Archive for March, 2023

• Morning News: March 31, 2023
  Eddy Elfenbein, March 31st, 2023 at 7:01 am

  Dogged Inflation Shades Rebound

  Eurozone Core Inflation Hits Record High

  2023 Has Been Bad for the Bears. Here are 5 Reasons Why It’s Going to Get Even Worse

  The Fed Is Doing Too Much, All at Once

  How Big Tech Camouflaged Wall Street’s Crisis in March

  Has Bitcoin Benefited From the Banking Crisis? Not in the Way Its Fans Hoped.

  Jamie Dimon Reprises 2008 Role as Rescuer of a Failing Bank

  Massachusetts Regulator Probes First Republic Insiders’ Stock Sales

  BofA Says Investors Poured $508 Billion Into Cash This Quarter

  Flight to Money Funds Is Adding to the Strains on Small Banks

  DeSantis’s Allies Discover Disney Evaded Florida’s Move to Rein It In

  ‘Hurry Up and Get It Done’: Norfolk Southern Set Railcar Safety Checks at One Minute

  How Paris Kicked Out Cars

  Bed Bath & Beyond Ends Hudson Bay Deal, Turns to Market for $300 Million to Avoid Bankruptcy

  Jack Ma Engineered Alibaba’s Breakup From Overseas

  Netflix Restructures Film Group as It Scales Back Movie Output

  Tetris Movie Shows Apple’s Ambition to Crack the Hollywood Puzzle

  How We Know the Super-Rich are Finally Clamping Down on Spending

  Be sure to follow me on Twitter.

• Morning News: March 30, 2023
  Eddy Elfenbein, March 30th, 2023 at 7:04 am

  The World’s Most Important Oil Price Is About to Change for Good

  A $3 Trillion Threat to Global Financial Markets Looms in Japan

  The Triumph of UBS Is Also the Humbling of Swiss Banking

  Swiss Authorities Reveal Cost of Credit Suisse’s Liquidity Lifeline

  The $59 Billion Swiss Franc Debt Sales Market Is Up for Grabs

  Shorting Global Banks Fetches $14.3 Billion in Paper Profit in March

  Janet Yellen to Say Bank Rules Might Have Become Too Loose

  A Rapid-Finance World Must Ready for a Slow-Motion Banking Crisis

  FDIC Considers Forcing Big Banks to Pay Up After $23 Billion Hit

  Morgan Stanley Downgrades Charles Schwab for First Time, Slashes Target

  Average Wall Street Bonus Plunges 26% to $176,700

  Why Banks Are Waging a Digital-Wallet War With Apple

  TikTok’s Owner Pushes a New App, While Under Washington’s Glare

  Publishers Worry A.I. Chatbots Will Cut Readership

  The Delusion at the Center of the A.I. Boom

  F.D.A. Approves Narcan for Over-the-Counter Sales

  The Class of 2023 Faces a Jittery Job Market: ‘The World Seems to Have Flipped on Its Head.’

  It’s Schultz Not Starbucks That Seems to Be Lost

  The Undoing of Guo Wengui, Billionaire Accused of Fraud on 2 Continents

  Ramen for Breakfast? Cup Noodles’ New Flavor Tastes Like Egg, Sausage and Maple Syrup Pancakes

  Be sure to follow me on Twitter.

• Morning News: March 29, 2023
  Eddy Elfenbein, March 29th, 2023 at 7:05 am

  How Ukraine’s Battered Steel Industry Galvanized Its War Effort

  U.S. Pushes for Business Investment in Africa to Counter China’s Reach

  SVB Mess Festered Under Fed’s Bureaucracy and Feel-Good Culture

  SVB’s Collapse Shows the World’s Favorite Safe Asset Isn’t Risk-Free

  UBS Veteran Ermotti Returns to Lead Credit Suisse Takeover

  US 30-Year Fixed Mortgage Rate Eases to Six-Week Low

  SES, Intelsat Near Deal to Create $10 Billion Satellite Giant

  Alibaba’s $32 Billion Day Signals Breakups for China Tech

  Rift Between Gaming Giants Shows Toll of China’s Economic Crackdown

  What’s Hot on TikTok? Defending Its C.E.O.

