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Recent US, Swiss Bank Collapse — Serious Theories & Fundamental Questions

I guess the time has come for due diligence on banks, as they are tumbling down globally, says JK Dadoo

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Is it not ironic that the country imposing sanctions on Russia, has tanked 3 banks and 5 more are on the hit list of Moody? Yet Russian bank coffers are filling daily with Russia-dictated roubles, for oil & gas purchases.

Reading a couple of dozen articles by experts, and several views of those who know, I find serious theories are being advanced why these banks are failing. Fundamental questions are emerging, which are analysed below, since it is causing considerable disquiet in many quarters, across continents.

Silicon Valley Bank (SVB), termed as the best Bank by Forbes recently, grew too fast on short-term money from depositors, from $116 billion in 2020 to $ 211 billion in 2021, & invested in long-dated bonds. By the end of 2022, it was one of the largest lenders in the USA. At the same time, S3 partners had tracked short selling in SVB to 6.7 per cent and bank shares fell 66 per cent. Without a risk officer for 8 months, SVB had the temerity not to disclose this to the regulators. Is this not a big red herring? Appears so as 90 per cent of its deposits were uninsured making it extremely vulnerable for a flight of capital by venture capitalists, in whose favour it was tilted heavily. In Dec 2022 SVB had no “interest rate hedges on its massive bond portfolio “detected by 4 agile journalists of Dow Jones. Moody took notice of SVB’s fourth-quarter results. So, it was not a sudden anomaly, it appears.

When Fed raised interest rates rapidly, it was saddled with losses & tried to sell $ 2 billion of its investments at a loss. Depressed depositors developed diarrhoea & drew back in droves. It lost 95 per cent of its market cap as its shares slid from $700 to $40, and shareholders weeped to the bank shaving off $ 110 billion. Bankrupt, it was shut down, with no Hindenburg to foresee all this.

Silvergate Capital Corporation, the crypto industry’s big bank, collapsed a few days before that. As if this was not enough, as SVB crashed, on March 9, the 4 biggest US banks JPMorgan, Bank of America, Wells Fargo & Citicorp shares fell sharply, tearing off $ 52 billion of their market cap. The third casualty was the Signature bank, by which time, Fed started damage control. Signature bank‘s majority assets are being sold to Flagstar bank immediately by Fed, as per the latest press reports.

Moody is not being moody, when it has put 5 other regional financial firms under review viz Western Alliance Bancorp, Intrust Financial Corporation, Umb Financial Corporation, Zions Bancorp, And Comerica Inc. The reasons were clear…these 5 lenders were relying on “uninsured deposit funding and unrealised losses in their asset portfolios “. Time alone will tell if Moody’s theory and actions are proven right or wrong.

A theory propounded by Insiders like Thomas Hoenig is that Us monetary policy played a pivotal role in this tragedy as it” suppressed the yield curve & sent wrong signals to the banking industry “. Consequently, banks bought govt securities in bulk to hold them till maturity.  Silvergate & SVB got hit worst as they focused on “boom-bust sectors”.

The most worrying theory is that SVB’s top executives including CEO Becker, sold $4.5 million in stock just before its crash, suggesting insider trading. Where was Hindenburg is the loud cry from such theorists and rightly so, because 

First Republic bank followed suit.

Its top executives started selling millions of $ of shares 2 months before they plummeted, report Foldy and McGinty. Among big sellers were chairman Herbert II, at $ 4.5 million and $ 7 million by its president Thornton, credit officer Lichman and CEO Roffler. Such insiders’ sales were not reported to SEC, as it is customary. Fed has made 11 banks to pump in $ 30 billion to rescue that bank, as its shares nosedived by 58 per cent. Fraud likelihood appears as S&P Global Ratings altered its ratings from “superlative to junk”. The justice department is being roped in to check all insider sales. Incidentally, 66 per cent of its bank deposits were uninsured and had no option but to instal a 90-day waiting period between filing for trade & executing it.

More disabilities are getting unearthed, as crypto dealers pulled out $ 3 billion from stablecoin USDC in 3 days with SVB’s fall. In 1 week, the figure was$ 6 billion, according to CoinGecko data. The same week USDC was forced to break its dollar peg.

The theory going around is that US regulators had issued another warning in Feb 23 that “crypto deposits in banks could be subject to liquidity risks because such stablecoin deposits show volatility when markets are stressed leading to heavy redemptions.”. Moody quickly highlighted that there are “unpredictable links between cryptocurrencies & traditional finance “, and advised against working with stablecoin operators.

As if this is not enough, LNbitcoin reported, that in the midst of this financial turmoil, FDIC suggested that the “public should not be taken into confidence to avoid panic & Bank run”. Lo & behold that is exactly what happened to turn the tables on them. Sam Adams commented that “corruption is mostly by partisan”

There are other interesting theories as you dig deeper. On 24 Feb 23, a fortnight before SVB busted, KPMG LLP gave it a clean chit despite Moody raising concerns. Lynn Turner ex-chief accountant at SEC has raised this as a concern for scrutiny and enquiry.

