from Amgen and we've only seen... They've press released out. They clearly knew this was coming because they had a rapid response, but we haven't seen their whole legal case yet. But of course, at this point, it's the government's burden. So, it's not like Amgen has to bring this. So government filed the case. Incidentally, we have a judge, we have a republican spoken at the Federalist Society, appointed by Trump looks like he would be somebody who wouldn't have casual deference to the government.
You can see by background, some people will just have a huge deference to administrative agencies on their beats[?]. And so in this case with antitrust, it would be a harder case to bring in front of a very progressive judge. So you have a Trump appointee, and you have somebody with no antitrust background. The two things you tend to look for are, is there somebody who is maybe very smart and ideological, who, one way or the other, wants to go way out on the limb and maybe wants to establish some new precedent and is going to write some blazing case for the ages. It's not that common, but that's one thing you look for. That is not the case here, based on his background.
If you don't know about some area of law and you're a smart judge and you can write well, the one thing you always do is, if you claim up, go back to precedence [inaudible]. Just bring me the case, this is identical as I can run at the source over the last guy's decision and just point to the statute and say, on the law, here's where it is and the facts here it is. And then just do a very cautious decision that's not going to be appealed and you're not going to look stupid. That would certainly benefit the companies in this case. And then you could say, hey, is he going to do something zany unless he was undercover and a Trump mistake. And of all the things that Trump did that were zany, he was very well advised on a lot of these judge picks. So I don't think it was somebody who's going to be surprising or surprisingly for us...
Andrew: Let me just pause there, because I do know, and I agree whenever a case gets assigned to a judge, the first thing every [inaudible] or anybody's interested in the case goes, they look at, who was the judge appointed by? What's their background? What's their historical precedent? And that absolutely is the case. And obviously, on both sides there are some crazy judges. You can think of the judge in Texas who rules against the federal government for anything. And I think there are probably a few judges out west[?] who rule for the federal government for everything and all those cases always go to the Supreme Court or wherever.
But I was just thinking on antitrust, a lot of sweat equity gets put into reading the judges things and I have just personally found, in general, on the antitrust cases, the judges, even people who... I've seen people love[?] the Trump judges or the Obama judges. They do seem to rule antitrust pretty down the middle, right? They go, they read it because I do think the judges are worried about, as you said, setting like super novel precedent, and if they do that, it can get appealed and they can get overturned in will be pretty embarrassing to get overturned. It's very easy to just go, read the precedency, what's happened and rule. I definitely hear you on the judge, but I think it gets so played up and I just haven't seen judges come out with super crazy antitrust rulings because it's pretty down the middle and you will get overturned if you go too crazy.
Chris: And the whole history of antitrust has been a fairly amicable and bipartisan one, up until this administration. There have been good relationships and probably less partisanship than almost any other administrative type agency issue. It breaks down a little bit when it's very consumer-facing, right? We saw recently in the spectrograms case. I categorize this progressive, but a very young new judge. So it was a little hard to categorize her well, judge appointed by Biden, who, while she didn't get to make a final decision because the company settled with the government, seemed to be very sympathetic and fact specific about the whole thing.
Andrew: That was exactly one of the case I was thinking, because I think a lot of people when the judge... If I remember correctly, there was an old judge in Chicago. They got replaced by a new judge and there was a lot of ink spilled, oh my God, this is an Obama appointee or a Biden appointee. They're going to be crazy, they're going to listen to everything the government says, they're down with capitalism and listening to the trial and you listen much more than me. But the judge was very down the book, she was asking interesting questions. I think she was really tipping our hand to the government. Hey, this isn't going to go well for you. I think the government got the signal from that because the government settled the whole thing, right? So, again, it's just a case where so much ink was spilled, but I think these cases are, not that they're completely cut and dry, but there's so much backlog. There's so much historical precedent. I think it's really tough for a judge to bring a lot of political views into this, unless it's very much on the margin.
Chris: Yeah. And in Spectrum, we're talking about high-end door locks and smart locks. There was really not a lot to pull at once heartstrings. There was not a lot of ideological about it, it was fairly fact-specific.