  Nvidia’s Sizzling AI-Driven Rally Flashes a Warning

  $335,000 Pay for ‘AI Whisperer’ Jobs Appears in Red-Hot Market

  In Sudden Alarm, Tech Doyens Call for a Pause on ChatGPT

  The Metaverse Is Quickly Turning Into the Meh-taverse

  GameStop Decides It Likes Stores After All

  Pepsi Unveils New Look First Refresh in 14 Years

  Union Showdown: Starbucks’ Howard Schultz Faces Bernie Sanders in the Senate

  He Wanted to Unclog Cities. Now He’s ‘Public Enemy No. 1.’

  The Hidden Ecosystem of Free Vacation Stuff

  Be sure to follow me on Twitter.

• CWS Market Review – March 28, 2023
  Eddy Elfenbein, March 28th, 2023 at 6:19 pm

  (This is the free version of CWS Market Review. If you like what you see, then please sign up for the premium newsletter for $20 per month or $200 for the whole year. If you sign up today, you can see our two reports, “Your Handy Guide to Stock Orders” and “How Not to Get Screwed on Your Mortgage.”)

  First Citizens Bank Wins the Bidding War for SVB

  Two weeks ago, Silicon Valley Bank collapsed in less than 48 hours. The bank lost one-quarter of its deposits in one day. One of the mysteries of this episode is that no one came forward to buy the bank, or even parts of it. The FDIC had to extend the deadline for bids.

  Why? How could the collapse happen so quickly yet the bidding on the remains take so long?

  Perhaps the remains of SVB were uglier than we were told. Normally, the FDIC likes to sell off any troubled banks as soon as possible to reassure depositors. This time, it had been two weeks and there were still no buyers. There was a deadline, in fact an extended deadline, set for last Friday.

  My hunch is that any potential bidder realized that they were in a strong position and could thus extract very lucrative incentives from the FDIC. After all, time was on the bidder’s side and the FDIC isn’t in the bank-running biz.

  Then it happened. Just before we got to Friday’s deadline, we learned that Valley National Bancorp and First Citizens BancShares (FCNCA) had both submitted bids to the FDIC. Eventually, First Citizens won the deal, and—boy, oh boy—did they win concessions.

  An Indirect Bailout

  Let’s start with the price tag. First Citizens will take over $72 billion worth of SVB’s assets at a 23% discount. That works out to $16.5 billion, but that’s not all. The FDIC also said it will be part of a loss-sharing deal on the commercial loans that First Citizen is taking over. The deal is to last for eight years. The bank will also get a special credit line for “contingent liquidity purposes.”

  As they say on late-night infomercials, “but wait, there’s more!” The FDIC is also giving First Citizens a $35 billion loan to help finance the deal. In exchange, the FDIC will get equity rights in the bank that could be worth up to $500 million.

  If this lasted any longer, First Citizens probably could have gotten free Taylor Swift tickets thrown in. They got a sweet, sweet deal. But don’t just take my word for it: on Monday, shares of First Citizens jumped 53.7%. And yet, the FDIC still isn’t done yet with SVB. It’s currently holding about $90 billion of assets in receivership.

  

  All told, the FDIC will take a hit of about $20 billion from SVB and another $2 billion from Signature Bank. That hole will be replenished by higher charges to member banks, which will ultimately be picked up by depositors. One benefit of the soaring share price is that the FDIC will make some money thanks to the equity rights I mentioned. The FDIC has two weeks to exercise those options.

  The auction for SVB got a little complicated because most potential bidders were looking at First Republic as their preferred target. Recently, a group of big banks gave a First Republic a badly-needed cash injection, but that didn’t stem the tide.

  With the First Republic deal lingering, that may have taken away more interest in SVB’s remains. There’s also the issue that I’ve mentioned before: once a banking panic starts, you never know where it will go next. Bank A can go under and then you suddenly learn that Bank B lent them tons of money and now Bank B is teetering. Then you learn that Bank C is exposed to Bank B. Once the panic gets going, even a well-run bank can be pulled under.

  First Citizens Emerges a Big Winner

  So who’s First Citizens? It’s a regional bank based in Raleigh, North Carolina. It’s not that big. Or I should say, it wasn’t that big, but it’s a lot bigger now.

