As the banking crisis continues, each week we will provide Trends Journal subscribers with an overview of the current events forming the future banking crisis trends.
Federal officials’ decision to recompense uninsured deposits at Signature and Silicon Valley banks and to open an emergency line of credit for the U.S. banking industry were sold to the public as a means to keep the financial system safe and reassure banks’ customers that their deposits were safe, according to the former Fed Head, Janet Yellen who is now playing the role as U.S. Treasury Secretary.
“We wanted to make sure the problems at Silicon Valley Bank (SVB) and Signature Bank didn’t undermine confidence in the soundness of banks around the country,” she explained. “We wanted to make sure there wasn’t contagion that could affect other banks and their depositors.”
“Our banking system remains sound and Americans can feel confident that their deposits will be there when they need them,” Yellen emphasized.
Following SVB’s collapse, Yellen ruled that the event posed a “systemic threat” to the economy, which enabled the Federal Deposit Insurance Corp. (FDIC) and the U.S. Federal Reserve to guarantee repayment of uninsured deposits at the failed banks and to broaden banks’ ability to borrow from the Fed.
The declaration also enabled the Fed to set up an emergency fund that will allow banks to take one-year loans if they might have a surge in demand for withdrawals.
The bank loans fund is being made up of fees collected from FDIC-insured institutions, Yellen and other administration officials have stressed; taxpayers will not be funding any of the provisions.
The central bank also loosened requirements for banks to borrow from its long-established discount window, its more conventional venue for loans to banks.
Banks had tapped the Fed’s emergency lending program for $11.9 billion by the end of last Thursday and had drawn $153 billion through the discount window.
Most of SVB’s depositors were small tech companies, entrepreneurs, and venture capital firms that used their accounts to pay day-to-day bills and payrolls. The bank had about $175 billion in deposits when it shut down.
About 94 percent of its deposits exceeded the $250,000 insurance limit set by the FDIC, according to S&P Global Intelligence. Streaming service Roku reportedly had $500 million in a single account at the bank.
Despite a federal guarantee that all SVB depositors will be made whole, Yellen said that not all uninsured bank deposits are now insured automatically if other banks fail.
Any similar future action would have to be approved by the White House and federal regulators, she explained.
She added that the actions do not constitute a step toward nationalizing the banking system.
Last week, Yellen coordinated a $30-billion infusion of capital from other banks for First Republic Bank, which ended Friday near collapse. Its shares were trading at $115 on 8 March and ended last week at $23. The price fell further through the weekend into Monday’s trading.
First Republic’s share price gave up another 8 percent even after the $30 billion in additional capital was pledged.
Yellen called for bank regulations to be reviewed and, if needed, adjusted to “make sure they are appropriate” to address the risks banks face.
“No matter how strong capital and liquidity supervision are, if a bank has an overwhelming run that’s spurred by social media so that it’s seeing deposits flee at that pace, a bank can be put in danger of failing,” she said.
TRENDPOST: As we have greatly detailed in this issue’s ECONOMIC UPDATE, bullshit has its own sound. The bank run was not a result of social media but the reality of those with a lot of money in the banks and inside knowledge of its going down who pulled out their funds because they knew the bank was on the road to disaster.
UBS TAKES OVER CREDIT SUISSE FOR $3.25 BILLION
UBS, Switzerland’s largest commercial bank, has agreed to buy the second largest—floundering Credit Suisse—in an all-stock deal worth three billion Swiss francs, or about $3.25 billion, in a government-brokered arrangement on Sunday.
The price is less than half Credit Suisse’s 7.4-billion-franc value at the close of stock markets Friday.
The Swiss government will cover up to nine billion francs’ worth of the losses UBS risks in taking on Credit Suisse. The Swiss National Bank has opened a 100-billion-franc line of credit for UBS to smooth the transaction and its aftermath.
Even with those guarantees, the risk that UBS will default on some of its newly acquired debt rose 40 basis points in credit-default swap markets after the deal was announced.
The Bank of Canada, the Bank of England, the European Central Bank, the Bank of Japan, and the U.S. Federal Reserve aided the sale by reopening dollar swap lines, enabling the Swiss National Bank to borrow dollars in exchange for its own francs.
The Fed had opened multiple dollar swap lines during the Great Recession.
UBS’s leadership will bring to heel Credit Suisse’s loose practices and freewheeling culture, UBS chair Colm Kelleher said in a press briefing after the deal was finalized.
