The Notebook: Neil Wilson on Credit Suisse, interest rates and Ayn Rand
How did you go bankrupt?” Two ways. Gradually, then suddenly.” Hemingway’s wisecrack could be the epitaph for Credit Suisse, whose ignominious end caps a series of disasters at the Swiss bank, eventually bringing it to the brink on Sunday. UBS has probably done rather well, picking up CS for cents on the dollar, even if it will take years before we know whether it rues or cheers the demise of its biggest rival. BofA says “the industrial logic is impeccable”; the inevitable schadenfreude at UBS is surely tempered by no small quantity of angst.
The question hanging over investors: is it over? Calm was restored to wider financial markets by Monday afternoon and continued Tuesday. But the pack is sniffing out weaker members: a US regional bank of impeccable quality called First Republic Bank seems to have been isolated from the herd. It’s another Bay Area bank (the San Francisco Fed has some questions to answer) with a similar bunch of large, rate-sensitive, flighty and herding depositors as Silicon Valley Bank. Shares jumped yesterday but remain down heavily for the year-to-date. The lesson of the last two weeks is that in banking a confidence crisis can lead to liquidity and funding problems that can spiral into solvency trouble. Jamie Dimon of JPMorgan is leading the effort to shore it up.
Undoubtedly, investors will continue to circle, and banks and regulators circle the wagons. FRC is in the firing line, but Wall Street is closing ranks in an effort to save it. It’s too early to say if this is over. The relief rally after the Bear Stearns rescue lasted months. It probably only ends when investors stop asking ‘who’s next?’ Meanwhile, the last two weeks probably make a recession closer and bank lending will undoubtedly dwindle. This might keep inflation in check.
Read the small print
The Swiss caused a stir with the way they brought UBS to the table by wiping out one class of CS bond holders whilst leaving shareholders with something. The BoE and ECB were quick to rush out statements saying they wouldn’t treat these ‘contingent convertible’ bond holders so shabbily. There is a question about whether there is a future for CoCos. But it also comes down to the more mundane: some banks’ CoCos get wiped out, others get converted to equity. It pays to read the small print.
Do I stay or do I go?
The Federal Reserve faces a dilemma today – keep the hammer down on inflation or bow to financial stability concerns. Nomura says cut, Barclays, Goldman Sachs and NatWest say pause. Citi, among others, says to go for a 25bps hike. Market pricing is a more assured – 80% chance of 25bps, 20% chance of a pause. Looking through a wider lens, we are in a new phase of the cycle where central banks are trying to explicitly separate monetary policy from financial stability policy.
A bold claim
Silicon Valley Bank is now marketing itself as the single safest “place to keep or transfer your deposits (fully insured with no limits or caps).” This was in some marketing material. In a conference call, new CEO Tim Mayopoulos “There is no safer place in the U.S. banking system to put your deposits.” You cannot make it up. Talk about moral hazard (and I have). But I guess he has a point. Question now is whether deposit insurance is extended.
Nothing to shrug at
Turgid, too long, apt to make you yawn…all true, but it’s time to look again at Atlas Shrugged by the inimitable Ayn Rand. As the world goes increasingly stark raving mad and communist, it’s a heavy bulldozer of sanity; even if the philosophy – when taken to the extremes of the book – is not terribly viable. But that’s not the point – you’re not supposed to take it to the extreme, but think for yourself. Just as Citadel founder Ken Griffin warns that American capitalism is ‘breaking down before our eyes’, it’s a timely reminder of the dangers of moral hazard, bailouts and big statism.