  First Citizens is an interesting bank because it enjoys snatching up banks from the FDIC. Since 2009, it’s bought more banks from the FDIC than anybody else.

  The bank has over 550 branches, and thanks to this deal, First Citizens has joined the big leagues. Three years ago, First Citizens had assets of $42 billion. That will now increase to $219 billion.

  

  One challenge for First Citizens is that banking for the high-tech community traditionally hasn’t been their main business. But First Citizens knows a lot about taking over troubled banks. Over the past few years, First Citizens has taken over Temecula Valley Bank, Venture Bank, Sun American Bank and United Western Bank in Colorado. It’s become adept at folding these troubled banks into its larger business.

  From the WSJ:

  The longer-term challenge for First Citizens will be running a bank that has dramatically transformed in a short period. The bank will need to hold on to the $56 billion of deposits left at SVB after the majority fled the bank during its meltdown and seizure by the FDIC. It will also have to manage a book of loans to venture-capital firms and startups, and persuade those companies to continue to do new business with the bank.

  Executives will have to do that while still digesting another big deal. First Citizens’s $2.2 billion purchase of commercial lender CIT Group Inc. closed in January 2022. CIT owned the remnants of IndyMac Bank, one of the biggest banks to fail during the 2008 financial crisis.

  First Citizens has long been controlled by the Holding family. Frank Holding, Jr. is the current Chairman and CEO. The bank has a special class of shares that gives family members 16 times the voting power of ordinary shares.

  The line of credit that First Citizens is getting is highly unusual. The idea is that it will protect First Citizens against a mad flight of capital. Between the lines, this tells me how badly the FDIC wanted a deal. Bear in mind that the folks taking over Signature Bank aren’t getting this nice little present from the FDIC.

  To its credit, the FDIC has gone out of its way to show the public that SVB is not getting bailed out. The shareholders certainly aren’t. But you could say that there’s an indirect bailout in play. Instead, it’s the new owners who are benefiting from the government’s largesse. I won’t be surprised to see more of these in the future.

  Home Prices Are Falling

  Earlier today, we got the latest Case-Shiller report on home prices, and housing seems to be the one area of the economy that’s been cured of inflation. Home prices have now fallen for seven months in a row.

  Over the last 12 months, ending in January, home prices increased by just 3.8%. That’s down from the 12-month figure for December of 5.6%. According to the report, “All 20 cities reported lower prices in the year ending January 2023 versus the year ending December 2022.” The hottest housing markets are Miami, Tampa and Atlanta, and the coldest are San Francisco, Seattle and Portland.

  It’s no secret what’s happening. Higher mortgage rates have made homebuying more expensive. As a result, many potential homebuyers have been driven from the market.

  

  This is the odd part about the Federal Reserve’s interest rate policy. Higher rates don’t slow down the economy broadly. Instead, the housing market stands in between higher mortgage rates and the Fed’s goal of taming inflation. The Fed started hiking rates one year ago, and we still have inflation in the economy, yet housing is under pressure.

  Housing analyst Bill McBride points out that with seasonal adjustment, San Francisco has fallen 13.2% from the peak in May 2022, and Seattle is down 11.4% from the peak.

  During Covid, mortgage rates dropped to the floor. In November, the average yield on a 30-year fixed rate mortgage peaked at just over 7%. It’s come down some since then. In fact, lower mortgage rates probably saved today’s Case-Shiller report from being worse than it was.

  The outlook for housing may change soon. The latest futures prices show that traders see the Fed pausing on interest rates for the next six months. I’ll caution you that these prices are merely guesses as to what the Fed will do. Actually, the next move traders expect is a Fed rate cut in September. If that’s true, it would very beneficial for stock prices.

  The next event coming is this Thursday when the government will revise the Q4 GDP. According to the last report, the U.S. economy grew in real annualized terms of 2.7% for Q4. On Friday, we’ll get the latest numbers for personal income and consumption. The Fed prefers to use this data to measure inflation.

  That’s all for now. I’ll have more for you in the next issue of CWS Market Review.

  – Eddy

  P.S. If you want more info on our ETF, you can check out the ETF’s website.

