What we’re reading (3/23)
“Charles Schwab Says It Could Ride Out A Deposit Flight” (Wall Street Journal). “Charles Schwab Corp., one of a host of financial firms that have taken a drubbing since the collapse of several regional banks this month, is pushing back against fears that it could face some of the same problems as paper losses on its bondholdings mount. In an interview with The Wall Street Journal, Schwab’s chief executive said the brokerage giant could continue to operate even if it lost most of its deposits over the next year.”
“Moody’s Sees Risk That U.S. Banking ‘Turmoil’ Can’t Be Contained” (MarketWatch). “Despite quick action by regulators and policy makers, there’s a rising risk that banking-system stress will spill over into other sectors and the U.S. economy, ‘unleashing greater financial and economic damage than we anticipated,’ said Moody’s Investors Service, one of the Big Three credit-ratings firms.”
“Guy Who Founded Social Network Ruining The World Also Allegedly Founded Company Facilitating Fraud, Money-Laundering, Other Social Ills” (Dealbreaker). “You might think that Nate Anderson’s got enough on his plate. He and other short-sellers are fighting an existential battle against Washington. He’s still (probably) making plenty betting against aspiring electric-vehicle maker Nikola. Oh yea, and he’s busy shaking the markets of the second-largest country on earth to their core, wiping some $135 billion from the market value of one of India’s biggest conglomerates, Adani Group, which Anderson’s Hindenburg Group says is as filled with fraud as his own firm’s namesake was with highly-combustible hydrogen. But no: The one-time Ponzi-seeking hobbyist is always on the lookout for scams big and small; ‘there are just so many outrageous companies,’ he once said excitedly. And one of them just happens to have been founded by the same guy who launched Twitter—and both are about equally good for the world, sayeth Hindenburg.”
“Smaller PE Funds Struggled To Raise Money In 2022” (Institutional Investor). “The fundraising environment was even more difficult for the smallest group of funds, which are defined by McKinsey as those with less than $250 million in assets. According to the report, only 1,500 of these funds reached their fundraising targets in 2022, down 51 percent from the year before. That’s the lowest level since 2015.”
“Get Ready: More Blackouts Are Coming” (Insider). “[M]ass blackouts are starting to become a more regular feature of modern American life. Power outages have increased 64% from the early 2000s, and weather-related outages — many driven by the worsening climate crisis — have increased 78%. But it's not just nature making our grid shakier: A system that was once largely controlled by localized public entities has been handed over to layers of regional authorities and private companies whose goal is maximizing profits — not reliability.”
What we’re reading (3/22)
“Credit Suisse’s Investment Bank Is Slowly Disappearing” (DealBook). “[I]t now looks like the investment bank will largely be dissolved, as UBS makes clear that it’s only interested in bits of the business, and as the Swiss government moves to bar some promised payouts to Credit Suisse’s bankers. What was once a top-flight shop of corporate advisers now appears to be a melting ice cube.”
“It Wasn’t Just Credit Suisse. Switzerland Itself Needed Rescuing.” (Wall Street Journal). “It is still far from clear whether the Swiss have fully contained the damage. Having two world-class banks was seen as a fail-safe to maintain Switzerland’s position in world markets. The forced marriage has left it with one and has shaken ordinary Swiss people and their faith in the country’s economic and political model.”
“The End Of Silicon Valley” (RiskHedge). “The collapse of SVB is an extinction-level event for Silicon Valley. The friendly “startup” bank that extended an olive branch during tough times is gone. And Wall Street giants like JPMorgan aren’t writing checks to money-losing startups. My VC contact told me, ‘Firms are clinging to their capital. Everyone I know is in survival mode. The bar is very high for new companies.’ Silicon Valley startups are now starved for funding. Many need to raise money. Most won’t be able to. Get ready for a ‘culling of the herd.’ Only the strongest will survive.”
“What Elizabeth Warren, Larry Summers, And Paul Krugman All Got Wrong About SVB” (The Nation). “SVB’s growth was indeed rapid, but much of that was back in 2021, the pandemic recovery year. The return on deposits was sweet, and the ad said, in a way that is not now reassuring, that SVB is ‘fundamentally different from other banks.’ It’s also true that SVB lobbied successfully for relief from some regulations on the ground that it d”id not pose a systemic risk. That looks bad, but SVB wasn’t a systemic risk—its peak deposits of $300 billion were a tiny fraction of US bank deposits.”
“Inadequate Capital And Unrestricted Executive Compensation Took Down SVB” (The Hill). “In the aftermath of the 2008 banking and financial crisis, I studied its causes and concluded that if banks were financed with a significantly greater proportion of equity capital, a banking crisis would be much less likely. The proposal has two components. First, bank capital should be calibrated to the ratio of tangible common equity to total assets (i.e., to total assets independent of risk) not the risk-weighted capital approach that is at the core of Europe’s Basel Committee for Banking Supervision’s regulatory standards. Second, bank capital should be at least 20 percent of its total assets. Finally, total assets should include both on-balance sheet and off-balance sheet items; this would mitigate concerns regarding business lending spilling over to the shadow banking sector.”
What we’re reading (3/21)
“Anxiety Strikes $8 Trillion Mortgage-Debt Market After SVB Collapse” (Wall Street Journal). “Last week, the risk premium on a widely followed Bloomberg index of agency MBS hit its highest level since October, when climbing interest rates turned global markets topsy-turvy. The move reflected fears that other regional banks might have to sell their holdings, bond-fund managers said.”
“Home Prices Just Broke A Decade-Long Streak” (CNN Business). “The median price of a US home was lower this February than it was in February 2022, ending more than a decade of year-over-year increases, the longest on record, according to a National Association of Realtors report released Tuesday.”
