The U.S. labor market is finally showing signs of cracking , but next week’s inflation data will be key in determining whether the Federal Reserve puts an end to its regime of rate hikes. The past week has seen reports showing job openings dropping , unemployment claims coming in higher than expected and layoffs outside of the technology sector. Friday’s jobs report could surprise to the upside again, but many economists expect the labor market to continue to weaken in the months ahead. Fed officials have been pointing to the tight labor market as an area of concern for inflation, using it as evidence that it hasn’t tightened rates enough. But after the regional banking crisis in March, traders have started to dial back their expectations for Fed rate hikes this year. Next week’s readings for consumer and producer price indexes could cement the case for a Fed pause, even as central bankers like Cleveland Fed President Loretta Mester call for rates to rise higher still. “I know the Fed has said they would like to [keep hiking]. Friday’s employment data will play into that, of course, but I think more important is the CPI and PPI, which we get next week,” said Randy Frederick, managing director of trading and derivatives at Charles Schwab. The stock market has cooled in the first week of April, with the Nasdaq Composite falling three straight days as investors shifted to defensive sectors. Utilities and health-care stocks have outperformed while bond yields have dropped, moves that could signal investors are battening down the hatches for a recession. XLV 5D mountain Health care stocks have outperformed in April But if next week’s inflation data shows that prices are also cooling, that could be a relief for investors, said Phillip Toews of Toews Asset Management. “I’d be biased toward market upside right now, for the two reasons that there’s so much money betting on risk off and north of $5 trillion in money markets and Treasurys that is potentially going to come in,” Toews said. “The markets have wanted real traction on the Fed pivoting for forever, and I think we may have just seen that,” he added. Earnings ahead Next week will also feature the first big reports of the first-quarter earnings season, with Delta Air Lines , JPMorgan Chase and a handful of other names set to report. After months of strategists and investors complaining that earnings estimates are too high, they’ve started to fall — but with a catch. “Consensus expectations are for EPS to fall by 7% year/year, the largest decline since 3Q 2020 and a significant deterioration from the -1% year/year growth posted in 4Q 2022. However, if analyst projections are realized, this quarter will represent the trough in S & P 500 earnings growth,” Lily Calcagnini and David Kostin of Goldman Sachs said in a note to clients Thursday. If the trough in earnings is close, then the stock market could be in for a big year. But more quarterly reports like Simply Good Foods could yield a different scenario. On Wednesday, the packaged-food company beat estimates for its quarter ended Feb. 25, but it kept its full-year sales forecast the same and warned that gross margins were under pressure. The stock fell more than 4% that day. In other words, the forward-looking earnings forecasts may still be too optimistic. “In a sense, it is encouraging to see that estimates more realistically reflect the upcoming economic slowdown, but when one looks at 2024 estimates, they call for 12% growth. Likely that number might have to come down as well,” said Angelo Kourkafas, investment strategist at Edward Jones. Calendar Monday: Earnings: Tilray Brands 10:00 a.m. ET – Wholesale inventories Tuesday: Earnings : Albertsons, CarMax 6:00 a.m. ET – NFIB small business index Wednesday: 8:30 a.m. ET – Consumer price index 2:00 p.m. ET – FOMC minutes Thursday: Earnings: Progressive, Fastenal, Delta Air Lines, Infosys Ltd. 8:30 a.m. ET – Jobless claims 8:30 a.m. ET – Producer price index Friday: Earnings: UnitedHealth, JPMorgan Chase, Wells Fargo, BlackRock, Citigroup, PNC Financial 8:30 a.m. ET – Export and import price indexes 8:30 a.m. ET – Retail sales 9:15 a.m. ET – Industrial production 10:00 a.m. ET – University of Michigan consumer sentiment 4:15 p.m. ET – Fed H.8 data on assets and liabilities of U.S. commercial banks