• Morning News: March 28, 2023
  Eddy Elfenbein, March 28th, 2023 at 7:03 am

  After Doling Out Huge Loans, China Is Now Bailing Out Countries

  China’s Cities Are Buried in Debt, but They Keep Shoveling It On

  For Chip Makers, a Choice Between the U.S. and China Looms

  U.S. and Japan Reach Deal on Battery Minerals

  New Shell CEO Faces Big Dilemma: Should the Company Pump More Oil?

  The Slow-Motion Tidal Wave Consuming Our Economy

  Markets Are Wrong on US Rate-Cut Bets, BlackRock Says

  Silicon Valley Bank’s Risks Went Deep. Congress Wants to Know Why.

  For Battered U.S. Bank Shares, Earnings May Make or Break

  Scion of $64 Billion Media Dynasty’s Firm Rides Out SVB Turmoil

  Schwab’s $7 Trillion Empire Built on Low Rates Is Showing Cracks

  Binance Woes Pile Up as Market Share Dives After Zero-Fees End

  Alibaba Splits Into Six, Plans New IPOs in Historic Overhaul

  Disney Eliminates Its Metaverse Division as Part of Company’s Layoffs Plan

  Walgreens Quarterly Profit Beats Estimates on Strong Pharmacy Performance

  Knowing Everyone’s Salaries Can Light a Fire Under Workers

  Dollar General Is Deemed a ‘Severe Violator’ by the Labor Dept.

  Adidas and Beyoncé to Part Ways After Ivy Park Sales Struggles

  Be sure to follow me on Twitter.

• Morning News: March 27, 2023
  Eddy Elfenbein, March 27th, 2023 at 7:03 am

  Meet the Xi Jinping Loyalist Now Overseeing China’s Economy

  Jack Ma’s Retreat Undercuts China’s Pitch to Private Business

  In Africa, Kamala Harris Looks to Deepen Relations Amid China’s Influence

  As Banking Worries Swirl, Europe’s Policymakers Express Confidence, With Caution

  Saudi National Bank Chair Resigns After Credit Suisse Remark

  First Citizens Buys Silicon Valley Bank After Run on Lender

  Banking Crisis Raises Concerns About Hidden Leverage in the System

  Morgan Stanley Strategist Says Earnings Are Next Risk to Equities

  Dear Volcker Happy Talkers, How’s the ‘Inflation’ Fight Going?

  Volkswagen Says EU Accord on E-Fuels a Boon for Porsche’s 911

  The Paper-Thin Steel Needed to Power Electric Cars Is in Short Supply

  Pentagon Woos Silicon Valley to Join Ranks of Arms Makers

  U.S. ‘Industrial Policy’ Returns With $53 Billion for Chip Manufacturing

  The Lure of the ‘Made in America’ Sales Pitch

  Why Chinese Apps Are the Favorites of Young Americans

  Tech’s AI Armies Are Huge, Yet Struggling to Innovate

  Uber Eats to Take Down Thousands of Virtual Brands to Declutter the App

  People Bought Crocs During the Pandemic. They Haven’t Stopped

  Be sure to follow me on Twitter.

• Morning News: March 24, 2023
  Eddy Elfenbein, March 24th, 2023 at 7:02 am

  China’s Economic Lifeline to Russia Gives Beijing Upper Hand

  Lawmakers Blast TikTok’s C.E.O. for App’s Ties to China, Escalating Tensions

  Evergrande Strikes Deal for $19 Billion Bond Restructuring

  Deutsche Bank Shares Plunge in Renewed Bout of Stress

  The Curse of Credit Suisse Conjures a New Banking Reality

  Banks Can’t Be Trusted. A ‘Golden Share’ Might Help

  Yellen Says US Prepared to Take More Action to Keep Bank Deposits Safe

  ‘Bonkers’ Bond Trading May Be Sending a Grim Signal About the Economy

  Accounting-Fraud Indicator Signals Coming Economic Trouble

  The Fed Has Targeted 2% Inflation. Should It Aim Higher?

  Volcker Slayed Inflation. Bernanke Saved the Banks. Can Powell Do Both?

