Monday, March 18, 2024

Poland’s LPP Sheds $3 Billion as Hindenburg Alleges Russia Ties

Konrad Krasuski
Fri, March 15, 2024 





(Bloomberg) -- Shares in one of eastern Europe’s biggest fashion retailers plunged 36% after activist short-seller Hindenburg Research said the Polish company’s withdrawal from Russia was a “sham.”

Hindenburg’s report on Friday alleged LPP SA didn’t fully divest its Russia business as promised following the start of war in Ukraine two years ago and has been selling its goods there through third parties. The short-seller dispatched “secret shoppers” to Moscow and St. Petersburg stores which it said sold “identical” clothes to LPP’s.

The stock plummeted the most on record, wiping out $3 billion in shareholder value in one day. The selloff pushed Warsaw’s blue chip WIG20 stocks gauge down by 2.5%, making it the world’s worst performer among more than 90 primary indexes tracked by Bloomberg.

In a series of statements, LPP said it’s a victim of an “organized disinformation attack” that no longer owns or runs businesses in Russia and alerted Polish prosecutors about the matter. Still, investors remain concerned about LPP’s transparency and reputation.

“Polish consumer sentiment may not be so forgiving as it likely assumed a cleaner break” from Russia, said Charles Allen, a senior analyst at Bloomberg Intelligence.

Russia was the biggest market for LPP following Poland until the retailer, which owns several brands including its flagship Reserved label, suspended its fast-growing operations in the country in March 2022.

Two months later, it sold its Russian unit, with inventories, to a Chinese consortium, while pledging to support the buyer with logistics, IT and supplies on a temporary basis.

“We think LPP devised an elaborate sham ‘divestment’ strategy to continue retailing in Russia while trying to fool investors and consumers in Poland, Ukraine, and its other markets into thinking otherwise,” Hindenburg, founded by Nate Anderson, said in its report.

Hindenburg had a remarkable 2023, when it released reports on the empires of high-profile businessman Gautam Adani, followed by attacks on companies run by Jack Dorsey and Carl Icahn. Short-seller activists carry out investigations into companies and seek to make money when their findings depress the stock price.

‘Identical Designs’

Hindenburg said its “secret shoppers” in Russia’s two biggest cities had in December found and photographed garments with “identical designs and colors to fall/winter collections in LPP’s online catalogs in Poland.”

This, according to the short-seller, indicated that LPP products were still “somehow making their way into Russia at least 18 months after the claimed divestiture.” It also accused LPP of using Kazakhstan as a backdoor to help supply stores in Russia, a claim denied by the retailer.

LPP said on Friday that it had previously informed investors that as part of the sale agreement of its Russian business there would be a transition phase “during which the buyer successively assumes complete autonomy over the various business areas.” It added that this period would run out as late as in 2026.

“The degree to which merchandise assortment overlaps between LPP’s core stores and the sold Russian units can be explained by transitory contractual obligations could reassure about reported revenue from new countries,” said Allen from Bloomberg Intelligence.

The Gdansk, Poland-based company’s sales recovered swiftly after its exit from Russia, which was broadly attributed then by analysts to the reopening of shopping centers from pandemic shutdowns as well as new demand from Ukrainian refugees fleeing war.

Strong public pressure pushed Polish companies to retreat quickly from Russia following the start of war in Ukraine in February 2022, with shoppers boycotting brands which failed to do so.

LPP, controlled by the family trust of founder Marek Piechocki, has gained 10% this year before Friday’s tumble, compared with a 3% advanced by the WIG20. The company has 14 buy-equivalent ratings, one hold and two sell views, according to data compiled by Bloomberg.

Following Friday’s collapse, the firm is the 10th biggest company by market value in Warsaw’s blue-stock index. On Thursday, it was the seventh.

The import of food, essential items and clothes — with the exception of luxury goods — aren’t under any international sanctions in Russia. Products ranging from iPhones to Coca Cola and garments made by international producers continue to enter the Russian market through so-called parallel imports, when they are purchased and re-exported by third countries. Russia has imported $70 billion of goods using this mechanism since early 2022, the government said in December.

Poland’s financial regulator KNF said in a statement that it was analyzing the situation in LPP, as it does whenever “there are doubts regarding the correctness of the performance of disclosure obligations by public companies or suspicion of manipulation of shares.”

--With assistance from Piotr Bujnicki and Piotr Skolimowski.

(Updates with closing market prices, new comments from LPP and analyst.)

Most Read from Bloomberg Businessweek
Hertz’s electric vehicle and CEO about-face is the latest twist after a COVID bankruptcy filing and a deep relationship with Carl Icahn

Steve Mollman
Sat, March 16, 2024

F. Carter Smith/Bloomberg via Getty Images

It seemed like a good idea at the time. Now we know better.

Hertz, reeling from a bankruptcy and the pandemic, announced plans to buy 100,000 Teslas in late 2021. The splashy move certainly helped Elon Musk’s electric-vehicle maker, which saw its market cap surge past $1 trillion for the first time.

Hertz enjoyed a bump in its market value as well, and the car-rental giant hired NFL star Tom Brady to show off its new fleet of Teslas.

“How do we democratize access to electric vehicles? That’s a very important part of our strategy,” interim CEO Mark Fields said at the time. “Tesla is the only manufacturer that can produce EVs at scale.”

But Hertz paid close to list prices for the Teslas, rather than demanding a large discount as car-rental giants often do. That decision would come back to bite it.

Last year, Musk’s EV maker cut prices across its lineup to boost sales. That not only angered individual customers who’d recently bought a Tesla at a higher price, but it also crushed the resale value of Hertz’s used EVs.
'Elevated costs' of EVs

This January, the rental giant revealed that it was selling off 20,000 electric vehicles, noting the costly depreciation, weak demand, and pricey repairs. It took a $245 million hit and suffered its steepest quarterly loss since the pandemic.

“The elevated costs associated with EVs persisted,” Hertz CEO Stephen Scherr said at the time. “Efforts to wrestle it down proved to be more challenging.”

This week, Hertz announced that Scherr was stepping down and would be replaced by Gil West, the former COO of General Motors’ Cruise robotaxi unit. While Scherr took over after the Tesla deal, under his leadership Hertz continued its focus on EVs, placing orders for some with GM and Polestar.

The ill-fated EV push followed a difficult stretch for Hertz that culminated in billionaire activist investor Carl Icahn unloading his substantial stake in the car-rental company in 2020 days after its bankruptcy. In 2014, Icahn had begun acquiring his stake in Hertz, which was struggling. He called Hertz “a great brand” that he hoped would “return to its former glory,” and three of his allies soon had board seats, while the hunt for a new CEO began.

After selling selling his stake, Icahn said, “Yesterday I sold my equity position at a significant loss, but this does not mean that I don’t continue to have faith in the future of Hertz.”

The following year, the company announced the decision to buy Teslas. Now it's about to welcome yet another new CEO, again tasked with turning things around.
US appeals court temporarily pauses SEC climate disclosure rules


Updated Fri, March 15, 2024 
By Clark Mindock

March 15 (Reuters) - A U.S. appeals court on Friday temporarily paused new rules issued by the Securities and Exchange Commission (SEC) requiring public companies to report climate-related risks.