Recent banking turmoil in the U.S. and Europe has been a source of panic, but analysts are pointing to a pocket of opportunity: the preferred shares of the big banks. “Of all the asset price movements driven by the banking panic in the past few weeks, one of the few notable pockets of value created in markets appears to be subordinated financial debt,” Citi said in a April 2 note, referring to preferred shares of banks. The large banks are “doing just fine,” Loreen Gilbert, CEO of WealthWise Financial, told CNBC’s ” Street Signs Asia ” on Monday. She said yields on the preferred stocks of the big banks are near 10-year highs. “We are not in favor of buying common bank stocks right now; rather, there is an opportunity in buying preferred stocks of the large banks as the dividends must be paid before common stock holders,” Gilbert added. Preferred stocks have characteristics of both stocks and bonds — they trade on exchanges like stocks but they have a face value and pay dividends like bonds. They are also like bonds in that when the value of the preferred stock goes down, yields rise. They typically offer a higher yield than other fixed income products and can be riskier. Go big Gilbert said she would focus on preferred shares of the United States’ big, national banks instead of its regional ones. “To be on the more defensive side, using preferred that are focused on the large banks is the more cautious way to go and they still provide a nice yield between 5% and 6%,” she told CNBC. She named Bank of America , JPMorgan and Morgan Stanley as her picks. A diversified basket of investment-grade preferred shares now yields more than bonds that are less than investment grade — by the highest level in over a decade, according to Citi. Some have yields near 8%, it said. AT1s Some types of preferred shares of banks are also known as additional tier-1 bonds (AT1s). They recently came under the spotlight, with Credit Suisse’s AT1 bonds losing all their value after the bank was taken over by UBS. AT1s are a type of debt that is considered part of a bank’s regulatory capital. The debt can be written down to zero in emergency situations, such as when a bank’s capital ratio falls below a specific threshold. Still, Citi analysts are bullish on this type of investment, saying it’s an opportunity right now as prices drop after the crisis. “When market volatility subsides, the relative value of preferreds may allow for appreciation potential,” Citi analysts, led by chief investment officer David Bailin, wrote in the note. Other potential catalysts include a decline in inflation leading to Fed rate cuts over the next 12 months, as well as the banking sector stabilizing as management focuses on improving liquidity, they wrote. “Short of a systemic financial event akin to the Great Financial Crisis, it’s unlikely for bank earnings to become so stressed that these banks can’t make dividend payments on their equity – meaning preferred payment performance on coupons is likely to continue,” Citi analysts wrote. “While a higher degree of selectivity will be required, we believe the AT1 market may offer an interesting risk/reward opportunity for investors who properly understand the risks of the instrument and issuer,” they concluded. How to invest There are many funds dedicated to preferred shares, as well as those that offer preferred shares as part of a larger fixed income allocation, according to Citi. Investors can also buy the preferred shares of any company directly. There are exchange-traded funds, such as the Invesco Preferred ETF, that track the ICE BofA Core Fixed Rate Preferred Securities, which is a widely followed index. The index is up more than 6% so far this year. The Global X U.S. Preferred ETF tracks the ICE BofA Diversified Core U.S. Preferred Securities Index. Both have yields of around 6% or more.
Charlie Javice, founder of the buzzy student financial assistance startup Frank, was arrested Monday night and charged by the US Securities and Exchange Commission for allegedly defrauding JPMorgan Chase in the $175 million acquisition of her company.
The SEC said in a complaint filed to a New York District Court that Javice led JPMorgan Chase to believe that Frank had 4.25 million users, when it in reality had fewer than 300,000.
The ensuing SEC investigation alleges that Javice took in “$9.7 million directly in stock proceeds, millions more indirectly through trusts, and a contract entitling her to a $20 million retention bonus” through the 2021 sale of her company.
“Ms. Javice engaged in an old school fraud: She lied about Frank’s success in helping millions of students navigate the college financial aid process by making up data to support her claims, and then used that fake information to induce JPMC to enter into a $175 million transaction,” Gurbir S. Grewal, director of the SEC’s Division of Enforcement, said in a statement.
Javice was arrested Monday night in New Jersey on counts related to the same deal. She is charged with one count of conspiracy to commit banking and wire fraud, one count of wire fraud, one count of bank fraud and one count of securities fraud. If convicted, each count carries a sentence that could mean decades in prison.
She is expected to appear in court Tuesday.