“An Insider Deconstructs ESG” (Law & Liberty). “Debates about business’s proper ends and responsibilities are not new. Many in the financial sector have been persuaded that ESG will allow business to continue generating wealth while also playing a positive role in society in ways that go far beyond the world of supply and demand. The problem, [former BlackRock Managing Director Terrence] Keeley says, is that ESG simply does not deliver.”
“Investigate The Bank Failures” (Luigi Zingales in City Journal). “In a speech last week, President Biden reassured the public that those responsible for the failure of Silicon Valley Bank (SVB) and Signature Bank will be held accountable. In the 2008–09 Financial Crisis, this did not happen. For Biden’s promise to be more than rhetoric, his administration must take a proactive role. As the last crisis showed, the normal mechanisms of accountability are broken. Banks paid billions of dollars in fees, but no CEO, board member, auditor, or regulator went to jail. Aside from a few CEOs, nobody even paid a fine out of his own pocket.”
“First Republic Bank Taps Lazard For Help With Review Of Strategic Options” (Wall Street Journal). “Lazard and McKinsey have been brought in alongside JPMorgan Chase & Co., which had already been hired by First Republic to advise on moves the bank could make to regain its footing after the failure of two other lenders caused its depositors to flee.”
What we’re reading (3/20)
“When Headlines Worry You, Bank On Investment Principles” (Dimensional Fund Advisors). “Nobel laureate Merton Miller famously used to say, ‘Diversification is your buddy.’ Thanks to financial innovations over the last century in the form of mutual funds, and later ETFs, most investors can access broadly diversified investment strategies at very low costs. While not all risks—including a systemic risk such as an economic recession—can be diversified away […], diversification is still an incredibly effective tool for reducing many risks investors face. In particular, diversification can reduce the potential pain caused by the poor performance of a single company, industry, or country”
“Federal Reserve Faces Tough Decision On Rate Increase” (Wall Street Journal). “The Fed has tried over the past year to telegraph its rate moves to avoid surprises and minimize volatility. Until now, it hasn’t confronted an abrupt and fluid crisis on the eve of a policy meeting. On Monday, investors anticipated the Fed would likely proceed with a rate rise, with interest-rate futures markets at midday implying a roughly three-in-four chance of a quarter-point increase, according to CME Group.”
“Google Was Beloved As An Employer For Years. Then It Laid Off Thousands By Email” (CNN Business). “Google (GOOGL), which for years ranked as the top company to work for in the United States, laid off thousands of workers by e-mail. And not just any employees: Decades-long veterans of the company, at least one employee on health leave, and even an employee in labor with her second child were all cut, with little explanation. Employees were left scrambling to determine who had been let go and those affected had no opportunity to say goodbye to colleagues or pack up their desks, former workers told CNN.”
“Can We Slow This All Down, Please?” (New York Times). “Over the past week, an observation by Matt Klein, a financial journalist, has gotten passed around quite a bit. ‘This was more a case of a ‘bank-run by idiots’ rather than a ‘bank run by idiots,’’ he wrote, referring to the collapse of Silicon Valley Bank. But why choose? Everyone involved in this looks terrible.”
“America’s New Class War” (UnHerd). “Taken together, then, we can see that affluent, college-educated voters and the donors in both parties are skewing American politics to the Left on social issues and to the Right on economics. This has left a substantial part of the American public unrepresented in our two-party system.”
What we’re reading (3/19)
“UBS Agrees To Buy Credit Suisse For More Than $3 Billion” (Wall Street Journal). “The deal between the twin pillars of Swiss finance is the first megamerger of systemically important global banks since the 2008 financial crisis when institutions across the banking landscape were carved up and matched with rivals, often at the behest of regulators.”
“Two Big Ideas For Preventing Another Banking Crisis” (DealBook). “Not everyone thinks deposits should be free of risk. Sheila Bair, who was the chair of the F.D.I.C. during the financial crisis, practically groaned when I brought up the idea of insuring all deposits. ‘These were big tech companies like Roku whining and crying about their uninsured deposits,’ she said. ‘If a $200 billion bank can bring down the banking system, then we don’t have a stable, resilient system.’”
“Before Collapse of Silicon Valley Bank, the Fed Spotted Big Problems” (New York Times). “Silicon Valley Bank’s risky practices were on the Federal Reserve’s radar for more than a year — an awareness that proved insufficient to stop the bank’s demise. The Fed repeatedly warned the bank that it had problems, according to a person familiar with the matter. In 2021, a Fed review of the growing bank found serious weaknesses in how it was handling key risks. Supervisors at the Federal Reserve Bank of San Francisco, which oversaw Silicon Valley Bank, issued six citations…But the bank did not fix its vulnerabilities.”
“Fed Poised To Approve Quarter-Point Rate Hike Next week, Despite Market Turmoil” (CNBC). “Even with turmoil in the banking industry and uncertainty ahead, the Federal Reserve likely will approve a quarter-percentage-point interest rate increase next week, according to market pricing and many Wall Street experts.”
“FDIC Announces Agreement To Sell Signature Bank Assets To New York Community Bancorp” (Reuters). “A subsidiary of New York Community Bancorp (NYCB.N) has entered into an agreement with U.S. regulators to purchase deposits and loans from New York-based Signature Bank, which was closed earlier this month.”
What we’re reading (3/18)
“UBS Nears Deal To Take Over Credit Suisse” (Wall Street Journal). “The deal could come together Sunday if not sooner, the people said. Regulators have offered to waive a requirement for customary shareholder votes to expedite the sale, one of the people said. The discussions were fast-moving and a remaining sticking point was the status of who will own Credit Suisse’s substantial Swiss retail arm, the people said.”
