Arraignment is a person’s first court appearance after they are charged with a crime. At the arraignment, a judge will read the charges against the defendant and ask them how they plead (guilty, not guilty, or no contest).
If the defendant pleads guilty, then the judge will set a date for sentencing.
If the defendant pleads no contest, then the judge will record the conviction and set a date for sentencing. This is exactly the same as pleading guilty except the defendant just accepts conviction without technically admitting guilt.
If the defendant pleads not guilty, then the judge will set a date for trial.
If the defendant pleads not guilty, then the judge will also decide whether to release the defendant on bail or keep them in jail until trial. In making that decision, the judge will consider factors such as the defendant’s criminal history, the severity of the charges, and whether the defendant is a flight risk.
If the defendant is released on bail, they will be required to pay a certain amount of money (the bail) to the court. The money will be refunded to the defendant if they appear for all of their court dates. If the defendant fails to appear for a court date, then the money will be forfeited to the court. If the judge decides to release a defendant on bail but the defendant doesn’t have enough money to cover the bail set by the judge, then the defendant might use a bail bond company. A bail bond company will charge the defendant 10% of the bail amount as a non-refundable fee, and in exchange, the company will cover the entire bail amount for the duration of the case.
Half of U.S. banks have lost over 33% of their equity
“The 2023 banking crisis is not over as long as there are banks with Deception Ratios over 100%. The Fed solved the bank liquidity problem without addressing the bank solvency problem.”
Three banks failed last month: Silvergate Bank on March 8, Silicon Valley Bank on March 10, and Signature Bank on March 12. A fourth bank (First Republic Bank) was over $9 billion underwater and had to be propped up with $30 billion in emergency loans from 11 other banks, and the stock is still down over 88% from just one month ago.
In response, the Fed created the Bank Term Funding Program (BFTP) which provides emergency loans to banks so that they can repay depositors on demand without running into a liquidity problem. However, the interest rate on those loans is something called the “1-year overnight index swap rate” plus 0.1%. As of today, that’s about 5%. However, many banks are holding portfolios of debt securities that are only yielding about 2%. For example, here are the average portfolio yields for 3 randomly selected publicly-traded banks:
Bank
Average Yield of Debt Securities Portfolio (as of Dec 31, 2022)
Mercantile Bank (NASDAQ: MBWM)
1.72%
Byline Bancorp (NYSE: BY)
1.89%
PacWest Bancorp (PACW)
2.36%
That means banks which borrow BFTP money from the Fed are borrowing money at a high interest rate just to lend it out at a much lower interest rate. For example, on March 22, PacWest announced it had borrowed $2.1 billion through BFTP at around 5%. However, the table above shows that PacWest only earns 2.36% from its debt securities. The net effect of the BFTP loan on PacWest’s balance sheet is the same as if PacWest had $2.1 billion of assets earning 2.36% evaporate and be replaced by $2.1 billion of liabilities costing 2.64%. Or, said another way, it instantly wiped out $4.2 billion of stockholders’ equity.
In reality, that $4.2 billion of stockholders’ equity was already gone. It was just being hidden from the balance sheet through the deceptive accounting tricks used by banks. Since the balance sheet from the bank’s 2022 annual report only claimed $3.95 billion of total stockholder’s equity, that means PacWest is almost certainly insolvent now (i.e. it has negative stockholders’ equity). And PacWest isn’t the only bank with this problem.
How much loss is the typical bank hiding off balance sheet?
We can use the statistical rule of 5 to estimate how close the typical U.S. bank is to insolvency. The result of this estimate will be a 97% confidence interval for the median unreported bank loss.
To do this, I randomly sampled 5 banks from the set of 292 commercial banks that are publicly traded on the NYSE or NASDAQ. For each bank, I calculated the percentage by which the balance sheet (BS) value of total stockholders’ equity differed from the fair value (FV) of total stockholders’ equity. I call this metric the “Bank Deception Ratio”.
The Bank Deception Ratio for each of the 5 randomly selected banks is shown in the table below.