Andrew: Here you are talking about rare diseases and stuff. So I know this [inaudible] [crosstalk] but again, this would a [inaudible] case and I think you're going to have the pharma industry. I think you'll have a lot of pharma industry writing into judging and be like, hey, if you do this you're going to destroy pharma. It's going to have huge ramifications for all the pharma because that small cap, they generally go invest in drugs with the hope that they get acquired by a big cat. If you rule against them, there's not going to be an exit on the end. So there's going to be a lot less investment into drug discovery. So, do you want to destroy the entire drug discovery business? Because that's what a ruling here could do, or maybe that's a little too hyperbolic. But I do think you'll see a lot of letters written to the court alongside that.
Chris: And it's such an awful case, it's not clear. And I think one of the big interesting things Amgen is going to have to do, is to decide how much of a case they want to make. Because sometimes, making more and more points, implies into your burden to convince the judge of those points. And I think there's very little, as of now, that they have to defend here. They have said categorically in terms of their response, we treat different diseases, we treat different populations of patients. This is not a traditional antitrust issue and this bundling of medicines, multi-product discounts. Couple things you know, it's it is speculative. It is just something the government's saying there is...
I have no reason based on public information, to believe that there are hot docs or that there is a wa-ha-ha, behind the scenes. We're going to do this. We're going to jack up prices in these new pricing bundles. Amgen, having already responded to say that they have no plans to do, presumably they're not going to get embarrassed and embarrass us in this view. We're in court, the government pulls out. Here's the hot doc saying, this was the plan the whole time. They say, it does not reflect real world competitive dynamics. Then there's also this issue of rare diseases. How are they supposed to be funded?
If you can't do deals, and you have this very, very lengthy process between discovery and commercialization, years and often billions of dollars. The funny thing about pharma and antitrust is, the reason why the industry is as concentrated as it is, is the government. The government forces these lengthy expensive processes[?,] largely through the FDA that only very few entities can possibly make it through. And then they're scandalized that there's very few entities. Well, that's a natural reaction to the government. I also think, even though it is a hypothetical case, and a weak one, maybe you just want to litigate based on that and say it's hypothetically weak or maybe you want to come up with very explicit, contractual effects to the government and you say, hey, here's this contractual effects.
[inaudible] the rest of the industry, I would really be rooting for Amgen just to fight this and win clean, versus having this as a backdoor new regulatory frame for the government, to say, "Hey, we want to get in the nuts and bolts of all of your pricing, including rare diseases." The problem with rare diseases is, if there's no tying whatsoever, at some point it becomes very hard to finance anything that is very expensive to study and has a very limited market.
And I don't even mean tying product to product, just to say, look, maybe this will have a broader label, maybe there's area of science will have different ways to monetize down the line and it's a broader commercial effort. But it can be can be really hard and it's not clear that we want to discourage this kind of thing. And I think Amgen is going to be able to come and say, "This is really important and we're looking to put more money into this and we're research effort into this not less."
Andrew: I want to move to to banking, but I do just want to quickly [inaudible] [crosstalk]
Andrew: I think when the story of the government suing to block [inaudible] there were two rumors that I heard, that are pretty interesting. They're not rumors, speculations. One, was speculation that the government was suing here to prove a point, but that there was absolutely, just going off what you last said, the government knows it's going to be a really bad case and they're absolutely going to just try to take a settlement and get something. Hey, we will not or promise not to monitor or something and that there's no way the government's going to let this if the court says because this is that bad a case. Do you have any thoughts on that?
Chris: I think it really rhymes with spectrum, in that, my understanding in both cases, from the buyers perspective, they thought it was a trivial issue or a non issue that even though it was trivial, they were happy to solve 100% of what the government said they were talking about and the government wouldn't take yes for an answer. So I think that there is a history Onyx[?] on the government's side and just a desire to position themselves, in a way that amongst other things follows through with the Liz Warren complaints about this deal and with both the DOJ and FTC angling for being more progressive.
They're not trying to solve the problems that they say they have, with this deal, or with spectrum or with deals, generally. They're using it, they're weaponizing it and they're trying to go beyond the four corners of the deal to solve other things that they see as problems with buyers.
Andrew: The other question I was going to ask is, I heard some people said, so Pfizer is buying Seagen in a $40 billion-ish big deal in the cancer space and that is treating about 50% to 60% implied to get through and the government hasn't even sued to block it. A lot of people based on this, how the government has treated, as we've talked about, deals, think the government will sue to block that. I heard some people saying, "Hey, you actually want to buy Seagen on this because here's what happened." The government started looking at Seagen-Pfizer, this huge $40 billion deal and they really wanted to suit a block and they just could not find a hook to suit a block there.
