Tag Archives: Banks

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Deutsche Bank Under Fire

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Is Deutsche Bank the next Credit Suisse? Traders think so today as they dump the stock and rush to protect bond holdings.

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From a new report in Bloomberg:

Deutsche Bank AG became the latest focus of the banking turmoil in Europe as ongoing concern about the industry amid a slowing economy sent its shares slumping the most in three years and the cost of insuring against default rising.

The bank, which has staged a recovery in recent years after a series of crises, was the biggest loser among large European bank stocks Friday after announcing a plan to repurchase debt, a move normally seen as a sign of strength. Analysts struggled to explain the selloff, which prompted German Chancellor Olaf Scholz to publicly back the lender.

The cost of insuring against a bank’s default is a key stat. Called a Credit Default Swap (CDS), this protection often soars in price when a bank is close to failing.


One thing in Deutsche Bank’s favor: a big pile of cash. It’s sitting on $179 billion of cash and deposits at central banks, according to its latest annual report.

That means it could pay back 28% of its deposits almost immediately. But the thing is, Credit Suisse had a ton of cash too.

It failed anyway. In the end, no bank can pay back all its depositors right away.

Even US regulators seem concerned. Treasury Secretary Janet Yellen convened a group of top officials this morning in an unscheduled, closed door meeting.

In the end, Germany won’t let Deutsche Bank fail. Neither will the ECB.

Deutsche Bank is the largest bank in Germany by far. It ranks #8 in the entire EU.

Olaf Scholz is not going to let old Granny Durchdenwald lose her life savings.

But that doesn’t mean Deutsche Bank shareholders are safe. Once mighty Credit Suisse is now a penny stock.

I hate bank stocks. Banks often pick up pennies in front of a steamroller, turning in decent profits until they suddenly get crushed.

Perhaps Deutsche Bank will survive as an independent company. Either way, shareholders won’t be sleeping well tonight.

What do you think will happen to Deutsche Bank? Leave a comment and let us know!

Have a great weekend everyone!

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More on markets:

Don’t Wanna Pay 216%? How About a Naked Short?

Interest Rate Time Bomb May Kill Hedge Funds

Executives Dumped Shares Shortly Before First Republic Rescue

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Business

Interest Rate Time Bomb May Kill Hedge Funds

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As March began, hedge funds placed one of their biggest bets of all time. It may be their undoing.

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Traders placed the largest bet in history on increasing short term interest rates. But as a banking crisis spreads, rates may fall, exposing them to huge losses.

From a report out this morning in Reuters:

Hedge funds face huge losses on their record bet that the Fed will go full steam ahead with its aggressive interest rate-raising campaign, after some of the most abrupt and violent swings in U.S. rates and bond market pricing in living memory.

Commodity Futures Trading Commission (CFTC) data shows that speculators held the largest ever net short position in three-month SOFR rate futures in the week ending March 7, only a few weeks after amassing a record short position in two-year Treasuries futures.

Now, their trade is deeply underwater:

Implied rates then plunged as much as 200 basis points in a week as traders drastically redrew their Fed outlook. The two-year Treasury yield posted its biggest fall since the Black Monday crash of 1987, and U.S. bond market volatility surged the most since Lehman’s collapse.

Many funds have already lost 10% of their assets or more so far this month. And as bank after bank fails, the bleeding may get even worse.

A month ago, most of us thought the Federal Reserve would keep raising rates. Inflation was the priority.

Now, with a cascade of bank failures, the Fed may cut rates to stop the crisis. Markets are predicting the Fed will lower rates this summer.

Already, hedge funds are going bust.

Adam Levinson’s Graticule Asia lost 25% this year, most of it in a few days after the SVB collapse. The fund has closed its doors.

As an investor, sometimes I think I know where markets are heading. But I never put too many eggs in one basket.

I’m playing with my own money. But most hedge funds aren’t.

And it’s not hard to tell.

What do you think will happen to these funds?

Leave a comment and let me know!

More on markets:

Executives Dumped Shares Shortly Before First Republic Rescue

SVB Fallout

Goldman Sachs Under Federal Investigation

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Business, Technology

Executives Dumped Shares Shortly Before First Republic Rescue

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Top executives dumped shares in First Republic bank this year, shortly before its near collapse and rescue. These sales were not part of pre-announced plans.

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From The Wall Street Journal:

Top executives of First Republic Bank sold millions of dollars of company stock in the two months before the bank’s shares plummeted during the panic over the health of regional lenders.

