by tyler | Apr 4, 2023 | CNN, investing
The banking crisis triggered by the recent collapses of Silicon Valley Bank and Signature Bank is not over yet and will ripple through the economy for years to come, said JPMorgan Chase CEO Jamie Dimon on Tuesday.
In his closely watched annual letter to shareholders, the chief executive of America’s largest bank outlined the extensive damage the financial system meltdown had on all banks — large and small — and urged lawmakers to think carefully before responding with increased regulation.
“These failures were not good for banks of any size,” wrote Dimon, responding to reports that large financial institution benefited greatly from the collapse of SVB and Signature Bank as wary customers sought safety by moving billions of dollars worth of money to big banks.
In a note last month, Wells Fargo banking analyst Mike Mayo wrote “Goliath is winning.” JPMorgan in particular, he said, was benefiting from more deposits “in these less certain times.”
“Any crisis that damages Americans’ trust in their banks damages all banks — a fact that was known even before this crisis,” he wrote. “While it is true that this bank crisis ‘benefited’ larger banks due to the inflow of deposits they received from smaller institutions, the notion that this meltdown was good for them in any way is absurd.”
The failures of SVB and Signature Bank, he argued, had little to do with banks bypassing regulations. He said that SVB’s high Interest rate exposure and large amount of uninsured deposits were already well-known to both regulators and to the marketplace at large.
Current regulations, he argued, could actually lull banks into complacency without actually addressing real system-wide banking issues. Abiding by these regulations, he wrote, has just “become an enormous, mind-numbingly complex task about crossing t’s and dotting i’s.”
And while regulatory change will almost certainly follow the recent banking crisis, Dimon argued that, “it is extremely important that we avoid knee-jerk, whack-a-mole or politically motivated responses that often result in achieving the opposite of what people intended.” Regulations, he said, are often put in place in one part of the framework but have adverse effects on other areas and just make things more complicated.
The Federal Deposit Insurance Corporation has said it will propose new rule changes in May, while the Federal Reserve is currently conducting an internal review to assess what changes should be made. Lawmakers in Congress, including Democratic Sen. Sherrod Brown of Ohio, have suggested that new legislation meant to regulate banks is in the works.
But, wrote Dimon, “the debate should not always be about more or less regulation but about what mix of regulations will keep America’s banking system the best in the world.”
by tyler | Apr 4, 2023 | CNN, investing
Some of the world’s largest oil exporters shocked markets over the weekend by announcing that they would cut oil production by more than 1.6 million barrels a day.
OPEC+, an alliance between the Organization of the Petroleum Exporting Countries (OPEC) and a group of non-OPEC oil-producing countries, including Russia, Mexico, and Kazakhstan, said on Sunday that the cuts would start in May, running through the end of the year. The news sent both Brent crude futures — the global oil benchmark — and WTI — the US benchmark — up about 6% in trading Monday.
OPEC+ was formed in 2016 to coordinate and regulate oil production and stabilize global oil prices. Its members produce about 40% of the world’s crude oil and have a significant impact on the global economy.
What it means for Putin: OPEC+’s decision to cut oil production could have big implications for Russia.
After Russia invaded Ukraine last year, the United States and United Kingdom immediately stopped purchasing oil from the country. The European Union also stopped importing Russian oil that was sent by sea.
Members of the G7 — an organization of leaders from some of the world’s largest economies: Canada, France, Germany, Italy, Japan, the United Kingdom and the United States — have also imposed a price cap of $60 per barrel on oil exported by Russia, keeping the country’s revenues artificially low. If oil prices continue to rise, some analysts have speculated that the US and other western nations may have to loosen that price cap.
US Treasury Secretary Janet Yellen said Monday that the changes could lead to reassessing the price cap — though not yet. “Of course, that’s something that, if we’ve decided that it’s appropriate to revisit, could be changed, but I don’t see that that’s appropriate at this time,” she told reporters.
“I don’t know that this is significant enough to have any impact on the appropriate level of the price cap,” she added.
Russia also recently announced that it would lower its oil production by 500,000 barrels per day until the end of this year.
Just last week Putin admitted that western sanctions could deal a blow to Russia’s economy.
“The illegitimate restrictions imposed on the Russian economy may indeed have a negative impact on it in the medium term,” Putin said in televised remarks Wednesday reported by state news agency TASS.
