Banks Sue Fed Over Stress Tests

FINANCE
Banks Sue Fed Over Stress Tests

Banks are suing the Federal Reserve over what they claim is a lack of transparency in the stress-testing process used to assess their resiliency during economic downturns. The lawsuit, filed Tuesday in Ohio by trade groups representing major banks like JPMorgan Chase, Bank of America, and Citigroup, argues that the Fed’s opaque methods create significant volatility in capital requirements, potentially harming the economy.

The lawsuit follows the Fed’s announcement on Monday of plans to overhaul the stress-test regime and seek public input on proposed changes in 2025. However, the banks remain skeptical that the reforms will address their concerns in time, citing a statute of limitations expiring in February.

Stress tests, introduced after the 2008 financial crisis, require banks to hold additional capital if they fail to meet standards in hypothetical adverse scenarios. While the banks do not oppose stress testing, they demand a more transparent and predictable process. The lawsuit highlights concerns about unexpected capital burdens that could amount to billions of dollars and have ripple effects on the broader economy.

Critics, including Dennis Kelleher of Better Markets, argue the proposed changes could make stress tests too predictable, reducing their effectiveness. The debate continues as the Federal Reserve considers opening its models and scenarios to public scrutiny.

FINANCE
Scientists Harness AI's Creative Flaws

AI’s ability to "hallucinate"—generating information that appears real but is fabricated—has been widely criticized. However, for scientists like Nobel laureate David Baker, this quirk is a game-changer. Baker, a University of Washington researcher, won the Nobel Prize in Chemistry for using AI to design entirely new proteins from scratch. He credits AI hallucinations for helping his lab create 10 million innovative proteins that don’t naturally exist.

Baker explained that AI’s imaginative outputs enabled breakthroughs in protein design, pushing boundaries even seasoned researchers hadn’t anticipated. Similarly, MIT professor James Collins praised hallucinations for accelerating his research on novel antibiotics, calling it an invaluable tool for exploring uncharted possibilities.

Critics see AI hallucinations as a flaw, but scientists like Baker and Collins view them as a catalyst for discovery. Baker hopes AI will further advance research, including creating proteins to tackle neurodegenerative diseases like Alzheimer’s.

FINANCE
Nordstrom Going Private in $6.25B Deal

The Nordstrom family, in partnership with Mexican retailer El Puerto de Liverpool SAB, plans to take Nordstrom private in a $6.25 billion all-cash deal, including debt. The family aims to revitalize the century-old department store outside the public market’s scrutiny, following a 40% stock decline over five years despite the S&P 500's 84% rise.

Under the agreement, the Nordstrom family will hold a 50.1% stake, with Liverpool owning 49.9%. Shareholders will receive $24.25 per share, matching Monday’s trading price. The transaction, expected to close in early 2025, requires approval from two-thirds of Nordstrom's shareholders and a majority of shares not owned by the family or Liverpool.

Nordstrom has struggled since the pandemic, with annual revenue peaking at $15.9 billion in 2019 but expected to hit just $14.9 billion this year. Nordstrom Rack’s off-price chain has shown mixed results, but recent sales improvements highlight growth potential. The deal includes cash from Liverpool, Nordstrom’s equity rollover, and up to $1.2 billion in financing. A special dividend of $0.25 per share is planned.

The board unanimously approved the deal, with Erik Nordstrom expressing optimism about the company's future under private ownership. Liverpool’s investment marks its first major foray into U.S. retail.

DISCLAIMER: None of this is financial advice. This newsletter is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. Please be careful and do your own research.