Executives had been selling for months, the documents show. Executive Chairman James Herbert II has sold $4.5 million worth of shares since the start of the year. In all, insiders have sold $11.8 million worth of stock so far this year at prices averaging just below $130 a share. The bank’s chief credit officer, its president of private wealth management and chief executive together sold $7 million worth of stock.

None of the filings for the executives’ sales indicate that they were executed under 10b5-1 plans, which are pre-scheduled sales designed to insulate insiders from accusations of trading on nonpublic information.

Their timing was great! The stock is down 72% this year, with most losses coming in the last week.

If authorities can find evidence that they knew the bank was teetering and didn’t warn investors, these men belong in prison.

Today, some of the country’s largest banks are working on a rescue for First Republic. From Bloomberg:

The nation’s biggest banks are close to agreeing upon a plan to deposit as much as $30 billion with First Republic Bank in an effort supported by the US government to stabilize the battered California lender, according to people with knowledge of the matter.

Customers have been pulling billions from First Republic since the failure of Silicon Valley Bank. This appears to have put First Republic on the brink of being unable to redeem deposits.

First Republic does not appear to be insolvent. But no bank can redeem a huge portion of its deposits at once.

And given these large, well-timed insider sales, the bank seems to have considerable internal dysfunction.

I’ve said it before, and I’ll say it again: diversify your deposits.

You can split 50/50 or into even smaller chunks. But be sure to include one or more of the Big 4 banks (JPM, Citi, BoA, Wells).

They can be a pain in the neck to deal with. But they’re the most Too Big to Fail-y banks out there.

What do you think an investigation of First Republic will find?

Leave a comment and let me know!

More on markets:

Time to Bail on Credit Suisse

Where Should Startups Put Their Money Now?

SVB Fallout

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Business

Time to Bail on Credit Suisse

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tl,dr: Get out of Credit Suisse.

The Swiss bank is suffering severe stress today, with its stock and bond prices plummeting. Depositors and investors are questioning its ability to survive.

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The Swiss National Bank has pledged to offer liquidity to CS if necessary, per Bloomberg.

However, the stock has barely reacted as of Wednesday afternoon in New York. Investors seem unconvinced.

What has gone so wrong at Credit Suisse?

Just about everything. Again from Bloomberg:

Credit Suisse’s failings have included a criminal conviction for allowing drug dealers to launder money in Bulgaria, entanglement in a Mozambique corruption case, a spying scandal involving a former employee and an executive and a massive leak of client data to the media. Its association with disgraced financier Lex Greensill and failed New York-based investment firm Archegos Capital Management compounded the sense of an institution that didn’t have a firm grip on its affairs. Many fed up clients have voted with their feet, leading to unprecedented client outflows in late 2022. 

Problems came to a head today as CS’s largest investor, the Saudi National Bank, refused to provide more capital to CS.

Credit Suisse appears to have ample reserves to pay depositors.

It has enough cash and highly liquid assets to pay back half its liabilities quickly. It even has 62 billion Swiss francs of cold, hard cash on deposit at central banks.

Yet its stock is in the toilet, and its bonds trade at levels implying a strong possibility of default. The cost to insure its bonds through credit default swaps is also sky high.

Are all 3 of these markets wrong? Maybe, but I wouldn’t want to make that bet.

For companies and individuals, there is little downside to pulling your money out.

Even if the Swiss National Bank, Federal Reserve, or others bail them out, there could be delays in getting your money. That was the case with SVB.

Can you afford that delay?

In the end, I doubt central banks will let CS collapse. But things could get very messy in the mean time.

What do you think of the problems at Credit Suisse?

Leave a comment and let me know!

More on markets:

SVB Fallout

Where Should Startups Put Their Money Now?

SVB Fails

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Business, Technology

SVB Fallout

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All modern economies use money. You have to put your money somewhere. Shouldn’t it be safe?

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The Federal Reserve thinks it should be, and I couldn’t agree more. Over the weekend, the Fed, Treasury and FDIC acted decisively to stop the banking crisis.

From Bloomberg:

The Federal Reserve brought out its bazooka Sunday, guaranteeing funds for any bank whose depositors might have been clicking “withdraw” over the weekend. The central bank saw clear potential for a systemic crisis in the closures of SVB and Signature Bank and acted to kill it before it got started.

Our government acted decisively and all US bank accounts are now protected.

So what’s the future for banking in America?

You have to put your money somewhere, right? And whether you’re an individual or a business, you have to assume that place is safe.

Let’s make regulation catch up with reality.

There should be no limit on FDIC insurance. Any person or business putting its money in a bank account should have peace of mind.

After all, $250,000 is a lot to an individual, but it’s not much for a business. That may not even cover a single payroll.