“After A Wild Week, What Are Markets Saying About the World?” (New York Times). “The good news for most investors is that the S&P 500 was resilient to worries that centered on the banking industry, and after a big rally on Thursday, the index ended the week with a gain of 1.4 percent. It shows that, to stock investors at least, the crisis in the banking sector appears mostly contained…But investors in other markets are worried about the economy.”
“Bailouts Of Insolvent Banks Don’t Lead To Hyperinflation” (Marginal Revolution). “Let’s say there is a big hole in the solvency of a banking system. Left unaddressed, that is radically deflationary. Demand (and other) deposits will disappear, crushing aggregate demand. Cascading financial failures will occur elsewhere, again with negative demand effects. If a government ‘prints money,’ or more likely creates new electronic bookkeeping entries, that offsets the deflationary pressures. These bailouts may have other negative effects, such as on future moral hazard and rent-seeking, but they won’t bring hyperinflation. If you wanted to create hyperinflation, the bailout would have to look something like ‘for every dollar you used to have in your bank account, the Fed says you now have five!’ But that is not on the agenda.”
“Wealthy Executives Make Millions Trading Competitors’ Stock With Remarkable Timing” (ProPublica). “These transactions are captured in a vast IRS dataset of stock trades made by the country’s wealthiest people, part of a trove of tax data leaked to ProPublica. ProPublica analyzed millions of those trades, isolated those by corporate executives trading in companies related to their own, then identified transactions that were anomalous — either because of the size of the bets or because individuals were trading a particular stock for the first time or using high-risk, high-return options for the first time.”
“The Mystery Millionaire Of Gage Park” (Chicago Magazine). “When Joseph Stancak died, he left behind a secret: He was worth $11 million. How did a reclusive electrician living in a modest bungalow amass the largest unclaimed estate in American history?
What we’re reading (3/18)
“Government Fear-Mongering Over Silicon Valley Bank — And How To Profit” (New York Post). “There is lots I don’t know—like where stocks will be in 45 days. I do know that once you get to bank failures, stocks are hugely higher two years later.”
“Worried About A Recession Coming? You’re Not Alone.” (Morningstar). “We surveyed 949 preretirement U.S. investors and found it’s not just experts who are predicting a recession. Our study found that 68% of investors think a recession happening in 2023 is likely to nearly certain. In fact, less than 1% of respondents felt there was almost no chance that a recession would happen, compared with 11.9% who felt it is almost certain.”
“What Gets Lost When You Rescue Markets” (Wall Street Journal). “As my colleague Greg Ip pointed out in his 2015 book ‘Foolproof,’ however, making an environment feel safer can lull many people into complacency and excessive risk-taking. It also tends to coalesce massive power into the hands of a few people at the pinnacle of the financial system.”
“SVB Board Bickering Wasted Crucial Time Before Collapse” (Semafor). “Silicon Valley Bank lost a crucial day to raise money from investors after its board rejected executives’ financial projections, leading to a chaotic and ultimately doomed scramble for cash, people familiar with the matter said.”
“In Silicon Valley, A Boom Era Feels Like It’s Ending” (MarketWatch). “Silicon Valley is getting a reset — some could also call it a comeuppance — after the past 12 to 13 years of insane growth, often irresponsible spending, hubris and swagger. Big Tech has grown astronomically, and there were real successes in companies developing social media, cloud computing, mobile apps and electric vehicles. But there were also frauds and debacles like Theranos and WeWork.”
What we’re reading (3/16)
“Eleven Banks Deposit $30 Billion In First Republic Bank” (Wall Street Journal). “The biggest banks in the U.S. swooped in to rescue First Republic Bank with a flood of cash totaling $30 billion, in an effort to stop a spreading panic following a pair of recent bank failures. The bank’s executives came together in recent days to formulate the plan, discussing it with Treasury Secretary Janet Yellen and other officials and regulators in Washington, D.C., people familiar with the matter said.”
“Why Barney Frank Went To Work For Signature Bank” (The New Yorker). [Per Frank] “I have read what Elizabeth [Warren], and others, said. I don’t see any argument that there was something that was going on that would’ve been stopped if they had got the same scrutiny as JPMorgan Chase. No one has made a specific connection there.”
“Low Rates Were Meant To Last. Without Them, Finance Is In for A Rough Ride.” (New York Times). “If a number defined the 2010s, it was 2 percent. Inflation, annual economic growth, and interest rates at their highest all hovered around that level — so persistently that economists, the Federal Reserve and Wall Street began to bet that the era of low-everything would last. That bet has gone bad. And with the implosion of Silicon Valley Bank, America is beginning to reckon with the consequences.”
“The Moral Hazards of Banking Keep Increasing” (Morningstar). “No size, it seems, is now too small to fail.”
“Where Did FTX Customer Money Go? Firm Says Bankman-Fried Took $2.2 billion” (Ars Technica). “As summarized by the Financial Times, ‘Bankman-Fried and five members of his inner circle transferred $3.2 billion in total to their personal accounts in the form of ‘payments and loans,’ the funds primarily coming from Alameda Research, a crypto trading hedge fund affiliated with FTX.’ John Ray, the new CEO leading FTX through bankruptcy proceedings, ‘has been seeking to identify the location of cryptocurrency and other assets that can be eventually returned to the millions of FTX customers whose accounts have been frozen since its collapse,’ the Financial Times noted.”