So they did this instead, just to put out there, "Hey, yes Liz Warren, we are stopping big deals and pharma." But the fact that they brought this instead of Seagen, shows that they're not going to bring a case against Seagen. Do you have any thoughts on that kind of line of thinking?
Chris: No, it's an interesting theory. I think a suit against that one's somewhat more likely than not. So I don't have a, I think my view's fairly conventional on that. But that could make sense, I think.
Andrew: That's just [inaudible] interesting. One more question on Horizon and then we'll move on to banking crisis. I think the best way to estimate [inaudible] because as you said, the downside here is really difficult to estimate. So I think the best way to look at this is, go pick an option month where this lawsuit will almost have certainly been done, everything and you can look at what the implied there is. So if I look at the...
Andrew: If I look at the December $100 calls, it was last traded for, I think... Sorry, I did the math yesterday. I think it was about $13, so they would be worth $1650 if the deal went through. So you can do the math there, that implies just under an 80% chance that this [inaudible] by December. And I just want to remind everyone. Not investing advice, options are risky. We're just doing the math here, to talk about the probabilities. But if I threw out, hey, the market's in the 80% range for Amgen winning this case and closing Horizon. Do you think that's too high, too low or kind of goldilocks just right?
Chris: I think it's fairly goldilocks. I've been thinking a lot about, I don't know if you listen to Stanley Druckenmiller recently, when he spoke at a certain conference. But he had this idea about, when he has no idea, he's willing to put on big positions and then take it off if he can disprove it quickly. And I wish I did that on the Horizon suit. I thought this suit sounded very suspect, but he took the time to call to speak with principals to read the complaint, to kind of understand. And it was a very expensive several-day research project because at 90 or so, I thought in hindsight, it was a really, really good.
So we set up some, but we just didn't load up. And then by the time he was really comfortable with it, it had gone from 90 to 100 and in 100, once he started doing that arithmetic, it sounds about right. I'll take the over[?] on that contract you mentioned and I'll take the over[?] on the market applied probability of equity. As far as we can ascertain, it just from equity side, but it works a lot better at 90 than at100.
Andrew: I want to move on to, I think we've mentioned Spectrum and we've mentioned it plenty of times in the past and that they settled, we don't really need to mention it. I just want to move on quickly to the banking sector.
Andrew: So this where you and I followed for a long time. I've really been focused on that the past few months, but since our last broadcast, our last podcast was April state of the markets. This is May, First Republic went under and got taken over by JP Morgan, in between now and then. So I just want to ask, regional banks in general, have been feeling a lot of pain. I did a post earlier this month that showed the regional banking ETF is down 40% over the past six months or so, while the market's flat.
And in the global financial crisis, the Regional Bank ETF was down, like 50% and the market was down 40%. So you're already almost to the drawdown you saw on the financial crisis and that's with a flat market which... I say that, not say, opportunity or not, I just only say that, say, there is a lot of panic in the space. So I just want to flip it over to you, what are you seeing and thinking, about what's going on in banking these days?
Chris: It's been a spectacular opportunity for the Baylor's[?]. If you look at the bidders on the distressed assets, they have got a chance to dictate terms. The government, in a few cases, had very specific delineations of who they wanted to accept bids from. And then you're sitting there in the seat you want to be sitting in, where you're deciding what you'll take, what you won't take, what you'll pay and the relationship with the government. The government said yes to the people. So it's been triumphant for the Baylor[?] outers. It has...
Andrew: I do hear that, just to comment on that. So, JP Morgan bought First Republic, that was a very big deal. But Silicon Valley Bank, last week or two weeks ago, the government released the list of banks that were bidding for Silicon Valley Bank, right? And there were at least four banks that I know of, that are of decent size, that have good balance sheets, that were bidding and their bids got rejected. I just keep looking that and be like, First Citizens' stock went up a 100% on announcing the Silicon Valley [inaudible], all right? And I know the [inaudible] difficult, but how did these other four banks...