Our own watchdog Ms Sucheta Dalal has retorted that” US regulators are more incompetent & compromised than ours, but act super-fast. Lobbyists rule the country “privatising profits & socialising losses.”

Tough theory to deny looking at crash after crash. Swarajya calls it their “ fiscal & monetary follies “.

Credit Suisse (CS ) caught the bankside fever across the Atlantic quickly and plummeted from $ 80 a share to about $2  on 15 March 23, after posting a $ 1.5 billion loss in Q4, & a total loss of $ 7.6 billion in 2022. SVB debacle added fuel to fire as the sell-off of stocks & bonds started worldwide, reports Greg Rubini and swarajya. $ 50 billion lifeline tap from Swiss national bank to improve its balance sheet was to help raise confidence. Cabe & Michell report that it contacted its 10000 wealthiest clients to pacify them, unheard of anywhere. But financial panic couldn’t be stopped & UBS, largest bank in Switzerland woke up last Sunday to buy credit Suisse for $3.24 billion with the intervention of the Swiss govt, which is at least at a 60 per cent discount feels TCA Raghvan. Besides the Swiss govt, the Central & State, will support this deal to the extent of$ 280 billion, almost a third of its total resources, reports Reuters. Bondholders are still furious since they have the first right of redemption, but CS is writing off $17.26 billion worth of high risk bonds, while equity holders are getting some equity in UBS. The theory reported by swarajya and TCA Raghvan here is that, CS reportedly dealt with hidden funds of clients who indulged in serious drug & financial crimes, and such illicit transactions led to its doom.

For finance policymakers, global business analysts and bankers, or if I was a Professor at IIM-A my alma mater or Harvard, doing this as a case study, I would identify the following 25 important questions or lessons that such titanic falls throw up.

-If top bank executives suddenly offload their large holdings, knowing their bank health, what are the best checks & balances for this, including information in advance to their Bank boards & SEC?

-Is the very rapid growth of a particular bank 

worthy of a yellow flag, ask ex-Governor of Fed Daniel Tarullo, because excess growth & excess risks should not go hand in hand. Undoubtedly, good performance deserves superlative recognition by rating agencies but is not chipped off as junk soon.

-Jaret Seiberg found both SVB & Silvergate had “ less onerous liquidity rules” which could not match their retail deposits, foreboding catastrophic losses. Should Fed have been careful about these rules?

-Timothy Coffey explored and even concluded that US regulators knew “unrealised losses in bank securities portfolios could lead to trouble “but turned a blind eye. Couldn’t the regulators undertake timely steps, and if not, why should they be absolved of their Accountability?

-FDIC is the only agency which pointed out by the end of 2022, that the entire banking industry had

 “$ 620 billion in unrealised losses on securities” implying that the rot had set in 

and jeopardy was not gaping at just 3 banks.

Why was FDIC not taken seriously by FED times and who is squarely responsible for this act of omission?

-A concomitant issue raised by my IIMA batchmate Vinod is & I quote “what happened to Basel & capital adequacy norms”. Were they overlooked by the powers that be? Shouldn’t they be suitably dealt with?

-While the Justice Department and SEC are now investigating these bank failures, what set of guidelines the Senate must pass, to ensure no one down the line, breaks a law

causing untold damage to the US public, and to some extent, the globalised world at large.

-Morgan Stanley‘s assessment is that funding for startups henceforth, may not be easy for a couple of years, with such erosion in banks’ health. The ultimate loss is the innovative entrepreneur. Who should help them now? To just survive, Garry Tan has calculated that unicorn startups need $ 300 billion & smaller ones with less than a billion-market cap, will need$250 billion this year. God alone can help the 16 million US employees at VC and private equity-owned companies. Stanley estimates a large number of startups consequently dissolving due to “ cash burn rates” as he puts it.

Is there any out-of-the-box solution for them? According to him, startups will be forced to draw resources from secondary transactions “at deep discounts to prior formal rounds”

-Are the regulators quickly looking at buyers to sell the collapsed banks so that they can recover money used “to cover the deposits“? Many, after due diligence, have declined. Why? What is its real net worth today? But buyers are interested but want huge discounts & govt support.

-Big fallout of this is the fear of recession.

Some are questioning whether Fed has further capacity to increase interest rates.

As Tellis Demos enquired, whether the banking industry which had gone off “Washington’s radar “would ever regain the confidence of the govt, is the moot question or is public memory short?

-Fed meets this week to assess the future. Inflation exceeds 2 per cent Fed‘s aim and markets are in a high tide zone. Fed is at a razor’s edge. Calming markets or controlling inflation? Rate hike induces “deep recession “claims Sung Won Sohn an independent analyst. Difficult choices. Judicious decision making required. How?