Putin said Russia’s economy had been growing since July, thanks in part to stronger ties with “countries of the East and South,” likely referring to China and some African countries.
Russia, China and Saudi Arabia: The OPEC+ announcement came as a surprise this week. The group had already announced it would cut two million barrels a day in October of 2022 and Saudi Arabia previously said its production quotas would stay the same through the end of the year.
“The move to reduce supply is fairly odd,” wrote Warren Patterson, head of commodities strategy at ING in a note Monday.
“Oil prices have partly recovered from the turmoil seen in financial markets following developments in the banking sector,” he wrote. “Meanwhile, oil fundamentals are expected to tighten as we move through the year. Prior to these cuts, we were already expecting the oil market to see a fairly sizable deficit over the second half or 2023. Clearly, this will be even larger now.”
Saudi Arabia stated that the cut is a “precautionary measure aimed at supporting the stability of the oil market,” but Patterson says it will likely “lead to further volatility in the market,” later this year as less available oil will add to inflationary feats.
Still, the changes signal shifting global alliances with Russia, China and Saudi Arabia around oil prices, said analysts at ClearView Energy Partners. Higher-priced oil could help Russia pay for its war on Ukraine and also boosts revenue in Saudi Arabia.
The White House, meanwhile, has spoken out against OPEC’s decision. “We don’t think cuts are advisable at this moment given market uncertainty – and we’ve made that clear,” National Security Council spokesman John Kirby said Monday.
– CNN’s Paul LeBlanc and Hanna Ziady contributed to this report
The crisis triggered by the recent collapses of Silicon Valley Bank and Signature Bank is not over yet and will ripple through the economy for years to come, said JPMorgan Chase CEO Jamie Dimon on Tuesday.
In his closely watched annual letter to shareholders, the chief executive of the largest bank in the United States outlined the extensive damage the financial system meltdown had on all banks and urged lawmakers to think carefully before responding with regulatory policy.
“These failures were not good for banks of any size,” wrote Dimon, responding to reports that large financial institution benefited greatly from the collapse of SVB and Signature Bank as wary customers sought safety by moving billions of dollars worth of money to big banks.
In a note last month, Wells Fargo banking analyst Mike Mayo wrote “Goliath is winning.” JPMorgan in particular, he said, was benefiting from more deposits “in these less certain times.”
“Any crisis that damages Americans’ trust in their banks damages all banks – a fact that was known even before this crisis,” said Dimon. “While it is true that this bank crisis ‘benefited’ larger banks due to the inflow of deposits they received from smaller institutions, the notion that this meltdown was good for them in any way is absurd.”
The failures of SVB and Signature Bank, he argued, had little to do with banks bypassing regulations and that SVB’s high Interest rate exposure and large amount of uninsured deposits were already well-known to both regulators and to the marketplace at large.
Current regulations, Dimon argued, could actually lull banks into complacency without actually addressing real system-wide banking issues. Abiding by these regulations, he wrote, has just “become an enormous, mind-numbingly complex task about crossing t’s and dotting i’s.”
And while regulatory change will be a likely outcome of the recent banking crisis, Dimon argued that, “it is extremely important that we avoid knee-jerk, whack-a-mole or politically motivated responses that often result in achieving the opposite of what people intended.” Regulations, he said, are often put in place in one part of the framework but have adverse effects on other areas and just make things more complicated.
The Federal Deposit Insurance Corporation has said it will propose new rule changes in May, while the Federal Reserve is currently conducting an internal review to assess what changes should be made. Lawmakers in Congress, like Democratic Sen. Sherrod Brown, have suggested that new legislation meant to regulate banks is in the works.
But, wrote Dimon, “the debate should not always be about more or less regulation but about what mix of regulations will keep America’s banking system the best in the world.”
Dimon’s letter to shareholders touched on a number of pressing issues, including climate change. “The window for action to avert the costliest impacts of global climate change is closing,” he wrote, expressing his frustration with slow growth in clean energy technology investments.
“Permitting reforms are desperately needed to allow investment to be done in any kind of timely way,” he wrote.
One way to do that? “We may even need to evoke eminent domain,” he suggested. “We simply are not getting the adequate investments fast enough for grid, solar, wind and pipeline initiatives.”