The New Orleans-based 5th U.S. Circuit Court of Appeals granted a request from Liberty Energy Inc. and Nomad Proppant Services LLC to put the rules on hold while it considers the oilfield companies' lawsuit challenging them.

The 5th Circuit did not explain the reasoning behind the order. It was the first court action on a flurry of lawsuits filed over the rules since the SEC approved them March 6.

The rules aim to standardize climate-related company disclosures about greenhouse gas emissions, weather-related risks and how companies are preparing for the transition to a low-carbon economy.

The SEC did not immediately respond to a request for comment.

First

proposed in 2022

, the rules are part of Democratic President Joe Biden’s efforts to leverage federal agency rulemaking to address climate change threats.

The companies said in court filings that the rules would force companies to collectively spend over $4 billion in compliance costs and could open companies up to increased litigation.

They argued the rules go beyond the SEC's authority under U.S. securities law, and that they are a "thinly veiled attempt" to inject the SEC into climate policy by requiring disclosure of a "breathtaking volume of information" about greenhouse gas emissions and other climate concerns.

On Wednesday, the SEC told the 5th Circuit that a pause was unnecessary, since the rules have extended compliance deadlines that do not require disclosures before March 2026. The agency said any potential harm to the companies is therefore not imminent.

The agency also said the rules "fit comfortably within" its authority to require disclosure of information important to investors, and that they would provide "consistent, comparable and reliable information" about climate risks.

At least 25 Republican-led states

including West Virginia

, Texas and Ohio and major business groups like the U.S. Chamber of Commerce have challenged the rules in court, including in the 5th, 6th, 8th and 11th U.S. Circuit Courts of Appeals.


The Sierra Club, one of the largest environmental advocacy groups in the U.S., has meanwhile

challenged the rules

in the U.S. Court of Appeals for the D.C. Circuit, arguing they do not go far enough to protect investors.

It is unclear whether the 5th Circuit or one of the other courts will ultimately hear the challenges, since the cases are expected to be consolidated and the venue picked via a lottery. (Reporting by Clark Mindock Editing by Franklin Paul, Alexia Garamfalvi and David Gregorio)
Bangladesh Launches Largest Offshore Exploration Drive in a Decade


Editor OilPrice.com
Sat, March 16, 2024 

This month, the Bangladesh government invited international bids for oil and gas exploration in 24 blocks in the Bay of Bengal. This is aimed at increasing the country’s oil output. For several years, Bangladesh has been plagued with energy shortages, as its gas reserves have been depleting. Further, the rise in energy prices following the Russian invasion of Ukraine and subsequent sanctions on Russian energy have hit the low-income country hard.

It is the first round of bidding since 2012 to offer offshore acreage, with 15 deep-water and nine shallow-water blocks available. The bidding round was approved following the provision of a 2D multi-client seismic data survey from the energy data firm TGS. The company delivered data from over 75,000 km2 across all 24 blocks on offer in April 2023.

David Hajovsky, the Executive Vice President of Multi-Client at TGS, stated: “The Bengal Fan is one of the world's largest deep-water fans with significant evidence of working petroleum systems. It is widely considered one of the most extensively underexplored frontier regions. With limited existing offshore Bangladesh data, this new high-quality seismic, combined with the revised Production Sharing Contract 2023 (PSC), is a critical component for companies to evaluate and submit competitive bids for the blocks on offer in the Bid Round.”

The government set a deadline for bids for the first week of September, with evaluations and deals expected to be finalised by the end of the year. Zanendra Nath Sarker, the chairman of state-owned Bangladesh Oil, Gas and Mineral Corporation (Petrobangla), stated “We're making plans to reduce supply shortages to keep gas-fired power plants and industries running.” He also stated the company’s intention to “drill 100 new gas wells in the country between 2025 and 2028 to boost local production.” There are two shallow water blocks under contract for exploration with a joint venture of ONGC Overseas Limited and Oil India Limited where drilling has already begun, according to officials.

Bangladesh has proven oil reserves of around 82 million barrels and a production rate of approximately 4,105 bpd. However, there are fears that Bangladesh’s gas reserves could be completely depleted by 2033 if no new discoveries are found in the region. The country, which already depends heavily on energy imports, is finding it increasingly difficult to fund its energy deficit, making new exploration projects increasingly attractive. The International Monetary Fund already provided Bangladesh with a $4.7-billion bailout to tackle increased energy costs in 2023, but new oil and gas finds could provide it with a longer-term solution to its energy crisis.

In February, the International Islamic Trade Finance Corporation (ITFC) signed a $2.1 billion financing plan with Bangladesh to fund the country's oil and gas imports. The State Minister for Power, Energy and Mineral Resources Nasrul Hamid explained, “ITFC has been cooperating with us in oil imports for a long time. Now $500 million can be used to import gas, which will help solve the gas crisis.” The funds will allow state-owned Bangladesh Petroleum Corporation to import oil and Petrobangla to import liquefied natural gas. This provided Bangladesh with a lifeline after its foreign exchange reserves fell below $20 billion at the end of January, enough for just four months of imports.


Bangladesh hopes to increase its trade with Saudi Arabia after the country’s Foreign Minister Hasan Mahmud met with the Foreign Minister of Saudi Arabia Faisal bin Farhan Al Saud in Jeddah this month. Mahmud emphasised Bangladesh’s interest in purchasing more crude from the Middle Eastern power, as well as seeking investment in its refining and petrochemicals industry. Bangladesh currently imports around 700,000 metric tonnes of crude from Saudi’s state-owned oil firm Aramco.

The Deputy General Manager of Bangladesh Petroleum Corp., Zahid Hossain, explained, “It’s very important as we are importing a large volume of crude oil from Saudi Arabia … If we can achieve this opportunity, it will definitely be a great support for us.” He added, “If we can defer the payment longer than 30 days, we would be able to use this ITFC fund to import other refined petroleum products. So, it will ease our financial burden to some extent.” If a payment plan can be arranged, it is expected to alleviate the financial pressure on Bangladesh and help its economic crisis.

Bangladesh is looking to boost its oil production through the announcement of a new bidding round, while also seeking financial support to help it import the crude needed to meet its energy needs. New exploration activities could help provide the energy needed to meet the country’s growing needs, helping to reduce its reliance on foreign energy sources. However, Bangladesh needs a long-term solution to its energy shortages and economic crisis, which likely includes funding from high-income nations to support the rollout of more sustainable alternative energy projects.

By Felicity Bradstock for Oilprice.com
Tesla settles race bias claims by Black former worker after $3 million verdict

Daniel Wiessner
Fri, March 15, 2024 a

(Reuters) -Tesla has settled a long running lawsuit by a Black former factory worker who claimed he was subjected to severe racial harassment, according to a court filing on Friday, as the electric carmaker faces a series of other discrimination lawsuits.

Tesla and lawyers for Owen Diaz, a former elevator operator at the company's Fremont, California assembly plant, did not disclose details of the settlement in the filing in San Francisco federal court.

The agreement ends appeals that both sides were pursuing after a jury last year awarded Diaz $3.2 million in damages. Tesla claimed it was not liable for the alleged discrimination and Diaz had argued that the company's lawyers engaged in misconduct warranting a new trial.