“Let me be very specific on this,” he said. “UBS intends to downsize Credit Suisse’s investment banking business and align it with our conservative risk culture.”
UBS will keep Credit Suisse’s retail and other more conventional bank operations, he added.
Credit Suisse was in the process of lopping 9,000 workers off its payroll when it collapsed; analysts expect even more layoffs now, Bloomberg reported.
The takeover renders about $17.3 billion worth of Credit Suisse bonds worthless to ensure that investors help bear the cost of the bank’s failure, regulators said.
Swiss pension funds that were holding those bonds have threatened legal action.
Other bondholders included private equity firms Bluebay Funds Management, Invesco, and Pacific Investment Management at the time of Credit Suisse’s last regulatory filing.
Even before the UBS takeover, Credit Suisse’s bonds affected by the sale were trading at about 35 cents on the dollar, around the level at which bonds trade when a company is about to collapse, Bloomberg noted.
A $54-billion bailout for Credit Suisse by the Swiss National Bank late last week failed to persuade depositors to keep their money in the bank or to prop up Credit Suisse’s crashing stock and bond prices.
The stock price crumbled earlier this month after the Saudi National Bank, Credit Suisse’s biggest shareholder, publicly refused to invest further in it.
After the news, trading in Credit Suisse shares was briefly halted on the Swiss stock exchange.
“The Saudis think Credit Suisse may have more troubles than was surmised and their decision [to not bail out Credit Suisse] has put an emphasis on investors having to investigate the soundness of large global banks,” William Lee, chief economist at the Milken Institute, told Al Jazeera.
At the bottom of its price trough, the share price was 85 percent below that of a year earlier.
Credit Suisse’s stock tumble last week dragged down shares of other financial firms on European and U.S. exchanges and even lopped $5 off the price of a barrel of Brent crude oil amid fears that the world economy would stumble.
The bank, which CNN Business called the weakest of Europe’s large banks, has been riddled by missteps and scandals for years:
- In 2014, it pled guilty to a charge of helping depositors evade taxes and paid $2.6 billion in fines
- In 2019, it was tarnished when a company whose stock issue it had underwritten was revealed to have falsified its sales data
- In 2020, its CEO resigned amid a spying scandal in which the bank had spied on board members, employees, and third parties
- In 2021, Credit Suisse paid $547 million in fines to authorities in the U.K. and U.S. after it made $850 million in loans to the nation of Mozambique that resulted in much of money being kicked back to bank employees and Mozambique officials
- The bank lost $5.5 billion in the collapse of the Archegos Capital hedge fund; regulators said Credit Suisse allowed the fund to take “potentially catastrophic” risks
- Depositors yanked billions from the bank last year when rumors spread on social media that it was about to collapse; the loss of deposits gave the bank a net loss for the year
- The bank remains in litigation over charges that it sold billions of dollars of Greensill Capital bonds as “low risk”; the bank itself lost $10 billion when Greensill crashed in 2021
Last month, Credit Suisse’s share price plunged to a record low after it reported its worst annual loss since 2008. More recently, reports circulated that regulators were looking into comments the bank’s chairman had made about the bank’s financial viability.
At that point, creditors and investors decided they had had enough.
TREND FORECAST: When the banking system collapsed during the Panic of ’08, UBS got a $5.3 billion direct injection by the Swiss government to bail it out. And now with the bailout of Credit Suisse, those owning ATI bonds got bashed. According to the Financial Times, “About $17 bn in Credit Suisse additional tier 1(AT1) bonds were wiped out … hitting investors…who bought the risky instruments,” which had a yield of 9.75 percent.
Beyond Credit Suisse, FT noted that it has “rippled across the wider $260bn AT1 market. And, among the investors, the question remains, why were the bank’s shareholders rescued while the bondholders were punished?”
Why? Because they make up what they want, when they want to benefit who they want.
We note this to illustrate the deep and hidden economic dangers ahead that have been temporarily contained… but will again escalate as recession pressures worsen and defaults on loans escalate.
FIRST REPUBLIC’S TAILSPIN CONTINUED MONDAY
California’s flailing First Republic Bank saw its share price fall to an all-time low on Monday, closing at $12.18.
Options traders snapped up more than 68,000 puts on First Republic at $5 each.
The bank’s bonds also headed down, trading at $0.585 to the dollar Monday afternoon.