And I read all their policies. They all say they put together good packages that they thought[?] price rate but I just wonder, if First Citizens can have their stock go up by a 100% on to you, none of the other banks could top that? Even with limited competition, it does seem like... I'm wondering if the other people underbid or maybe the government discouraged them so much, they couldn't... Something strikes me as a little strange there.
Chris: It was a rushed process. The government excluded private equity bids, and if you look at the nature of the people who won, you have a lot of concentrated family-dominated institutions where they probably internally could act very, very quickly.
Andrew: I think that's right. Yeah.
Chris: [crosstalk] CEO, if you were the government and I was the CEO, could actually just like, give you an oral answer on some commitment where you had some side qualitative issue and I was like, yes, I will do that. And then everybody else had to go back to their investment committee or board or something. And so, I rather suspect the extreme informality and time crunch had a big qualitative difference for the people who won...
Andrew: I think your probably right, and especially Silicon Valley Bank because that happened so quick. Literally, hundreds of loans that you need to look through and thousands of assets, worth billions of dollars. And I do think you're right, the Silicon Valley guys, they might have been able to swag it and say, "Okay we've got a lot of margin of safety here, we can buy this." Whereas, maybe, some of the other banks said, "Hey, we need a little bit more time. We have to build in more in certainty if we can't get a little more time to go and really research these things." So yeah, I think that's probably right.
Chris: So, the Baylor's have done very well. The too-big-to-fail banks have done well so far. We know more of the positive than the negative because we don't know if there's going to be this big regulatory backlash that cuts into whatever benefit. And especially in last few weeks, there's quite a good glimmer of hope for the Community Banks. You see, the loss of deposits actually, in many cases reversed and people are growing deposits again. There's really, I think we're out of the panic phase of whatever this banking crisis is and every day that goes by without another failure, makes the existing failures look more anomalous.
And we hear from so many banks, it's just that the ones that fail to have nothing to do with huge numbers of the banks out there. And it's almost a mystery, if you look at the areas that I'm most worried about right now, where the badlands[?] are, where the mistakes are, other than these very specific cases that have failed so far. Because one by one, the individual banks don't look nearly as bad, to me, as the generalized description of the problem, including some things that you could have always said about banks. I mean, some of the breathless reporting on this, is simply just stating terms about what banking is and seeing in kind of a gory way, to describe how bad it could be in the worst case scenario.
Andrew: No, I'm with you. Again, I think I was talking to someone and I marked out. I think I've read like 60 Bank 10[?] cases in the past couple of weeks. And one of the things that jumps out to me is, everybody says, "Oh, commercial real estate downturn. You're gonna have this big commercial real estate." And yeah, it is very difficult, right? Because let's say, you've got a bank that has, I tell you, "Hey, 4% of their loan book is in commercial real estate, right? 4% of their loan book is in offices." You'd say, "Oh, that's nothing." But banks are generally levered about 10 to one. So if you thought, like all those office loans were a zero that would be about 40% of their equity or something, right?
So it's very difficult there, but you look at these things, every time I talk to someone and they're like, "Oh, what about when we have the commercial real estate recession coming and all this?." I think a lot of people think the empty office buildings in downtown, New York, or San Francisco, [inaudible] to buy these small banks and that's simply not the case. Most of them if they do have office exposure, it's like the suburban office exposure or a doctor who owns his office or something, tends to be more where their office exposure is. And yeah, I can't disprove a commercial real estate recession, but I think a lot of people seem to think this is the global financial crisis 2.0 and that was, hey, this loan that I thought was worth AAA worth 100 cents on the dollar come hell or high water, it's worth zero the next day.
Whereas this, to me, has been a lot more a couple banks failed on risk control. And yes, there might be commercial real estate incoming, but these banks have had over a year to prepare for it. They all look well reserved, the commercial real estate, they do it's smaller, it's well-diversified. It's really hard for me to look at these banks and look at this panic and not think there's opportunity.
Chris: Also, a lot of the banks lend in areas that have not had a huge run up. A lot of financial analysts and hedge funds, and financial intermediaries are in the areas that had a huge run up. So you you think about real estate as midtown Manhattan and San Francisco and so on, and those have had big runups and those could be precarious. But huge swaths of the country never did and a lot of the bankers I talk with, that originated tons of lending also have offloaded a lot of them to non-bank entities, right? A lot of the more speculative credit is outside of the whole traditional banking system full stop. So, I think both of those things make the individual cases that I've looked at, much more benign than the thematic story. Stuff that you talk about if you were reporting on it.