Eminent domain is the government’s power to take private property for public use, so long as fair compensation is provided to the property owner.
by tyler | Apr 3, 2023 | CNN, investing
Tesla reported a modest 4% rise in sales in the first quarter compared to the final three months of last year, despite a series of price cuts on its lower priced vehicles and talk by CEO Elon Musk about strong demand at those lower prices.
The first quarter also marked the fourth straight quarter that Tesla has produced more vehicles than it has delivered to customers. Some of that may be due to the ramp up in production at two new factories, one in Texas, the other in Germany, which opened last spring, and a lag between that increased production and sales.
Tesla said there was an increase in the number of its more expensive models, the Model S and Model X, in transit to Europe, the Middle East and Africa, as well as to the Asia Pacific region.
But it does mean that over the last 12 months Tesla has produced 78,000 more cars than it has sold, suggesting that talk of strong demand by Tesla executives may not be backed up by the numbers. That 78,000-vehicle excess production is equal to 5% of the cars it has built. First quarter sales trailed production by 18,000 vehicles, less than the gap in third and fourth quarter of last year, but still equal to 4% of the vehicles it built.
“Early this year, we had a price adjustment. After that, we actually generated a huge demand, more than we can produce, really,” Tom Zhu, Tesla’s executive in charge of global production and sales, said at Tesla’s “investor day.”
“And as Elon said, as long as you offer a product with value at affordable price, you don’t have to worry about demand.”
But some analysts said the hard numbers reported Sunday raises questions about the strength of demand for Tesla, no matter how bullish the comments from Zhu and Musk.
“If it wasn’t clear before, it now is, Tesla has a demand problem,” Gordon Johnson, an analyst who is one of the biggest Tesla critics, said in a note Monday.
“For four straight quarters, Tesla has produced more cars than they have sold, despite the fact that two of its plants are operating at 20% to 40% utilization, and it shut-down its largest plant, unexpectedly, three times in the first quarter,” said Johnson said, who said he believes Musk has a “pathological problem with the truth.”
“In short, no matter what Elon Musk says, Tesla has a serious/major demand problem,” said Johnson.
The company reported it completed sales of 422,875 vehicles in the quarter. That’s short of the forecast of 430,000 vehicles from analysts surveyed by Refinitiv. Dan Ives, tech analyst for Wedbush Securities, said the consensus that Wall Street was looking for was deliveries of 421,500, which would mean a very narrow beat for Tesla.
But even Ives, a bull on Tesla stock, said the lower prices that Tesla got for cars in the quarter will mean tighter profit margins going forward. Tesla will report full first quarter financial results on April 19.
“The big question will be margins as cutting prices will have an impact on this front,” he said in a note to clients Sunday.
First quarter production was up only 0.2% from the final three months of 2022, despite it efforts to ramp up production in Germany and Texas.
Production and sales were up much more when compared to the first quarter of 2022, with production up 44% and deliveries up 36%. But even that suggests that Tesla is below the 50% annual growth target it has set for the company long term.
Shares of Tesla
(TSLA), which fell 65% in 2022 for its worst annual performance ever, closed Friday up 68% so far in 2023. Still that left shares off 41% from where they stood at the end of 2021. Shares were down more than 5% in midday trading Monday on the sales report.
by tyler | Mar 31, 2023 | CNN, investing
It cost the Federal Deposit Insurance Corporation about $23 billion to clean up the mess that Silicon Valley Bank and Signature Bank left in the wake of their collapses earlier this month.
Now, as the dust clears and the US banking system steadies, the FDIC needs to figure out where to send its invoice. While regional and mid-sized banks are behind the recent turmoil, it appears that large banks may be footing the bill.
Ultimately, that means higher fees for bank customers and lower rates on their savings accounts.
What’s happening: The FDIC maintains a $128 billion deposit insurance fund to insure bank deposits and protect depositors. That fund is typically supplied by quarterly payments from insured banks in the United States. But when a big, expensive event happens — like the FDIC making uninsured customers whole at Silicon Valley Bank — the agency is able to assess a special charge on the banking industry to recover the cost.
The law also gives the FDIC the authority to decide which banks shoulder the brunt of that assessment fee. FDIC Chairman Martin Gruenberg said this week that he plans to make the details of the latest assessment public in May. He has also hinted that he would protect community banks from having to shell out too much money.
