Mixed feelings about First Republic’s bailout
America’s biggest banks unveiled an impressive show of force yesterday, injecting $30 billion into First Republic Bank as it teetered on the brink of collapse.
The plan was meant to shore up confidence in the financial system and contain fallout from the implosion of Silicon Valley Bank. But investors and bank executives are wondering if that effort will hold up.
How the plan came together:
Treasury Secretary Janet Yellen suggested enlisting the private sector for help during a call on Tuesday with Jay Powell, the Fed chair; Martin Gruenberg, chair of the F.D.I.C.; and Michael Barr, the Fed’s vice chair for supervision.
She then proposed the idea to Jamie Dimon, the C.E.O. of JPMorgan Chase, which had extended the bank a credit line this week. Despite still feeling bruised by the fallout from JPMorgan’s rescues of Washington Mutual and Bear Stearns during the 2008 financial crisis, Mr. Dimon started calling other C.E.O.s to raise the money.
Yesterday morning, Ms. Yellen convened a call with regulators and bank C.E.O.s before she testified to the Senate Finance Committee. After the hearing, Mr. Dimon met Ms. Yellen for a prescheduled appointment before the banks released a joint statement. (Another key player: Rodge Cohen of the law firm Sullivan & Cromwell, who has helped respond to nearly every banking failure over the past three decades, and was counseling First Republic.)
It’s a page from a well-tested playbook. In 1907, J. Pierpont Morgan and his allies bought up $30 million worth of New York City bonds to stem a widening financial crisis. In 1984, big banks and the Chicago Fed provided more than $5 billion to Continental Illinois. And in 1998, banks banded together to invest $3.6 billion in Long Term Capital Management.
Is First Republic safe now? Its shares closed up 10 percent yesterday — but were down sharply in premarket trading this morning after the bank said it would cancel its dividend. First Republic also said it had been suffering daily deposit outflows, though the pace was “slowing considerably.”
Not everyone is happy about the intervention. The hedge fund billionaire Bill Ackman tweeted that the banks’ actions were a “fictional vote of confidence” and said First Republic’s “default risk is now being spread 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 meant to limit the damage to the wider financial system. (The banks’ cash injection into First Republic was via unsecured deposits, so those lenders are hoping that the government will backstop that move as well.)
What’s next? Banks have already been building up liquidity — the Fed disclosed yesterday that it had lent $153 billion to banks through its discount window in the week ended Wednesday — but the likely prospect that credit ratings agencies will downgrade regional lenders’ debt will create more pressure to find additional capital.
One embattled regional bank, PacWest, is reportedly in talks with investment firms to do just that, according to Reuters.
In other banking news: Peter Thiel, whose venture firm urged portfolio companies to withdraw their money from Silicon Valley Bank, had $50 million of his own money at the lender when it failed. Goldman Sachs reportedly weighed a takeover of S.V.B. in 2020. And here is why the lender’s collapse portends bad news for SoftBank, the Japanese tech investor.
HERE’S WHAT’S HAPPENING
Xi Jinping of China is set to meet with 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 U.S. intelligence has suggested that it has planned to arm Russian troops, which Beijing has denied.
Emmanuel Macron forces through a change in France’s retirement age. The French president used a special measure to raise the age to 64 from 62, after failing to win enough support in Parliament. Opponents are working on a no-confidence vote in Mr. Macron’s government, and protesters briefly blocked a major highway ringing Paris.
A Chinese tech giant’s A.I. event draws a mixed reception. Shares in Baidu fell yesterday after the company offered a peek at Ernie, its answer to the chatbot ChatGPT. But the stock recovered today after some users got hands-on access to the technology, and analysts noted that the chatbot was the most likely to succeed in China.
New study links Covid origins to animals. A global team of experts said yesterday that 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 F.B.I. 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 withdraw 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 at Silicon Valley Bank. But Bitcoin is rising, trading above $26,000 amid hopes that the Fed will ease up on rate increases.
Central bankers are under the gun
Until last week, persistent inflation was central banks’ biggest worry — and then came the collapse of Silicon Valley Bank. Investors have since wondered whether monetary authorities would ease up on raising interest rates to avoid further spooking investors.
