Morning News: March 24, 2023
Posted by Eddy Elfenbein on March 24th, 2023 at 7:02 am

China’s Economic Lifeline to Russia Gives Beijing Upper Hand

Lawmakers Blast TikTok’s C.E.O. for App’s Ties to China, Escalating Tensions

Evergrande Strikes Deal for $19 Billion Bond Restructuring

Deutsche Bank Shares Plunge in Renewed Bout of Stress

The Curse of Credit Suisse Conjures a New Banking Reality

Banks Can’t Be Trusted. A ‘Golden Share’ Might Help

Yellen Says US Prepared to Take More Action to Keep Bank Deposits Safe

‘Bonkers’ Bond Trading May Be Sending a Grim Signal About the Economy

Accounting-Fraud Indicator Signals Coming Economic Trouble

The Fed Has Targeted 2% Inflation. Should It Aim Higher?

Volcker Slayed Inflation. Bernanke Saved the Banks. Can Powell Do Both?

Jack Dorsey’s Wealth Tumbles $526 Million After Hindenburg Short

Most Americans Doubt Their Children Will Be Better Off, WSJ-NORC Poll Finds

Faulty Credits Tarnish Billion-Dollar Carbon Offset Seller

Ford Says It Will Lose $3 Billion on EVs This Year as It Touts Startup Mentality

Accenture to Cut 19,000 Jobs as IT Spending Slows

Pandemic Pet Adoptions Propel Rise of a $500 Billion Global Market

Crypto Fugitive Do Kwon Charged With Fraud by US Prosecutors in New York

The Younger Brother Caught in the Middle of the FTX Investigation

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Morning News: March 23, 2023
Posted by Eddy Elfenbein on March 23rd, 2023 at 6:24 am

Consumers Foot the Bill for Traders ‘Manipulating’ UK Power Market

Bank of England to Weigh a Rate Increase After a Jump in Inflation

Swiss Central Bank Lifts Key Rate, Declares End to Bank Crisis

China’s Rise Relied on Ties to the West, Which Xi Is Now Loosening

China Is Starting to Act Like a Global Power

China Voices Strong Opposition to Any Forced Sale of TikTok

TikTok CEO Seeks to Convince Congress App Isn’t Security Threat

Double-Barreled Economic Threat Puts Congress on Edge

Fed Walks Tightrope Between Inflation, Bank Turmoil—but for How Long?

Powell’s Own Guide to Recessions Shows Rate Cuts Are Coming

Citi CEO Fraser Warns Mobile Money is ‘Game Changer’ for Bank Runs

Banks Are Risky. Silicon Valley Bank’s Risk Officer Was AWOL.

Wall Street Eases Hiring Freeze in Grab for Credit Suisse Talent

What Does ‘Made in America’ Mean? In Green Energy, Billions Hinge on the Answer

Twitter Isn’t Making Money. Here’s Why Musk Thinks It Could Soon

Is Working From Home Really Working?

GM to Stop Making Iconic Chevrolet Camaro Following Sales Slump

California Could Ban Skittles Due to Concerns Over Health Impacts

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Morning News: March 22, 2023
Posted by Eddy Elfenbein on March 22nd, 2023 at 7:03 am

Xi and Putin Bind China and Russia’s Economies Further, Despite War in Ukraine

U.K. Inflation Swings Upward, in a U-Turn

Lagarde Vows ‘Robust’ Policy With ECB Ready to Act as Needed

A New Chapter of Capitalism Emerges From the Banking Crisis

SVB-Fueled Turmoil Junks Lessons of the Global Financial Crisis

First Republic Rescue May Rely on US Backing to Reach a Deal

A Big Question for the Fed: What Went Wrong With Bank Oversight?