What’s at stake here is hard working Americans getting the paychecks they earned. No worker should be unable to pay her bills because a bank made bad decisions.

What’s more, individuals and businesses aren’t equipped to figure out how safe a bank is. That’s the job of regulators.

If the regulators fail to prevent disaster, we shouldn’t take it out on the depositors.

But isn’t this a license for banks to do anything?

Not with the right regulations. We should expand stress tests and tight regulation from just the biggest banks to all banks.

This could prevent another SVB.

We should also increase FDIC insurance premiums. Banks pay these premiums to get FDIC insurance.

With the insurance expanding, the premiums must also rise.

And what about the SVB executives and shareholders?

Screw ‘em. Let them lose their jobs and money.

They made bad decisions, and they deserve to pay, big time.

But you know who doesn’t deserve to pay? Hard working people counting on a paycheck.

Finally, what should founders do post-SVB? Create multiple bank accounts.

Perhaps 50% of your money goes into a startup-friendly product like Mercury. The other half can go in old economy but rock solid JP Morgan.

Splitting cash across several accounts, including one or more Big 4 Banks (JPM, BoA, Citi, Wells) is wise. Expect many VC’s to require it.

We dodged a very big bullet this weekend. Let’s celebrate!

More on tech:

SVB Fails

Venture Funding Down 65%

Everything You Always Wanted to Know About Venture (But Were Afraid to Ask)

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Misfits Market

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Business, Politics

Chinese Stop Paying Mortgages as Real Estate Crisis Spreads

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Chinese homebuyers are refusing to pay their mortgages in a boycott that’s spreading across the country. Many fear the homes they’re paying for will never be finished.

Now, suppliers to builders are also defaulting on loans.

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From ABC News Australia:

A fast-growing mortgage boycott across dozens of cities in China has prompted some property suppliers to cease their bank loan repayments, raising fears the escalating situation could trigger a further downward spiral in the sector and even threaten the country’s financial stability. 

Hundreds of landscapers, sculpture-makers and construction companies have expressed their anger that they have been bled dry because some debt-saddled developers did not pay their bills while they continued to service or help build apartments, Chinese media Caixin reported.


Chinese usually buy homes and start making payments before they’re complete.

The boycott has spread to 90 cities in mere weeks.

The Chinese government is censoring reports on the boycott, per Bloomberg. So the situation inside China may be even worse than reported.

A real estate meltdown is a catastrophe for the average Chinese saver. Chinese put 70% of their wealth in real estate, compared to 35% in the US.

The property sector accounts for about 25% of GDP. China’s GDP growth has flatlined as the sector sputters.

And it gets worse. Chinese banks have lent huge sums to property developers.

As developers default, bank runs are spreading across China. Government thugs have beaten protesters desperately trying to recover their life’s savings.

Amid a bleak economy and constant COVID lockdowns, workers are struggling. Youth unemployment has spiked, hitting over 19% last month.

Consider the picture for the average Chinese person: most of your savings are tied up in an apartment that will never be completed, the rest is in a bank that’s insolvent, and your only child can’t find work.

Revolution might start to sound good.

In the US, we know that a property crisis fueled by heavy debt can spread quickly. Huge liabilities pop up at different institutions unpredictably.

This undermines confidence in the entire financial system. When that happens, you get a financial crisis.

That’s what China is facing today.

At stake is the legitimacy of the Chinese Communist Party. Officials have staked their power on offering ever-increasing living standards.

Those days may be over.

I can only hope that Chinese citizens prevail and oust a government that has brutalized them for generations.

More on China:

Mass Protests in China as Bank Runs Continue

Will Evergrande Spark a Global Financial Crisis?

China Is Killing its Tech Industry

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Photo: Unfinished Chinese apartment buildings being demolished in Kunming, China

Business

Wall Street Banks Turn on Each Other as Federal Probe Looms

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Morgan Stanley has been under federal investigation since February. Now, banks are turning on each other and unidentified sources are leaking information.

From a report that broke overnight in the Financial Times:

…according to reports, two of Morgan Stanley’s competitors, Credit Suisse and Goldman Sachs, have gone so far as to alert the US Attorney’s office and the Hong Kong regulator SFC, respectively, about “potential issues” around block trades executed by Morgan Stanley.

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The SEC and DOJ are investigating Morgan Stanley’s stock trading business.

Morgan frequently handles large “block trades” for institutional investors. There are allegations that it may have tipped off hedge funds to big sales that could move markets.

This would allow hedge funds to short the stock before the big block of shares is sold. Such a trade could offer quick, easy profits.

Why would Morgan do this? Because hedge funds are among the bank’s best clients.