What we’re reading (3/15)
“How Good Is Current Stress Testing?” (Marginal Revolution). (Citing a tweet stating: “To me, the biggest culprit in SVB’s failure is that the fed’s most severe stress test scenario in 2022 didn’t even consider the possibility of rising interest rates. Asleep at the wheel.”). “I know how easy it is for some of you to write your Op-Eds calling for more, more, more regulation, but banking is already a remarkably regulated sector. Maybe sometimes those regulations just don’t work so well. (I still recall the earlier call for “have them hold more government securities!”) And you can’t just blame that on the ‘plutocrats,’ the ‘tech bros,’ or whatever.”
“Why (Almost) Everyone In Washington Is Ticked At The Fed” (Semafor). “Lawmakers are asking how examiners at the Federal Reserve Bank of San Francisco, which was in charge of supervising SVB, failed to spot signs of trouble that later sparked a run by its depositors. They note that the issues were readily visible on SVB’s public financial statements, and drew attention from short-sellers months before. Making the optics worse: SVB’s CEO sat on the San Francisco Fed’s board until Friday.”
“How Goldman’s Plan To Shore Up Silicon Valley Bank Crumbled” (Wall Street Journal). “ Goldman had lined up a slate of investors at $95 a share, about $11 less than the day’s closing price. At around 5 p.m., Goldman bankers got a report on SVB’s deposit outflows. The bank’s lawyers at Sullivan & Cromwell LLP said the deal couldn’t go forward without a disclosure about the deposit losses. Goldman abandoned the deal.”
“The Silicon Valley Bank Crisis’ Parallels To The 1980s” (Axios). “From 1980 to 1994, nearly 1,300 of these smaller, home loan-focused banks failed. And they failed mostly because of at least one issue that plagues us today: high inflation that prompted big rate increases by the Fed. The S&Ls were in the mortgage business, and when they made these loans they held them on their books. As rates rose, those mortgages were worth less and less — a sort of corollary to the mortgage-backed and government securities sitting on SVB's books.”
“Swiss National Bank Will Provide Credit Suisse Financial Support ‘If Necessary’” (Washington Post). “Shares of Credit Suisse plunged more than 20 percent Wednesday before rebounding somewhat. The Dow Jones industrial average fell by almost one percent and European banking stocks tumbled, contributing to a 3 percent fall in the Pan-European Stoxx 600 index.”
What we’re reading (3/14)
“Silicon Valley Bank Creditors Form Group in Advance of Possible Bankruptcy” (Wall Street Journal). “Creditors of Silicon Valley Bank’s parent company have formed a group in anticipation of a potential bankruptcy filing, through which they hope to profit from a sale of the collapsed firm’s private-wealth and other units, according to people familiar with the matter.”
“Silicon Valley, Once The Underdog, Is Now Too Big To Fail” (Washington Post). “Here we have a sector full of self-styled free thinkers — brought to its knees by groupthink. Risk-takers who valorize failure — as long as someone else is footing the bill. Meritocrats who couldn’t hack it on their own. Mavericks who scoff at the political establishment until they desperately need it.”
“Elizabeth Warren: Silicon Valley Bank Is Gone. We Know Who Is Responsible.” (New York Times). “In the aftermath of the 2008 financial crisis, Congress passed the Dodd-Frank Act to protect consumers and ensure that big banks could never again take down the economy and destroy millions of lives. Wall Street chief executives and their armies of lawyers and lobbyists hated this law. They spent millions trying to defeat it, and, when they lost, spent millions more trying to weaken it.”
“This Bank Panic Should Not Exist” (Vanity Fair). “The most important bank in Silicon Valley failed on Friday, prompting a Sunday night bailout for some of the wealthiest people in the world as the Federal Reserve opened a new emergency lending program hoping to prevent the crisis in California from triggering a nationwide banking collapse. As with any financial crash, it’s impossible to predict where exactly the money will flow next, but it’s clear that the tech sector that reshaped American business and culture in the 21st century is coming apart.”
“FBI Says $10 Billion Lost To Online Fraud In 2022 As Crypto Investment Scams Surged” (CNN Business). “More than $10 billion in losses from online scams were reported to the FBI in 2022, the highest annual loss in the last five years, according to a new report from the bureau.”
What we’re reading (3/13)
“Biden Team Scrambles To Contain Financial And Political Contagion” (CNN Business). “The Treasury Department and federal regulators insisted there was no systemic risk to the banking system as a whole that could cause a repeat of the cataclysmic 2008 meltdown as they raced against the opening of Asian markets with measures to head off a run on small or regional US banks.”
“Bank Shares Tumble in Wake of Failures” (New York Times). “The stocks of U.S. regional banks plummeted on Monday as investors reassessed how much such lenders were worth following the recent sudden collapses of Signature Bank and Silicon Valley Bank.”
“Investors Are Searching for Safe Spaces in Banking” (Wall Street Journal). “The megabanks aren’t totally free from worry about the interest-rate risk that was central to fears about Silicon Valley Bank. Many big banks have taken hits to their capital ratios due to rising interest rates and have their own unrealized investment securities losses. But investors appear to feel these banks—having the most resources, the most diverse business units and being the most regulated—are going to emerge as winners.”
“Signature Bank’s Collapse Spells Trouble For Cryptocurrency Industry” (Wall Street Journal). “The bank has long been an integral financial institution for the industry, hosting tools for facilitating digital transactions and counting notable crypto companies, such as the cryptocurrency exchange Coinbase, as its clients. It’s part of a slim group of mainstream banks catering to the needs of cryptocurrency firms and their clients, an area that was upended after the closing of another crypto-friendly bank, Silvergate Capital, last Wednesday.”
“SVB Doesn’t Deserve a Taxpayer Bailout” (Vivek Ramaswamy in WSJ). “Some claim that SVB’s failure would bring down other worthy startups and leave the U.S. less competitive. That’s wrong too. Presumably, these startups’ business models are the same today as they were last week. That means investors could infuse fresh equity capital to make up for any balance-sheet losses. That involves painful equity dilution for founders and venture capitalists, but that’s no justification for a public bailout.”
