• 3 trillion reasons to unseat Google in search
  • Twitter’s surprise partnership, and what it foretells
  • Apple’s next big step into financial services

Dear Reader,

In this ugly economic environment, it has become hard to just relax and enjoy a weekend. It feels almost as if we’ve been trained to expect that something else will go wrong.

And that’s exactly what happened this weekend.

First Republic Bank was seized by regulators, quickly becoming the second largest bank failure in U.S. history. That was a title held for just a few short weeks by Silicon Valley Bank (SVB).

Not that it’s a competition for the worst bank collapses, but SVB drops to third largest, and that means that Signature Bank drops to fourth. We can’t help but wonder who’s next.

First Republic fell for the same reasons that the others did. It was sitting on too many long-dated securities that had declined in value due to the Federal Reserve’s record level of aggressive monetary policy. As depositors withdrew capital from the bank, it resulted in a massive liquidity crisis.

I wrote about First Republic (FRC) most recently on Wednesday last week. The numbers are staggering. In the first quarter of this year, depositors pulled out $102 billion from the bank. And this was despite First Republic having borrowed $92 billion from the Federal Reserve and another $30 billion from 11 larger banks.

Apparently, that wasn’t enough capital to save the bank. Which is what led to a very busy weekend.

Regulators scrambled to find a buyer over the weekend in hopes of not having to clean up the mess themselves. Who didn’t show up to bid for First Republic was just as telling as who did.

Notably absent was Warren Buffet. This came as a surprise to many considering that it was Buffet that stepped into the fray to save Goldman Sachs with a $5 billion investment during the financial crisis in 2008. His $5 billion also bought him inexpensive warrants that enabled him to buy another $5 billion worth of Goldman. It was an investment that made Berkshire Hathaway billions in profits, which is why many thought he would throw his hat in the ring for the First Republic fire sale. 

But Buffett and his partner Munger see what’s coming as worse. They are particularly worried about the worsening situation with commercial real estate. And I agree with them. The risk to reward scenario isn’t good enough for a firm like Berkshire Hathaway.

A different kind of buyer was needed for First Republic, one that wants access to the kind of depositors that First Republic was known for: high net worth clients… The regulators found one in JP Morgan Chase (JPM).

JP Morgan stepped up to acquire $173 billion in loans, $30 billion in securities, and $92 billion in deposits for just $10.6 billion. The deal comes with the added benefit of the FDIC covering 80% of all credit losses that JP Morgan suffers from bad loans over the first seven years of mortgages and first five years of commercial loans.

That’s a nice deal for JP Morgan, but there are repercussions. The FDIC estimates that its cost to clean up this mess will be about $13 billion, which is to say that the cost to U.S. taxpayers will be about $13 billion.

Sadly, this was a better outcome than letting the whole thing collapse and allowing additional banks to follow. That would be far more costly.

And I have to say, the move by JP Morgan was smart. It books an immediate $2.6 billion from the transaction and acquires $92 billion of deposits from the kinds of customers that it wants to have – high net worth individuals.

The reality is that in “normal” market conditions, JP Morgan would have never been permitted to acquire First Republic. It is already too big of a bank, and a deal like that would have never been approved by the Federal Trade Commission (FTC). But in times of emergency, where a buyer needs to be found over a weekend, the government is happy to turn a cheek and look the other way.

The result? The big banks become even bigger… Waaaaay too big to fail. And the concentration of power becomes even greater.

In this environment, we have to wonder if that was the intention all along…

Google’s scramble to integrate advertising with AI…

As we’ve been exploring recently, the rise of generative AI caught Google completely flat footed. This is the first time in the last two decades that Google’s had to scramble due to a competitive threat to its core business.

That’s because generative AI fundamentally threatens to dethrone Google dominance in search.

When we search for something on Google, the search engine provides us with countless links that might be what we’re looking for. Then we have to sift through them to find out.

However, presenting the same search queries to a generative AI like OpenAI’s ChatGPT yields a direct answer without all the “noise.” The AI gives us the exact information we’re looking for – no sifting required.

This technology is the next generation of search.

Obviously Microsoft recognizes this potential. That’s why it integrated ChatGPT so quickly into its Bing search engine in February. The privacy-centric search engine DuckDuckGo did the same thing in March.

Suddenly Google Search is in serious jeopardy of losing major market share.

This forced Google to rush out its own generative AI Bard… but it wasn’t ready. The launch fell flat when the generative AI made some glaring mistakes in Google’s live demonstration.

As a result, Google’s share price dropped 9% – shedding $100 billion in market cap.