  Jack Dorsey’s Wealth Tumbles $526 Million After Hindenburg Short

  Most Americans Doubt Their Children Will Be Better Off, WSJ-NORC Poll Finds

  Faulty Credits Tarnish Billion-Dollar Carbon Offset Seller

  Ford Says It Will Lose $3 Billion on EVs This Year as It Touts Startup Mentality

  Accenture to Cut 19,000 Jobs as IT Spending Slows

  Pandemic Pet Adoptions Propel Rise of a $500 Billion Global Market

  Crypto Fugitive Do Kwon Charged With Fraud by US Prosecutors in New York

  The Younger Brother Caught in the Middle of the FTX Investigation

  Be sure to follow me on Twitter.

• Morning News: March 23, 2023
  Eddy Elfenbein, March 23rd, 2023 at 6:24 am

  Consumers Foot the Bill for Traders ‘Manipulating’ UK Power Market

  Bank of England to Weigh a Rate Increase After a Jump in Inflation

  Swiss Central Bank Lifts Key Rate, Declares End to Bank Crisis

  China’s Rise Relied on Ties to the West, Which Xi Is Now Loosening

  China Is Starting to Act Like a Global Power

  China Voices Strong Opposition to Any Forced Sale of TikTok

  TikTok CEO Seeks to Convince Congress App Isn’t Security Threat

  Double-Barreled Economic Threat Puts Congress on Edge

  Fed Walks Tightrope Between Inflation, Bank Turmoil—but for How Long?

  Powell’s Own Guide to Recessions Shows Rate Cuts Are Coming

  Citi CEO Fraser Warns Mobile Money is ‘Game Changer’ for Bank Runs

  Banks Are Risky. Silicon Valley Bank’s Risk Officer Was AWOL.

  Wall Street Eases Hiring Freeze in Grab for Credit Suisse Talent

  What Does ‘Made in America’ Mean? In Green Energy, Billions Hinge on the Answer

  Twitter Isn’t Making Money. Here’s Why Musk Thinks It Could Soon

  Is Working From Home Really Working?

  GM to Stop Making Iconic Chevrolet Camaro Following Sales Slump

  California Could Ban Skittles Due to Concerns Over Health Impacts

  Be sure to follow me on Twitter.

• Morning News: March 22, 2023
  Eddy Elfenbein, March 22nd, 2023 at 7:03 am

  Xi and Putin Bind China and Russia’s Economies Further, Despite War in Ukraine

  U.K. Inflation Swings Upward, in a U-Turn

  Lagarde Vows ‘Robust’ Policy With ECB Ready to Act as Needed

  A New Chapter of Capitalism Emerges From the Banking Crisis

  SVB-Fueled Turmoil Junks Lessons of the Global Financial Crisis

  First Republic Rescue May Rely on US Backing to Reach a Deal

  A Big Question for the Fed: What Went Wrong With Bank Oversight?

  Fed Caught Between Inflation and Bank Crisis

  Investors Trade Cautiously Ahead of Pivotal Fed Decision

  JPMorgan Says Treasuries Coping Amid Worst Liquidity Since 2020

  Bank Crisis Could Cast Pall Over Commercial Real Estate Market

  30-Year Mortgage Rate Falls to a Five-Week Low

  Willy Loman, And When It Is Never Too Late In The Job Market

  TikTok CEO Shou Zi Chew Promises Firewall to Shield User Data

  Pulling the Plug on TikTok Will Be Harder Than It Looks

  Google Launches Bard AI Chatbot to Counter ChatGPT

  White Claw Upended Beer. Now It’s Coming for Vodka

  ‘End of an Era’: Dodge Unveils Last Super-Fast Gasoline Muscle Car

  Be sure to follow me on Twitter.

• CWS Market Review – March 21, 2023
  Eddy Elfenbein, March 21st, 2023 at 6:08 pm

  (This is the free version of CWS Market Review. If you like what you see, then please sign up for the premium newsletter for $20 per month or $200 for the whole year. If you sign up today, you can see our two reports, “Your Handy Guide to Stock Orders” and “How Not to Get Screwed on Your Mortgage.”)

  RIP: Credit Suisse

  After 167 years, Credit Suisse is no more. The bank has ceased to be. It is bereft of life. This is an ex-bank.

  Over the weekend, UBS bought out its long-time rival, Credit Suisse, for $3.24 billion.