Andrew: Look, a recession coming, or recession security, but these banks, many of them have... I wasn't really around for the savings and loans crisis, so I can't really speak to that. I can only speak to some of the stuff I've read, but I look at these [inaudible] say, they look very well reserved, for what we're seeing. All of them have spent the past year taking reserves up, getting a little more conservative and time is literally money when it comes to these banks, right? Because if you have a crisis happen today, that's really difficult. But if you can prepare for it for a year, you can build up reserves, you can build up your capital base.
That all is really helpful to them. And yeah, I just look at them and say, maybe we don't have a recession or if we do, all of them, in their [inaudible] they all say, "Hey, we model for loan reserves, based on a Moody's economic forecasts." And all of them for the past year have been using the Moody's downturn forecast. And yes, that's a lot of excel and a lot of modeling and things can get into this in credit, but they're already modeling in that, we're going to have a recession. So I just look at all that, I look at the prices and history just suggests to me, if you can go and buy banks at tangible book and the bank's going to earn above their cost of capital, that's a really interesting proposition and I think we've got that here. And we've just got a lot of panic going on.
Chris: Yeah, makes sense.
Andrew: Anything else you want to talk about?
Chris: Well, let's see. Antitrust, banks. I think that's good. I loved your conversation with Chance, the other day. AMC is the other one that's been a little bit on my mind. But I don't think I have anything to add to what you guys discussed. So, in terms of entertainment value, that's been an amazing situation.
Andrew: It'd be tough to add anything to Chance's thoughts there because she's so thorough on it. I would be embarrassed if listeners could hear, before the podcast, how much time and mindshare space we have devoted to Mark Zuckerberg's Murph time. I think that would be a little embarrassing, but I know that something that's top of mind these days.
Chris: Yeah, so he claimed 39 minutes for Murph, which is pretty spectacular. So I know he's done a huge fitness kick between Jiu-Jitsu tournaments and CrossFit, it's cool to see.
Andrew: 39:58 waited. So, it's running two miles in total. So you'd have to run two miles with a weighted vest on. 100 pull-ups, 200 push-ups, 300 air squats, waited. I mean, 39:58, as we were saying that's approaching professional athlete levels. And there's lots you don't know, right? He could have done in partitions, so you can break the pull-ups and push-ups and everything up into different orders and stuff. But I don't want to doubt his training and his workout regimen and stuff, and the running is [inaudible], but I just cannot believe that time.
Chris: Just just over five minutes off of the all-time world record, which is extremely good. And so it's just a matter of somebody new to something, versus somebody who has limitless resources to get coaching and so forth.
Andrew: That is true.
Chris: If this was as stated, it would be interesting to hear his coach talk about it. It would be great to see just a video clip of his form on some of these things, to see how he'd move that quickly, but it was impressive.
Andrew: If he did it under 40 minutes, his coach should go out marketing that, because I think almost every CrossFitter in the world is going to sign up for his program, if he can tell us how he got Mark Zuckerberg under 40 minute Murph. Partitioned, unpartitioned, whatever it was, because that is a heck of a time and that's a heck of a coaching job, if he did it.
Chris: Yeah. The two boldest Murph claims, have been so far, as Zox and Donald Trump J, so, I think it would be a great charity to have a Donald Jr, versus, Zox Murph competition. People could bet on it, bet on their times, bet on who wins, with the whole thing videoed with actual CrossFit judges to see whether...
Andrew: For those who don't know, Donald Trump, I think it was in 2016 or 2017. He said he did Murph and he reported the time, Zox was, at least believable to the point where Chris and I could believe it. I think the time that Donald Trump Jr reported would have been like, he would have won the CrossFit games. He would be the Murpher in the world. And age does matter a little bit in these things. So I think Donald Trump Jr. was mid 40. So, he would be a mid 40 man, who looks fine, but not like a professional athlete. A mid 40 man who was beating[?] like these CrossFit just legends, just smoking them at it. So, that was unbelievable.
Andrew: But anyway, this has been great. Summer [inaudible] way. I'm looking forward to catching up for our June state of the markets and we will talk then.
Chris: Absolutely. Thanks, Andrew.
Andrew: All right. Bye.