The fees that the FDIC assesses on banks tend to vary. Historically, they were fixed, but 2010’s Dodd-Frank act required that the agency needed to consider the size of a bank when setting rates. It also takes into consideration the “economic conditions, the effects on the industry, and such other factors as the FDIC deems appropriate and relevant,” according to Gruenberg.
On Tuesday and Wednesday, members of the Senate Banking Committee and the House Financial Services Committee grilled Gruenberg about his plans to charge banks for the damage done by SVB and others, and repeatedly implored him to leave small banks alone.
Gruenberg appeared receptive.
“Will you commit to using your authority…to establish separate risk-based assessment systems for large and small members of the Deposit Insurance Fund so that these well-managed banks don’t have to bail out Silicon Valley Bank?” asked the US Rep. Andy Barr, a Republican who represents Kentucky’s 6th district.
“I’m certainly willing to consider that,” replied Gruenberg.
“if smaller community banks in Texas will be left responsible for bailing out the failed banks in California and New York?” asked US Rep. Roger Williams, a Republican who represents Texas’ 25th district.
“Let me just say, without forecasting what our board is going to vote, we’re going to be keenly sensitive to the impact on community banks,” replied Gruenberg.
Representatives Frank Lucas, John Rose, Ayanna Pressley, Dan Meuser, Nikema Williams, Zach Nunn and Andy Ogles all asked similar questions and received similar responses. As did US Sens. Sherrod Brown and Cynthia Lummis.
“I don’t doubt he’s still fielding a lot of phone calls,” from politicians pressuring him to place the burden on large banks, former FDIC chairman Bill Isaac told CNN.
Smaller banks are saying that they’re unable to pick up this tab and didn’t have anything to do with the failure of “these two wild and crazy banks,” said Isaac. “They’re arguing to put the assessment on larger banks and as I understand it, the FDIC is thinking seriously about it,” he added.
A spokesperson from the FDIC told CNN that the agency “will issue in May 2023 a proposed rulemaking for the special assessment for public comment.” In regard to Gruenberg’s testimony they added that “when the boss says something, we defer to the boss.”
Big banks: “We need to think hard about liquidity risk and concentrations of uninsured deposits and how that’s evaluated in terms of deposit insurance assessments,” said Gruenberg to the Senate Banking Committee, indicating that smaller banks that are operating carefully could be asked to bear less of the assessment.
A larger assessment on big banks would add to what will already be a multi-billion dollar payment from the nation’s largest banks like JPMorgan Chase
(JPM), Citigroup
(C), Bank of America
(BAC) and Wells Fargo
(WFC).
The argument is that the largest US banks will be able to shoulder extra payments without collapsing under it. Those large banks also benefited greatly from the collapse of SVB and Signature Bank as wary customers sought safety by moving billions of dollars worth of money to big banks.
Passing it on: Regardless of who’s charged, the fees will eventually get passed on to bank customers in the end, said Isaac. “It’s going to be passed on to all customers. I have no doubts that banks will make up for these extra costs in their pricing — higher fees for services, higher prices for loans and less compensation for deposits.”
It’s hard out there for a Wall Street banker. Or harder than it was.
The average annual Wall Street bonus fell to $176,700 last year, a 26% drop from the previous year’s average of $240,400, according to estimates released Thursday by New York State Comptroller Thomas DiNapoli.
While that’s a big decrease, the 2022 bonus figure is still more than twice the median annual income for US households, reports CNN’s Jeanne Sahadi.
All in, Wall Street firms had a $33.7 billion bonus pool for 2022, which is 21% smaller than the previous year’s record of $42.7 billion — and the largest drop since the Great Recession.
For New York City and New York State coffers, bonus season means a welcome infusion of revenue, since employees in the securities industry make up 5% of private sector employees in NYC and their pay accounts for 22% of the city’s private sector wages. In 2021, Wall Street was estimated to be responsible for 16% of all economic activity in the city.
DiNapoli’s office projects the lower bonuses will bring in $457 million less in state income tax revenue and $208 million less for the city compared to the year before.
Beleaguered retailer Bed Bath & Beyond will attempt to $300 million of its stock to repay creditors and fund its business as it struggles to avoid bankruptcy, reports CNN’s Nathaniel Meyersohn.