Fed Caught Between Inflation and Bank Crisis

Investors Trade Cautiously Ahead of Pivotal Fed Decision

JPMorgan Says Treasuries Coping Amid Worst Liquidity Since 2020

Bank Crisis Could Cast Pall Over Commercial Real Estate Market

30-Year Mortgage Rate Falls to a Five-Week Low

Willy Loman, And When It Is Never Too Late In The Job Market

TikTok CEO Shou Zi Chew Promises Firewall to Shield User Data

Pulling the Plug on TikTok Will Be Harder Than It Looks

Google Launches Bard AI Chatbot to Counter ChatGPT

White Claw Upended Beer. Now It’s Coming for Vodka

‘End of an Era’: Dodge Unveils Last Super-Fast Gasoline Muscle Car

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CWS Market Review – March 21, 2023
Posted by Eddy Elfenbein on March 21st, 2023 at 6:08 pm

(This is the free version of CWS Market Review. If you like what you see, then please sign up for the premium newsletter for $20 per month or $200 for the whole year. If you sign up today, you can see our two reports, “Your Handy Guide to Stock Orders” and “How Not to Get Screwed on Your Mortgage.”)

RIP: Credit Suisse

After 167 years, Credit Suisse is no more. The bank has ceased to be. It is bereft of life. This is an ex-bank.

Over the weekend, UBS bought out its long-time rival, Credit Suisse, for $3.24 billion.

This is a major event in global banking. Consider that at the end of last year, Credit Suisse had a balance sheet of half a trillion dollars and 50,000 employees globally. Shares of CS closed Monday at 94 cents.

To say this was a fire sale badly understates the events. The Swiss government essentially forced this deal to happen. They aimed to stop the banking crisis cold. To give you an idea of how far they went, the settled price for Credit Suisse was less than half of Friday’s closing price. It works out to 7% of CS’s tangible book value.

CS shareholders will get one share of UBS for every 22.48 shares of CS they own. That values a share of CS at 0.76 Swiss francs which is 99% below its high.

The Swiss government even sweetened the pot for UBS. The government said it would chip in $9 billion to backstop any losses from the deal. The Swiss National Bank said it would provide $100 billion in liquidity. Investor lesson: When the government—any government—wants a financial outcome badly enough, it’s hard to say “no.”

Mind you, the authorities weren’t crazy. The Swiss government strongly preferred a buyout over a wind-down that would be run by courts, lawyers and regulators. Plus, they wanted a deal done fast. The goal was to have something complete before Asian markets opened on Sunday evening. They made it, but barely.

Frankly, they had to do something. The mess at Credit Suisse was bad and getting worse. The bank was hemorrhaging $10 billion a day. Credit Suisse’s Chairman, Axel Lehmann, said, “The acceleration of the loss of trust and the worsening of the last few days made it clear that Credit Suisse cannot continue to exist in its current form.” That statement was one of the few things they got right.

Banking Is About Confidence

This wasn’t a story of garbage loans. Instead, all the customers headed for the exits. Quite simply, no one believed in them anymore.

That’s the thing about banking. Most people think banking runs on money. It doesn’t. A bank runs on confidence. Once that’s gone, the whole game’s up. It doesn’t matter how much money SNB threw at the problem; without confidence, it wasn’t enough, and it never could be enough.

It’s hard not to have some sympathy for Credit Suisse, but they made just about every mistake they could. They recently got a $4 billion cash injection from the Saudi National Bank on the hopes they could engineer a turnaround. That didn’t happen. Perhaps CS’s biggest mistake was going bust so close behind SVB and Signature.

Last Thursday, the Swiss government extended CS a $54 billion lifeline to make sure they would last until the weekend. Later, they had to double that amount.

Not surprisingly, UBS clearly didn’t want any part of a deal. They realized they were in the strong position, so they asked for a lot, and they got it. During any normal time, the hitching of these two would have been an obvious anti-trust red flag. Not this time. Funny how the government can decide which rules to enforce, when and to whom.

The initial deal that UBS offered was for $1 billion. After shareholders complained, the price tag was lifted to $3 billion, which is still very cheap. As a result of the deal, UBS said it would halt its stock buyback program and pare back its plans for CS First Boston, CS’s investment banking business.

One of the big issues is CS’s investment banking business. CS had been looking to spin it off, and that’s probably not going to happen. They could lose a bundle in scrapping the deal. That’s one of the reasons why UBS was so reticent about taking CS on.

Over the weekend, there was one last-ditch attempt to save CS. A group was planning to inject $5 billion into CS if the government promised to make the bondholders whole. The government turned it down.

I had difficulty keeping up with all of Credit Suisse’s misdeeds. Here are a few.