Hedge funds have “prime brokerage” arrangements with big Wall Street banks like Morgan. Those trading accounts mean lots of juicy fees for the bank.

Let’s say you want to get or keep a lucrative customer. You might be tempted to give them valuable information, even if it’s illegal.

Nothing has been proven against Morgan yet. It’s possible that they were just conducting big trades in a straightforward and honest way.

But watching these big banks turn on each other gives me pause. I have rarely seen major banks reporting each other to regulators, as Goldman and Credit Suisse did with Morgan.

What’s more, Morgan has suspended some of its block trading staff. Why would they do that if they had done nothing wrong?

But it’s not just the big banks that are talking. Unidentified whistleblowers are also offering up information on possible wrongdoing at Morgan:

This noise goes well beyond the normal thrust-and-parry of a hyper-competitive business. Visceral grudges and grievances underlie these complaints; the Feds are on the case; unidentified people “close to the investigation” are briefing the media and naming names; and careers, livelihoods and reputations hang in the balance.

Perhaps it’s all a big misunderstanding. But my gut tells me where there’s smoke, there’s fire.

Do you think Morgan and other big banks help hedge funds front run trades? Leave a comment at the bottom and let me know.

More on markets:

AMC Fails to Deliver Pass 2.6 Million in New Report

New Law Could Put Big Short Sellers on the Endangered Species List

Bill Ackman Loses $4.8 Billion

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Misfits Market

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Business, Politics

Mass Protests in China as Bank Runs Continue

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Major news out of China as over 1,000 protestors in Zhengzhou demanded their savings back:

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There are runs on several Chinese banks. The depositors, desperate not to lose their life’s savings, are taking great risk to speak out.

From the Indian Express:

In a rare large protest in China, over one thousand angry bank depositors, who have been protesting for access to their frozen funds, faced off with the police in Henan province leading to a violent clampdown Sunday.

Depositors of four rural banks in this central province have not been able to withdraw their funds since April. Sporadic protests have been going on since May.

Many smaller Chinese banks promised high interest rates to attract deposits. They advertised those rates on platforms run by Chinese tech giants like Baidu and JD.

Now, these small banks are finding themselves unable to pay those high rates. Worse yet, some banks have been infiltrated by criminals who are siphoning money out:

In the present case it is being alleged that these banks attracted deposits by offering attractive terms and high interest rates. A report in the South China Morning Post in May said that while Bank of China offers 2.75% a year interest on five-year deposits, the found banks in question were giving around 4.5% a year on their deposit products through third-party platforms.

Also, a statement by the Henan police on July 10 said that a criminal group had gradually taken control of several rural banks and was moving out funds.

Behind the peril facing Chinese banks is a weak economy. Intense COVID lockdowns this year have hammered economic activity.

An overheated property market is also crumbling. This has triggered defaults at major property developers, including Evergrande.

Something interesting happens when people see depositors struggling to get their money out. They start wondering about their own bank.

This is how a contagion could spread through the Chinese banking system. Cue It’s a Wonderful Life, without the happy ending.

The Chinese government’s violent repression of small savers in Zhengzhou may be just the beginning.

China is in a sensitive period. The 20th Party Congress, enormously important to the Communist elite, happens in November.

At that meeting, Xi hopes to secure a third term in office and effectively become leader for life. He and his underlings are likely to repress any “disturbance” during this time.

Already, China’s massive surveillance apparatus is being turned on these small savers.

Zhengzhou protesters have had their “health codes” turned off. Without the green QR code on their phones, they can go nowhere and do nothing.

The health code system was created to stem COVID. Predictably, it’s now being turned against dissidents.

I’m not a particularly religious man, but this Orwellian act reminded me of a passage from the Bible:

It forced all the people, small and great, rich and poor, free and slave, to be given a stamped image on their right hands or their foreheads,

so that no one could buy or sell except one who had the stamped image of the beast’s name or the number that stood for its name.

Revelation 13:16-17

I hope these decent, hardworking people will get their life’s savings back. I also hope we always resist this type of tyranny here at home.

What do you think is next in China? Leave a comment at the bottom and let me know.

More on China:

China’s Real Goal in Tech Crackdown: A Regimented, Obedient Society

How China’s Tech Industry Dies

China’s Tech Crackdown Means Economic Decline

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Business

Credit Suisse May Need Up to $1 Billion After Huge Losses

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Credit Suisse may soon raise over $1 billion in new capital after a string of huge losses last year. From a Reuters report this morning:

Credit Suisse is in the early stages of weighing options to bolster its capital after a string of losses has eroded its financial buffers, two people with knowledge of the matter told Reuters.

