Banks on the Brink: 2023 Mini-Crisis

[Iskaral Pust]

57 minutes ago, kiko said:

Not sure that will lead to anything. It has been tried unsuccessfully with Banco Popular. There is a reason for the almost 10% coupon (not sure about Crédit Suisse, but others pay that much).

As you said before and reminded your team, the risk is high.

But if the risk management wasn't adequate, maybe trying to hide the fact behind a frivolous lawsuit is not a bad idea? When it's solved to the disappointment of the bank shareholders, the responsible managers have moved on anyway.

They have a decent chance of getting a judgment that they should have been converted to common stock and participated in the terminal value of the CS equity (over $3bn in aggregate).  Their share of that won’t be much but it’s worth the cost of the lawsuit. 

[Wilbur]

On 3/16/2023 at 8:28 PM, Paxter said:

A few other miscellaneous points I’d make:

- The run on SVB was old-fashioned…and not-so-old-fashioned at the same time. The Twitter-fuelled speed of the deposit outflows was quite something to behold and caught the oversight bodies by surprise.

I want to point out that the fact that the Thiels of the world withdrew their own cash and then spent their time bothering board members of other companies about it and tweeting about it is not a secret.

Technology and people with malevolent intentions combined to accelerate the death of SVB.

Blackstone CEO: 'People on iPhones' caused SVB crisis | Fortune

[kiko]

13 hours ago, Iskaral Pust said:

They have a decent chance of getting a judgment that they should have been converted to common stock and participated in the terminal value of the CS equity (over $3bn in aggregate).  Their share of that won’t be much but it’s worth the cost of the lawsuit. 

Of course they have to sue. It's their duty. Doesn't change the fact that the fine print was there all the time.

 

Eta:

What annoys me with their whining is the following:2008 after the finance economic meltdown caused by the finance institutes, the states decided to take a lot of tax money and future wealth (by printing money). The financial institutes took and still take the money. So it's somewhat annoying that they now complain that the same states now dare to not decide in their favour.

Understandable, but if they are really interested in polishing their reputation, they don't do themselves any favour.

Edited March 31 by kiko
Whining about whiners

[Paxter]

A little nugget hidden in Canada's recent budget:

Quote

Buried in the Finance Minister Chrystia Freeland's budget this week was a statement that government may amend the Canada Deposit Insurance Corp. Act to "provide expanded authorities to increase deposit insurance and related measures in the event of a market disruption."

So the Biden/Yellen move to back all depositors is already starting to catch hold globally. This wouldn't be an explicit backstop for the uninsured, but one wonders if Canada would be brave enough not to use it in the event of a crisis now that SVB and Signature have been backstopped. 

I don't know that I like it overall. Deposits are the main way that commercial banks are funded. Once you provide guarantees to the majority of bank funding, you aren't really operating in a marketplace. But I mean it was effective in this instance at stopping the rot in the regional banks. Requires more thinking and debate. 

Edited March 31 by Paxter

[Iskaral Pust]

17 hours ago, kiko said:

Of course they have to sue. It's their duty. Doesn't change the fact that the fine print was there all the time.

 

I think you’re missing the distinction.  The fine print says CoCo bonds get converted to ordinary stock if there’s a solvency problem.  But these bonds somehow got converted to be worth even less than the ordinary stock.  That is very much not in the fine print. That’s why all of the other jurisdictions are loudly, publicly reaffirming that cannot happen in their jurisdiction.  And that’s why the CoCo bond holders have a decent chance of getting awarded equal status with the ordinary shareholders and sharing in the buyout sum ($3bn+) that went to the shareholders.

Regulators keep doing whatever seems politically expedient to them in bank bailouts.  From the FDIC suddenly expanding guarantees to larger deposits at SVB, back to AIGFP receiving a huge bank bailout without even being a bank, and even far back to the S&Ls.  But sometimes there are contractual terms that cannot just be dismissed.  I’ve no reason to support CS AT1 holders but I do like to see rule of law upheld. 

Edited April 1 by Iskaral Pust

[kiko]

9 hours ago, Iskaral Pust said:

I think you’re missing the distinction.  The fine print says CoCo bonds get converted to ordinary stock if there’s a solvency problem.  But these bonds somehow got converted to be worth even less than the ordinary stock.  That is very much not in the fine print. That’s why all of the other jurisdictions are loudly, publicly reaffirming that cannot happen in their jurisdiction.  And that’s why the CoCo bond holders have a decent chance of getting awarded equal status with the ordinary shareholders and sharing in the buyout sum ($3bn+) that went to the shareholders.