-Whether 50 basis point hike by president European Central Bank Lagarde was correct 

last week in the wake of the crisis of confidence in Credit Suisse and the likely contagion effect on at least 2 major European banks Societe Generale & BNP PARIBUS. Shares of the latter fell by 8 per cent in a day last week, forcing the Paris stock exchange to close that day. Both are looking for govt support. Will they get it is the trillion-dollar question as BNP PARIBUS has an AUM OF $2.7 trillion.

-Divam Sharma another analyst, feels Fed has a trigger now to stop pushing rates. Why? His assessment is that stopping any further increase will “ensure a rally for equity investors especially for FPI flows into countries like India” with higher growth rates compared to the rest of the world.

-Kranthi Bathini has another perspective as the stoppage of a hike by the Fed, would quieten RBI in its meeting next month and help domestic investment. How far this is true is another pertinent question.

-It is substantially clear now that fears of global consequences are reaching Canada, India and China after touching France, the EU & UK. Chancellor Hunt got 180 tech companies complaining about a loss of deposits hitting the banking industry terribly, reports Bloomberg. No wonder HSBC stepped in to buy SVB UK units for a measly £1.

Who won and who lost are serious questions which time alone will answer.

There are other issues being discussed. Quick action by Fed on 12/3/23

to remove SVB's top guys, protect all depositors & make “additional funding to eligible depository institutions “ for this purpose, may stem the rot to some extent for both SVB & Signature Bank. But shareholders & unsecured debt holders are taking huge hits, enough to send them into a coma. Is it a win-or-loss situation? Is a win win possible at all, through box thinking? Is Musk serious in offering to buy SVB? Can Buffet give any sane advice sought by the government? All these are worth deliberately pensively despite Treasury Secretary showing her recent confidence in restoring order.

⁃ Other points raised are like the one to Bill Ackman who pounced on Adani, & then demanded a bailout for SVB. Are these world-class double standards or standard operating procedures?

⁃ To Raghu Ram Rajan who is a renowned professor in finance & economics but says has no clues about Bank collapses in the US, retorts Siddharth Dey, in a tweet, that begs an earnest reply.

⁃ To Joseph Gentile, chief administrative officer of SVB, with a dubious past as CFO LEHMAN BROTHERS of 2008 fame, & his role in the whole game

⁃ To Mos Chandrasekhar who spoke to 450 startups & who has to find ways and means to assuage the feelings of hundreds of Indian startups affected by this global chaos & seeking refuge. He wants Indian banks to help startups.I feel there is enough start-up funding with the Ministry of DPIIT and Indian banks should not expose themselves to unnecessary risks at this time, as economic flu catches instantaneously.

⁃ It is little known that SVB had an 800-manned tech centre in Bengaluru with services provided in engineering, analytics & testing. What happens to all that now is a serious concern.

⁃ Global crisis has hit Sensex and nifty especially the banking sector and bearish sentiment was evident as Uday Kotak commented that this was “an accident waiting to happen “. Analyst Osho Krishan warns of close tracking of developments domestically and worldwide, to ensure minimum risk-taking now. No wonder gold prices have touched the roof at 60000 per gram, an indicator of where wealth is going now.

⁃ To DEA Secy Seth, who feels crisis will not hit domestic banks as they are “well capitalised &well regulated “. He is yet to answer their request to lower dividend pay-out demands this year, to enable them to strengthen their capital base

⁃ Have sanctions on Russia served their purpose at all, or they have propelled a transcontinental financial gloom? Is it time to get the global supply chain in the mode of, business as usual, to stop an escalator speed decline in global financial markets? Isn’t it time for g7 or g20 to say enough is enough, & halt the war? Argentina is in an inflationary spiral & more than 50 countries are crying for debt relief. Who decides the world’s priorities? Who should, in the face of the failure of the security council? I suggest 3 apolitical Nobel laureates, in medicine, economics & peace, be asked by United Nations, to do a quick audit of sanctions on Russia for the world at large, not with a US/ EU perspective.

⁃ Cryptocurrencies are ruining financial stability in the name of financial freedom. They should be banned globally and e-currencies started by Central Banks of all countries. Otherwise, more skeletons will fall from the cupboard, with no place to handle them.

DgbYSw_Screen-Shot-s[6406].jpgThese are gloomy but serious questions in difficult financial times. But the date has come to take the bull by the horns and answer them. Blame-mongering is worse, for it leads to rumour-mongering, which threatens to become a conflagration, causing huge bank runs.

Gandhiji has remembered in crisis always: “We can satisfy everyone’s needs, but not everyone’s GREED"

The author is a retired IAS officer

Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.

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J.K. Dadoo

The author is a retired IAS officer

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