Bank
Bank Deception Ratio (as of Dec 31, 2022)
First Interstate BancSystem (NASDAQ: FIBK)
21.5%
NBT Bancorp (NASDAQ: NBTB)
24.6%
Washington Trust Bancorp (NASDAQ: WASH)
33.5%
Guaranty Bancshares (NYSE: GNTY)
53.7%
Parke Bancorp (NASDAQ: PKBK)
24.9%
The rule of 5 says that there is a 97% probability that the median Bank Deception Ratio of all public banks is at least 21.5%. In other words, it is almost certain that the majority of banks have have less than 79% of the equity they claim to have. In addition, statistics tells us that while it is almost certain that banks are hiding equity losses of at least 21.5%, it’s most likely that 50% of banks are hiding losses of at least 33.5% of their equity. That means half of all banks have lost more than a third of their total stockholders’ equity.
What does that mean?
Banks face two kinds of existential threats:
Liquidity crises
Insolvency crises
In a liquidity crisis, a bank has assets worth more than its liabilities, but its assets take a long time to sell which can put the bank into a bind if its creditors (e.g. depositors) demand their money back sooner than expected. A liquidity crisis can be solved by someone (such as the Fed) giving the bank an emergency loan to pay back creditors until the bank can finally sell some assets and pay back the loan.
A solvency crisis is completely different. In a solvency crisis, a bank has more debt (i.e. liabilities) than it has assets. In that situation, it doesn’t matter whether the bank’s assets are easy to sell or not because even if the bank could magically sell them all immediately for fair market value, the resulting cash received would not be enough to pay back all the bank’s debt.
The Fed’s Bank Term Funding Program is an emergency lending program which means it can help banks avoid liquidity crises, but it does nothing to help banks avoid insolvency crises. The math we did earlier showed that 50% of banks have probably lost over a third of their equity already. From the 8 randomly sampled banks mentioned previously in this article, we also saw one (PacWest) which likely has negative equity and one (Guaranty Bancshares) which had already lost over half of its equity as of December 31, 2022. That means dozens if not hundreds of the more than 4,000 commercial banks in the U.S. may be secretly insolvent already. And there are only two realistic ways that such zombie banks can avoid collapsing:
The zombie bank might be acquired by a larger, better capitalized bank before the zombie bank collapses.
The Fed may cut interest rates back down to 3% or lower within the next year or two
The first scenario is a possibility since even an insolvent bank can sometimes carry enough intangible brand value to make it worth acquiring. However, there are numerous political, legal, and practical obstacles to such acquisitions that must all be overcome to make those deals happen.
The second scenario is also a possibility but definitely not a guarantee. Inflation is still high, OPEC+ unexpectedly announced oil production cuts yesterday, global supply chains are being reworked into slightly less efficient national supply chains, and the Ukraine war is still ongoing. In other words, inflation is high and may well remain high for years to come. If it does, the Fed may not be able to cut rates enough to make zombie banks solvent again.
Carpe diem, short sellers.
By the way, if you are an entrepreneur or active investor who enjoys content like this, you can subscribe to my free weekly(ish) newsletter for more research studies in finance and business.
Which banks are in danger of failing?
Most of the 4,000+ commercial banks in the U.S. are not publicly traded companies which means we don’t have access to their financial statements. That makes it impossible to know how high the risk is of those banks collapsing.
However, for publicly traded banks, we can look at SEC filings. If you want to know how high the danger is of any particular public bank failing, search the name of the bank using EDGAR and find the most recent form 10-K or 10-Q. Once you find the form, follow the steps in this article (balance sheet lie #1) to calculate the fair value adjusted stockholders’ equity. You can then calculate the Bank Deception Ratio using the formula provided earlier in this article. If the Bank Deception Ratio is over 50%, then the bank is at pretty high risk of failing.
Do bank failures create any business opportunities?
Bank failures create opportunities for sophisticated investors:
Shorting bank stocks which are at higher risk of failure than the stock market realizes
Shorting the stock of companies with large uninsured deposits at non-systemically-important banks that are at high risk of failure
Shorting the stock of fintech companies who rely on key partner banks that are at high risk of failure
The Italian Data Protection Authority (an Italian government agency tasked with protecting the privacy of Italian internet users) has temporarily banned ChatGPT in Italy, citing a lack of data controls. In particular, the regulator cites several issues:
ChatGPT suffered a data breach on March 20, 2023 that constitutes a breach of the EU’s GDPR rules. The incident was created by a bug in OpenAI’s code that allowed some users to see the titles of other users’ chat conversations.