JPMorgan Chase filed a lawsuit to a Delaware court in December claiming that Javice lied about “Frank’s success, Frank’s size, and the depth of Frank’s market penetration” by falsifying a list of student users of her startup.
Despite the Street’s sour view on the banking sector, we continue to own Wells Fargo (WFC) and Morgan Stanley (MS) as special situations that are making progress on internal transformations to boost their values. Wells Fargo is a multiyear turnaround story, encompassing cost-cutting strategies to please investors and improvements to risk-management operations to satisfy both regulators and investors. Morgan Stanley is a business evolution story, leaning into the fee-based revenues of asset management to diminish its dependence on the boom-and-bust cycles of investment banking. These distinct characteristics attracted us to these companies in the first place, and now give us relative comfort in owning their stocks in a market that’s eschewed the sector following the collapse of three U.S. lenders in March . Those bank failures have unleashed a cascade of worries on Wall Street, most of which are generally considered unfavorable for financials. This includes whether the U.S. economy is now more likely to fall into a recession as credit conditions tighten, and whether Washington would pursue a set of tougher regulations that erode the profitability of banks. The latter is particularly concerning for bank shareholders, so much so that JPMorgan Chase (JPM) CEO Jamie Dimon addressed it Tuesday in his closely followed annual shareholder letter. “We need banks to be attractive investments,” Dimon wrote. “It is in the interest of the financial system that banks not become ‘un-investable’ because of uncertainty around regulations that affect capital, profitability and long-term investing. Erratic stress test capital requirements and constant uncertainty around future regulations damage the banking system without making it safer.” Dimon gets to at an important truth in investing: Uncertainty is detested. Bad news for a company is eventually digested by the market and future expectations are readjusted to reflect the up-to-date reality. But uncertainty, especially around future regulatory burdens, can be more difficult to account for and deter investors from committing capital to a company or sector. Right now, the market also remains unsure on whether another domino will fall in the bank sector. Despite a perceived stabilization in recent weeks , Dimon said in Tuesday’s letter he believes “the current crisis is not yet over.” The S & P 500 is up more than 3% since the close on March 8, the last session before Silicon Valley Bank’s troubles began to dominate markets. But the index’s financial sector hasn’t participated in rally, falling 7.5% over the same stretch. Wells Fargo shares have dropped roughly 14%, while Morgan Stanley has dipped roughly 9%. Both stocks were firmly in the red Tuesday, with Wells Fargo sinking below $37 per share and Morgan Stanley below $85 per share. Bottom line Our rationale for investing in Wells Fargo and Morgan Stanley — two special situations within the banking cohort — hasn’t changed just because their stock prices have declined. Of course, we acknowledge the bigger picture has become more challenged, and Wall Street has largely lost its appetite for bank stocks. In the short run, that decreases the likelihood that shares of Wells Fargo and Morgan Stanley will rip higher. But at current levels, it is not prudent to let the stocks go. That’s especially true for Wells Fargo, knowing that CEO Charlie Scharf can execute additional restructurings to reduce expenses. “We’re not going to sell it down here,” Jim Cramer said during Tuesday’s “Morning Meeting.” “That’s just ridiculous. It’s just too cheap based on all the cuts they could make.” (Jim Cramer’s Charitable Trust is long WFC and MS. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.
The logo of Morgan Stanley is seen in New York
Shannon Stapleton | Reuters
Despite the Street’s sour view on the banking sector, we continue to own Wells Fargo (WFC) and Morgan Stanley (MS) as special situations that are making progress on internal transformations to boost their values.
Charlie Javice, Founder/CEO of Frank, which is a college financial aid start-up.
Source: JP Morgan
The Justice Department on Tuesday criminally charged Charlie Javice, founder of college financial planning platform Frank, with defrauding JPMorgan Chase out of $175 million.
Javice, 31, is accused of “falsely and dramatically” inflating the number of customers Frank actually had in a scheme to “fraudulently induce” the bank to acquire the startup in 2021, federal prosecutors in Manhattan said. She stood to gain more than $45 million from the alleged deception, they added.