If it’s not able to raise sufficient money from the offering, the home furnishings giant said Thursday it expects to “likely file for bankruptcy.”
Bed Bath & Beyond was able to initially avoid bankruptcy in February by completing a complex stock offering that gave it both an immediate injection of cash and a pledge for more funding in the future to pay down its debt. That offering was backed by private equity group Hudson Bay Capital.
But on Thursday, Bed Bath & Beyond said it was terminating the deal with Hudson Bay Capital for future funding and is turning to the public market.
Shares of Bed Bath & Beyond dropped more than 26% Thursday. The stock was trading around 60 cents a share.
by tyler | Mar 31, 2023 | CNN, investing
Regulation introduced after the 2008 financial crisis was supposed to make bank bailouts a thing of the past. But its biggest test so far has revealed some serious shortcomings.
In what feels like deja-vu, governments have had to step in as lenders of last resort to prevent the recent bout of turmoil in the banking sector from escalating into a full-blown crisis. By tapping public funds to shore up ailing private institutions, they have laid bare the huge risks that bank failures still pose to taxpayers and the wider financial system.
“I have argued for years that the biggest banks in the world are still too big to fail. This question is now beyond doubt,” Neel Kashkari, president of the Federal Reserve Bank of Minneapolis, told broadcaster CBS Sunday.
Karin Keller-Sutter, Switzerland’s finance minister, hit the message home when she said that restructuring embattled Credit Suisse
(CS) in line with internationally agreed post-2008 guidelines “would probably have triggered an international financial crisis.”
“I have come to the realization in recent weeks that a globally active, systemically important bank cannot simply be wound up according to the ‘too big to fail’ plan,” Keller-Sutter told Swiss newspaper Neue Zürcher Zeitung. “Legally, this would be possible. In practice, however, the economic damage would be considerable.”
Keller-Sutter was at the center of a government-orchestrated rescue of Credit Suisse by its larger rival UBS
(UBS) earlier this month. The Swiss authorities decided that the lender, which had struggled for years, needed an emergency takeover after the sudden failure of Silicon Valley Bank in the United States rattled bank investors around the world.
But executing the deal could eat up billions of dollars of public money through loans and guarantees. That raises uncomfortable questions over whether much-vaunted regulatory reforms have really made the financial system more stable and less of a threat to the public purse.
Global standards for dealing with teetering “too big to fail” banks were key a part of the package of rules introduced after the global financial crisis. They were designed to make it possible to wind down a big bank without destabilizing the financial system or exposing taxpayers to the risk of losses.
Yet, when several lenders got into trouble this month, regulators “didn’t use the mechanisms they promised us would work,” said Anat Admati, a finance and economics professor at Stanford Graduate School of Business. “Too big to fail is still a problem. It never got solved.”
When it came to Credit Suisse, the Swiss government judged that a rescue by UBS was the only viable option, even though that has left the country’s economy exposed to a single massive lender.
Although some investors in Credit Suisse bonds lost everything, Swiss taxpayers are still on the hook for up to 9 billion Swiss francs ($9.8 billion) of potential losses arising from certain Credit Suisse assets.
The state has also explicitly guaranteed a 100 billion Swiss franc ($109 billion) lifeline to UBS, should it need it, although that would be repayable.
Likewise, US regulators have had to take unprecedented steps that undermined post-crisis rules to ensure SVB’s collapse didn’t spiral into a broader banking meltdown.
In an extraordinary move, the Federal Deposit Insurance Corporation guaranteed all SVB deposits — including those above the usual $250,000 threshold per person. That limit was enshrined in law by the 2010 Dodd-Frank Act.
The money for this will come from a fund that banks pay into, rather than from taxpayers. But the move has nonetheless sparked debate over whether this amounts to a bailout.
“They say it’s not a bailout because the industry will pay. It’s still a bailout, whoever pays,” said Admati of Stanford.
Alongside this, the Fed launched an emergency lending facility for banks after the collapse of SVB and Signature Bank to prevent more failures, exposing the central bank to risky loans, according to Admati.
“It’s a way to maintain [the banking system] from cracking, but it’s not making it healthier,” she said.
Aaron Klein, a former US Treasury official who worked on the Dodd-Frank reforms, is worried about the precedent that has been set.