The regulator claims OpenAI had “no legal basis” for using the data that it used “to train the algorithms that power the platform.”
ChatGPT does not verify the age of users and does not stop children under 13 from using the chatbot. The Italian regulator claims this exposes children to “responses that are absolutely unsuitable to their degree of development and self-awareness.”
The regulator claims that ChatGPT’s failure to always provide accurate information leads to misuse of personal information that the chatbot discusses.
In addition to demanding OpenAI stop operating ChatGPT within Italy, the regulator has given OpenAI 20 days to show proof that it has taken steps to correct the issues enumerated above, or else it will impose fines.
At minimum, OpenAI would need to add age checks, update its privacy policies and data usage disclosures, and request more explicit user permissions in order to comply with Italy’s demands. However, OpenAI may face a more difficult challenge if the regulator insists that all identifiable Italian people and their information be removed from GPT’s training data.
If OpenAI doesn’t satisfy the regulator’s demands, the company could be hit with a GDPR fine of up to € 20 million (approximately $22 million) or 4% of its global revenue, whichever is greater.
This isn’t the first time the Italian regulator has banned an AI chatbot. In February, the regulator banned Replika.ai, an emotional companion & erotic discussion chatbot.
Italy is the first European country to make such bold moves against AI companies, but the rest of Europe is not far behind. The EU is currently in the late stages of preparing a new regulatory framework that goes beyond GDPR to more specifically regulate how AI is used in Europe. If passed, the new regulations would (among other things) explicitly regulate the types of data that may be used to train AI systems. The fine for violating the AI law would also be higher than the fine for violating GDPR: € 30 million or 6% of global revenue, whichever is greater.
For entrepreneurs and investors, there are three interesting consequences of these developments:
AI startups should (financially speaking) focus more on building products for the U.S. market than for the European market so that they can move faster. Once they have solidified enough market share, they can then spend the money to compliantly spread into Europe.
As AI gains wider adoption in the U.S. but not Europe, the economic productivity gap will widen, making U.S. companies outperform European companies.
If the EU’s new AI legislation passes, it will create an opportunity for entrepreneurs to create AI compliance startups.
A grand jury indictment is one of three ways that someone can be charged with a federal crime. Those three ways are:
Indictment. The U.S. Constitution requires that federal felony prosecutions begin with an indictment. Most federal white collar crimes are felonies and thus require an indictment. To obtain an indictment, a prosecutor presents proposed charges to a grand jury (typically a group of 16-23 people). At least 12 of these jurors must vote to affirm the proposed charges for an indictment to be issued.
Criminal Information. To charge someone via a “criminal information”, a prosecutor must present a judge with sufficient evidence of wrongdoing to show that probable cause of some crime exists. If the judge agrees with the prosecutor, then the accused person will be formally charged and arrested or arraigned.
Criminal Complaint. A criminal complaint (also known as a felony complaint) is a written accusation of crime(s) prepared by a prosecutor in conjunction with law enforcement. A criminal complaint must be followed by either a criminal information or an indictment to continue holding someone in custody after a certain time period.
If the prosecution believes that time is critical, they can use a criminal information or criminal complaint to charge and arrest someone quickly, even if that charge is for a federal felony. However, if the charge is for a felony, the prosecution must still obtain a grand jury indictment after that in order to proceed with their case (unless the defendant chooses to waive that requirement).
Grand juries at the state level
About half of U.S. state governments also employ grand juries for certain criminal accusations, but the composition and rules of state grand juries differ from one state to the next.
For example, in Florida, the only crime that a grand jury is needed for is first degree murder. Florida statewide grand juries consist of 18 members, with a quorum of 15 needed to issue an indictment.
In contrast, in New York, a grand jury may consist of anywhere from 16-23 sitting jurors. There are several possible outcomes of a New York grand jury proceeding:
The grand jury can issue an indictment.
The grand jury can direct the prosecutor to file a criminal information accusing the subject of a lesser offense that doesn’t require an indictment under New York law.