What we’re reading (3/11)
“Silicon Valley Bank Collapse Sets Off Blame Game in Tech Industry” (New York Times). “For once, the crisis didn’t seem to revolve around a cryptocurrency company. The sudden collapse of Silicon Valley Bank on Friday set off panic across the technology industry. But crypto executives and investors — who have endured a year of near-constant upheaval — seized on the moment to preach and scold.”
“Where Were The Regulators As SVB Crashed?” (Wall Street Journal). “The Federal Reserve was the primary federal regulator for both banks. Notably, the risks at the two firms were lurking in plain sight. A rapid rise in assets and deposits was recorded on their balance sheets, and mounting losses on bond holdings were evident in notes to their financial statements.”
“With SVB It Takes A Village...To Mess Things Up This Badly” (RealClear Markets). “SVB bought my business in 2001 and I worked there as a senior executive for 2 1/2 years. I’ll offer a little insight into what went wrong….Any bank has three main actors; the bankers, the customers (depositors and borrowers, which often are the same), and the regulators. Let’s start with customers, who in this case had to be incredibly naïve and irresponsible to believe deposits in any bank above the insured limit of $250K are riskless. But then VC’s and tech companies have a long history of being terribly neglectful custodians of cash. They believe that their purpose in life is to make great things, and cash management is just a nuisance. The vast majority of responsible corporations and money managers put excess cash in money market programs, which invest in highly-rated, short-term securities like T-bills. In fact, SVB had just such a program that the responsible, non-lazy corporations used, and those funds will be unaffected by the collapse of the bank.”
“Fewer People Are Going To College. That Could Be A Good Thing.” (Reason). “Fewer and fewer young people are enrolling in college after graduating high school. However, while many have presented this decline as tantamount to a national emergency, declining college attendance rates may actually be a good thing. Lower enrollment sends the message that four-year colleges need to lower their inflated prices. Plus, the decline may actually be coming from students who were already likely to drop out of school without a degree. By skipping school, many are saving themselves from accruing unnecessary debt for a degree they likely would never have obtained.”
“Do Non-Profits Drive Social Change?” (Comment). “If high-net-wealth coastal elites donate their money and time to non-profits, surely they must be important. The mainstream media helps cement this image. Ever seen the ‘How to Spend It’ section of the Financial Times, or comparable supplements from the Wall Street Journal or the New York Times? Though most media figures are not high net wealth and have little to do with non-profits, they are pandering to the high-net-wealth crowd. So if the high-net-wealth crowd has a psychological bias toward non-profits, both elite and mainstream media will track and reinforce that trend. These biases deserve to be challenged. Just how important are non-profits really? I think we still don’t know, and I have been involved with non-profits my entire life.”
What we’re reading (3/10): bank run edition
“Silicon Valley Bank Closed By Regulators, FDIC Takes Control” (Wall Street Journal). “Silicon Valley Bank collapsed Friday in the second-biggest bank failure in U.S. history after a run on deposits doomed the tech-focused lender’s plans to raise fresh capital. The Federal Deposit Insurance Corp. said it has taken control of the bank via a new entity it created called the Deposit Insurance National Bank of Santa Clara. All of the bank’s deposits have been transferred to the new bank, the regulator said.”
“Silicon Valley Bank Fails After Run Bby Venture Capital Customers” (New York Times). “If there is one enduring axiom in banking, it is this: Don’t run out of money.
Silicon Valley Bank, a lender to some of the biggest names in the technology world, did just that on Friday, becoming the largest bank to fail since the 2008 financial crisis. The move put nearly $175 billion in customer deposits, including money from some of the biggest names in the technology world, under the control of the Federal Deposit Insurance Corporation.”
“Startup Bank Had A Startup Bank Run” (Matt Levine, Bloomberg). “You are the Bank of Startups, and startups are a low-interest-rate phenomenon…When interest rates were low for a long time, and suddenly become high, all the money that was rushing to your customers is suddenly cut off….This is all even more true of crypto — I mean, the Fed raised rates once and the entire crypto industry vanished? — but it is not not true of startups. But if some charismatic tech founder had come to you in 2021 and said ‘I am going to revolutionize the world via [artificial intelligence][robot taxis][flying taxis][space taxis][blockchain],’ it might have felt unnatural to reply ‘nah but what if the Fed raises rates by 0.25%?’ This was an industry with a radical vision for the future of humanity, not a bet on interest rates. Turns out it was a bet on interest rates though.”
“Silicon Valley Bank Is A Very American Mess” (Financial Times). “Despite being the 16th largest bank in the US by balance-sheet size, SVB was apparently not subject to the “no more Dexias, no more HBOSes” regulation. The reason, as implied in the 10-K disclosure above, seems to be that a bank is only required to follow the NSFR and LCR rules if they have a certain amount of “short term wholesale funding”, and SVB’s liability side was dominated by deposits from corporate customers. Of course, as we’re seeing now, the fact that a risk isn’t covered by a regulatory ratio doesn’t mean it doesn’t exist. Although they grumbled and moaned back in the 2010s (NSFR compliance in particular was a big drag on European bank profitability), the European and UK banks basically managed to become compliant with the funding rules, which in many ways just codify sensible treasury management practices.”
“Silicon Valley Bank” (Marginal Revolution). “I am seeing estimates that over 97% of the funds are not FDIC insured, and many of those accounts are held by start-ups. An outright failure would be calamitous for the Silicon Valley start-up ecosystem…Note that every now and then the U.S. banking system is semi-insolvent, but matters work out because “on paper” losses do not have to be either realized or reported as such. Remember the 1980s? One danger is that if other banks start selling their bonds at a loss, the problems in the system will become increasingly transparent and compound themselves. That is not the most likely scenario, but it is something to watch out for.”
