Higher inflation could be a ‘Christmas present’ for banks and insurance companies – but up to a point, negotiator says

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Banking and insurance negotiator J. Christopher Flowers says rising interest rates will help the financial sector in the short term, but he is wary of sharp spikes.

“If you were to bring a Christmas present to the big banks, higher interest rates would be a good idea,” said Flowers, founder and CEO of New York-based private equity firm JC Flowers & Co., which currently manages around $ 6 billion.

See also: Consumer prices soar again, pushing the US inflation rate to its highest level in 31 years

Inflation is good up to a point because it increases the net interest income of banks and boosts profitability. But if it gets too high, inflation exerts a “corrosive force” on the wider economy, Flowers told MarketWatch in an interview.

A “comfortable level” of inflation would be around 5% on a 10-year Treasury bill, up from around 1.5% currently and rising, he said.

See: Treasury yields rise after U.S. consumer price index hits 31-year high

Flowers, a Goldman Sachs GS,
-0.94%
The veteran who started the business in 1998 said the credit environment looked like something out of the children’s classic ‘Alice in Wonderland’ – when the White Knight talks backwards or everything is suddenly out. of proportion, for example.

Back when the COVID-19 crisis first hit in 2020, everyone expected lenders’ credit performance to be a disaster, but instead it was a success. spectacular, because Congress and the Fed sent billions of dollars to people, who then paid off their loans. This has translated into a fantastic credit performance for everyone.

“Someday the party has to end, but when? That’s such a good question, ”said Flowers. “Things that can put an end to it: interest rates go up a lot or if federal money falling into people’s hands stops.” “

Read: Unemployment claims in US slide to 267,000 as layoffs drop to record highs

Raising private credit to record highs of $ 1 trillion and above to compete with the corporate government debt market could also face the headwinds of inflation, he said.

“It’s obvious to me in this area, we’re having the biggest New Year’s party the world has ever seen,” he said. “It’s such a gargantuan scale – the party of leveraged loans – that it won’t end well if interest rates rise too high. “

Despite these potential pitfalls, Flowers said the financial sector M&A environment remains healthy in the United States and abroad. The company invests approximately 50% in the United States and 50% overseas, and concludes approximately five transactions per year. He plans to maintain this pace of agreement in 2021.

On Monday, JC Flowers announced an investment in Tricor Insurance, a Wisconsin-based agency that provides business insurance, employee benefits, personal insurance, and individual life and health products.

This year, JC Flowers also invested in iLending, a Denver-based auto loan company that helps people refinance their auto loans, and UK-based LMax Ltd., which operates institutional currency and crypto exchanges. -coins.

“It came back up – it was dying for a while,” Flowers said of the deal environment in his industry. “It was kind of like being the Maytag repairman doing bank mergers.”

The company has owned several banks in the United States in the past, but currently does not have any.

“We love banks,” Flowers said. “The problem is the price. It is a compliment that they are trading at good prices. They don’t need our help. In general, the banks are doing well. When things are going well, banks don’t need access to our capital.

On the other hand, JC Flowers shopped for banks in Greece. And in April, JC Flowers and Bain Capital Credit acquired a minority stake in Co-Operative Bank in the UK

Flowers called the firm’s minority investment in LMax a particularly interesting deal because it is a forex brokerage exchange for institutional companies that recently added dollar-for-bitcoin trading.

“LMax is like Coinbase for institutions,” he said. “We don’t invest in bitcoin. We provide the platform, but we don’t know who wins and who loses.

Looking ahead, Flowers, 64, continues to remain actively involved with the company, which was recently promoted to Managing Director Tim Hanford and Erice Rahe as Co-Chairs.

“We have a strong pipeline of deals with lots of opportunities,” said Flowers. “The environment is great but we also want to be in a good position when the bubble bursts.”

The Financial Select Sector SPDR ETF XLF,
+ 0.06%
has gained 36% in the year to date, while the S&P 500 SPX,
-0.57%
gained 25%.


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