A different jury in 2021 had awarded Diaz $137 million, one of the largest verdicts ever in a discrimination case involving a single worker. But a judge found that the verdict was excessive and ordered a second trial after Diaz refused a lowered award of $15 million.

Diaz, who first sued Tesla in 2017, claimed that when he worked at the Fremont plant he was subjected on a daily basis to racial slurs, scrawled swastikas and other racist conduct, and that Tesla ignored his complaints.

Tesla and lawyers for Diaz did not immediately respond to requests for comment. The company has said it does not tolerate discrimination and has fired employees accused of racist conduct.

Tesla faces similar claims of tolerating race bias at the Fremont plant in a pending class action on behalf of 6,000 workers, separate cases from California and U.S. anti-bias agencies, and multiple lawsuits involving individual employees. The company has denied wrongdoing in those cases.

(Reporting by Daniel Wiessner in Albany, New YorkEditing by Chris Reese, David Gregorio and Alexia Garamfalvi)

Leaked SpaceX documents show company forbids employees to sell stock if it deems they've misbehaved



Aria Alamalhodaei
Updated Mon, March 18, 2024 

Image Credits: TechCrunch

SpaceX requires employees to agree to some unusual terms related to their stock awards, which have a chilling effect on staff, according to sources and internal documents viewed by TechCrunch.

That includes a provision that allows SpaceX the right to purchase back vested shares within a six-month period following an employee leaving the company for any reason. SpaceX also gives itself the right to ban past and present employees from participating in tender offers if they are deemed to have committed “an act of dishonesty against the company” or to have violated written company policies, among other reasons.

Employees often aren’t aware of the “dishonesty” condition when they initially sign up on the equity compensation management platform, one former employee said.

If SpaceX bars an employee from selling stock in the tender offers, the person would have to wait until SpaceX goes public to realize cash from the shares — and it’s unclear when that will happen, if it ever does.

SpaceX did not respond to multiple requests for comment.
Employees pay taxes on their shares

Like most tech companies, SpaceX includes stock options and restricted stock units (RSUs) as part of its compensation package to attract top talent. No doubt this has paid off: SpaceX's 13,000-strong workforce is helping to push the limits of what was thought possible in aerospace, including delivering crew to and from the International Space Station and building out the largest satellite constellation in history.

Unlike stock in public companies, stock in private companies cannot be sold without the company’s permission. So employees can only turn that part of their pay into cash when their employer allows such transactions. SpaceX is known for generally holding buyback events twice a year — meaning SpaceX will buy the shares back from employees; this schedule, which has been fairly reliable in recent years, means that employees have biannual opportunities to liquidate assets that have likely appreciated since the vesting date.

It’s not uncommon for additional terms to be attached to employee stock compensation at startups, and employees who stay with the company long enough to vest stock may have acquired stock under various stock plans with various conditions. Yet no employee at startups and private companies is entitled to sell their stock without their employer's approval.

Indeed, at SpaceX, if an employee was fired “for cause,” the company stated it can repurchase their stock for a price of $0 per share, according to documents viewed by TechCrunch.


“It sounds unusual to have [a] cause type exclusion provision in a tender offer agreement,” attorney and stock options expert Mary Russell told TechCrunch. She said it is also unusual for a traditional venture-based startup to have repurchase rights for vested shares that are unrelated to a bad-actor-type “for cause” termination.

These terms “keep everyone under their control, even if they have left the company,” one former employee said, because employees don’t want to be forced to return their valuable SpaceX stock for no compensation. “And since there is no urgency by SpaceX to go public, being banned from tender offers effectively zeros out your shares, at least for a long time. Even though you paid thousands to cover the taxes.”

“They also try and force a non-disparagement agreement on you when you leave, either with a carrot, or a stick if they have one,” the person said.
SpaceX names Elon Musk actions as a "risk factor"

As recently as 2020, SpaceX was also providing to employees a separate document outlining the risks of investing in the company’s securities. It reads similar to an S-1 registration statement that public companies must file; given that SpaceX is private, it is a unique disclosure into the company’s risk profile.

To a large extent, such documents are written to minimize the company’s legal liability. The SpaceX document rightly points out that equity investments are inherently risky, because participants are trading a highly liquid asset — cash — for highly illiquid shares. As such, they exhaustively list various material risk factors, no matter how unlikely — for example, in its risk document, seen by TechCrunch, SpaceX includes that Hawthorne, California, which is home to its headquarters, is a “seismically active region.”

The company also includes a number of risk factors related to Elon Musk, its CEO and founder.

“To date, the Company has been highly dependent on the leadership provided by the Company’s founder, Chief Executive Officer and Chief Technical Officer, Elon Musk,” the document reads. “SpaceX, Mr. Musk, and other companies Mr. Musk is affiliated with, frequently receive an immense amount of media attention. As such, Mr. Musk’s actions or public statements could also potentially have a positive or negative impact on the market capitalization of SpaceX.”

The document also calls out a $40 million settlement between Musk and the SEC, which came about after he tweeted in August 2018 that he was considering taking Tesla private. Even though that tweet did not relate to SpaceX, “the settlement has implications for SpaceX,” the document says.

“If there is a lack of compliance with the settlement, additional enforcement actions or other legal proceedings could be instituted against Mr. Musk, which could have adverse consequences for SpaceX. Most notably, the SEC could deny SpaceX the right to rely on Regulation D, which is an exemption from registration under the Securities Act of 1933 for private financing transactions. A denial of future reliance on Regulation D could potentially make it more difficult for the Company to raise capital in the future.”

While Tesla’s recent securities statements do call out the SEC settlement, they do not address potential media attention in the same direct manner.

The document also states that there is a risk that there may never be a public market for the company’s common stock — an issue should an employee ever be barred from tender events.

SpaceX is one of the most valuable private companies in the world, with the valuation topping out at $180 billion as of last December. Like other private companies, its stock is split into preferred and common stock. Employees are awarded the latter, while preferred stock is generally owned by institutional investors and entities affiliated with Musk. Preferred stock has some superior rights attached to it, including liquidation preferences and dividends.

The common stock is split into three stock classes: Class A, B and C. According to an equity incentive plan approved by the SpaceX board in March 2015, and which has a termination date in 2025, employees receive Class C stock, a non-voting stock.
Almost all top BP shareholders unhappy with green strategy, claims activist investor

Luke Barr
Sat, March 16, 2024 

BP's chief executive Murray Auchincloss has vowed to continue to pursue his predecessor's investment in renewables - RYAN LIM/AFP via Getty Images

Almost all of BP’s biggest shareholders are unhappy with its shift to green energy, an activist investor has claimed, amid a growing backlash over the oil giant’s focus on net zero targets.

Giuseppe Bivona, chief executive of Bluebell Capital, which has a minority stake in BP, said he had spent the past three weeks talking to many of the company’s top 30 investors.

He said: “With only the exception of one shareholder, I am still to find someone who supports BP in its entirety.”

Bluebell is spearheading a brewing investor revolt after sending a 30-page letter to the FTSE 100 company in January.

In the letter it urged BP to halt investment in renewable energy schemes, prioritise oil and gas production, and rewrite net zero targets to clarify that they will be achieved “in line with society”.

BP has been under increasing pressure over net zero commitments that have allegedly left shareholders £40bn poorer.

Mr Bivona said he plans to share negative feedback with BP on a no-name basis, which he said will “clearly expose them to the fact that many investors are sympathetic to what we are saying”.