“Silicon Valley Bank Has Failed” (The Verge). “Silicon Valley Bank is important for venture capital firms and startups. But as the economy has changed, VC-funded companies burned through their available cash. Simultaneously, VC funding dried up. So Silicon Valley Bank’s deposits dropped faster than the bank anticipated.”
“‘It’s A Big F - - - - - - Mess’: How Silicon Valley Bank’s Collapse Is Creating Chaos” (New York Magazine). “Flow Health runs a network of diagnostic labs and provides COVID testing for clients in the entertainment industry. It’s headquartered in Culver City, California, with offices around the country. It employs about a thousand people, none of whom are getting paid this week. “We just have no way,” says Alex Meshkin, Flow Health’s CEO. ‘It’s a big fucking mess.’ He notified his employees this morning. They’re mad, and with good reason. Many are hourly workers living paycheck to paycheck. Some have threatened not to come to work or to quit. Others are just trying to figure out what the next week looks like. ‘You should see the messages in Slack,’ Meshkin says.”
“Silicon Valley Bank Dies But Its Disease Lives On” (Reuters). “Nearly three years with no U.S. bank failures just came to an unseemly end. Silicon Valley Bank, which counts among its customers half of all U.S. venture-capital backed startups, was taken into receivership by the Federal Deposit Insurance Corp on Friday after a slide in deposits and a hasty capital raising failed to restore confidence. By acting quickly, regulators have stopped one crisis, but may have laid the groundwork for more.”
“SIVB: Held-To-Mortem Governance” (Nongaap Investing). “With Silicon Valley Bank’s well-publicized blow-up underway, a question I have is when did insiders begin to realize they were potentially in trouble? Examining recent disclosures in the 2023 Preliminary Proxy, a governance-based argument could be made insiders were quite aware the situation was serious throughout 2022.”
What we’re reading (3/9)
“Markets Are Telling Investors Two Things At Once” (Wall Street Journal). “There is a big puzzle in today’s market: Treasurys appear to be anticipating a recession, while stocks and corporate bonds aren’t, despite recent falls. How can such big markets be sending such different signals? There are several decent answers—and none of them suggest an easy time for investors.”
“Home Prices Will Grow Again in 2024, Per Report” (UrbanTurf). “A recent survey of housing experts predicts that home prices will bottom out this year and start rising again in 2024. Zillow's latest Home Price Expectation (ZHPE) survey expects home prices to fall 1.6% through December, before rising again annually in the years ahead.”
“The Perks Workers Want Also Make Them More Productive” (FiveThirtyEight). “Three years after the start of the COVID-19 pandemic, remote and hybrid work are as popular as ever. Only 6 percent of employees able to do their jobs remotely want to return to the office full time, according to a Gallup survey published in August. The vast majority of “remote-capable” workers1 want to spend at least some of their workdays at home. When they’re forced to return to an office, they’re more likely to become burned out and to express intent to leave, according to Gallup.”
“Nikkei 225: A Long-Term Technical Pattern Like No Other In The World” (Knowledge Leaders Capital). “The Nikkei 225 (NKY) peaked in December 1989, and in local currency, has yet to reach the previous peak. But, I look at stocks from the standpoint of a US investor, meaning any foreign asset needs to be translated into USD. Yes, one can hedge foreign currency exposure, but it is difficult, expensive, and actually reduces the diversification benefits of international exposure.”
“Why JPMorgan Is Turning on an Ex-Star” (DealBook). “At JPMorgan Chase, James “Jes” Staley rose through the ranks, leading its asset management and investment banking businesses and becoming a top lieutenant to the banking giant’s chief, Jamie Dimon. But JPMorgan sued Staley on Wednesday, accusing him of failing to fully inform the bank about what he knew about Jeffrey Epstein, the disgraced financier who died in federal custody in 2019 and was a longtime client. If JPMorgan is found liable for providing banking services to Epstein, it wants its former executive to pay up.”
What we’re reading (3/8)
“Fear of a Recession Spooks the Market” (DealBook). “It seems even the most bullish on Wall Street now get the message: The Federal Reserve is prepared to raise interest rates until it feels it’s sufficiently beaten back inflation — even if those moves cool off the job market and send the economy into recession.”
“The Rally In Stocks Won’t Be Swayed By A Hawkish Powell, As Falling Inflation Still Points To A 20% Gain For The Market This Year, Fundstrat Says” (Insider). “The rally in stocks isn't going to be derailed by a hawkish Federal Reserve, as falling inflation still points to a 20% gain for the market this year, according to Fundstrat's head of research Tom Lee. In a note on Wednesday, Lee reiterated his bullish view on stocks despite Fed Chairman Jerome Powell's hawkish testimony before Congress on Tuesday.”
“Job Openings Declined In January But Still Far Outnumber Available Workers” (CNBC). “The Labor Department’s Job Openings and Labor Turnover Survey, or JOLTS, showed there are 10.824 million openings, down some 410,000 from December, the Labor Department reported. That equates to 1.9 job openings per available worker, or a gap of 5.13 million.”
“U.S. Shale Boom Shows Signs Of Peaking As Big Oil Wells Disappear” (Wall Street Journal). “The boom in oil production that over the last decade made the U.S. the world’s largest producer is waning, suggesting the era of shale growth is nearing its peak. Frackers are hitting fewer big gushers in the Permian Basin, America’s busiest oil patch, the latest sign they have drained their catalog of good wells. Shale companies’ biggest and best wells are producing less oil, according to data reviewed by The Wall Street Journal.”