In 2020, the CEO resigned after it was learned that the COO hired a private investigator to spy on the bank’s former head of wealth management. They wanted to see if he was poaching clients or employees as he had recently transferred to UBS.

Even though the CEO resigned, an investigation found that he had no knowledge of the plan, which raised the question of why was he out of the loop. The scandal later took a tragic turn when the hired private investigator committed suicide.

The following year, Credit Suisse was fined after it was revealed that the bank had bribed government officials in Mozambique and accepted kickbacks. The bank was supposed to be organizing loans to help Mozambique’s tuna industry. The fines would have been higher, but CS agreed to write off some of the loans.

Credit Suisse was also involved in the very strange story of Bill Hwang and his firm, Archegos Capital. Hwang seemed to have no idea what he was doing. Naturally, he was managing several billion dollars.

As you might guess, this came to an unpleasant end. Hwang made a giant and highly-leveraged bet on ViacomCBS (now called Paramount Global). The media company announced a stock sale, and the shares took a big hit. Hwang’s leveraged position started to plunge and he got a margin call. One of my first jobs in finance was making margin calls to clients. When you get a margin call, you have two options: put up more money or sell. If you don’t sell, the firm will do it for you.

According to Bloomberg, Hwang lost $20 billion in two days. He had borrowed tons of money from Wall Street banks, and they were suddenly left exposed. Goldman Sachs and Morgan Stanley moved fast to protect themselves. Credit Suisse did not, and the bank got stung for a loss of $5.5 billion.

Hwang was later arrested and charged with racketeering, securities fraud and wire fraud. Credit Suisse’s reputation never recovered.

What Are CoCo Bonds?

Another odd aspect of this Credit Suisse debacle is that the bonds have been far more volatile than the equity. CS shares are getting shares of UBS. That’s pretty straightforward, but some of the bondholders have been wiped out.

Credit Suisse has what are called additional tier 1 (AT1) bonds. More formally, these are called convertible contingency bonds. Less formally, they’re known as CoCos.

CoCos are bonds that convert into stock if some pre-specified event happens. For example, going bankrupt. CoCos can even be declared worthless, and that’s exactly what happened with Credit Suisse.

On Sunday, the Swiss regulators announced that as part of the deal, Credit Suisse’s AT1 bonds will get a brand-new price of $0. The AT1 investors are furious, and I’m sure this will all be headed to court.

This is one of the hidden aspects of a financial blowup. You never know exactly where it will spread. The AT1 bonds are turning into a major issue. According to the regulators, $17.3 billion of CS’s CoCo bonds have gone up in smoke.

So now folks are wondering why the CoCos got torched when the stockholders didn’t. Traditionally, bondholders outrank equity owners. This has roiled the entire CoCo market. For example, Invesco has an ETF that invests in AT1 bonds. On Monday, it lost close to 6%.

CoCos came about after the financial crisis and became popular with many European banks. Today, there’s more than $250 billion of outstanding AT1 bonds. The bonds were popular with investors. They paid a good deal and the prospect of going bust seemed improbable. Raymond DeVoe famously said, “More money has been lost reaching for yield than at the point of a gun.”

In 2020, Credit Suisse was able to float $1.5 billion in AT1s and they got a rate of 5.25%. They were seen as a safe way of shifting bailout risk to bondholders from taxpayers. That’s why they were afterward called bail-ins instead of bailouts.

But now, the whole CoCo market has gone cuckoo. Everyone had assumed these bonds were safe. Hey, what’s the worst that can happen? Well, now we know. I’ve seen several clips this week of investors furious that their Cocos have been zeroed out. Don’t play the game if you don’t know the risks. In Monday’s trading, Deutsche Bank saw its AT1 bonds drop sharply. So did UBS. Importantly, CoCos are not issued by American banks.

Thanks to this deal they didn’t want, UBS is now one of the largest and most important financial institutions in the world.

Expect the Fed to Hike by 0.25%

I got a good response from last week’s issue when I did a deep dive on what happened at Silicon Valley Bank. That’s why I decided to do the same with Credit Suisse.

But I didn’t want to leave without discussing this week’s Fed meeting. The Fed’s two-day meeting began today and will wrap up tomorrow. The policy statement will be released on Wednesday at 2 p.m. ET.