The grand jury can dismiss the proposed charges, in which case the subject will never know they were even investigated.
The grand jury can refer a matter to a family court.
What crimes require a grand jury indictment in New York state?
The New York State Constitution requires a grand jury indictment in any case where a person is charged with a felony, unless the accused person waives the grand jury process in open court and in writing.
Jury vs Grand Jury: What’s the difference?
A normal (trial) jury is a group of normal citizens who decide whether or not someone charged with a crime is guilty as part of a criminal trial. In contrast, a grand jury (grand just means big) is a larger group of normal citizens who decide whether or not someone should even be charged with a crime. If a grand jury decides that someone should be charged with a crime, then that person will go to a trial where a normal trial jury will decide whether or not that person is guilty.
Key differences between trial juries and grand juries include:
A trial jury decides whether or not someone is guilty of a crime. A grand jury only decides whether or not it is likely enough that someone has committed a crime to warrant formally charging them with that crime (at which point they would then go on trial with a normal jury).
A trial jury decides whether or not they are sure “beyond a reasonable doubt” that someone has committed a crime. In contrast, a grand jury only decides if it is “more likely than not” that someone committed a crime (a strictly weaker criterion).
A trial jury’s guilty verdict must be unanimous, but a grand jury’s “more likely than not to be guilty” decision must only be agreed upon by a supermajority. The exact size of the supermajority needed for a grand jury indictment differs by jurisdiction.
Why are grand juries used?
Grand juries are constitutionally guaranteed for many federal crimes:
“No person shall be held to answer for a capital, or otherwise infamous crime, unless on a presentment or indictment of a grand jury…”
Additionally, sometimes grand juries may be used even when not required. Reasons for using grand juries include:
Making it more difficult for overzealous or politically-motivated prosecutors to bring unfounded cases against innocent people.
Allowing witness testimony to be provided without damaging the privacy and reputation of someone who is ultimately innocent.
What is a “charging instrument”?
A “charging instrument” is lawer-speak for a legal procedure used to formally charge someone with a crime. The three types of charging instruments are (1) grand jury indictment, (2) criminal information, and (3) criminal complaint. Each of these charging instruments is just a document that has been approved by the appropriate channels (e.g. a grand jury or judge) and now carries legal weight.
The RESTRICT Act could affect crypto, VPNs, and social media
“The Secretary [of Commerce] is authorized to and shall take action to identify, deter, disrupt, prevent, prohibit, investigate, or otherwise [mitigate] any risk arising from any covered transaction by any person, or with respect to any property, subject to the jurisdiction of the United States, that the Secretary determines poses an undue or unacceptable risk…to the national security of the United States or the safety of United States persons.”
Does that sound like a TikTok ban to you? Me neither. That’s because it’s an excerpt from a bill that is so sweepingly broad that (if passed) it wouldn’t only give the U.S. federal government the ability to ban TikTok, it would give the U.S. federal government the ability to ban, dismantle, censor, or regulate any social media company, any conventional media company, any phone or internet service company, any messaging app, any web hosting company, and essentially any other tech company with at least 1 million users in the U.S. Here are just a few ways that the U.S. government could abuse this power, if it gets it:
The federal government could force Google Chrome, Bing, or other browsers to censor political views that differ from their own by claiming such views were being promoted by SEO optimized content produced by China or Russia in an effort to affect U.S. elections.
Democrats who dislike Elon Musk could claim his foreign investors make both Twitter and SpaceX’s StarLink national security threats. They could then force him to sell or shutdown those companies.
Republicans who dislike transgender speech could claim Russian bots are promoting transgender speech on Facebook in order to corrupt American youth. They could use that as justification to shut down or dismantle Facebook, or force Facebook to censor transgender voices.
The federal government could ban Bitcoin in the U.S. by claiming it was being used by Russia to bypass sanctions and therefore posed a national security risk. Using the same justification, the U.S. could require U.S. Ethereum stakers only validate transactions which come from people or businesses that are registered with the U.S. government and provide evidence of such registration with their transactions.
VPNs could be banned in the U.S. because they allow users to access information that social media companies were required to censor under this act.