He is hopeful this will serve as a “wake-up call” for the company, with Bluebell having previously taken similar action against blue-chip giants Glencore and Danone.

The activist threat represents the first major test for Murray Auchincloss, BP’s new chief executive, who has told staff that he will stick to the green energy plans rolled out by his predecessor Bernard Looney.

One of Mr Bivona’s biggest criticisms of BP is that it has destroyed shareholder value by investing billions of pounds in loss-making renewable energy businesses.

He said: “When you want to deploy £30bn on renewable power at a return of 6pc to 8pc, that is insane. BP is such a poorly managed company.”

Despite the criticism, Mr Bivona has given BP a stay of execution to allow it to respond to Bluebell’s concerns, adding that he was not looking to stir up trouble at the forthcoming shareholder meeting.

He added: “But watch out for the next one.”

Mr Bivona said BP is open to the idea of scrutinising its green energy plans but said the company is too scared to follow through with Bluebell’s requests in case of a backlash from environmentalists.

A BP spokesman said: “We do not recognise the assertions Bluebell has made. In recent weeks and months, we have engaged extensively right across our shareholder base internationally, including with our largest shareholders.

“We have heard clear and widespread support for BP’s strategy and our focus on delivery. Throughout this engagement, we have not heard support for Bluebell’s proposals.”
Mnuchin’s interest in TikTok and distressed NY bank echoes his pre-Trump investment playbook


STAN CHOE and CHRISTOPHER RUGABER
Updated Sat, March 16, 2024 


NEW YORK (AP) — It seems like a bizarre mishmash: A former Trump cabinet official is saying he wants to buy TikTok just days after leading a group that pumped $1 billion into a beaten-down bank. But it all actually fits in with the complicated career of Steven Mnuchin.

The man who served as former President Donald Trump’s Treasury secretary is well connected in the world of finance, after all. From 1985 to 2002, he worked at Goldman Sachs, one of the most storied — and criticized — investment banks on Wall Street.

Mnuchin also has a history in media and entertainment. Among his Hollywood credits are “Mad Max: Fury Road” and “The Lego Movie,” where he was one of the executive producers. Think of them as much bigger-budget versions of TikTok videos.

And Mnuchin certainly has experience taking risks with troubled institutions. He famously swooped in to turn around the struggling IndyMac bank after its failure in the financial crisis of 2008.

But for critics, Mnuchin's dealmaking also raises concerns about ethics. Robert Weissman, president of the watchdog group Public Citizen, points to TikTok in particular, where the U.S. government may force its Chinese owners to sell. Imagine something similar happening in another country, where its former finance minister ended up as the buyer, he said.

"When you’re at the top of the financial policymaking hierarchy, you don’t jump from that to figure out how you can help yourself,” Weissman said.

Other former Treasury secretaries have gone to Wall Street after their terms ended, including Robert Rubin, a Goldman Sachs executive who served under President Clinton. In all cases, the move carries the appearance of cashing in on their time in government, Weissman said.

Mnuchin, who couldn’t be reached for comment through a request via his private-equity firm, has often generated controversy as he has generated cash.

After leaving the Treasury Department in January 2021, he launched his private-equity fund, Liberty Strategic Capital, which raised $2.5 billion by that September, according to news reports.

Much of that money was from government-controlled investment funds in Saudi Arabia and other Persian Gulf states, which Mnuchin had frequently visited as Treasury secretary. He was in the Middle East just weeks before leaving office, cutting the trip short after the Jan. 6 Capitol riot.

The rapid shift from his government travel overseas to business dealings in those same countries prompted a watchdog group, Citizens for Responsibility and Ethics in Washington, to call for a one-year ban on senior government officials doing business overseas after leaving office.


Earlier this month, Mnuchin jumped back into the headlines when his PE firm led a roughly $1 billion investment in embattled New York Community Bancorp.

NYCB was looking for a lifeline, and its stock had at one point plunged more than 80% from the start of the year. The bank is struggling with falling values for investments tied to commercial real estate and the growing pains associated with some of its past acquisitions.

It all hearkens back to the move that may have defined Mnuchin's career.


In 2009, OneWest Bank Group, where Mnuchin was chairman and CEO, bought the troubled IndyMac after federal regulators took over the bank. Other big-name backers included funds tied to George Soros and hedge-fund manager John Paulson.

OneWest bought all of IndyMac’s deposits and assets at a discount of $4.7 billion following an auction by the Federal Deposit of Insurance Corp. The FDIC also agreed to share in the losses created by some mortgages tied to single-family homes.

Kevin Kaiser, an adjunct professor of finance at the Wharton School, said such investors can profit by buying at steep discounts when markets are panicking. To ensure the investment pays off, however, investors like Mnuchin have to pay hardball with borrowers at risk of default, he said.

“They’re a little bit sharp elbowed,” Kaiser said, referring to distressed-property investors as a group. “And what that means is they’re not shy to get into a bit of a conflict situation.”

After OneWest, Mnuchin was Trump’s top fundraiser in the 2016 election. He came under fire in Congress when he was nominated for the Treasury post, after it came out that OneWest foreclosed on tens of thousands of homes after the U.S. housing bubble popped.

Advocates found the bank particularly difficult to work with under government mortgage modification programs. Some of those who lost their homes had voted for Trump in 2016 and were disappointed in Mnuchin’s nomination.

Maxine Waters, the top Democrat of the House’s financial committee, at the time called Mnuchin the “foreclosure king.”

In testimony before a Senate committee considering his nomination, Mnuchin said he had worked to help homeowners remain in their homes and that his company had extended more than 100,000 loan modifications to borrowers.

Mnuchin was Treasury secretary in 2020, when the Trump administration brokered a deal where Oracle and Walmart would take a large stake in TikTok. That deal eventually fizzled for several reasons, but the popular video app is again under pressure after the House of Representatives passed a bill Wednesday to ban it in the U.S. if its China-based owner doesn't sell its stake.

On Thursday, Mnuchin said in an interview with CNBC that he had spoken with “a bunch of people” about creating an investor group to buy TikTok.

And Mnuchin may not be done.

Mnuchin has plenty of potential, distressed targets given the banking industry's troubles, said Chris Caulfield, who runs the banking practice at West Monroe, a consulting firm.

Besides having a history of bringing in new leadership teams to right struggling banks, Mnuchin also has experience in the potentially thorny world of regulations.

“He also has access to capital,” Caulfield said of Mnuchin. “Should there be need for more capital, he's somebody who’s very adept at putting consortiums together.”

___

Rugaber reported from Washington.



Trump official and Goldman Sachs alum Steve Mnuchin plots to buy TikTok as Gen Z panics about a possible ban

Dylan Sloan
Fri, March 15, 2024 

On Tuesday, former Treasury Secretary Steve Mnuchin closed a $1 billion equity deal to rescue the faltering New York Community Bank. On Thursday, he said he was working to buy TikTok with a group of investors after the House passed a bill demanding that Chinese firm ByteDance sell the app. It's been the source of considerable Gen Z (and probably a lot of millennial) panic, as the realization dawns that the defining social-media platform of the 2020s really could go away.