The one-time rising tech star — who was once named as one of Forbes’ 30 Under 30 — was arrested Monday night in New Jersey and is expected in Manhattan federal court Tuesday afternoon.
She faces four counts. They are one count of conspiracy to commit bank and wire fraud, one count of wire fraud affecting a financial institution, one count of bank fraud, and one count of securities fraud. Three of the charges each carry a maximum sentence of 30 years in prison.
“This arrest should warn entrepreneurs who lie to advance their businesses that their lies will catch up to them, and this Office will hold them accountable for putting their greed above the law,” Damian Williams, U.S. attorney for the Southern District of New York, said in a statement.
The Securities and Exchange Commission on Tuesday also sued Javice for fraud in connection with the alleged scheme.
“Charlie denies the allegations,” a spokesperson for her attorney, Alex Spiro, told CNBC. Spiro had no additional comments, the spokesperson said.
JPMorgan did not immediately respond to a request for comment. The bank’s CEO, Jamie Dimon, in January called the acquisition of Frank a “huge mistake.”
The charges come months after JPMorgan filed a lawsuit against Javice alleging she duped the bank into believing Frank had more than 4 million customers. In reality, the startup had fewer than 300,000, JPMorgan said in its suit.
Javice used a data science professor to invent millions of fake accounts after JPMorgan pressed for confirmation of Frank’s customer base, the bank alleged. The suit included emails between the professor and Javice, including when the entrepreneur asked, “Will the fake emails look real with an eye check or better to use unique ID?”
JPMorgan only discovered the discrepancy when 70% of emails sent to a batch of about 400,000 Frank customers bounced back, according to the bank. It shut down the startup in January.
Javice in February filed a counterclaim, saying it was “implausible” that JPMorgan “was led to believe Frank had 4.25 million registered users when its website publicly claimed the company had helped more than 350,000 people access financial aid.”
The banking crisis triggered by the recent collapses of Silicon Valley Bank and Signature Bank is not over yet and will ripple through the economy for years to come, said JPMorgan Chase CEO Jamie Dimon on Tuesday.
In his closely watched annual letter to shareholders, the chief executive of America’s largest bank outlined the extensive damage the financial system meltdown had on all banks — large and small — and urged lawmakers to think carefully before responding with increased regulation.
“These failures were not good for banks of any size,” wrote Dimon, responding to reports that large financial institution benefited greatly from the collapse of SVB and Signature Bank as wary customers sought safety by moving billions of dollars worth of money to big banks.
In a note last month, Wells Fargo banking analyst Mike Mayo wrote “Goliath is winning.” JPMorgan in particular, he said, was benefiting from more deposits “in these less certain times.”
“Any crisis that damages Americans’ trust in their banks damages all banks — a fact that was known even before this crisis,” he wrote. “While it is true that this bank crisis ‘benefited’ larger banks due to the inflow of deposits they received from smaller institutions, the notion that this meltdown was good for them in any way is absurd.”
The failures of SVB and Signature Bank, he argued, had little to do with banks bypassing regulations. He said that SVB’s high Interest rate exposure and large amount of uninsured deposits were already well-known to both regulators and to the marketplace at large.
Current regulations, he argued, could actually lull banks into complacency without actually addressing real system-wide banking issues. Abiding by these regulations, he wrote, has just “become an enormous, mind-numbingly complex task about crossing t’s and dotting i’s.”
And while regulatory change will almost certainly follow the recent banking crisis, Dimon argued that, “it is extremely important that we avoid knee-jerk, whack-a-mole or politically motivated responses that often result in achieving the opposite of what people intended.” Regulations, he said, are often put in place in one part of the framework but have adverse effects on other areas and just make things more complicated.
The Federal Deposit Insurance Corporation has said it will propose new rule changes in May, while the Federal Reserve is currently conducting an internal review to assess what changes should be made. Lawmakers in Congress, including Democratic Sen. Sherrod Brown of Ohio, have suggested that new legislation meant to regulate banks is in the works.
But, wrote Dimon, “the debate should not always be about more or less regulation but about what mix of regulations will keep America’s banking system the best in the world.”