Last Thursday, at the behest of treasury secretary Janet Yellen, 11 banks together deposited $30 billion into struggling First Republic Bank.
Bank of America, Citigroup, JPMorgan Chase, and Wells Fargo put up most of the money, each investing $5 billion.
In a joint statement, the four said their action “demonstrates their overall commitment to helping banks serve their customers and communities.”
Goldman Sachs and Morgan Stanley each put in $2.5 billion. BNY Mellon, PNC Financial, State Street, and U.S. Bank sent in $1 billion apiece.
The rally was intended to show confidence in First Republic’s future and convince markets that the bank’s troubles were temporary and not a sign of fundamental weakness.
First Republic called the mass cash infusion “a vote of confidence for First Republic and the entire U.S. banking system.”
Markets were not convinced.
After the deal was announced, First Republic’s share price dropped by another 30 percent, bringing its total decline to 70 percent over the preceding week.
On Monday, JPMorgan chair James Dimon led an effort to transform the $30 billion in deposits into a $30-billion cash infusion in a last-ditch attempt to keep First Republic alive.
First Republic was an early casualty of the panic that seized markets after Silicon Valley and Signature banks collapsed abruptly less than two weeks ago.
Last weekend, following some $70 billion in customer withdrawals from First Republic, the bank borrowed $70 billion from the U.S. Federal Reserve and JPMorgan. Days later, it hired advisors to help sell the bank to a competitor or to find additional sources of cash it could tap.
On Monday, 13 March, chair James Herbert said the bank was not seeing an unusual level of withdrawals. On 16 March, the bank suspended its dividend and admitted in a press statement that it was seeing its volume of deposits shrink day by day.
Depositors had sucked as much as $89 billion out of the bank over the previous seven days, Jeffries analysts estimated.
First Republic is a major player in the mortgage market and also specializes in offering money management services to wealthy clients.
First Republic’s wobbles began when it was revealed that a majority of Silicon Valley Bank’s deposits were uninsured because they exceeded the $250,000 insurance cap set by the U.S. Federal Deposit Insurance Corp.
First Republic’s sizable roster of rich clients sparked worries that it, too, had a large volume of uninsured deposits. More than 70 percent of the money in its accounts was uninsured at the time of its most recent regulatory filing.
Also, because the bank is heavily invested in mortgages, analysts feared it lacked the liquidity to meet a surge in demands for withdrawals.
Major ratings agencies then further downgraded First Republic’s credit rating.
On Sunday, S&P Global Ratings cut its rating of the bank for the second time in less than a week, casting its bonds into an even lower category of junk.
First Republic’s shares sank by as much as 37 percent in premarket trading Monday.
TREND FORECAST: Again, the game is rigged. Despite calls by JPMorgan Chase’s CEO Jamie Dimon for more big banks to pump more money in First Republic and fears of a worsening banking collapse, its stock spiked some 30 percent today.
Why? Because according to CNBC, “First Republic led a comeback rally in regional bank shares Tuesday, as investors hoped for some sort of strategic action by the troubled bank—or another big regulatory move—to stem the downward spiral in the sector.”
We maintain our forecast of a major financial crisis that will crash equities and economies. The government/banking crime syndicate will do all they can to artificially prop up banks and equity markets. And before they reach their breaking point, those rigging the markets will bail out before the next bust.
TREND FORECAST: Again, as we say, and prove, over and over: The Game is Rigged for the Bigs. Top executives at the sinking First Republic Bank sold $11.8 million of their personal stock in the company from the beginning of this year through 6 March at prices averaging more than $120 a share, The Wall Street Journal reported.
On Monday, 20 March, the stock closed at $12.18.
The CEO, president of the private wealth management office, and chief credit officer together unloaded $7 million worth of shares.
Executive chairman James Herbert sold $4.5 million in two batches representing 4 and 7 percent of his company stock, according to the WSJ.
Robert Thornton, president of the private wealth management operation, shed 73 percent of his shares on 18 January, collecting $3.5 million.
Unlike most insider trades, executives were not required to report theirs to the U.S. Securities and Exchange Commission (SEC).
Instead, the trades are reported to the Federal Deposit Insurance Corp.
As of 15 March, First Republic was the only company listed in the S&P 500 whose insider trades were not reported to the SEC, the WSJ noted.
The bank and the executives involved refused to comment publicly on the sales.