Democrats could claim stories about Hunter Biden’s laptop are being promoted by Russian bots and use that as justification to censor stories about Hunter Biden on all social media platforms.
Either Democrats or Republicans could claim that foreign bots are driving political misinformation about elections and use that as justification to censor particular viewpoints across all social media. They might even claim that bots are spreading misinformation via comments on millions of WordPress blogs and use that to force the WordPress developers to implement default filters to remove certain types of political comments from blogs.
The U.S. government could ban AliExpress and Alibaba in the U.S. by claiming transactions on those sites were being used to fund foreign adversaries.
Republicans who dislike identity politics could claim Reddit is being used by Russian bots to confuse American youth (hence posing a “safety risk to U.S. persons”) and use that as justification to force Reddit to censor posts and comments about gender identity.
The RESTRICT Act really is THAT sweepingly broad. Its scope includes “[any] transaction in which [a foreign adversary, an entity subject to the jurisdiction of or organized under the laws of a foreign adversary, or an entity owned, directed, or controlled by any of the previously mentioned entities] has any interest (including through an interest in a contract for the provision of the technology or service)… [and including any] current, past, or potential future transaction.”
Who exactly is a foreign adversary?
A foreign adversary is “any foreign government or regime, determined by the Secretary [of Commerce]… to have engaged in a long-term pattern or serious instances of conduct significantly adverse to the national security of the United States and safety of United States persons.”
In the recent Congressional hearing with TikTok’s CEO, it seemed that some politicians now believe “propaganda” is a national security risk. If that belief gains traction, then the RESTRICT Act could essentially be used to censor online media discussions from any political minority. That would not only make the U.S. a much less free country, it would significantly hurt the business reputation and opportunities in the U.S. It would make foreign companies less willing to provide tech goods and services to the U.S. and it would decrease the willingness of foreign investors to back U.S. startups. And in a worst case, it could even be used to ban entire industries such as the crypto industry from operating in the U.S.
What is the current status of the RESTRICT Act?
The RESTRICT Act was introduced in the Senate by Democratic Senator Mark Warner of Virginia. As of March 30, 2023, the bill has not yet passed the Senate or been taken to the House, but it has garnered bipartisan support from over 20 Senators from both sides of the aisle. It has also been publicly encouraged by President Biden.
A ChatGPT plugin is essentially an app that people can use within the normal ChatGPT interface. In particular, a ChatGPT plugin is an API with a manifest.json file that is registered with OpenAI. Plugins can allow ChatGPT to access up-to-date or personal information as well as use third-party software services. Here are some examples of things plugins could be created to do:
Access the current top 5 stories on CNN’s website
Get a list of all events on a ChatGPT user’s Google Calendar for today
Add shampoo to your Amazon cart
Get the current stock price for Microsoft
Get a list of the 5 cheapest “Entire place” Airbnb listings in Miami
Run a web search for a particular topic and return the text of the first informational page returned in the search results
Send an email
Check and summarize any unopened emails in a ChatGPT user’s inbox
Check what time it is
Check the weather in a given city
ChatGPT plugins are currently in alpha testing. OpenAI has created three native plugins:
A web browsing plugin that allows ChatGPT to search the internet in real time
A code interpreter plugin that allows ChatGPT to run python code (including code to generate plots and graphics)
A document repository search plugin that allows ChatGPT to search a private repository of notes/documents
Additionally, several companies have partnered with OpenAI to produce plugins that are currently available to in alpha testing:
Expedia
Instacart
OpenTable
Zapier
Wolfram Alpha
Klarna Shopping
Kayak.com
FiscalNote
Speak.com
Shopify
If you want to build your own plugin, you can build your API now but you’ll have to join OpenAI’s waitlist to register it as a ChatGPT plugin.
NOTE: According to OpenAI rules, any plugin that distributes personal communications (e.g. a plugin to send emails) must indicate in those communications that the content was generated by AI.
What are some ChatGPT plugin business ideas?
A plugin to post Tweets and Twitter threads.
A plugin to publish blog posts on WordPress sites.
A plugin to do image searches on the web.
A plugin that allows ChatGPT to make changes to Google Sheets or Excel spreadsheets.
A plugin that allows ChatGPT to write book chapters in a Google Doc.