After leaving the public eye for years after Joe Biden’s electoral defeat of Donald Trump in 2020, Mnuchin is back in the business pages. It’s just the latest in a wide-ranging career that’s brought him from the Goldman Sachs trading floor to Hollywood—Mnuchin has production credits on “Avatar” and “The Lego Batman Movie.”

Mnuchin’s interest in TikTok dates back at least to his time in Trump’s cabinet, when he urged the then-president to block Chinese company ByteDance from acquiring TikTok, back when it was called musical.ly. Mnuchin’s experience as a dealmaker and fundraiser, though, goes back much further, to the very beginnings of his career in business.

Mnuchin is a Wall Street veteran through and through. His father, Robert Mnuchin, was a partner at Goldman Sachs who worked at the bank for over three decades. After Steve graduated from Yale in 1985, he took a job at his father’s company, working in Goldman’s mortgage-backed securities department.

Working his way up to partner and Chief Information Officer, Mnuchin left Goldman in 2002 and spent over a decade bouncing around between various management roles, ranging from film to California-based OneWest Bank to serving on the Sears board. (Dune Capital, a hedge fund that Mnuchin co-founded with seed money from George Soros, put up some of the money for David Cameron’s 2009 movie Avatar, alongside other hits such as Magic Mike XXL.)

Donald Trump tapped Mnuchin to lead the finance arm of his presidential campaign in 2016, and nominated him to be Secretary of the Treasury after the election—the first Wall Street vet to hold the role since his old Goldman Sachs boss Hank Paulson nearly a decade earlier. Democrats were unanimously opposed to Mnuchin, pointing to his allegedly predatory track record of foreclosing on California homeowners while serving as OneWest Bank’s CEO. But Mnuchin was narrowly confirmed by the Senate, and was one of the few Trump cabinet members to remain in office for all four years of Trump’s term.

As Treasury Secretary, Mnuchin stuck close to the party line, emerging as an unflinching Trump ally: he pushed to enact Trump’s tax cuts and supported rolling back the Dodd-Frank Act passed after the 2008 financial crisis, which weakened the Consumer Financial Protection Bureau. But his work across the aisle during a crisis will likely be his legacy, as he worked with Speaker Nancy Pelosi to shepherd the Covid-19 stimulus bill that he helped through Congress: allocating nearly $1 trillion in federal aid and temporarily expanding the social safety net at a sorely needed time.
What has Mnuchin been up to during the Biden administration?

In 2021, after leaving office, Mnuchin founded Liberty Strategic Capital, a $3.1 billion private equity firm focusing on tech and fintech. By far its highest-profile investment to date came earlier this week, when it handed New York Community Bank a $1 billion lifeline to keep it afloat after the bank’s shares plummeted off ratings downgrades and concerns over its struggling commercial real estate portfolio.


“It’s a top-20 bank. We put up a lot of capital which will stabilize the business, brought in Joseph Otting as CEO, and I think there’s going to be a great turnaround,” Mnuchin said of the deal on CNBC on Thursday.

A potential TikTok purchase would be a far bigger—and far more complicated—prize. In a deal with high geopolitical stakes, Mnuchin’s fundraising ability can only take him so far.

“I’m assuming he can raise the money easily enough…I don't know what the price would be. [But] I think the identity of the CEO of the buyer is a pretty low level consideration,” Columbia Law professor and corporate governance expert John C. Coffee told Fortune. “This is not an ordinary business transaction between a buyer and a seller. It's two sovereigns facing off, and one may want to say, ‘You can't do that to us. Go ahead and do it, and we'll engage in economic reprisals of our own.’”

The House of Representatives voted 352-65 on Wednesday to pass a bill that would ban TikTok unless the app’s Chinese parent company, ByteDance, sells it. The bill isn't expected to pass the Senate, but it’s reignited debate over the risks of a Chinese company potentially having access to over 170 million American users’ data—as well as control over what they’re seeing on an app where close to a third of adults age 13-29 get their news, according to Pew Research Center data.

“I had President Trump sign an order that TikTok had to be sold, and I continue to believe that. So I think the legislation should pass…It’s a great business, and I’m going to put together a group to buy TikTok,” said Mnuchin on CNBC on Thursday. “It should be owned by U.S. businesses. There’s no way that the Chinese would ever let a U.S. company own something like this in China.”
Another feather in the cap

Buying TikTok would be a huge get for Mnuchin. The app reported $16 billion in annual sales on Friday, and an Oxford Economics report found that it contributed $24.2 billion to US GDP last year (TikTok contributed funding for the study). Bloomberg Intelligence recently valued TikTok’s U.S. business at an estimated $40-50 billion.

The last major social media buyout was Elon Musk’s Twitter takeover in 2022. Musk has taken a central role in Twitter (now X.com)’s operations ever since, dictating content moderation policies and experimenting with payment models. NYU Business professor and former Obama Assistant Secretary of State Michael H. Posner told Fortune that he wasn’t concerned about Mnuchin potentially exerting Musk-like control over TikTok.

“It's a very different thing than Elon Musk owning X, or even Mark Zuckerberg effectively having operational control of Meta. So, you know, I would be less concerned,” Posner said. “Elon Musk at X has inserted himself in a way that I think is very detrimental to the company and not good for our society…I think Mnuchin probably wouldn't have that kind of control.”

Posner pointed out that if legislators are concerned about Chinese influence over TikTok, forcing a sale is only one half of the equation: it would also be necessary to remove that all of the app’s data centers and engineering staff from any Chinese oversight, a process that could take a long time.

“Mnuchin and his group, if they had the money, and they were able to buy [TikTok], and separate not only ownership but the technology—making sure that the algorithms, all the engineering was also taken out of China—that would obviously, to me at least, be a very positive development,” Posner said.

This story was originally featured on Fortune.com

Charting the Global Economy: Stubborn Inflation Giving Fed Pause



























Vince Golle and Molly Smith
Sat, March 16, 2024 

(Bloomberg) -- Fresh US data showing persistent inflation so far this year and limited signs of a weakening job market underscore a Federal Reserve in no rush to start lowering interest rates.

Industrial production figures illustrated a euro area economy that’s merely limping along. In Japan, speculation intensified for the first rate hike in more than a decade after the country’s largest labor union secured big wage deals.

The world of geopolitics continued to evolve, including Ukrainian drone attacks on Russian oil refineries, declining foreign investment in China and US concerns about Beijing’s subsidies for shipbuilders.

Here are some of the charts that appeared on Bloomberg this week on the latest developments in the global economy, geopolitics and markets:

World

Ukrainian drone attacks halted three oil refineries deep within Russian territory in an assault President Vladimir Putin said was aimed at disrupting his presidential election later this week. An aerial strike on Wednesday caused a blaze at one of the country’s biggest crude-processing facilities, Rosneft PJSC’s Ryazan plant near Moscow. Since the start of this year, Ukraine has used drones to target important Russian oil facilities from the Black Sea to the Baltic Sea.

US President Joe Biden pledged to look into a petition from a group of unions asking his administration to review China’s subsidies for shipbuilders, as tensions between the world’s two largest economies simmer on trade and key supply chains during a critical American election year. Shipbuilding is emerging as the latest battleground in the US-China trade war.

Georgia and Ukraine cut rates, while Angola raised them. After holding rates steady last week, the European Central Bank presented a new framework for how it implements monetary policy, preserving the current system of steering interest rates while giving lenders more of a say over how much cash they need to operate.