Jamie Dimon, President, CEO & Chairman of JP Morgan Chase, speaking on Squawk Box at the WEF in Davos, Switzerland on Jan. 19th, 2023.
Adam Galica | CNBC
The stress on the financial sector caused by two bank failures in the United States last month is still a threat and should be addressed by a reimagining of the regulatory process, according to JPMorgan Chase CEO Jamie Dimon.
“As I write this letter, the current crisis is not yet over, and even when it is behind us, there will be repercussions from it for years to come,” the longtime CEO said in his annual letter to shareholders on Tuesday.
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“But importantly, recent events are nothing like what occurred during the 2008 global financial crisis,” he added.
The stress on the regional banks has led investors and analysts to suggest that the “too big to fail” banks would be a beneficiary of the crisis, but Dimon said JPMorgan wants to strengthen the smaller banks for the benefit of the whole financial system.
JPMorgan Chase, 1-year
“Any crisis that damages Americans’ trust in their banks damages all banks – a fact that was known even before this crisis. While it is true that this bank crisis ‘benefited’ larger banks due to the inflow of deposits they received from smaller institutions, the notion that this meltdown was good for them in any way is absurd,” Dimon wrote.
Dimon also cautioned against knee-jerk changes to the regulatory system. He wrote that most of the risks, including the potential losses from held-to-maturity bonds, were “hiding in plain sight.” The interconnected network of SVB’s deposit base was the unknown variable, he said.
“The recent failures of Silicon Valley Bank (SVB) in the United States and Credit Suisse in Europe, and the related stress in the banking system, underscore that simply satisfying regulatory requirements is not sufficient. Risks are abundant, and managing those risks requires constant and vigilant scrutiny as the world evolves,” Dimon wrote.
The JPMorgan CEO instead called for more forward-looking regulation. He pointed out that the held-to-maturity bonds that have become problems for many banks are actually highly rated government debt that scores well under current rules, and that recent stress tests did not game out a rapid rise in interest rates.
“This is not to absolve bank management – it’s just to make clear that this wasn’t the finest hour for many players. All of these colliding factors became critically important when the marketplace, rating agencies and depositors focused on them,” Dimon wrote.
Dimon said that regulation should be “less academic, more collaborative” and that policymakers should be more wary of potentially pushing some financial services to nonbanks and so-called shadow banks.
Two other broad topics that Dimon touched on, besides the financial results of JPMorgan, were the need for investments in climate technology and resiliency programs and the rise of artificial intelligence.
Dimon said that there needed to be more urgency at many different levels to speed up the development of green technology, raising permitting reform and eminent domain as two areas to consider.
“To expedite progress, governments, businesses and non-governmental organizations need to align across a series of practical policy changes that comprehensively address fundamental issues that are holding us back,” Dimon wrote.
And for AI, which has rocketed to the forefront of investor’s minds since the launch of OpenAI’s ChatGPT in November, Dimon said that JPMorgan already has hundreds of use cases for AI in production but stressed the importance of being careful with the technology.
“We take the responsible use of AI very seriously and have an interdisciplinary team of ethicists helping us prevent unintended misuse, anticipate regulation, and promote trust with our clients, customers and communities,” the CEO wrote.
The shareholder letter comes after a rough year for markets, with the major U.S. averages dropping into bear markets in 2022. Dimon called it a challenging year for the world, citing the war in Ukraine and rising geopolitical tensions with China.
However, the CEO said 2022 was “somewhat surprisingly” strong for JPMorgan. The bank’s stock fell 15% during the calendar year, but it generated more than $37 billion in net income.
A mugshot of Jeffrey Epstein released by the U.S. Justice Department.
Source: U.S. Justice Department
Google founder Sergey Brin, former Disney executive Michael Ovitz, Hyatt Hotels executive chairman Thomas Pritzker and a fourth billionaire, real estate investor Mort Zuckerman, will be subpoenaed in a lawsuit against JPMorgan Chase by the government of the U.S. Virgin Islands related to sex trafficking by Jeffrey Epstein.
The subpoenas were first reported Friday by The Wall Street Journal. A source familiar with the matter confirmed them to CNBC.