Regulators keep doing whatever seems politically expedient to them in bank bailouts.  From the FDIC suddenly expanding guarantees to larger deposits at SVB, back to AIGFP receiving a huge bank bailout without even being a bank, and even far back to the S&Ls.  But sometimes there are contractual terms that cannot just be dismissed.  I’ve no reason to support CS AT1 holders but I do like to see rule of law upheld. 

Since I have to access to the original fine print, I am forced to read what is freely available on the net. This is from the Crédit Suisse website: 

Quote

Event risk: In the case a trigger event occurs contingent capital is converted into equity or written down and thus may loose substantially in value. In addition, the Fund being predominantly exposed to financial institutions, adverse circumstances affecting this sector may cause material losses.

There are plenty of sources on both sides of the Atlantic that formulate it even more clear, at least it's clear for me as a layperson.

In general this whole Coco bond debacle unmasks the modus operandi of the financial industry quite nicely. It would have been possible to issue new equity instead of bonds to bolster their capital base. But the return on equity is usually ridiculously low. That's why they* had to invent this instrument to siphon out earnings without responsibilities. Or so they thought. Compare the returns for the shareholders with the bonus returns of the managers. I remember in Crédit Suisse it was 1:10 over the last 10 years. Finance managers have a huge interest in keeping the money spinning instead of sharing it with the nominal owners. 

 

*"they" is used here as a short hand for the responsible actors, not in the conspiracy theory sense.

[DireWolfSpirit]

Inevitably the dispute between those bondholders and the Swiss regulators will have to be settled in the legal arena, its an interesting conundrum.

In other banking news theres a story on the Russian sanctions front in Abu Dhabi.

https://www.reuters.com/world/middle-east/uae-cancels-license-russias-sanctioned-mts-bank-branch-2023-03-31/

UAE cancels licence for Russia's sanctioned MTS Bank

 

[ThinkerX]

Then there is this - straight up fraud that apparently (almost?) duped one of the big boys on the block. Was everybody asleep at the switch?

Charlie Javice, the founder accused of fraud by JPMorgan, is arrested as DOJ files criminal charges (yahoo.com)

The Department of Justice filed criminal charges against Charlie Javice Tuesday, alleging the former Frank CEO committed fraud when she sold her financial aid startup to JPMorgan Chase in September 2021 for $175 million. She faces more than 100 years in jail if convicted.

The DOJ and the Securities and Exchange Commission both filed lawsuits against Javice Tuesday, escalating the legal predicament of the Frank founder. Javice, 31, is a onetime media darling who was heralded for trying to simplify the college financial aid process. According to the DOJ’s lawsuit, Javice “falsely and dramatically” inflated the number of customers Frank had in order to induce JPMorgan, one of the world’s biggest banks, to buy the company. Javice allegedly claimed that the startup had 4.25 million customers, but in reality, Frank had only about 300,000 clients, according to the lawsuit. Javice stood to gain more than $45 million from the fraud, the DOJ said.

[Paxter]

A sideshow, but the WSJ is reporting that at least three US politicians (some of whom were involved in Government decision making) actively traded bank shares during the recent crisis:

Quote

At least three lawmakers traded bank stocks last month as the federal government grappled with a banking crisis, according to financial disclosures analyzed by The Wall Street Journal.

The disclosures raise the question of whether lawmakers received inside information relating to the collapse of Silicon Valley Bank and Signature Bank that may have guided their stock trades. 

The crisis led to volatile price swings in bank stocks, creating opportunities for profit. Regulators who played a central role in the response privately briefed lawmakers on their plans to stabilize the banking system.

Lawmakers must disclose their stock trades within 45 days of the transaction, but they’re only required to report the amount in broad ranges. 

This needs to stop. Though it is kinda funny that one of the trades was going long on SVB. 

[Iskaral Pust]

5 hours ago, Paxter said:

A sideshow, but the WSJ is reporting that at least three US politicians (some of whom were involved in Government decision making) actively traded bank shares during the recent crisis:

This needs to stop. Though it is kinda funny that one of the trades was going long on SVB. 

