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Finance

But bankers are now paid in stock

Executives at Silicon Valley Bank (SVB) and Credit Suisse took substantial risks. SVB proactively expanded the bank’s deposits, some might say excessively. These depositors were uninsured and undiversified. And back when interest rates were low, the bank invested significantly in US government bonds, which was fine at the time. But when there were signs that interest rates were rising and creating substantial interest rate risk, managers left this portfolio unhedged and unchanged. How come SVB managers took those risks? It seemed that they lacked “skin in the game”.

The risks taken by executives at Credit Suisse were of a different nature, but still substantial. By becoming involved in such companies as the now defunct Greensill and Archegos, the bank’s capital took a hit. The fines it has accrued after facing scandal after scandal have also bitten into its capital. It can be said that those involved also lacked skin in the game.

Their wages are pretty good, sure. But their fortunes are in stock in the bank. How much skin do you want them to have?

Let’s take the SVB example. After its failure, depositors were bailed out, and shareholders made to take losses. So far, so good. Except that some executives at the very top bore almost no losses at all – in fact, they made a profit. They sold their shares two weeks before failure, when there was no public information yet about the state of SVB, so its shares were still high. The problem is that they did this perfectly legally. Here’s how.

Quite, those shares were a significant part of their wage packets. That’s how they got them.

This weekend’s trade is CS and UBS

So, the talk is that UBS is being lined up to take over CS.

Given that markets are closed (well, not really, but, you know) we are free to speculate without anyone running off and putting the pension down on green or red.

So, the usual trade in a takeover is to buy the target, sell the buyer. They always overpay is the market reaction. So, CS at $2 (the US quote) and UBS at $19 (ditto). Buy CS and have an equal amount of money selling UBS short.

But that assumes that a bank, in extremis, takeover is like a normal takeover. Maybe the Swiss are going to claim that CS is headed for zero by Wednesday. Therefore UBS should pay 1CHF for the whole thing. At which point, obviously CS plunges and UBS soars having got a very grand deal there.

Or even, UBS gets CS for 1 CHF and everyone thinks this is Lloyds buying HBOS all over again and sells out of everything.

My belief – belief, on no inside knowledge at all – is that UBS has to pay a premium to the current CS price to clinch the deal. So, CS rises, UBS falls on announcement.

We’re about to find out, aren’t we? Also, lucky the markets are closed to that no one can put the pension on this.

A little piece of elegance

This is nicely illustrated in the following chart and table, taken from Raymond James’s Municipal Bond Investor Weekly. They show that the yield on 10-year Single-A-rated Munis trades below USTs, but the Tax Equivalent Yield of 10-year Single-A-rated Munis traded UST+126bps, which is maybe roughly where a know-nothing foreigner might expect them to trade given the ICE BofA Single-A corporate index was marked on the same day at UST+128bps.

Investors look at post tax yields on their investments, not pre tax yields.

That’s why US municipal bonds – which are income tax free on their interest – trade at a lower yield than US Treasuries, despite having higher risks, risks more like corporate bonds than Treasuries. Or, or course, why munis have lower yields than corporates with the same risk profile.

Now, anyone who wants to say that folk don’t look at their post tax income when deciding upon an investment does have to explain the prices in this $4 trillion muni market.

Carry on.

Well, sorta and maybe

The bank’s credit default swaps, which investors buy to protect themselves from a company defaulting on their debts, surged to a new record high as speculation swirled that it could be forced into a bailout.

Not wholly and exactly true.

The Credit default swap market is highly liquid and often cheap to trade. Certain bellwether issues don’t in fact trade upon actual evaluations of credit issues. Rather, upon speculative sentiment.

OK, so that should be speculative sentiment about credit issues but life gets more complex than that. What does everyone else think about credit issues?

For example, imagine you thought that the banking system was looking a bit fragile. You want to be able to bet – make money off – the idea that banks are going to be worth less. The CDS of a major like Credit Suisse is a great place to go take a bear position.