“Can Policymakers Trust Forecasters?” (Institute for Progress). “Despite all this, the superforecaster phenomenon appears real: the very best forecasters are more skilled than others at predicting, in arbitrary domains, even given little prior knowledge. But where does that leave policymakers looking for insight into the future? If you’re a policymaker, how can you know when to seek expert counsel, invoke statistical models, query the forecasters, or do all of the above? Our problem is matching the right platform to the right policymaker, based on the information they need, and augmenting one method of forecasting with the others.”
What we’re reading (3/7)
“Fed Chair Opens Door To Faster Rate Moves And A Higher Peak” (New York Times). “Jerome H. Powell, the Federal Reserve chair, made clear on Tuesday that the central bank is prepared to react to recent signs of economic strength by raising interest rates higher than previously expected and, if incoming data remain hot, potentially returning to a quicker pace of rate increases.”
“A Bull Market Is In Full Swing – And Most Of Us Are In Denial” (New York Post). “This Pessimism of Disbelief – or PoD for short – starts with each new bull market, lasting about a third of its full duration. At this juncture, PoD has infected most investors.”
“Silicon Valley’s AI Frenzy Isn’t Just Another Crypto Craze” (Vox). “Apps like ChatGPT, created by the Microsoft-backed startup OpenAI, are just the beginning of generative AI’s full range of capabilities, according to its boosters. Many believe it’s a once-in-a-lifetime technological breakthrough that could impact virtually every aspect of society and disrupt industries from medicine to law.”
“Nice People Don’t Value Money? Your Personality May Reveal Your Savings Skills” (Study Finds). “It doesn’t hurt to be a little mean if you’re looking to save more money. A new study says nice people finish last when it comes to managing their finances, since they don’t value it as much. Researchers from Columbia University explain that those who are more agreeable are the least likely to save money, because they prioritize hanging out with people over material wealth. Meanwhile, highly conscientious people may be more motivated to plan for the future and save funds. Moreover, if your personality matches your saving goals you will keep more cash, the research shows.”
“The Supreme Court Should End Home Equity Theft” (Cato Institute). “Geraldine Tyler, age 94, owed Hennepin County $2,300 in unpaid property taxes on her Minnesota condominium. She eventually accrued another $12,700 in fees. Her local government then seized her condo and sold it to pay the taxes and fees. The condo sold for $40,000, and Tyler owed the county only $15,000. But the county didn’t return the excess $25,000 to Tyler. Instead, the county pocketed the excess equity in her home. Tyler sued the county to get the $25,000 back, but she lost in the Court of Appeals for the Eighth Circuit, which held that a Minnesota tax statute “abrogated” Tyler’s property right in her home equity. Effectively, the court held that the county had not taken any of Tyler’s “property” at all, because once the county seized her condo, a statute defined the home equity as no longer her property. Now the Supreme Court has taken Tyler’s case[.]”
What we’re reading (3/6)
“Billionaire Marc Andreessen Warns We’re Headed To A World Where A College Degree Costs $1 Million And A Flatscreen TV Costs $100” (Insider). “The Silicon Valley investor said that sectors provided or controlled by the government have become "technologically stagnant." Innovation in certain highly regulated sectors, like education and healthcare, "is virtually forbidden," causing high prices, he wrote. Andreessen said that over time the price of highly regulated products will continue to climb, while less-regulated products, like flatscreen TVs, will become cheaper.”
“The Dirty Little Secret Of Credit Card Rewards Programs” (New York Times). “In 2016, Chase launched its Sapphire Reserve card. The card comes with perks, bonuses and points multipliers that for big-spending travelers and diners are worth far more than its steep $550 annual fee. There was so much initial demand that Chase ran out of the metal slabs it prints the cards on. Sapphire’s enormous success set off a credit card perks war, with numerous banks flooding the market with sign-on bonuses worth thousands of dollars.”
“Why the Recession Is Always Six Months Away” (Wall Street Journal). “The government’s stimulus measures left household and business finances in unusually strong shape. Shortages of materials and workers mean companies are still struggling to satisfy demand for rate-sensitive goods, such as homes and autos. And Americans are splurging on labor-intensive activities they avoided in recent years, including dining out, travel and live entertainment.”
“Blackstone Defaults On Nordic CMBS As Property Values Wobble” (Bloomberg). “Blackrock Inc. defaulted on a €531 million ($562 million) bond backed by a portfolio of Finnish offices and stores as rising interest rates hit European property values.”
“Arm Opts For New York Stock Listing In Blow To London” (BBC). “The Cambridge-based firm designs the tech behind processors - commonly known as chips - that power devices from smartphones to game consoles. Reports in January said Prime Minister Rishi Sunak had restarted talks with Arm's owner, Japanese investment giant SoftBank, about a possible UK listing. Arm says it decided a sole US listing in 2023 was ‘the best path forward’.”
What we’re reading (3/5)
“Stock Futures Are Little Changed As Investors Look Ahead To Powell Comments, Jobs Data This Week” (CNBC). “U.S. stock futures were little changed on Sunday night as Wall Street looked ahead to a week filled with economic data and the latest commentary from the Federal Reserve.”
“Wonking Out: Peering Through The Fog Of Inflation” (New York Times). “Predicting the future has always been hard, but these days it’s becoming tricky even to predict the past: The statistical agencies keep making large revisions to older data. At the beginning of this year, consumer price data seemed to show a significant decline in inflation over the course of 2022. Then the Bureau of Labor Statistics revised its seasonal adjustment factors, which had no effect on inflation for the year as a whole but made inflation look lower in early 2022 and higher later in the year. The numbers still show improvement, but it’s sufficiently less significant to curb many economists’ initial enthusiasm.”