  This is a major event in global banking. Consider that at the end of last year, Credit Suisse had a balance sheet of half a trillion dollars and 50,000 employees globally. Shares of CS closed Monday at 94 cents.

  

  To say this was a fire sale badly understates the events. The Swiss government essentially forced this deal to happen. They aimed to stop the banking crisis cold. To give you an idea of how far they went, the settled price for Credit Suisse was less than half of Friday’s closing price. It works out to 7% of CS’s tangible book value.

  CS shareholders will get one share of UBS for every 22.48 shares of CS they own. That values a share of CS at 0.76 Swiss francs which is 99% below its high.

  The Swiss government even sweetened the pot for UBS. The government said it would chip in $9 billion to backstop any losses from the deal. The Swiss National Bank said it would provide $100 billion in liquidity. Investor lesson: When the government—any government—wants a financial outcome badly enough, it’s hard to say “no.”

  Mind you, the authorities weren’t crazy. The Swiss government strongly preferred a buyout over a wind-down that would be run by courts, lawyers and regulators. Plus, they wanted a deal done fast. The goal was to have something complete before Asian markets opened on Sunday evening. They made it, but barely.

  Frankly, they had to do something. The mess at Credit Suisse was bad and getting worse. The bank was hemorrhaging $10 billion a day. Credit Suisse’s Chairman, Axel Lehmann, said, “The acceleration of the loss of trust and the worsening of the last few days made it clear that Credit Suisse cannot continue to exist in its current form.” That statement was one of the few things they got right.

  Banking Is About Confidence

  This wasn’t a story of garbage loans. Instead, all the customers headed for the exits. Quite simply, no one believed in them anymore.

  That’s the thing about banking. Most people think banking runs on money. It doesn’t. A bank runs on confidence. Once that’s gone, the whole game’s up. It doesn’t matter how much money SNB threw at the problem; without confidence, it wasn’t enough, and it never could be enough.

  It’s hard not to have some sympathy for Credit Suisse, but they made just about every mistake they could. They recently got a $4 billion cash injection from the Saudi National Bank on the hopes they could engineer a turnaround. That didn’t happen. Perhaps CS’s biggest mistake was going bust so close behind SVB and Signature.

  Last Thursday, the Swiss government extended CS a $54 billion lifeline to make sure they would last until the weekend. Later, they had to double that amount.

  

  Not surprisingly, UBS clearly didn’t want any part of a deal. They realized they were in the strong position, so they asked for a lot, and they got it. During any normal time, the hitching of these two would have been an obvious anti-trust red flag. Not this time. Funny how the government can decide which rules to enforce, when and to whom.

  The initial deal that UBS offered was for $1 billion. After shareholders complained, the price tag was lifted to $3 billion, which is still very cheap. As a result of the deal, UBS said it would halt its stock buyback program and pare back its plans for CS First Boston, CS’s investment banking business.

  One of the big issues is CS’s investment banking business. CS had been looking to spin it off, and that’s probably not going to happen. They could lose a bundle in scrapping the deal. That’s one of the reasons why UBS was so reticent about taking CS on.

  Over the weekend, there was one last-ditch attempt to save CS. A group was planning to inject $5 billion into CS if the government promised to make the bondholders whole. The government turned it down.

  I had difficulty keeping up with all of Credit Suisse’s misdeeds. Here are a few.

  In 2020, the CEO resigned after it was learned that the COO hired a private investigator to spy on the bank’s former head of wealth management. They wanted to see if he was poaching clients or employees as he had recently transferred to UBS.

  Even though the CEO resigned, an investigation found that he had no knowledge of the plan, which raised the question of why was he out of the loop. The scandal later took a tragic turn when the hired private investigator committed suicide.

  The following year, Credit Suisse was fined after it was revealed that the bank had bribed government officials in Mozambique and accepted kickbacks. The bank was supposed to be organizing loans to help Mozambique’s tuna industry. The fines would have been higher, but CS agreed to write off some of the loans.

  Credit Suisse was also involved in the very strange story of Bill Hwang and his firm, Archegos Capital. Hwang seemed to have no idea what he was doing. Naturally, he was managing several billion dollars.