I expect the Fed will once again hike interest rates by 0.25%. Until recently, I was leaning toward a 0.50% increase, but the events of late have changed that outlook.

At the next meeting in May, I expect another 0.25% hike. After that, however, I think things may change. There’s a good chance that the Fed will take a break for a few months and leave rates unchanged. Of course, this is just a guess and much of what the Fed will do will depend on the behavior of inflation and the economy.

There’s even a decent chance that the Fed will soon shift its bias toward rate cuts, especially if the slowdown in housing spreads to other sectors. The simple fact is that the economy will probably weaken as we get closer to 2024. I hope the Fed will address these issues in tomorrow’s press conference. I’ll have more details in our next premium issue.

That’s all for now. I’ll have more for you in the next issue of CWS Market Review.

– Eddy

Morning News: March 21, 2023
Posted by Eddy Elfenbein on March 21st, 2023 at 7:05 am

Car Makers Revive India Growth Plans as China Market Sags

Where High Interest Rates Have Sent Home Prices Sliding

Sri Lanka, Its Economy Reeling, Is Approved for $3 Billion Rescue Loan

Ferraris and Hungry Children: Venezuela’s Socialist Vision in Shambles

The New Central Bank Dilemma From the Fed to the Philippines

Yellen Says US Will Intervene if Needed to Protect Smaller Banks

What Is a ‘Minsky Moment’ and Why Are Fears of One Mounting?

SVB Collapse Shows Smaller Banks Can Pose Risk in Numbers

Fate of First Republic Hangs in Balance as Shares Plummet Again

How the FDIC Protects You When Your Bank Fails

Biggest Fear for Trillion-Dollar Funds Is Missing Next Rally

Ralph Hamers, the Dutchman Thrust in the Driver’s Seat at Swiss Bank UBS

Credit Suisse Gold Bars, Vintage Swag for Sale After UBS Merger Deal

Credit Suisse Bankers Swarm Headhunters After UBS Rescue

Bank Fears Rattle Oil Markets Poised for Chinese Boom

Banking Turmoil Tests the American Consumer

Elon Musk’s Global Empire Has Made Him a Burning Problem for Washington

Miami Beach Wants to Cancel Spring Break, Sets Curfew After Deadly Shootings

Amazon CEO Says Laying Off 9,000 More Workers ‘Is Best for the Company Long-Term’

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Morning News: March 20, 2023
Posted by Eddy Elfenbein on March 20th, 2023 at 7:04 am

Central Banks Signal No Dash for Dollars in New Swap Lines

Fed Meets as Bank Chaos Collides With Inflation

Did SVB Break the Fed? Officials Mull Risks of More Rate Increases

‘We Never Thought a Bank So Successful Could Collapse So Fast’

US Banks on Bumpy Path as First Republic’s Troubles Persist

New York Community Bank Agrees to Buy a Large Portion of Signature Bank

Credit Suisse, the Risk-Taking Swiss Banking Giant, Succumbs to Crisis

UBS Agrees to Buy Credit Suisse for More Than $3 Billion

How Scandal and Mistrust Ended Credit Suisse’s 166-Year Run

Risky Credit Suisse Bond Wipeout Upends $275 Billion Market

Bank Stocks Teeter as Investors Worry About Who May Fall Next

Crypto Wants Its Shine Back

Egg Prices So High, Dollar Tree Pulls Them from Shelves Completely

Oil Prices Drop on Recession Worries

Falling Lithium Prices Are Making Electric Cars More Affordable

TikTok’s Chinese Parent Has Another Wildly Popular App in the U.S.

Inside Apple’s Companywide Cost-Cutting Push to Avoid Layoffs

Read the Letter Google Employees Sent to Sundar Pichai About Mass Layoffs That Tells Him: ‘Don’t Be Evil’

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Morning News: March 17, 2023
Posted by Eddy Elfenbein on March 17th, 2023 at 7:03 am

China Cuts Reserve Requirement Ratio To Boost Economy

Silicon Valley and Capitol Hill Build an Anti-China Alliance

ECB Defies Mounting Banking Strains With Half-Point Rate Rise

Another Chaotic Week for Banks Marks the End of an Era for the Global Economy

Wall Street’s Biggest Banks Rescue Teetering First Republic

First Republic Shares Resume Slide as Investors Assess Aid

Credit Suisse Got Its Lifeline. Now It Must Win Back Clients

America’s Smallest Lenders See Deposit Boost Amid Banking Turmoil on Wall Street

Bank Failures, Like Earlier Shocks, Raise Odds of Recession

Will the Fed Keep Tightening as Banks Fail?

