Mixed feelings about the rescue of the First Republic
America’s largest banks put on an impressive show of force on Thursday, pumping $30 billion into First Republic Bank as he teetered on the brink of collapse.
The plan was intended to bolster confidence in the financial system and contain the fallout from the Silicon Valley Bank implosion. But investors and bank executives wonder if that effort will stick.
How the plan was put together:
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Treasury Secretary Janet Yellen suggested asking the private sector for help during a call Tuesday with Fed Chairman Jay Powell; Martin Gruenberg, Chairman of the FDIC; and Michael Barr, vice president of supervision at the Fed.
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He then pitched the idea to Jamie Dimon, the CEO of JPMorgan Chase, who had extended a line of credit to the bank this week. Even though he was still hurt by the fallout from JPMorgan’s bailouts of Washington Mutual and Bear Stearns during the 2008 financial crisis, Dimon began calling on other CEOs to raise the money.
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On Thursday morning, Ms Yellen convened a call with regulators and bank CEOs before testifying before the Senate Finance Committee. After the hearing, Mr. Dimon met with Ms. Yellen for a pre-scheduled appointment before the banks issued a joint statement. (Another key player: Rodge Cohen of the law firm Sullivan & Cromwell, who helped respond to nearly every bank failure in the past three decades and advised First Republic.)
It’s a page from a well-tested playbook. In 1907, J. Pierpont Morgan and his allies purchased $30 million worth of New York City bonds to stop a growing financial crisis. In 1984, the big banks and the Chicago Federal Reserve contributed more than 5,000 million dollars to mainland Illinois. And in 1998, the banks came together to invest $3.6 billion in Long-Term Capital Management.
Is the First Republic safe now? Its shares fell more than 20 percent on Friday morning after the bank said Thursday it would cancel its dividend. The bank also admitted that it had been experiencing daily deposit outflows, although the pace was “slowing down considerably.”
Not everyone is happy with the intervention. The Hedge Fund Billionaire Bill Ackman tweeted that the banks’ actions were a “fictitious vote of confidence” and said that First Republic’s “default risk is now spilling over to our largest banks.”
But Mrs. Yellen defended the government’s handling of the crisis, telling the Senate Finance Committee that protecting depositors at Silicon Valley Bank and Signature Bank was meant to limit the damage to the broader financial system. (The banks’ cash injection into the First Republic was through unsecured deposits, so those lenders are hoping the government will back that move, too.)
Whats Next? Banks have already been hoarding liquidity: The Fed revealed on Thursday that it had lent $153 billion banks through their discount window in the week ending Wednesday, but the likely possibility of credit rating agencies downgrading the debt of regional lenders will create more pressure to find additional capital.
A beleaguered regional bank, PacWest, is allegedly in talks with investment firms to do just that, according to Reuters.
THIS IS WHAT IS HAPPENING
China’s Xi Jinping will meet Vladimir Putin next week. of the chinese president state visit to moscow it will be closely watched by the West for signs of Beijing’s intentions regarding the war in Ukraine. China has maintained relations with Russia, and US intelligence has suggested that it plans to arm Russian troops, which Beijing has denied.
Emmanuel Macron forces a change in France’s retirement age. The French president used a special measure to increase age from 62 to 64, after failing to gain sufficient support in Parliament. Opponents are working on a vote of no confidence in Macron’s government, and protesters briefly blocked a major highway around Paris.
The artificial intelligence event from a Chinese tech giant has a mixed reception. Baidu shares fell on Thursday after the company offered a look at Ernie, his answer to the ChatGPT chatbot. But the stock rallied today after some users got hands-on access technology, with analysts noting that the chatbot was more likely to succeed in China.
A new study links the origins of Covid to animals. A global team of experts said Thursday it had found data linking the coronavirus to raccoon dogs that were sold at a Wuhan market, supporting the theory that the pandemic spread to humans from an infected animal. The FBI and Department of Energy have said in recent weeks that a lab leak it was the most likely origin, but there is no consensus within the Biden administration.
Traders withdraw billions of a major cryptocurrency. USDC, one of the largest so-called stablecoins, saw $3 billion in net departures this week after its operator, Circle, said it had $3.3 billion trapped in Silicon Valley Bank. But Bitcoin is rising, trading above $26,000 amid hopes that the Federal Reserve will moderate rate hikes.