The subpoenas demand communications and documents related to the bank and Epstein, The Journal noted.
News of the subpoenas comes three days after it was reported that JPMorgan CEO Jamie Dimon will answer questions under oath in the lawsuit, which alleges that the bank ignored warning signs about Epstein for years and continued retaining him as a customer.
Kelly Sullivan | Getty Images Entertainment | Getty Images
Last week, the Virgin Islands in a press release noted that it “alleges JPMorgan Chase could have prevented harm and trauma faced by the survivors of Jeffrey Epstein’s heinous abuse.”
“But instead the bank chose to look the other way on these legal matters while continuing to use their banking relationship to grow their business with new clients introduced by Epstein,” the release said.
On March 20, Judge Jed Rakoff ruled the suit against the bank, as well as a similar one by women who say Epstein trafficked them, can proceed toward trial.
The plaintiffs claim that JPMorgan knowingly benefited from participating in Epstein’s trafficking scheme, which transported women to his residence in the Virgin Islands so that he could sexually abuse them.
Jamie Dimon, CEO, JP Morgan Chase, during Jim Cramer interview, Feb. 23, 2023.
CNBC
JPMorgan has denied allegations in the suits which are pending in U.S. District Court in Manhattan.
The bank earlier this month sued former JPMorgan investment banking chief Jes Staley, claiming he is responsible for the suits related to Epstein.
The bank seeks to claw back more than $80 million that it paid Staley. He quit as CEO of Barclays in 2021 after a probe by United Kingdom financial regulators over his ties with Epstein.
A lawyer for the Virgin Islands earlier this month said in court that Dimon knew in 2008 that Epstein was a sex trafficker. That was the year that Epstein first was hit with sex crime charges in state court in Florida.
“If Staley is a rogue employee, why isn’t Jamie Dimon?” the attorney, Mimi Liu said at the hearing,
“Staley knew, Dimon knew, JPMorgan Chase knew” about Epstein’s criminal conduct, Liu said.
A JPMorgan lawyer said at the time that the bank disputed those claims, “in particular the point about Jamie Dimon having any specific knowledge.” A bank spokeswoman has said, “Jamie Dimon has no recollection of reviewing the Epstein accounts.”
JPMorgan only ended its customer relationship with Epstein in 2013.
Epstein, a former friend of Donald Trump, Bill Clinton and Britain’s Prince Andrew, was arrested on federal child sex trafficking charges in July 2019. He killed himself a month later in a Manhattan jail cell after being denied bail.
The market rally will fade soon, but certain tech names are poised to outperform, according to hedge fund manager Dan Niles. The stock market is ending the first quarter higher , with tech stocks leading the way. The Technology Select SPDR ETF is up 9% in March, more than any other sector ETF. One name in the sector that Niles has liked for a while is Meta . He bought shares of the Facebook parent after the stock was crushed in late October following its guidance for “horrific expense growth,” he said in an interview Friday with CNBC’s ” Squawk on the Street .” However, since cutting expenses through layoffs and restructuring, the stock has rallied and is up nearly 75% year to date. META YTD mountain Meta’s climb this year There will also be certain companies that benefit from artificial intelligence. Nvidia will be the big winner, he said. The company recently unveiled new products at partnerships at its developer conference and launched its DGX Cloud, which can be used to train models behind generative AI applications. “We are going to need more powerful microprocessors as well and Intel is very, very inexpensive,” Niles said. Intel’s earning figures are going to be “OK” because of their draconian cuts heading into this quarter, he said. Outside of tech, Niles sees opportunity in sports-betting name DraftKings . Overall, he expects the market rally to be short lived. On April 14, earnings season kicks off with big banks reporting, including JPMorgan Chase . “That’s sort of your sell by date on this rally,” he said. “Earnings are going to have get cut anywhere between 10% to 20% on bank EPS just because you’ve had deposit rates go up a lot, which squeezes their net interest income margins,” Niles said.