“What Is A CEO’s Pay Actually Worth?” (Wall Street Journal). “The old approach, still in use, requires companies to show pay for top executives as it was valued when they received it. Stock options and restricted stock are valued as of the day of grant, often a year or more before it is disclosed and several years before it vests, or becomes fully the executive’s property. Companies generally haven’t detailed how award values change during that period.”
“A Do-Nothing Day Makes Life Better” (The Atlantic). “Despite the fact that a day of rest is a core tenet of several ancient religions, as Heller notes, setting it all aside has become so uncommon in American society that we need to actively work to do it.”
“The rise Of The Gen Z Side Hustle” (BBC). “Side hustles existed before the pandemic, but they were often borne from a place of necessity rather than passion. In the past several years, they’ve come in the form of gig-economy jobs, either in lieu of a full-time role, or as a means of supplementing wages. Even now, side hustles are necessary to supplement income for many people: one September 2022 survey of 4,000 UK workers, from insurance company Royal London, shows 16% of respondents had taken on an additional role to help pay for cost of living increases.”
What we’re reading (3/4)
“How The Market Has Changed In The 20+ Years I’ve Covered It” (CNN Business). “If I’ve learned anything in my nearly three decades as a financial journalist (I started my career just out of college in 1995 at the long-defunct Financial World magazine) it’s that ‘this time is different’ is perhaps the biggest myth in investing. There are variations on that theme but, to quote Led Zeppelin, ‘the song remains the same.’”
“Stronger Economic Momentum Will Induce More Rate Hikes In 2023” (Morningstar). “With inflation already easing substantially without a recession, we’re very confident that the U.S. economy is capable of a soft landing, but achieving it is contingent on avoiding monetary policy error. Near-term growth in economic activity is proving more resilient to monetary policy tightening than we had anticipated, which is inducing the Federal Reserve to continue hike rates.”
“A 120-Year-Old Company Is Leaving Tesla In The Dust” (New York Times). “But the more I dealt with Tesla as a reporter — this was before Mr. Musk fired all the P.R. people who worked there — the more skeptical I became. Any time I spoke to anyone at Tesla, there was a sense that they were terrified to say the wrong thing, or anything at all. I wanted to know the horsepower of the Model 3 I was driving, and the result was like one of those oblique Mafia conversations where nothing’s stated explicitly, in case the Feds are listening. I ended up saying, ‘Well, I read that this car has 271 horsepower,’ and the Tesla person replied, ‘I wouldn’t disagree with that.’ This is not how healthy, functional companies answer simple factual questions.”
“Higher Education Is Shockingly Right-Wing” (Steve Waldman). “If "left" and "right" have any meaning at all, "right" describes a worldview under which civilized society depends upon legitimate hierarchy, and a key object of politics is properly defining and protecting that hierarchy…Whatever else colleges and universities do in the United States, they define and police our most consequential social hierarchy, the dividing line between a prosperous if precarious professional class and a larger, often immiserated, working class. The credentials universities provide are no guarantee of escape from paycheck-to-paycheck living, but statistically they are a near prerequisite.”
“One Way U.S. Students Can Save Money On College Tuition: Head To Europe” (Wall Street Journal). “College tuition in the European Union tends to be far less than in the U.S., not only for locals but for students who come from outside the EU as well. Indeed, both undergrad and graduate-school degrees in Europe often can be earned at a fraction of what it costs in the U.S.”
What we’re reading (3/3)
“A ‘Perfect Storm’ Of Recession, Debt, And Out-Of-Control Inflation Is Coming For Markets This Year, ‘Dr. Doom’ Nouriel Roubini Says” (Insider). “A ‘perfect storm’ is brewing, and markets this year are going to get hit with a recession, a debt crisis, and out-of-control inflation, the economist Nouriel ‘Dr. Doom’ Roubini said. Roubini, one of the first economists to call the 2008 recession, has been warning for months of a stagflationary debt crisis, which would combine the worst aspects of ‘70s-style stagflation and the '08 debt crisis.”
“Fed’s Credibility Can’t Take A Soft Landing” (Manhattan Institute). “Someone is in denial over inflation — either investors or Federal Reserve policymakers. But no matter how things play out, the disconnect suggests the Fed has lost its credibility. Or perhaps it never had it to begin with. And if that’s the case, soft landing or hard, one casualty of this economy could be the Fed’s inflation-targeting regime.”
“Oil Companies Hit With Backlash After Bringing In $200 Billion In Profits Last Year” (CNBC). “Oil companies pulled in record profits in 2022, as oil prices skyrocketed. Revenues for the biggest integrated European and American oil companies nearly doubled during 2021. Profits soared. But that has also spurred backlash from consumer advocates and political leaders. ‘Oil companies’ record profits today are not because they’re doing something new or innovative,’ President Joe Biden said Oct. 31. ‘Their profits are a windfall of war — the windfall from the brutal conflict that’s ravaging Ukraine and hurting tens of millions of people around the globe.’”
“Crypto Companies Behind Tether Used Falsified Documents and Shell Companies to Get Bank Accounts” (Wall Street Journal). “In late 2018, the companies behind the most widely traded cryptocurrency were struggling to maintain their access to the global banking system. Some of their backers turned to shadowy intermediaries, falsified documents and shell companies to get back in, documents show.”
“Office Mandates. Pickleball. Beer. What Will Make Hybrid Work Stick?” (New York Times). “Business leaders are in a phase of trial and error that comes with staggering stakes. They are figuring out how many days to call employees back to the office, and on top of that how strictly to enforce their own rules. While some companies are in five days a week and others have gone remote forever, many more employers have landed on a hybrid solution, and as they announce these plans they are facing fierce resistance.”