Ackman Concerned About ‘Contagion Risk’ Spiraling Out of Control

Low Rates Were Meant to Last. Without Them, Finance Is In for a Rough Ride.

Banned From Russian Airspace, U.S. Airlines Look to Restrict Competitors

Small Businesses Face Big Tax Bills From Research-Deduction Change

Set It and Actually Forget It

A $100 Billion Bet on Semiconductors Hinges on Remaking Upstate New York’s Workforce

How Trader Joe’s Beat Out Conventional Supermarkets by Offering Less

America Is in a Disgraced Class of Its Own

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Morning News: March 16, 2023
Posted by Eddy Elfenbein on March 16th, 2023 at 7:02 am

Credit Suisse to Borrow Up to $54 Billion From Central Bank

Big ECB Hike Called Into Doubt by Credit Suisse

Bank Fears Go Global, Sending a Shudder Through Markets

Fears of Financial Meltdown Haunt Governments

Silicon Valley’s Favorite Bank Was Its Single Point of Failure

How Goldman’s Plan to Shore Up Silicon Valley Bank Crumbled

Why Top Washington Officials Chose to Rescue SVB, Signature Depositors

There’s a Run on Silicon Valley Bank Swag

First Republic Bank Is Exploring Options Including a Sale

Yellen Says U.S. Banking System ‘Remains Sound’ Amid Market Turmoil

JPMorgan Joins Those Saying Cash in Bond Gains

Glencore CEO Rides Coal Windfall on the Way to a Low-Carbon World

U.S. Threatens Ban if TikTok’s Chinese Owners Don’t Sell Stakes

How Siri, Alexa and Google Assistant Lost the A.I. Race

T-Mobile to Buy Low-Cost Carrier Mint Mobile

China Wine Tariff Pushes Australia’s Grape Growers Into Crisis

How a Penny-Stock Company Sold the Pentagon on Small Drones for Ukraine

Diamond Sports Files for Bankruptcy Ahead of Start of MLB Season

A Chinese Businessman’s Trek From Beijing Gadfly to Steve Bannon Confidante to Fraud Suspect

Morning News: March 15, 2023
Posted by Eddy Elfenbein on March 15th, 2023 at 7:03 am

Web of Secret Chip Deals Allegedly Help US Tech Flow to Russia

China’s Economy Rebounds, Spurred by Consumption

China Will Reduce Number of High-Risk Institutions, Defuse ‘Bombs’ – Central Bank

The British Government Is Issuing a Call to Work

U.S. Inflation Cooled in February as Fed Confronts Bank Failures

Bank Runs, Crypto Concerns and Takeovers: A Timeline of the Panic

BlackRock’s Fink Says SVB Failure Shows Cracks in Finance System

Short Sellers Scored $2 Billion Profit as Regional Banks Plunged

Soaring Bond-Market Volatility After SVB Collapse Is Making It Impossible to Say What Stocks Are Really Worth

Powell’s Legacy Risks Being Tarnished Further by SVB Collapse

Meet the Man in Charge of What Remains of Silicon Valley Bank

SVB Is a ‘Nail in the Coffin’ for Bay Area Housing Market’s Gold Rush

US 30-Year Mortgage Rates Retreat for First Time in Five Weeks

Credit Suisse Top Holder Rules Out Investing More After Drop

European Banks Battered as Credit Suisse Drops Over 20%

10 Ways GPT-4 Is Impressive but Still Flawed

Facebook Parent Meta Plans 10,000 Job Cuts in New Round of Layoffs

Novo Nordisk to Slash Insulin Prices by Up to 75%

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CWS Market Review – March 14, 2023
Posted by Eddy Elfenbein on March 14th, 2023 at 5:52 pm

(This is the free version of CWS Market Review. If you like what you see, then please sign up for the premium newsletter for $20 per month or $200 for the whole year. If you sign up today, you can see our two reports, “Your Handy Guide to Stock Orders” and “How Not to Get Screwed on Your Mortgage.”)