Several bank stocks appear ready to rebound in April as the failure of Silicon Valley Bank fades from investors’ minds, according to UBS. The latest data from the Federal Reserve shows that borrowing from the central bank decreased slightly last week, suggesting that the liquidity issues caused by the collapse of Silicon Valley Bank may be easing. UBS analyst Erika Najarian said in a note to clients that the next step could be a rebound for bank stocks. “In any bad accident, there tend to be a lot of rubber neckers, and we sense that the market participation (long and short) in banks is broader than usual. While we believe regularly involved hedge fund investors have understood that contagion risk seems limited, we continue to field questions on more extreme scenarios on liquidity and deposit flight. Thus, we see the stage setting for a rally into earnings,” Najarian said. With many of these stocks still down sharply since the collapse, the upcoming earnings season could be a “clearing event” for shares of regional banks, Najarian said. Two of the stocks that UBS highlighted were Comerica and Western Alliance , which are down about 38% and 52%, respectively, in March. WAL 1M mountain Western Alliance is one of many regional bank stocks that has struggled in March. Banks that are based on the west coast, including Western Alliance , First Republic and PacWest, have been hit particularly hard during the sell-off due to fears that they are more exposed to risky customers like SVB had. Comerica is set to report its latest earnings on April 20, and Western Alliance will likely release its results around the same time. To be sure, Najarian did caution that the rebounds could find a ceiling as the regional banking crisis this month has raised questions about the future profitability of the sector. “Lack of confidence in consensus estimates is especially acute for regional banks, and we expect P/E multiples for banks between $100-700bn in assets to be capped by concerns over net interest income revisions near-term (as many assume that the mega caps enjoyed the lion’s share of the benefit in deposit reallocation) and tighter regulation longer-term,” Najarian said. The potential for more regulation has led many analysts to say that the the biggest banks will be the long-term winners from this crisis. Najarian pointed to Bank of America as one stock that could rally even past earnings, due to its relative valuation to rival JPMorgan Chase . — CNBC’s Michael Bloom contributed to this report.
The winning bidder in the government’s auction of Silicon Valley Bank’s main assets received several concessions to make the deal happen.
First Citizens BancShares is acquiring $72 billion in SVB assets at a discount of $16.5 billion, or 23%, according to a Sunday release from the Federal Deposit Insurance Corporation.
But even after the deal closes, the FDIC remains on the hook to dispose of the majority of remaining SVB assets, about $90 billion, which are being kept in receivership.
And the FDIC agreed to an eight-year loss-sharing deal on commercial loans First Citizen is taking over, as well as a special credit line for “contingent liquidity purposes,” the North Carolina-based bank said Monday.
All told, the SVB failure will cost the FDIC’s Deposit Insurance Fund about $20 billion, the agency said. That cost will be born by higher fees on American banks that enjoy FDIC protection.
Shares of First Citizens shot up 45% in trading Monday.
The deal terms may be explained by tepid interest in SVB assets, according to Mark Williams, a former Federal Reserve examiner who lectures on finance at Boston University.
“The deal was getting stale,” Williams said. “I think the FDIC realized that the longer this took, the more they’d have to discount it to entice someone.”
The ongoing sales process for First Republic may have cooled interest in SVB assets, according to a person with knowledge of the process. Some potential acquirers held off on the SVB auction because they hoped to make a bid on First Republic, which they coveted more, this person said.
In the wake of SVB’s collapse, many investors were worried about the risk of further contagion in the financial system, sparking a sell-off of regional bank shares. First Republic was one of the hardest hit.
In its release, First Citizens said it has closed more FDIC-brokered bank acquisitions than any other lender since 2009. The bank’s holding company has $219 billion in assets and more than 550 branches across 23 states.
The deal is a significant boost to First Citizens’ asset size and deposit base, according to Williams.
“They move into the big leagues with this deal,” he said. “When other banks see fire, they run away. This bank runs towards it.”
First Republic Bank headquarters is seen on March 16, 2023 in San Francisco, California, United States.
Tayfun Coskun | Anadolu Agency | Getty Images
The surge of deposits moving from smaller banks to big institutions including JPMorgan Chase and Wells Fargo amid fears over the stability of regional lenders has slowed to a trickle in recent days, CNBC has learned.