Central bankers are in the crosshairs
Until last week, persistent inflation was the biggest concern for central banks, and then came the collapse of Silicon Valley Bank. Investors have since wondered if monetary authorities would ease up on raising interest rates to avoid spooking investors further.
For now, the answer appears to be no, after the European Central Bank was left with a projected half-point increase in its deposit rate to 3 percent on Thursday. But the ECB admits that its path forward is uncertain, and there are questions about what the Fed will do next week.
“Inflation is projected to stay too high for too long,” Christine Lagarde, the president of the ECB, said on Thursday. Traders and economists increasingly expected the ECB to raise rates by just a quarter of a percentage point, but the bank had to rely on projections based on economic data before the turbulence in bank shares began, forcing it to take a decision with imperfect clarity.
That said, Lagarde left room to change course: The ECB “stands ready to respond as necessary to preserve price stability and financial stability in the euro area,” she said.
Attention now turns to the Fed’s interest rate decision next week. Until recently, it was expected to raise rates by half a point as well. But the collapse of Silicon Valley Bank, fueled in large part by rising rates that reduced the value of its bond holdings, has convinced many that a minor hike, or none at all, is in the offing.
As they deliberate their next steps, Fed leaders are surely weighing whether other unintended consequences of their quick squeeze will emerge. “There’s an old saying: Every time the Fed hits the brakes, someone goes through the windshield,” Michael Feroli, chief economist at JPMorgan Chase, told The Times.
Some investors are urging the Fed to stay the course. One of them is the billionaire. carlos icahnwho told The Financial Times: “I think the disease of inflation needs to be stamped out.”
Credit Suisse is not out of the woods yet
Credit Suisse shares were lower this morning, after rising nearly 20 percent Thursday in response to the Swiss National Bank’s decision to extend a $54 billion lifeline to the embattled lender.
But investors remain cautious about Credit Suisse’s future, both because of longstanding concerns about whether its ambitious turnaround plan will succeed, and more immediate concerns that markets could suddenly panic again, with dire consequences. .
Credit Suisse’s debt reflects more concern than its stock. The price of some of its bonds maturing in the next few years had fell below 70 cents on the dollar on Thursday, suggesting that investors were worried about the likelihood of getting their money back.
Thanks to the Swiss National Bank, Credit Suisse now has access to more liquidity, supplementing capital buffers that financial authorities have already said are more than adequate. But although the prices of the contracts that insure the bank’s debt have fallen, they are still very high; that, in turn, makes overnight financing costs high as well.
And Credit Suisse has a lot more work to do. Many investors and analysts are still not convinced that his restructuring plan, which includes spinning off much of his investment banking and focusing on less risky wealth management, is enough to revive his fortunes. Meanwhile, a potential bailout plan, a sale by Credit Suisse to archrival UBS, is in the offing. opposition from both banksaccording to Bloomberg.
‘Try not to become a robot’
The creators of ChatGPT released a improvement of the AI chatbot this week that inspired even more fascination and anxiety. Technology has captured the public imagination, but it has also taken advantage of some of our deepest fears about being human in the machine age.
Tomas Chamorro-Premuzic, an organizational psychologist, says that we worry about the wrong things. He spoke to DealBook about his new book, “I, Human: AI, Automation, and the Quest to Reclaim What Makes Us Unique.” This interview has been edited and condensed.
What makes us human?
The four main qualities are curiosity, empathy, creativity and self-awareness. Some people dismiss ChatGPT because it makes mistakes or doesn’t have a sense of humor, but the same goes for most humans. There’s nothing stopping machines from getting smarter, but if we ignore technology, our chances of being wiped out by it increase. So we need to think deeply about the human elements of what we do.
How do we cultivate these qualities?
Creativity is easy to cultivate. Start by injecting unpredictability into your life. Try to spend more time in the analog world.
How do companies apply this?
For businesses, there has never been a better time to rehumanize work. A lot of time has been spent on digital transformation, but there are signs that employees are having a less-than-rewarding experience. Going to an office, interacting offline, is more likely to humanize us.
Why AI is exciting despite the dangers
It can increase social biases, but AI could also help reduce biases in the workplace and promote a healthier version of meritocracy if we use data engines to help us look beyond politics and personalities and understand the underlying dynamics about who actually contributes.
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