US

The latest data on inflation and unemployment filings gave Fed officials more reasons to hold off on cutting interest rates, even as retail sales suggested a slowdown in consumer spending. Key components from the latest consumer and producer price reports that inform the personal consumption expenditures price index — the Fed’s preferred inflation metric — suggest the February PCE will come in strong again when released later this month.


The Biden administration is offering a $2.26 billion loan to help Lithium Americas Corp. develop a Nevada lithium deposit that’s the country’s largest. Demand for lithium, which also is used for grid storage and weapons, is projected to exceed current production by 2030. About 65% of the critical mineral is processed in China.

Europe

Euro-area industrial production slumped at the start of the year, raising the prospect that the economy as a whole is struggling to grow in the first quarter.

The UK economy rebounded in January, registering modest growth after falling into a technical recession in the second half of last year. Gross domestic product rose 0.2%, bolstered by services and construction, after a 0.1% decline in December

Asia

Japan’s largest union group announced stronger-than-expected annual wage deals, a result that will fuel already intense speculation that the central bank will next week raise interest rates for the first time since 2007. The central bank has long pursued a goal of achieving sustainable 2% inflation. A key component of that goal is setting in motion a virtuous cycle in which wage growth feeds into demand-led price gains.

India’s inflation was little changed in February, staying above the central bank’s target and giving policymakers reason to remain cautious. India’s strong economic growth last quarter is another reason for policymakers to stay on guard.

South Korea’s direct investment flows into China last year fell by the most in data going back more than three decades in a sign of weakening economic ties between the two countries. The re-orientation of South Korea’s investment away from China comes amid a change in the breakdown of its export markets. China is close to being overtaken by the US as the biggest destination for South Korean exports.

The Philippines is counting on the US and its allies to play a crucial role in its plans to explore energy resources in the disputed South China Sea, according to Manila’s envoy to Washington. The Philippines is exploring several options in its quest to tap the resource-rich South China Sea, waters that China claims almost in its entirety. The body of water is estimated to hold significant quantities of oil and gas

Emerging Markets

President Luiz Inacio Lula da Silva’s plan to help Brazilians escape the record amounts of debt they amassed during the pandemic remains well short of its targets as it approaches its March 31 expiration, denting his efforts to unleash consumer spending and boost growth in Latin America’s largest economy.

Argentina’s monthly inflation slowed for a second consecutive time as the impact of December’s large peso devaluation fades and President Javier Milei’s austerity measures push the economy into recession. The night before the release, the central bank announced a surprise rate cut to 80% from 100% as policymakers said they see monthly inflation cooling.

--With assistance from Philip Aldrick, Andrew Atkinson, Jan Bratanic, Andreo Calonzo, Sam Kim, James Mayger, Ari Natter, Yoshiaki Nohara, Anup Roy, Augusta Saraiva, Zoe Schneeweiss, Manolo Serapio Jr., Manuela Tobias, Sylvia Westall, Josh Xiao and Erica Yokoyama.

Fed, BOJ to Lead a Week of Rate Decisions for Half the World






















Craig Stirling
Sun, March 17, 2024

(Bloomberg) -- Investors may glean more on the Federal Reserve’s resolve to ease and how close Japan is to finally exiting negative interest rates as central banks set policy for almost half the global economy.

The coming week features the world’s biggest agglomeration of decisions for 2024 to date, including judgments on the cost of borrowing for six of the 10 most-traded currencies. The collective outcome may underscore how monetary officials’ perception of inflation risks is diverging noticeably.

That would reflect how a global consumer-price shock in the wake of the pandemic, further exacerbated by Russia’s war in Ukraine, has transitioned asymmetrically, with some economies facing stronger domestic price pressures than others.

In turn, the world now features a patchwork of different policy dynamics, in contrast to the largely synchronized response that central banks previously engineered.

Most consequential will be the Fed’s decision on Wednesday, which may reveal whether still-robust economic data are giving Washington officials cause to dial back intentions to cut rates — or whether their outlook for three reductions this year remains on track.

The Bank of Japan’s announcement on Tuesday is also pivotal. The prospect that it’s moving toward finally raising borrowing costs and effectively calling an end to a generation-long period of feeble price growth points to how tectonic plates are shifting in another key member of the global financial system.

In Europe, meanwhile, central banks from the UK to Switzerland might inch toward reducing borrowing costs, while all four with decisions in Latin America in the coming week are poised to either begin or extend easing cycles.

Click here for what happened last week, and below is a look at the monetary highlights anticipated over the next five days.

Monday

Pakistan will be Monday’s main rate event. With a team of International Monetary Fund officials visiting this weekend for talks over the troubled economy’s loan program, most forecasters in a Bloomberg survey reckon the central bank will keep its rate unchanged at 22%.


A minority does anticipate a cut, though, with predictions of its size ranging from a quarter point to a full percentage point.

Tuesday

The BOJ’s decision will be among the most closely watched in decades, as officials decide whether to end the world’s last negative rate now, or wait until April.

The meeting comes days after the nation’s largest umbrella group for unions announced that annual pay negotiations resulted in the biggest increases in more than 30 years, sending a signal to authorities that their long-sought-after virtuous cycle of strong wages fueling demand-led inflation may be emerging.

The raises outpaced inflation in a positive sign for households that have seen real wages fall every month for almost two years. Economists are divided on whether the central bank will move Tuesday or not.

“We think it will judge that it’s too early to tighten,” Taro Kimura, senior Japan economist at Bloomberg Economics, said in a report. “To be sure, there is a significant risk to our call.”

The same day, the Reserve Bank of Australia will probably hold its cash rate at 4.35% after weaker-than-expected inflation in January. Investors will focus on whether the institution keeps its hawkish tone or hints at a pivot a few months out.

And later in Morocco, with inflation having slowed to 2.3% in January, the central bank may opt to keep its rate steady at the 3% level it reached a year ago.

Wednesday

A trio of decisions in Europe and Asia might pique investors’ interest before the day’s main events. Firstly, Indonesia’s central bank is seen keeping rates on hold.

Over in Europe, Iceland may begin easing with a quarter-point cut from 9.25% — the highest level in Western Europe — according to lender Islandsbanki hf. Slowing inflation and a long-term pay deal may provide officials with reassurance against a potential wage-price spiral.

The Czech central bank is poised to act more aggressively, with most economists anticipating a half-point reduction and one predicting a bigger move.

Attention then shifts across the Atlantic, where the Fed is widely expected to hold rates steady for a fifth consecutive meeting, and to continue to project three quarter-point rate cuts in 2024, even as inflation has proven stickier than expected the past two months.

After raising their benchmark federal funds rate more than five percentage points starting in March 2022, the Federal Open Market Committee has held borrowing costs at a two-decade high since July.

Against the backdrop of strong job growth and a jump in prices in January and February, officials have repeatedly emphasized they’re in no rush to ease.

Most economists surveyed by Bloomberg News expect the policymakers to pencil in three cuts for 2024, with the first move coming in June, in line with markets’ current pricing, though more than a third expect a hawkish surprise of fewer reductions.

Chair Jerome Powell told Congress this month that the central bank is getting close to the confidence it needs to start lowering rates, saying they were “not far” from that when considering the strength of inflation.