BANK STOCKS LOSE $460 BILLION IN MARCH
As of 17 March, investors had pulled about $460 billion from bank stocks in Europe, Japan, and the U.S., the sector’s worst rout since early 2020 when the COVID virus arrived.
U.S. banks’ shares fared worst. The KBW Bank Index was off 18 percent at the end of last week; Europe’s Stoxx sub index of bank stocks had shed 15 percent. Japan’s Topix index’s banking sector was down 9 percent.
Governments’ efforts to shore up the industry’s stock values were only partially successful as of last Friday, when shares of troubled First Republic Bank dumped about 30 percent of their value despite the bank receiving $30 billion in new capital from a consortium of banks including Goldman Sachs and JPMorgan Chase.
Credit Suisse shares went down another 8 percent even after the Swiss national bank granted it a $54-billion credit line. Credit Suisse’s default credit swaps were trading at “distressed” levels, which indicated a growing belief that the bank will fail. (See “UBS Takes Over Credit Suisse for $3.25 Billion” in this issue’s special section.)
TREND FORECAST: We maintain our forecast for a temporary bounce-back in the banking and equity markets as governments, central banks, and big banks do all they can to avert a “Panic of 23.”
However, with the EU and the U.S. raising interest rates, an economic calamity is on the near horizon. The higher interest rates rise, the deeper economies and equities will fall.
OFFICE BUILDING BUST, TOP TREND 2023: BANKS’ FAILURE PUTS COMMERCIAL LANDLORDS IN THE CROSSHAIRS
Signature Bank, which failed on 12 March, was one of the largest lenders of commercial real estate loans in the U.S. and held a 12-percent share of that market in New York state, according to real estate data service Trepp.
The bank’s collapse is likely to nudge interest rates higher for the sector, The Wall Street Journal noted. Signature’s presence likely will be replaced by specialized real estate debt funds, which charge higher rates, it said.
Also, the market for office space has permanently shrunk as the transition to remote work has taken hold. Lower demand means lower rent, translating to lower property incomes and values at a time when interest rates are rising.
The market price of office buildings has sunk 25 percent from their peak in March 2022, data firm Green Street reported.
Lower property values, reduced incomes, tighter margins, and disappearing equity gives office building owners more and more incentive to default on their loans, the WSJ added.
Columbia Property Trust, a subsidiary of private equity giant Pacific Investment Management, recently defaulted on $1.7 billion in loans against seven office buildings in conventional business downtowns.
Defaults will grow as loans on buildings with shrinking values need to be refinanced at higher interest rates, the WSJ predicted.While landlords will be mangled, banks are at less risk.
Only about 4 percent of U.S. banks with more than $50 billion in assets hold more in real estate loans than regulators recommend; when the Great Recession began in 2008, the figure was 15 percent.
However, 29 percent of lenders with $10 billion or less in assets are overexposed to real estate defaults, the WSJ said.
TREND FORECAST: As we had forecast early in the COVID War that the office real estate market would be permanently broken.
Nationally, only about half of workers are back in central offices regularly. Leases are expiring and tenants are slashing their office space needs.
Those who remain are demanding lower rents or free services such as redecorating. Others are migrating to newer spaces with more amenities.
As we reported in “Study: One Billion Square Feet of U.S. Office Space Will Be Empty by 2030” (28 Feb 2023), about 330 million square feet will fall vacant because of remote work. Another 740 million will sit empty because the buildings are aging, lack key amenities, or need “significant upgrades” to refurbish or repurpose them, according to real estate services firm Cushman & Wakefield.
About 25 percent of U.S. office space has become “undesirable,” while another 60 percent risks obsolescence without major investment, the firm warned.
Rising interest rates are making it much harder, and in many cases impossible, to finance upgrades that would make older buildings competitive with new ones as tenants seek the most alluring spaces at the cheapest rates.
To save their margins, more and more office building owners are contesting their property tax assessments. (See “Business Office Bust Begins to Bite,” 20 Dec 2022.)
TREND FORECAST: The recent bank failures have shaken the industry. As a result, banks will take even greater steps to reduce risk and to avoid loans that might not perform.
A tighter lending market will make it even harder for office building landlords to find funds to keep buildings in good repair, much less to make improvements to compete with newer buildings with more amenities.
The new environment will drive more office building landlords to sell properties at bargain-basement prices or, if all else fails, to default on their loans and walk away, as Columbia Property Trust did… which will put more downward pressure on the banks, many of them midsize, that loaned them the money.