This sent Google back to the drawing board making efforts to improve Bard, as well as working on another project that may show more promise. We just learned that the tech giant is also working on a parallel generative AI called Magi.

Magi is similar to Bard and ChatGPT in that it can answer questions and perform tasks for users when prompted. The difference is, it’s being designed to mix advertising in with its answers.

So Magi will attempt to generate specific transactions from each engagement with users. This is how Google plans to protect its core advertising revenue stream coming from its massive Google Search business.

This is an interesting twist. Though, I can’t say I’m surprised. Generating advertising revenue from data surveillance and collection is what the entire company was built on. Even today, 80% of Alphabet’s (Google’s) revenues are from advertising revenue generated by selling access to our data.

But I have to ask – now that the generative AI genie is out of the bottle, will consumers adopt something like this?

After all, millions of people are now using ChatGPT. And similar products are rapidly entering the fray. We’ve talked about the work both Stability AI and Cerebras are doing in this space earlier this month. Plus, Elon Musk is racing to build a non-biased generative AI he’s calling TruthGPT.

These are all options that don’t “taint” search results with bias and advertising. That’s the key.

This is an amazing moment in time. Consumers will have an even more attractive alternative than Google for search. Will we take it? I hope so.

The reality is that Magi isn’t going to be head and shoulders better than the competition as Google Search was originally. And Google’s already way behind. People who know and love products like ChatGPT and those that quickly follow will have very little incentive to switch back to Google.

Alphabet is currently worth almost $1.3 trillion. Basically, that’s what search and advertising are worth to one single company. And that’s also why the competition is investing billions and treating this like it’s a life or death race to unseat the search giant.

Musk’s first step towards the “everything app”…

We talked last week about how Musk has always envisioned creating an “everything app.”

The idea here is to have a one-stop shop for consumers to do all sorts of things. The app would combine social media, messaging, and video calls with the ability for users to make payments, play games, order food and groceries, and even book doctor’s appointments.

Well, it’s become very clear that Musk intends to make that a reality using Twitter as a foundation. And Musk’s first move in that direction is Twitter’s most recent announcement, a partnership with eToro. This is a company that allows users to trade stocks and digital assets.

This means that Twitter users will soon be able to access charts and invest in stocks and digital assets right from their Twitter app. And from my perspective, this is the perfect first step.

What’s commonly referred to as Financial Twitter or FinTwit has been a high growth mainstay on Twitter. Many big names in the financial space use Twitter to share investment ideas and engage with viewers and readers.

So Twitter already has a large user base that’s interested in investing. This deal with eToro will allow them to immediately act upon their favorite ideas from FinTwit – all from the Twitter platform.

This is a logical first step towards expanding Twitter’s features and functionality.

So the “everything app” vision is quickly becoming a reality. I suspect this is just the first of several new features we’ll see Twitter roll out this year.

Apple’s new savings account is far better than any bank’s…

Big news from Apple – the consumer electronics giant is now offering a savings account.

And it’s not just another savings account on par with what we can get at our bank. Apple’s account will offer a 4.15% yield.

We had a look last week at the piddly savings rates offered by banks right now. The national average is just 0.24%. That’s basically nothing.

And as we discussed, this measly offering makes no sense because the big banks are raking in money hand over fist right now. JP Morgan just reported record net interest income of more than $20 billion.

So here comes Apple with a savings rate that’s over 16 times better than what the banks are offering. I love it.

This is quite a timely move. And it will go a long way towards expanding Apple’s financial services business.

As I’m sure many readers know, Apple launched its own credit card several years back. They partnered with Goldman Sachs on it.

And as a customer myself, I can say it’s a fantastic product. It took me less than a minute to sign up and get approved. Then a few days later I got the physical card in the mail.

What I love is that it’s integrated right into Apple’s iOS software, and it uses the near field communications (NFC) technology built into the iPhones, so we don’t even need to take our cards out for a transaction. Users can just tap the card on a card reader and it will process the transaction. The integration and user interface are so well done.

So I’m not surprised to see Apple expanding into the savings market. They are teaming up with Goldman Sachs again on the new high-yield savings account. Users can simply deposit funds into the account just like any other bank.

The extension of the Goldman Sachs partnership was a smart move as well. As we just saw over the weekend, the concerns around the solvency of regional banks have increased. Why would a depositor hold funds that might be at risk for just 0.25% when they can deposit with Apple/Goldman Sachs at 4.15%? 

I think Apple’s new savings account will be very successful for that reason. And it may very well pave the way for even more financial service offerings to come.

Regards,

Jeff Brown
Editor, The Bleeding Edge

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