This week’s news on Wall Street has been dominated by the stunning collapse of Silicon Valley Bank. This is the second-largest bank failure in U.S. history. Investors are still feeling the shockwaves. We’re not done. There could be others.

In this week’s issue, I want to explain what happened and why. I also want to discuss potential ramifications.

Banks Are Different

Before we dig into the remains of Silicon Valley Bank, I should explain that free enterprise is often referred to as the “profit system,” but that’s not quite right. It’s really the profit and loss system. It’s the “and loss” part that helps make it so successful.

When a business goes bust, it’s an unfortunate thing, but it’s necessary to close unprofitable enterprises. You don’t want zombie businesses that are kept alive by endless streams of funding.

A crowd of outside the American Union Bank during the Great Depression.

When a business goes bankrupt, there’s a standard playbook to follow. The business goes to a bankruptcy court. A judge orders all the assets to be sold. The creditors get first dibs, and the equity holders get whatever’s left. That’s basically it.

Again, it’s unpleasant but necessary. The worst part is that employees lose their jobs. While that’s also unpleasant, most people can find something new rather quickly. Of course, there’s also unemployment insurance.

Some studies have shown that being laid off can often be a blessing in disguise in that it forces people to leave an unsatisfying job for something more rewarding. I’ve seen many examples of that personally. I’m sure you have as well.

The other downside of a bankruptcy is that your suppliers lose your business, but, for the most part, the world moves on. The ending of one business leaves a wound that tends to heal surprisingly quickly.

Now we come to the one, giant exception to what I’ve said. When a bank goes under, it’s a very big deal because the damage isn’t limited to a few parties. If a bank goes under, it can take all its depositors with it.

That means that several other businesses could go bust even though they were perfectly healthy. Bank runs can quickly become self-reinforcing cycles. That’s happened many times in history, not just in “Mary Poppins” and “It’s a Wonderful Life.” In fact, it’s the volatile and viral nature of bank runs that led to the creation of the Federal Reserve in the first place.

One of the foundational issues in finance is, “how do we let bad banks fail without ruining the depositors?” Frankly, there are no good answers, but there are several less-bad answers such as deposit insurance and risk capital ratios. We make do the best we can.

What Happened at Silicon Valley Bank

Having said that, let’s turn to what happened at Silicon Valley Bank. What’s interesting is that what impacted SVB was many of the same things we’ve talked about in recent months.

When Covid struck, the Federal Reserve responded quickly by lowering interest rates to the floor. That sparked a furious rally in high-risk assets. Our Buy List certainly felt the effect. In Silicon Valley it led to a venture capital-funded investment boom. Every start-up was getting funding. When rates are at 0.%, why not?

SVB was the banker of choice for Silicon Valley. If you’re a start-up and you got, say, $5 million in Series A funding, then you most likely stuck it in SVB. All the cool kids were doing it.

This led to a large surge in deposits for SVB. As odd as it may sound, that’s not always a good thing for a bank. SVB had to invest those assets to make money to cover its deposits. The bank selected to invest in longer-term government bonds, agency bonds and mortgage-backed bonds.

Then came inflation and game changed. The Fed aggressively raised interest rates and high-risk assets faltered. The venture capital spigot for Silicon Valley was shut off, so the start-ups withdrew money from their SVB accounts. Start-ups can burn through cash at an alarming rate.

To cover those withdrawals, SVB had to sell those bonds. The problem was that the values of the bonds had tanked thanks to the Fed and inflation, so SVB was selling for a big loss. It also didn’t help that for nine months, SVB didn’t have a chief risk officer.

One of our Buy List stocks, Moody’s (MCO), told SVB that it was looking to downgrade the company’s stock credit rating.

SVB came up with an idea. On Wednesday, SVB announced a plan to raise money by selling stock. That was truly a massive flop.

Instead of calming investors, the stock sale news frightened depositors and they withdrew their money, nearly all at once. Nowadays, it only involves the click of a mouse to move money, instead of waiting in line at the old Bailey Building & Loan. In one day, depositors withdraw one-quarter of the bank’s total deposits. The bank’s website was having difficulty keeping up which isn’t a good look for anything based in Silicon Valley.