For now, the answer appears to be no, after the European Central Bank stuck with a planned half-point increase in its deposit rate to 3 percent yesterday. But the E.C.B. concedes that its path ahead is uncertain — and there are questions about what the Fed will do next week.
“Inflation is projected to remain too high for too long,” Christine Lagarde, the E.C.B.’s president, said yesterday. Traders and economists had increasingly expected the E.C.B. to raise rates by just a quarter percentage point, but the bank had to rely on projections based on economic data from before the turmoil in banking stocks began, forcing it to make a decision with imperfect clarity.
That said, Ms. Lagarde left room to change course: The E.C.B. “stands ready to respond as necessary to preserve price stability and financial stability in the euro area,” she said.
Focus now turns to the Fed’s rate decision next week. Until recently, it had been expected to also raise rates by a half point. But the collapse of Silicon Valley Bank, driven in large part by rising rates that cut into the value of its bond holdings, has convinced many that a smaller increase, 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 rapid tightening will emerge. “There’s an old saying: Whenever the Fed hits the brakes, someone goes through the windshield,” Michael Feroli, the chief economist at JPMorgan Chase, told The Times.
Some investors are urging the Fed to stay the course. One of them is the billionaire Carl Icahn, who told The Financial Times: “I think you have to stamp out the disease of inflation.”
Credit Suisse isn’t out of the woods yet
Shares in Credit Suisse were down this morning, after soaring nearly 20 percent yesterday in response to the Swiss National Bank’s decision to extend a $54 billion lifeline to the beleaguered lender.
But investors remain wary about Credit Suisse’s future, both because of longstanding concerns about whether its ambitious turnaround plan will succeed — and more immediate worries that markets could suddenly panic again, with dire consequences.
Credit Suisse’s debt reflects more concern than its shares do. The price of some of its bonds maturing within the next few years had fallen below 70 cents on the dollar yesterday, suggesting investors were worried about the likelihood of being paid back.
Thanks to the Swiss National Bank, Credit Suisse now has access to more liquidity, topping up capital reserves that financial authorities have already said are more than sufficient. But while the prices of contracts that insure the bank’s debt have dropped, they’re still very high; that, in turn, is keeping overnight funding costs expensive as well.
And Credit Suisse has a lot more work to do. Many investors and analysts are still unconvinced that its restructuring plan — which includes spinning off much of its investment bank and focusing on less risky wealth management — will be enough to revive its fortunes. Meanwhile, one potential bailout plan, a sale of Credit Suisse to its archrival UBS, is opposed by both banks, according to Bloomberg.
‘Try not to become a robot’
The makers of ChatGPT released an upgrade of the A.I. chatbot this week that inspired even more fascination and anxiety. The technology has captured the public imagination, but it has also tapped into some of our deepest fears about being human in a machine age.
Tomas Chamorro-Premuzic, an organizational psychologist, says we’re worrying about the wrong things. He spoke to DealBook about his new book, “I, Human: A.I., 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 errors or doesn’t have a sense of humor, but the same goes for most humans. There is no stopping machines from getting smarter, but if we ignore technology our chances of getting eliminated 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 simple to cultivate. Start by injecting unpredictability into your life. Try to spend more time in the analog world.
How do businesses 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 employees are having an unrewarding experience. Going to an office, interacting offline, is more likely to humanize us.
Why is A.I. exciting despite the dangers?
It can augment societal biases, but A.I. could also help reduce bias in the workplace and advance a healthier version of meritocracy if we use data engines to help us look past politics and personalities and understand underlying dynamics about who truly contributes.
THE SPEED READ
Why it would be hard for ByteDance of China to sell TikTok, even if China would allow it. (NYT, The Information)
Michael Jordan is reportedly in talks to sell a majority stake in the Charlotte Hornets to a group led by a minority owner of the N.B.A. team. (ESPN)
MindGeek, the owner of Pornhub, was sold to a newly formed Canadian private equity firm. (FT)
Best of the rest
Inside Elon Musk’s relentless campaign to slash costs at Twitter. (FT)
Evictions in the U.S. have returned to prepandemic levels. (Axios)
Google Glass is going away. Again. (WSJ)
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