Agreed.  It’s disgusting that members of Congress can trade their personal portfolios while possessing inside knowledge of pending legislation.  Presidents have to place their personal assets in a blind trust, so why not Congress?  We should also investigate deeply any public servant who becomes more wealthy during public office.

[The Anti-Targ]

An interesting video, which some with more economics cred might like to comment on.

 

[Wilbur]

On 4/12/2023 at 1:09 AM, The Anti-Targ said:

An interesting video, which some with more economics cred might like to comment on.

 

My two centavos are that this is a good, sensible description of events and the times in which we live.  Particularly the money multiplier discussion, and the obvious point that this no longer happens, and that as a result banks don't need individual deposits, but regarding individual accounts as annoyances.  (Join your local credit union!)

One quibble is that the video gives the S&L Banks a pass in terms of failing to mention the active fraud (insider trading, dereliction of duty from boards, etc.) and speculation that a lot of their owners and executives were performing in the mid-80s.  And it fails to point out that proposed bank regulations that were NOT adopted in response to the S&L crisis would have prevented, or a least confined to a very small number of investment banks, the contagion of 2008.

A second is that I am not aware that SVB was providing any kind of novel banking services or techniques.  I like that they showed some good parallels between the bank failures and frauds over time, but SVB just got caught in a liquidity trap and the rumor mill.  They could have pointed out that the de-regulation of the banks in the 1980s, resulting in the S&L crisis, was paralleled by Trump rolling back Frank-Dodd bank regulations in 2018.

The other would be that competent corporate treasurers have not used one-stop banking for a couple of decades.  Having only a single banking relationship with a bank, particularly as they (the banks) are currently operating is to enchain yourself into their apparatus to be milked dry of any and all profits.  Good treasurers have spread out the various capital needs and activities to a variety of providers for a long time.

Generally, I enjoyed this video because it sets out in plain language and images the results of the work of econometricians without boring the viewer to tears.  Thank you!

[Iskaral Pust]

On 4/12/2023 at 4:09 AM, The Anti-Targ said:

An interesting video, which some with more economics cred might like to comment on.

 

I subscribe to this YouTube channel and generally find that they convey the key points without bias or unpacking a lot of level-down details.  I rarely learn much new but I find it reassuring that he’s explaining these mechanics to ordinary people, especially in an era when there are increasingly paranoid conspiracies about how finance and economics work.

But I have not watched this particular video yet. 

[The Anti-Targ]

It's the only economics Youtube channel I subscribe to, partly because his most common phrase is "No one can predict the future, LEAST of all economists."

[Paxter]

First Republic down after hours today today after reporting a 40% deposit flight in the first quarter. Ouch. 

I’m not sure what the end game is. Orderly wind down/shrinking over a few years? Sweetened sale? Continued deposit outflows and shutdown?

[Larry of the Lawn]

I keep seeing this thread and hoping there's new posthumous Iain Bank's material coming out.  Boooooo!

[Paxter]

First Republic stock cut in half today. It’s possible we are heading for yet another resolution weekend, with either an orderly wind down or maybe a good bank/bad bank emerging on the other side. Contagion risk should still be relatively low with the implicit deposit guarantee in place. 

[Jeor]

Couple First Republic's resurfacing with Congress's debt limit brinkmanship and I think there will be a lot of nervous bankers around. The bond market is already reacting to the debt ceiling with 3 month bonds tanking. And the $30bn deposits in First Republic from fellow banks is technically withdrawable around the same time. It is going to be a bumpy ride for a while yet.

[Mlle. Zabzie]

20 hours ago, Jeor said:

Couple First Republic's resurfacing with Congress's debt limit brinkmanship and I think there will be a lot of nervous bankers around. The bond market is already reacting to the debt ceiling with 3 month bonds tanking. And the $30bn deposits in First Republic from fellow banks is technically withdrawable around the same time. It is going to be a bumpy ride for a while yet.

Only good news on the debt ceiling brinksmanship is that tax collections have been solid so we have into July.  But, that means the uncertainty will also last until July because you know they will use every minute they have.

[ThinkerX]

2 hours ago, Mlle. Zabzie said:

Only good news on the debt ceiling brinksmanship is that tax collections have been solid so we have into July.  But, that means the uncertainty will also last until July because you know they will use every minute they have.

Well, somewhat surprisingly, the GOP House did pass a budget - albeit one filled with horrible cuts that will not pass muster with the senate.