“Bailouts beget bailouts,” Klein, now a senior fellow in economic studies at the Brookings Institution, told CNN. “It’s difficult, once you start down the path of bailing people out, to switch course.”
Even as existing rules have been ignored, the recent bank failures have some lawmakers and regulators arguing that banking regulation needs to be tightened. Although on certain measures banks are more resilient than they were before the global financial crisis, recent turmoil has given regulators pause.
Michael Barr, the Fed’s vice chair for supervision, told the US Senate banking committee Tuesday that rules for banks needed to be strengthened. The Swiss government, for its part, announced Wednesday a “comprehensive evaluation of the too-big-to-fail regulatory framework,” the findings of which will be reported to parliament.
And Sam Woods, deputy governor for prudential regulation at the Bank of England, has told UK lawmakers that there may be a question around whether banks are mandated to have enough cash on hand or easily accessible.
“A striking feature of the Silicon Valley Bank run, though not so much of the Credit Suisse one, was the speed with which it took place,” he said Tuesday. “I do think we have to look back at these outflow rates … and ask what we have learned.”
Some of this cuts to the heart of banks’ business model. Lenders are required to set aside only a portion of the money deposited with them. The rest is lent out at higher interest rates or invested, because that’s how big banks make most of their profit.
This means any institution whose depositors all want to withdraw their cash at the same time would be in trouble.
Removing the risk of a bank run entirely would require lenders to hold 100% of all deposits in cash or reserves at central banks. But regulators do not see this as a desirable outcome.
“We do not want to operate a zero-failure regime, because there would be some significant costs in terms of availability of lending to the economy,” Woods said. “That is a trade-off that is made in all regulations.”
There are less drastic ways to make banks safer. Requiring lenders to fund themselves with more equity and less debt would be one approach, according to John Vickers, who led the independent commission reviewing UK banking regulation after the 2008 crisis.
They would then “have more equity capital with which to absorb losses,” he told CNN.
Banks should also undergo “much tougher, more transparent” tests to establish to what extent they could withstand losses in various adverse scenarios, taking into account the market value of their capital, said Vickers, now an economics professor at Oxford University.
“Undoubtedly, major progress was made in the reforms after the crisis of 2008/2009, but in my view [they] did not go far enough.”
by tyler | Mar 31, 2023 | CNN, investing
Three stocks with ties to former President Donald Trump surged Friday after two sources familiar with the case told CNN that Trump faces 30 counts related to business fraud in an indictment from a Manhattan grand jury.
It’s not clear why investors sent shares of those companies soaring Friday, although the stocks tend to swing wildly — surging and plummeting — when Trump makes news.
Shares of Digital World Acquisition Corp., the blank-check firm seeking to merge with Trump’s media venture, rose 10% Friday. Phunware
(PHUN), the company that developed the Trump campaign’s mobile app for the 2020 presidential race, gained 3%. And Rumble
(RMBL), a conservative video platform that partners with Trump’s Truth Social app, also rose 3%.
The stocks have moved significantly before when Trump has been in the spotlight. For example, DWAC shares soared after Republicans won the House of Representatives in November 2022 (though shares have fallen 55% since then).
DWAC announced plans in October 2021 to acquire Trump Media & Technology Group, owner of the Truth Social app. The former president is the chairman and a major shareholder of TMTG. But the deal between DWAC and TMTG has failed to come to fruition, as a shareholder vote on the transaction had been delayed several times before it ultimately failed in September 2022.
The controversial merger has also been stalled by legal scrutiny. The Justice Department is investigating the acquisition, in addition to the SEC. In late June, Digital World revealed its board members had received subpoenas from a federal grand jury in the Southern District of New York related to due diligence regarding the deal.
Digital World has said the federal probes have blocked the ability to get the deal with TMTG consummated. Despite shareholders’ rejection of the TMTG deal, the shell company said late last year it has been able to buy additional time because its sponsor, ARC Global Investments II, deposited nearly $3 million into the company’s trust account to exercise an option to unilaterally extend the merger agreement.
If that hadn’t happened, the entire deal could have unraveled, forcing Digital World to return the roughly $300 million it has raised. That money is intended to fund the merger with Truth Social owner TMTG. A liquidation would have also threatened the additional $1 billion the Trump media company has raised.