  As you might guess, this came to an unpleasant end. Hwang made a giant and highly-leveraged bet on ViacomCBS (now called Paramount Global). The media company announced a stock sale, and the shares took a big hit. Hwang’s leveraged position started to plunge and he got a margin call. One of my first jobs in finance was making margin calls to clients. When you get a margin call, you have two options: put up more money or sell. If you don’t sell, the firm will do it for you.

  According to Bloomberg, Hwang lost $20 billion in two days. He had borrowed tons of money from Wall Street banks, and they were suddenly left exposed. Goldman Sachs and Morgan Stanley moved fast to protect themselves. Credit Suisse did not, and the bank got stung for a loss of $5.5 billion.

  Hwang was later arrested and charged with racketeering, securities fraud and wire fraud. Credit Suisse’s reputation never recovered.

  What Are CoCo Bonds?

  Another odd aspect of this Credit Suisse debacle is that the bonds have been far more volatile than the equity. CS shares are getting shares of UBS. That’s pretty straightforward, but some of the bondholders have been wiped out.

  Credit Suisse has what are called additional tier 1 (AT1) bonds. More formally, these are called convertible contingency bonds. Less formally, they’re known as CoCos.

  CoCos are bonds that convert into stock if some pre-specified event happens. For example, going bankrupt. CoCos can even be declared worthless, and that’s exactly what happened with Credit Suisse.

  On Sunday, the Swiss regulators announced that as part of the deal, Credit Suisse’s AT1 bonds will get a brand-new price of $0. The AT1 investors are furious, and I’m sure this will all be headed to court.

  This is one of the hidden aspects of a financial blowup. You never know exactly where it will spread. The AT1 bonds are turning into a major issue. According to the regulators, $17.3 billion of CS’s CoCo bonds have gone up in smoke.

  So now folks are wondering why the CoCos got torched when the stockholders didn’t. Traditionally, bondholders outrank equity owners. This has roiled the entire CoCo market. For example, Invesco has an ETF that invests in AT1 bonds. On Monday, it lost close to 6%.

  CoCos came about after the financial crisis and became popular with many European banks. Today, there’s more than $250 billion of outstanding AT1 bonds. The bonds were popular with investors. They paid a good deal and the prospect of going bust seemed improbable. Raymond DeVoe famously said, “More money has been lost reaching for yield than at the point of a gun.”

  In 2020, Credit Suisse was able to float $1.5 billion in AT1s and they got a rate of 5.25%. They were seen as a safe way of shifting bailout risk to bondholders from taxpayers. That’s why they were afterward called bail-ins instead of bailouts.

  But now, the whole CoCo market has gone cuckoo. Everyone had assumed these bonds were safe. Hey, what’s the worst that can happen? Well, now we know. I’ve seen several clips this week of investors furious that their Cocos have been zeroed out. Don’t play the game if you don’t know the risks. In Monday’s trading, Deutsche Bank saw its AT1 bonds drop sharply. So did UBS. Importantly, CoCos are not issued by American banks.

  Thanks to this deal they didn’t want, UBS is now one of the largest and most important financial institutions in the world.

  Expect the Fed to Hike by 0.25%

  I got a good response from last week’s issue when I did a deep dive on what happened at Silicon Valley Bank. That’s why I decided to do the same with Credit Suisse.

  But I didn’t want to leave without discussing this week’s Fed meeting. The Fed’s two-day meeting began today and will wrap up tomorrow. The policy statement will be released on Wednesday at 2 p.m. ET.

  I expect the Fed will once again hike interest rates by 0.25%. Until recently, I was leaning toward a 0.50% increase, but the events of late have changed that outlook.

  At the next meeting in May, I expect another 0.25% hike. After that, however, I think things may change. There’s a good chance that the Fed will take a break for a few months and leave rates unchanged. Of course, this is just a guess and much of what the Fed will do will depend on the behavior of inflation and the economy.

  There’s even a decent chance that the Fed will soon shift its bias toward rate cuts, especially if the slowdown in housing spreads to other sectors. The simple fact is that the economy will probably weaken as we get closer to 2024. I hope the Fed will address these issues in tomorrow’s press conference. I’ll have more details in our next premium issue.

  That’s all for now. I’ll have more for you in the next issue of CWS Market Review.

  – Eddy