Peter Thiel, an influential figure in Silicon Valley, withdrew his money from SVB. On Thursday, SVB’s stock crashed 60%. The government had seen enough. They stepped in and shut SVB down. A bank hadn’t failed in the U.S. in more than two years.

Typically, when the government takes over a bank, it aims to sell it off quickly to a nearby competitor, even at a steep discount. The Feds would rather do a deal fast than good. The government was desperately looking for a buyer and, apparently, no one was interested.

Even if the government could sell off some of SVB’s assets, that could meet limited withdrawal needs. In 1907, J.P. Morgan famously stopped the financial panic by serving as the lender of last resort. Alas, in 2023, no one on Wall Street wanted anything to do with SVB.

FDIC insurance covers deposits up to $250,000 but that was a tiny portion of SVB’s deposits. The large majority of deposits were uninsured. On Sunday, the government announced a plan to insure all SVB’s deposits, whether they had been insured or not.

Make no mistake – this is a bailout, but it’s different from what happened in 2008. This is more of an indirect bailout. To be clear, SVB’s shareholders are getting nothing and all the top people will be fired.

Still, thanks to the government, lots of Silicon Valley startups have been pulled from the fire. For example, a company called Wrapbook, which does payroll processing for the entertainment industry, said its payments might be delayed. If their deposits were wiped out, that could have hurt a lot of regular Joes. Don’t think this was all about protecting the fat cats.

This is the problem with a financial mess like this. You don’t know who has exposure to whom until the house of cards comes tumbling down.

Over the weekend, there were some panicky voices predicting bank runs on Monday morning. That didn’t happen.

I’ve noticed that people like to overlay a highly moralized narrative on a financial breakdown. That can be a mistake. Not that there aren’t heroes and villains, but that it may cloud what really happened. SVB was in a lousy position – they had bad luck and they made some dumb mistakes. Very dumb. It didn’t help matters that this happened so shortly after FTX and the same time that Silvergate announced its voluntary liquidation.

I am, however, curious about well-timed stock sales from senior SVB management. I hope this will be looked into.

Signature Bank Also Comes to an End

The government also shut down Signature Bank (SBNY) which was a former Buy List stock. The government is also standing by SBNY’s uninsured deposits. We sold out of SBNY three years ago. We even made a small profit. The bank decided to become a major financial resource for crypto. Let’s just say that I don’t have any regrets in selling SBNY.

There’s a Regional Bank ETF (KRE) that’s become an unofficial bellwether for the current crisis. The ETF dropped 4% last Thursday and another 8% on Friday. Yesterday, KRE dropped another 12%.

The other bank that’s teetering on the edge is First Republic (FRC). Its stock plunged 62% on Monday. Trading was halted in several banking stocks yesterday. Wall Street seems to be breathing a lot easier today. Shares of FRC gained 27% today. Charles Schwab (SCHW) was up 9%. KRE closed 2% higher.

I suspect that the worst is behind us, but we’re not out of the woods just yet. Earlier today, Moody’s cut its view on the banking sector from stable to negative.

If you want to take advantage of the crisis, I would say that SCHW is a speculative buy here, but expect a lot of volatility.

There’s also the question of what happens to deposit insurance now. Is there no longer a $250,000 limit? I don’t know, but if you make an exception for one group, then others will expect the same. Some observers have said this will cause an exodus from smaller banks to only the largest banks. I’m not sure if that’s right but it could happen.

It doesn’t seem right to expect every bank customer to review the soundness of each bank. Just insure all bank deposits. This crisis reveals that that’s what would happen anyway.

Another effect of Silicon Valley has been a big jump in Treasuries in the last few days. Over Thursday, Friday and Monday, the yield on the two-year Treasury fell 103 basis points (or 1.03%). Ironically, some of the recent rally certainly helped SVB’s bond portfolio.

The Federal Reserve meets again next week, and the expectations are for a rate increase of 0.25%. Earlier, traders had been expecting an increase of 0.50% but the banking system may be too fragile. Traders also expect to see a few rate cuts later this year. I’m not fully convinced that will happen but it’s not out of the question.

That’s all for now. I’ll have more for you in the next issue of CWS Market Review.

– Eddy