Markets worry about the First Republic and other banks remain under pressure

Mixed feelings about the First Republic bailout

America’s biggest banks unveiled an impressive show of force on Thursday, pumping $30 billion into First Republic Bank as it teetered on the brink of collapse.

The plan aimed to bolster confidence in the financial system and contain the fallout from the Silicon Valley Bank implosion. But investors and bank executives wonder if this effort will hold up.

How the plan came about:

• Treasury Secretary Janet Yellen suggested seeking private sector help during a Tuesday call with Fed Chairman Jay Powell; Martin Gruenberg, FDIC Chairman; and Michael Barr, Fed Vice Chairman for Supervision.

• She then pitched the idea to Jamie Dimon, the CEO of JPMorgan Chase, who had granted the bank a line of credit this week. Although he still feels bruised by the fallout from JPMorgan’s bailouts of Washington Mutual and Bear Stearns during the 2008 financial crisis, Mr. Dimon began calling on other CEOs to raise funds.

• 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 meeting before the banks released a joint statement. (Another key player: Rodge Cohen of law firm Sullivan & Cromwell, who has helped address nearly every bank failure over the past three decades, and advised First Republic.)

This is 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 stem a deepening financial crisis. In 1984, the big banks and the Chicago Fed provided over $5 billion to Continental Illinois. And in 1998, the banks banded together to invest $3.6 billion in long-term capital management.

Is the First Republic safe now? Its shares fell sharply on Friday morning after the bank announced it would cancel its dividend on Thursday. The bank also admitted it was suffering from daily deposit outflows, although the pace was “slowing 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 “the risk of default from the First Republic is now extended to our largest banks”.

But Ms. 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 intended to limit damage to the broader financial system. (Banks’ cash injection into the First Republic was via unsecured deposits, so these lenders hope the government will support this move as well.)

And after? Banks have already been hoarding cash – the Fed revealed on Thursday that it lent $153 billion to banks through its discount window in the week ended Wednesday – but the likely outlook that credit rating agencies will downgrade the debt of regional lenders will create more pressure to find additional capital.

A troubled regional bank, PacWest, is said to be in talks with investment firms to do just that, according to Reuters.

HERE’S WHAT HAPPENS

China’s Xi Jinping is due to meet Vladimir Putin next week. The Chinese president’s state visit to Moscow 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 hinted that it plans to arm Russian troops, which Beijing has denied.

Emmanuel Macron imposes a change in the retirement age in France. The French president used a special measure to raise the age from 62 to 64, after failing to garner enough support in parliament. Opponents are working on a vote of no-confidence in Mr Macron’s government, and protesters briefly blocked a major highway that surrounds Paris.

Chinese tech giant’s AI event draws mixed reception Baidu shares fell on Thursday after the company offered a preview of Ernie, its response to chatbot ChatGPT. But the stock rallied today after some users got convenient access to the technology, and analysts noted the chatbot was most likely to succeed in China.

A new study links the origins of Covid to animals. A global team of experts said on Thursday they had found data linking the coronavirus to raccoon dogs sold at a market in Wuhan, supporting the theory that the pandemic spread to humans from an infected animal. . The FBI and the Energy Department have said in recent weeks that a lab leak was the most likely origin, but there is no consensus within the Biden administration.

Traders are withdrawing billions from a major cryptocurrency. USDC, one of the biggest so-called stablecoins, saw $3 billion in net outflows this week after its operator, Circle, said it had $3.3 billion trapped in Silicon Valley Bank. But Bitcoin is on the rise, trading above $26,000 on hopes the Fed will ease rate hikes.

Central bankers are under fire

Until last week, persistent inflation was the biggest concern for central banks, then came the collapse of the Silicon Valley Bank. Investors have since wondered whether the monetary authorities would ease interest rate hikes to avoid further spooking investors.

For now, the answer appears to be no, after the European Central Bank settled for a planned half-point increase in its deposit rate to 3% on Thursday. But the ECB admits its path forward is uncertain – and there are questions about what the Fed will do next week.

“Inflation is set to stay too high for too long,” Christine Lagarde, President of the ECB, said on Thursday. Traders and economists had increasingly expected the ECB to hike rates by just a quarter of a percentage point, but the bank had to rely on projections based on economic data dating back to before the banking stock turmoil began, forcing him to make a decision with imperfect clarity.

That said, Ms. Lagarde left room for maneuver to change course: the ECB “stands ready to react if necessary to preserve price stability and financial stability in the euro area”, she said.

Attention now turns to the Fed’s rate decision next week. Until recently, it was expected to also raise rates by half a point. But the collapse of Silicon Valley Bank, prompted in large part by rising rates that reduced the value of its bond holdings, has convinced many that a smaller rise, if any, is in sight.

As they deliberate on their next steps, Fed leaders are surely wondering if any other unintended consequences of their rapid tightening will emerge. “There’s an old saying: Every time the Fed puts on 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 billionaire Carl Icahn, who told the Financial Times: “I think you have to eradicate the disease of inflation.”

Credit Suisse is not out of the woods yet

Shares of Credit Suisse were down this morning, after climbing nearly 20% on Thursday in response to the Swiss National Bank’s decision to extend a $54 billion lifeline to the embattled lender.

But investors remain wary of Credit Suisse’s future, both due to long-standing worries about the success of its ambitious turnaround plan – and more immediate worries that markets could suddenly panic again. , with disastrous consequences.

Credit Suisse’s debt reflects more concern than its stocks. The price of some of its bonds maturing in the next few years had fallen below 70 cents on the dollar on Thursday, suggesting investors were worried about the likelihood of being repaid.

Thanks to the Swiss National Bank, Credit Suisse now has access to more liquidity, supplementing the capital reserves that financial authorities have already declared more than adequate. But if the prices of the contracts that secure the bank’s debt have fallen, they are still very high; this, in turn, also keeps day-to-day financing costs high.

And Credit Suisse still has a lot of work to do. Many investors and analysts remain unconvinced that his restructuring plan — which includes spinning off much of his investment bank and focusing on less risky wealth management — will be enough to revive his fortunes. Meanwhile, a potential bailout, a sale of Credit Suisse to arch-rival UBS, is being opposed by the two banks, according to Bloomberg.

“Try not to become a robot”

The creators of ChatGPT released an AI chatbot update this week that has inspired even more fascination and anxiety. Technology has captured the public imagination, but it has also tapped into some of our deepest fears about being human in the machine age.

Tomas Chamorro-Premuzic, an organizational psychologist, says 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 lacks a sense of humor, but so do most humans. Nothing prevents machines from getting smarter, but if we ignore technology, our chances of being wiped out increase. So we need to think deeply about the human elements of what we do.

How do we cultivate these qualities?

Creativity is simple 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’s never been a better time to re-humanize 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 into an office, interacting offline, is more likely to humanize us.

Why is AI exciting despite the dangers?

It may increase societal bias, but AI could also help reduce bias in the workplace and advance a healthier version of meritocracy if we use data engines to help us look beyond politics and personalities and to understand the underlying dynamics of who really contributes.

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