For later in the day, Brazil’s central bank has telegraphed that a sixth straight half-point cut is on tap, which would take the key rate down to 10.75%.

The institution’s board, led by President Roberto Campos Neto, may shorten the horizon on current guidance, which signals cuts of “the same magnitude in the next meetings” after three straight above-forecast inflation prints.

Economists see a year-end rate of 9%, but the policy path from there remains less clear as neither the central bank nor analysts see consumer prices back to target before 2027.

Thursday

Three decisions will reveal how parts of Western Europe have reached a crossroads in monetary policy.

Firstly, the Swiss National Bank is anticipated by most economists to stay on hold, though two respondents in Bloomberg’s survey predict that officials will cut rates, opting not to wait for bigger counterparts to start their own easing cycles.

Shortly after that, Norges Bank is also expected to keep borrowing costs on hold, with investors focusing on potential changes in its outlook for when reductions might start. Most economists still see the pivot to easing in Norway no earlier than in the third quarter, even as inflation has been cooling faster than anticipated.

Bank of England policymakers will have fresh inflation data on Wednesday and the latest purchasing manager surveys on Thursday to consider before their decision, which is seen likely to keep rates unchanged again.

With consumer-price growth slowing but likely to still come in well above the 2% target, the UK central bank is in no rush to move toward easing for now.

Observers are likely to focus on the vote count from officials on the Monetary Policy Committee, with another three-way split possible between those wanting no change and others favoring either a cut or a hike.

“Having dropped its tightening bias at its February meeting, we don’t think the MPC will be minded to alter its guidance,” Dan Hanson and Ana Andrade of Bloomberg Economics wrote in a report. “A bigger shift in tone is likely to come in May.”

Investors will also closely watch Turkey’s rate decision after February’s inflation numbers came in higher than expected. Several banks, including JPMorgan, say monetary officials will probably raise the key rate beyond its current level of 45%, though most doubt that will happen until after this month’s local elections.

The focus will again shift to Latin America later in the day. In Mexico, officials may finally pull the trigger on a long-awaited cut — likely a quarter point — and by doing so join major peers across the region in easing monetary policy.

Banco de Mexico, led by Governor Victoria Rodriguez, has kept borrowing costs at a record-high 11.25% since last March while consumer prices have embarked on a protracted and bumpy path downward.

In one of Latin America’s smaller economies, Banco Central del Paraguay will likely cut its key rate for an eighth time since August, from the current 6.25%, after inflation slowed to 2.9% last month.

Friday

The Bank of Russia’s first post-election rate decision is likely to keep borrowing costs unchanged for a second straight time, following last month’s hold at 16%. With inflation at 7.7% — well above its 4% target — the central bank has said it sees room to begin lowering borrowing costs only in the second half of the year.

Later on, Colombia’s central bank is all but certain to cut the current 12.75% rate for a third straight meeting — and may opt to go bigger after consecutive quarter-point reductions.

Policymakers led by Governor Leonardo Villar do have room for maneuver: inflation has slowed for 11 months and Colombia’s economy is operating well short of potential.

Economic Data

The coming week will also feature some key data releases:

China’s monthly batch of numbers may show growth in retail sales and industrial output slowed in the first two months of 2024, while property investment may have dropped 8% on year.


US statistics on the schedule include housing starts and PMI numbers.


Canada, Japan, South Africa and the UK will all release inflation data.


Euro-zone reports due include PMI surveys and consumer confidence.


Germany’s ZEW and Ifo indicators will provide a snapshot of the potential recovery of Europe’s biggest economy.


Singapore, Malaysia, New Zealand, Japan and South Korea publish trade data.

--With assistance from Brian Fowler, Piotr Skolimowski, Robert Jameson, Monique Vanek, Paul Wallace, Kira Zavyalova, Steve Matthews and Ott Ummelas.

Most Read from Bloomberg Businessweek




Starbucks Investors Approve CEO Pay Package That Drops DEI Reference


Daniela Sirtori-Cortina and Jeff Green
Sat, March 16, 2024 



(Bloomberg) -- Starbucks Corp. shareholders approved a plan to drop a bonus tied to DEI goals for its executives and replace it with a more general workforce target while also shifting more compensation to financial performance.

The new structure, approved at an annual meeting on March 13, nixes a specific goal from the 2023 compensation package that tied 7.5% of executives’ bonuses to an undisclosed goal related to diversity, equity and inclusion.

The new plan was approved by 92% of shareholders, the company said in a filing Friday. The vote is non-binding, but companies tend to make changes in compensation if the plans fail or get significant opposition. The coffee chain first said it would include ESG-related targets in executive compensation in October 2020.

Starbucks’s equality, social and governance goals will be part of a longer-term incentive program that makes up about 25% of bonuses that no longer mentions DEI, referring instead to “talent.” The portion of the bonus paid for hitting financial targets rose to 75%, from 70%.

In an earlier regulatory filing, the company said it opted to “modify the talent metric to include a broader spectrum of the workforce and provide for different representation improvement targets in connection with this change.” It said it made the change after meetings with shareholders.

Starbucks retains inclusion and diversity goals within its overall compensation structure, a spokesperson said in a statement. US goals to achieve racial and ethic diversity of at least 30% at all corporate levels and at least 40% across manufacturing and retail roles by 2025 are also still in place, the company said.

Conservative activists have been targeting executive compensation that rewards leaders for meeting DEI goals because they contend that such incentives might encourage illegal hiring behavior to meet company diversity targets. It’s part of a broader backlash against corporate diversity programs after the US Supreme Court ruled that affirmative action in college enrollment is illegal.

Strive Asset Management, an anti-activism fund company co-founded by former Republican presidential hopeful Vivek Ramaswamy, sent a letter to Southwest Airlines Co. in August warning it to end its executive compensation incentives for environmental and social goals. The group has also met privately with about a dozen large companies on the issue, according to Justin Danhof, Strive’s head of corporate governance, declining to name the companies.

Strive plans to release a detailed report later this year, after the proxy season ends, he said in an interview, adding Strive voted against compensation plans and the chair of compensation committees “at every company where there was ESG/DEI in the compensation plan.”

The Conference Board found that about 76% of S&P 500 companies had DEI/ESG incentives in their compensation plan in 2023, an increase from about 67% in 2021. Those goals can include a mixture of climate and diversity goals, the study found.

Starbucks’s switch to “talent” avoids the term DEI, which has been “weaponized” by the opposition, while still making it clear the company is seeking to broaden the pool of applicants, according to Charles Tharp, a professor who teaches executive compensation at Boston University’s Questrom School of Business.

Companies use compensation plans to highlight issues they believe are important to investors, employees, customers, and the general public, Tharp said. He added that opposition to the incentives, such as a letter last year from 13 state attorneys general questioning the legality of certain companies’ DEI plans, will definitely spark caution going forward.

“What I hope is we don’t go to what I would call diversity hushing, where people don’t want to talk about what they’re doing,” Tharp said.

--With assistance from Saijel Kishan and Clara Hudson.
Why auto insurance costs are rising at the fastest rate in 47 years

Pras Subramanian
·Senior Reporter
Updated Sat, March 16, 2024

As car prices moderate from a pandemic-era surge, insurance has pushed the cost of car ownership to the brink for many Americans.