The size of the increase would be likely to exceed 1 billion Swiss francs ($1.04 billion), but this has not yet been determined, said one of the people, who declined to be named because the deliberations are still internal.

The cash injection would help Switzerland’s second-biggest bank to recover from billions of losses in 2021 and a series of costly legal headaches.


Credit Suisse lost $5.5 billion last year just in trades with failed hedge fund Archegos Capital Management. It has since closed the prime services business that serviced Archegos and other funds.

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Risk controls have been almost nonexistent at the Zurich-based bank. Big dealmakers have routinely overruled compliance staff, with predictable results.

In my view, Credit Suisse would not be seeking to raise capital in this bear market unless it badly needed it. Stocks are crashing, the IPO market is closed, and bond markets are volatile.

If the Reuters report is accurate, I suspect Credit Suisse is getting desperate.

If Credit Suisse is in a bind, investors are apt to drive a hard bargain. The terms of a financing may be punitive, if it happens at all.

Any new equity financing would also dilute existing shareholders, making their shares worth less. Those shareholders are already reeling from a 37% loss in the last year.

The best way for Credit Suisse to avoid scandals and massive losses in the future is to change its employees incentives. When a banker that brings in a big deal gets a huge bonus and a promotion regardless of how risky the deal is, other bankers take note.

Rather than compensating employees for individual success, Credit Suisse should take a page out of Silicon Valley’s playbook.

Tech companies incentivize employees to work together for the long term success of the business by granting equity. This equity often comes in the form of Restricted Stock Units (RSU’s) that vest over 4 years.

Employees only win if the business as a whole wins. And there’s no incentive to make a reckless deal for a short-term pay-off.

I’ll be closely following any Credit Suisse fundraise. But even billions more in fresh capital won’t change the bank’s dysfunctional culture.

Do you think Credit Suisse is in trouble? And what other financial institutions could be next?

Leave a comment at the bottom and let me know!

More on markets:

This Is Why Credit Suisse Keeps Getting Punched in the Face

$6B Hedge Fund Cut Off from Trading As Investigation Looms

Citadel Adds Millions to AMC Options Bet

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Business

This Is Why Credit Suisse Keeps Getting Punched in the Face

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Credit Suisse keeps getting smacked. Let’s review a few of their recent scandals:

  • $4.7 billion charge for losses in trades with Archegos Capital Management, the imploding hedge fund
  • $1.5 billion loss likely in dealings with collapsed supply chain finance company Greensill Capital, just three weeks prior
  • Bonus scandal: Former CEO Tidjane Thiam spied on employees and was forced out in February 2020

So they’ve been busy! Why is this one company stumbling from cliff to quagmire?

A major factor appears to be its bifurcated business, which focuses on both asset management and investment banking, but is too small to be a big player in either market. So, in order to win business from its bigger competitors, it has to offer better terms and do worse deals.

In reality, the asset-management unit, which brought in Greensill, and the investment bank, which handled Archegos, were too small to square off with Wall Street giants. The bank tried to make more money from fewer clients than rivals with larger balance sheets and ended up overlooking risks, the executives said.

There were clear warning signs on both Archegos and Greensill.

There were clear warning signs on both Archegos and Greensill. Archegos founder Bill Hwang had been sanctioned by the SEC for insider trading and banned from handling client money, which is the entire reason he started Archegos in the first place. It was a family office, managing just his own family’s money, due to that SEC ruling. Credit Suisse thought the risk was limited because he wasn’t managing client money, but failed to consider what would happen to its own funds!

Greensill too had come under scrutiny early enough to avert problems, but nothing was done:

In 2019, members of the credit-structuring team escalated its alerts about Greensill to the bank’s reputational-risk committee, the person familiar with the funds said. They had become concerned Greensill might be taking operational shortcuts.

Interestingly, the dynamic of Credit Suisse agreeing to anything in order to win business from larger competitors was played out by its client Greensill as well:

Mr. Greensill signed up some big, credit-rated companies. To wrest those customers from big banks, Greensill had to offer competitive terms that didn’t make it much money, according to people familiar with Greensill’s business.

Credit Suisse seems to lack any internal controls whatsoever, and I strongly recommend investors avoid

Credit Suisse seems to lack any internal controls whatsoever, and I strongly recommend investors avoid it. We can also gain a broader lesson from this fiasco. If you’re a smaller company trying to get into a market, don’t do disadvantageous deals just to get some market share. You expose yourself to too many problems that will blow you up before you ever get a chance to compete with the big boys.

For more on Archegos, check out these posts:

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Photo: “Punch to the Face” by Ninja M. is licensed under CC BY-NC-SA 2.0