Yes, some of it will be speculation that CS itself will stop paying on its bonds. Don’t know whether it’s got contingent capital bonds or not but if they do they’d be hit hardest, obviously. But some of this is just going to be that we’ve a herd movement here and the CS CDS is a highly liquid market in which you can place a bear position.

The point of this being that we shouldn’t take the full change in the CDS as being the full estimation of the default possibility. Simply because some are using the instrument for a different speculative purpose. Information loops and all that…..

Ahh, that’s how they’re doing it

Similarly with the announcement by the US Federal Reserve that it will provide as much funding as banks need to meet deposit withdrawals, with lodged collateral valued at par, not the seriously eroded value much of it now commands in the markets.

Banking aficionados will like that one. About time to start buying US banks again with guarantees like that….

Ah, yes

At one point its investment portfolio had swelled to 57pc of total assets. SVB started to look less like a bank and more like an investment firm with a massive unhedged position in US government debt.

Say – imagine – that capital needs to be 10% of total assets. Not far off reality.

And you’ve 60% of assets in long bonds. Which then fall in price as interest rates move from zero to 4%. None of those numbers exactly right but.

We could certainly believe – depending upon how long those bonds were – that the 60% has fallen in value so much that the 10% capital is all gone.

Which is, roughly enough, what did actually happen.

Jeepers Goddamit

Take UK Power Networks, the National Grid power distributor. Last financial year, according to Companies House, it made a staggering £1.3bn pre-tax profit. Billions in profit, bonanzas for the executives and shareholders, while there are only real pay cuts on offer for workers.

Err, no, no it didn’t. And this is a union leader trying to tell us stuff.

EBITDA and profit really are not the same thing.

Biden’s lying

And he states firmly, twice, that “No losses will be born by taxpayers”.

Instead, the money will come from the fees that banks pay into America’s deposit insurance fund.

The fees are calculated on up to $250k per account. So, by definition, the fees won’t cover greater recovery than that.

Now it’s possible that there is no loss here at all – it’s illiquid, not insolvent. But even then what Biden’s said above is wrong.

Fun times with American banks

OK, so Silicon Valley Bank, a bank run. Triggered by their losing their capital in long dated Treasuries. OK.

Now the grubby detail. So, if you hold bonds to maturity then you don’t have to mark to market. SIVB was doing exactly that. The bond portfolio had large losses in it because they’d bought long dated Treasuries then interest rates rose. In the portfolio marked hold to maturity you don’t have to crystalise this loss. It becomes more of an opportunity cost than a direct bite out of the capital base.

SIVB had a forced conversion of that hold to maturity portfolio to a tradeable on the market one. Which is when you do have to mark to market. At which point their capital base vanished – those opportunity costs suddenly crystalised into a vanishing of their capital.

One amusement here is going to be watching where ‘Tater goes with this one. Should banks mark to market? Or not? It’s possible to divine either response from his earlier writings. Also, look how lovely and safe government debt is as a savings vehicle, eh?

But the actually important point is, well, who else has that same gremlin on their books. Losses on the hold to maturity portfolio which will bankrupt the bank if crystallised?

My guess – guess – is that it’s quite a lot of people.

Maybe necessary but not good

US financial regulators rolled out emergency measures Sunday night to stem potential contagion from the collapse of Silicon Valley Bank. The measures include ensuring that depositors with the failed bank would have access to all their money on Monday morning.

Regulators announced the measure in a joint statement from the treasury secretary, Janet Yellen, the Federal Reserve chair, Jerome Powell, and the Federal Deposit Insurance Corporation (FDIC) chair, Martin Gruenberg.

“Depositors will have access to all of their money starting Monday, March 13. No losses associated with the resolution of Silicon Valley Bank will be borne by the taxpayer,” they said in a statement.

The announcement came as Signature Bank was closed on Sunday by regulators, the second to fail in a week. Depositors in Signature would also be made whole, the statement said.