New data out this week showed auto insurance costs rose 20.6% from the prior year in February, matching January's increase as the most since December 1976, when costs rose 22.4% over the prior year.

On an annual basis, motor vehicle insurance costs rose 17.4% in 2023, the most since a 28.7% increase in 1976, according to data from the BLS.

The sticker shock hitting many American drivers is being driven by a rise in accidents, the severity of accidents, and geographical factors combining to create a perfect storm and push costs higher.

Read more: Tips for getting cheap car insurance

'Severity' and bodily injury claims on the rise

The most alarming factor driving insurance costs higher is more severe claims.

"In general, the numbers of crashes, injuries, and fatalities are up, and inflation has made the cost of repairs more expensive," AAA spokesperson Robert Sinclair told Yahoo Finance.

Sinclair said motorists developed "bad habits" on the road during pandemic lockdowns, contributing to current behavior. For example, as the New York Times reported earlier this year, researchers in Nevada discovered that during the pandemic, motorists were speeding more (and driving through intersections), seat belt use was down, and intoxicated driving arrests were up to near historic highs.

Sinclair also pointed to NHTSA data, which found that in 2021, at the height of the pandemic, road fatalities increased by 10.5% to their highest level since 2005, even while most Americans stayed at home. The NHTSA said it was the highest percentage increase it had ever seen. The agency found that fatalities in 2022 only decreased by 0.3% as compared to 2021.

Insurance tech firm Insurify found that auto insurance premium hikes were "largely due to the skyrocketing price of auto parts and the increasing number and severity of claims." And while increases may moderate, analysts still believe further premium hikes are on the horizon.

"While the magnitude of rate increases is likely to ease somewhat, after several years of double-digit increases, some lingering claim cost inflation and adverse claim severity and frequency will likely lead to a 'higher for longer' auto rate environment,” CFRA analyst Cathy Seifert told Yahoo Finance.

Not surprisingly, severe accidents leave insurance companies with rising loss ratios, or a share of premiums collected that insurers paid out in claims.

"Broadly speaking, severity in [the] auto [business] is running mid- to high-single digits — think closer to mid in the vehicle severity, think closer to high in bodily injury — and so that's sort of where trends are running today," Travelers (TRV) personal insurance president Michael Klein said during the insurance giant's latest earnings call in January.

"We've seen a bit of a mix shift towards more bodily injury claims, which is one of the things that has us keeping our severity trend estimates at that sort of elevated level," Klein added.

In response, Travelers increased premiums, especially for customers renewing their policies. In the fourth quarter, its renewal premium price change was a whopping 16.7% in its auto business, contributing more than $2 billion of additional premium into the segment compared to the same quarter last year.

GEICO, the cost-conscious insurer owned by Warren Buffett's Berkshire Hathaway (BRK-A, BRK-B), also felt the effects of those rising severity claims.

The second-largest auto insurer in America behind only State Farm, GEICO was hit by six consecutive quarters of underwriting losses beginning at the height of the pandemic. The company has since responded with more aggressive policy writing, trimmed marketing budgets, and higher premiums.

GEICO eventually earned $3.64 billion before taxes from underwriting in 2023, but the trend of higher severity of claims remains.


Shareholders pose for a picture with a Geico mascot at the Berkshire Hathaway annual shareholder's meeting on April 30, 2022, in Omaha, Neb. (Scott Olson/Getty Images) (Scott Olson via Getty Images)

"Average claims severities continued to rise in 2023 due to higher auto repair parts prices, labor costs, and medical inflation," the insurer said in parent Berkshire Hathaway's 2023 annual report, despite the frequency of claims coming down for property and auto claims.

GEICO said, "Average claims severities in 2023 were higher for all coverages, including property damage (14-16% range), collision (4-6% range), and bodily injury (5-7% range)." GEICO also sought rate increases in numerous states in 2022 and 2023 in response to accelerating claims costs.

On the flip side, insurer Progressive (PGR) noted in its latest earnings report that the severity and frequency of claims were coming down, suggesting some relief for the insurer's bottom line and perhaps consumer wallets.

"Severity seemed to moderate a little bit [in Q4], and so we're hoping that it's a little bit benign," Progressive CEO Tricia Griffith said in Progressive's fourth quarter earnings call. "When you look at last year, we were affected by fixing cars, and that seems to be a little bit calmer."

Complex repairs, rising labor costs

As bodily injury and property damage costs rise, so too have the incidence of more complex repairs and the need for more expensive mechanics to get them done.

New vehicle prices have risen over 20% since 2019, leading to an increase in the cost of parts. Additionally, newer cars contain more technology, such as sensors and control modules built into bumpers and exterior panels, which makes a simple fender bender a potential several-thousand-dollar repair.

And like almost all industries since the pandemic, the cost of labor has risen dramatically as well.

"Within auto repair, most of our expenses are human beings, and as minimum wage laws come into effect, that pushes the cost of labor up," a general manager at a major Southern California-based auto dealer told Yahoo Finance.


An auto mechanic walks under a vehicle being repaired from a lift at Gates Automotive Service on Jan. 13, 2022, in Louisville, Ky. (Jon Cherry/Getty Images) (Jon Cherry via Getty Images)

A lack of supply of technicians that handle the most complex repairs has also pushed costs higher. "To give you some perspective, I have transmission technicians and diesel technicians that make $200,000 a year," the general manager said.

The number of workers employed in the motor vehicles and parts industry fell more than overall employment during the pandemic, dropping almost 40% from peak to trough. And while employment in this industry has since surpassed pre-pandemic levels, it took until August 2022 to recover.

Another issue for dealers and the service business is the rise of electric cars.

While the rate of service for EVs is lower, EVs have a "much higher magnitude" of costs, the general manager said, when it comes to body or structural repairs. EVs also tend to require a more advanced tech solution, requiring even more specialized technicians in an even shorter supply.

Read more: Are electric cars more expensive to insure?

Griffith, Progressive's CEO, for her part noted that garage labor fees were still rising, saying the company's auto parts inflation was "nearing zero," but that auto services inflation was still rising by "mid-single digits."
Weather catastrophes 'are not going away'

Where you live also plays a big factor in what you pay to insure your vehicle: Severe weather in states like Florida, Louisiana, and South Carolina has drivers paying premium costs that exceed the national average.

In Louisiana, auto insurance costs are the highest in the nation on a per-capita basis, with 4.7% of the median household's income going towards car insurance, Insurify noted.

In Florida, what Insurify called "rampant" insurance fraud, along with natural disasters, pushed premiums up to nearly $3,000 a year on average.

"The average full-coverage insurance rate in Florida is $243 per month, influenced by severe weather events that strain the state’s insurers," Insurify's report said. "In 2022, Hurricane Ian caused $109.5 billion worth of damage in Florida, making it the costliest hurricane in the state's history, according to NOAA."

Insurers and policyholders did get a respite in 2023 with a relatively calm hurricane season, but there's no expectation that a repeat will happen in the years ahead.

"While 2023 results benefited from the lack of a record-breaking catastrophe (like Hurricane Ian), catastrophes and volatile and outsized weather patterns are not going away," CFRA's Seifert said.


Pras Subramanian is a reporter for Yahoo Finance. You can follow him on Twitter and on Instagram.