Guaranteeing all deposits, well, they’ve not been paying the insurance fees so why should they gain the insurance?

But on the other hand, runs are runs and you do have to head them off at the pass.

So, who is the company run for?

In a post that could be viewed by all staff, the long-serving employee criticised bosses and the direction in which they were taking the lender, saying Monzo had lost its way and was now overly focused on turning a profit at the expense of employee wellbeing.

The message was swiftly removed by management who said it was unduly critical and diminished the hard work others were doing.

Yet in a show of defiance, other employees started re-posting screenshots of the original message, ultimately forcing management to capitulate. The situation was described by one ex-employee as “a fiasco”.

Two years later and Monzo’s mission to turn a profit is in its final stages, with the challenger bank expecting to breakeven in 2023 after years of losses. But at what cost?

In a series of interviews with current and former employees, The Telegraph has been told how the digital lender has evolved from being a supportive employer to one that turns the heat on its staff as it races to appease impatient investors.

The owners, obviously, for all here at least are capitalists. But that bankers don’t grasp that is a fairly difficult sign of the times, innit?

This is fun

He transferred 350,000 WANdisco shares at 320p to investment firm Equities First in return for a three-year loan. Sources said the loan was continuing, despite the share suspension that makes it impossible to value Richards’ collateral. He owns 1,836,867 shares, a 2.7 per cent stake.

So, are the shares just partial security? Or is the loan non-recourse – that is, they can’t ask for more security than they’ve already got?

That second would be very weird but I seem to recall something about them doing that indeed very weird thing before.

On the other hand, if he’s already spent the money then he’s bust, inne?

Yes, yes, you could say that

On the Seeking Alpha page for a certain bank:

Warning: SIVB is at high risk of performing badly. Learn why

Yes, yes, you could say that.

BTW, the answer as to why this hasn’t changed is that SA is run by Orthodox who take it seriously. Nowt happens between sunset Fri and dusk Sat.

Jeez

The bank was unable to lend out these funds at the same frantic pace with which they came in. Instead, the company invested in long-term debt securities related to government bonds and US mortgages.

Long term for the yield. But, of course, that maximises losses when rates rise. Which is actually what killed them.

BTW shows the Spudtastic value of investing in government bonds, dunnit?

Ouch

WANdisco (LSE: WAND), the data activation platform, provides the following revision to its anticipated trading performance and financial position.

Following investigations undertaken by the CFO and CEO, and as reported to the Board of Directors of the Company (the “Board”), significant, sophisticated and potentially fraudulent irregularities with regard to received purchase orders and related revenue and bookings, as represented by one senior sales employee, have been discovered. These irregularities give rise to a potential material mis-statement of the Company’s financial position.

The identification of these irregularities will significantly impact the Company’s cash position and lead to a material uncertainty regarding its overall financial position and significant going concern issues. The Board now expects that anticipated FY22 revenue could be as low as USD 9 million and not USD 24 million as previously reported. In addition, the Company has no confidence in its announced FY22 bookings expectations.

As far as I can tell that is revenue they’re talking about too, not net revenue.

*Whistles cheery tune past the graveyard….*

WANdisco’s technology allows businesses to move large amounts of data into cloud computing, a process that can be time-consuming and fraught with risks.

Last year its sales rose by 1,200pc to $127m after what it described as the “rapid proliferation” of the Internet of Things.

Well, maybe it did……

Oh for fuck’s sake Willy

In 2000, around 42% of the shares on the London Stock Exchange were owned by insurance companies and pension funds; today, it is about 6%. British funds backing risk and enterprise on any scale have all but disappeared.

So G Brown changing pension tax reliefs, the govt borrowing a couple of trillion, the rules insisting that defined benefit pension plans – as they mature into paying pensions – move into gilts and out of shares, you’re now saying that all of these are a bad idea, are you?

The deliberate policy of moving pensions, especially, from funding equity to funding govt borrowing is something you now want to reverse?

Or are you so damn stupid you’re not even aware of what you’re saying?