Uncertainty caused by the collapse of Silicon Valley Bank earlier this month triggered outflows and plunging share prices at peers including First Republic and PacWest.
The situation, which roiled markets globally and forced U.S. regulators to intervene to protect bank customers, began improving around March 16, according to people with knowledge of inflows at top institutions. That’s when 11 of the biggest American banks banded together to inject $30 billion into First Republic, essentially returning some of the deposits they’d gained recently.
“The people who panicked got out right away,” said the person. “If you haven’t made up your mind by now, you are probably staying where you are.”
The development gives regulators and bankers breathing room to address strains in the U.S. financial system that emerged after the collapse of SVB, the go-to bank for venture capital investors and their companies. Its implosion happened with dizzying speed this month, turbocharged by social media and the ease of online banking, in an event that’s likely to impact the financial world for years to come.
Within days of its March 10 seizure, another specialty lender Signature Bank was shuttered, and regulators tapped emergency powers to backstop all customers of the two banks. Ripples from this event reached around the world, and a week later Swiss regulators forced a long-rumored merger between UBS and Credit Suisse to help shore up confidence in European banks.
The dynamic has put big banks like JPMorgan and Goldman Sachs in the awkward position of playing multiple roles simultaneously in this crisis. Big banks are advising smaller ones while participating in steps to renew confidence in the system and prop up ailing lenders like First Republic, all while gaining billions of dollars in deposits and being in the position of potentially bidding on assets as they come up for sale.
The broad sweep of those money flows are apparent in Federal Reserve data released Friday, a delayed snapshot of deposits as of March 15. While large banks appeared to gain deposits at the expense of smaller ones, the filings don’t capture outflows from SVB because it was in the same big-bank category as the companies that gained its dollars.
Although inflows into one top institution have slowed to a “trickle,” the situation is fluid and could change if concerns about other banks arise, said one person, who declined to be identified speaking before the release of financial figures next month. JPMorgan will kick off bank earnings season on April 14.
At another large lender, this one based on the West Coast, inflows only slowed in recent days, according to another person with knowledge of the matter.
JPMorgan, Bank of America, Citigroup and Wells Fargo representatives declined to comment for this article.
The moves mirror what one newer player has seen as well, according to Brex co-founder Henrique Dubugras. His startup, which caters to other VC-backed growth companies, has seen a surge of new deposits and accounts after the SVB collapse.
“Things have calmed down for sure,” Dubugras told CNBC in a phone interview. “There’s been a lot of ins and outs, but people are still putting money into the big banks.”
The post-SVB playbook, he said, is for startups to keep three to six months of cash at regional banks or new entrants like Brex, while parking the rest at one of the four biggest players. That approach combines the service and features of smaller lenders with the perceived safety of too-big-to-fail banks for the bulk of their money, he said.
“A lot of founders opened an account at a Big Four bank, moved a lot of money there, and now they’re remembering why they didn’t do that in the first place,” he said. The biggest banks haven’t historically catered to risky startups, which was the domain of specialty lenders like SVB.
Dubugras said that JPMorgan, the biggest U.S. bank by assets, was the largest single gainer of deposits among lenders this month, in part because VCs have flocked to the bank. That belief has been supported by anecdotal reports.
For now, attention has turned to First Republic, which has teetered in recent weeks and whose shares have lost 90% this month. The bank is known for its success in catering to wealthy customers on the East and West coasts.
Regulators and banks have already put together a remarkable series of measures to try to save the bank, mostly as a kind of firewall against another round of panic that would swallow more lenders and strain the financial system. Behind the scenes, regulators believe the deposit situation at First Republic has stabilized, Bloomberg reported Saturday.
First Republic has hired JPMorgan and Lazard as advisors to come up with a solution, which could involve finding more capital to remain independent or a sale to a more stable bank, said people with knowledge of the matter.
If those fail, there is the risk that regulators would have to seize the bank, similar to what happened to SVB and Signature, they said. A First Republic spokesman declined comment.
While the deposit flight from smaller banks has slowed, the past few weeks have exposed a glaring weakness in how some have managed their balance sheets. These companies were caught flat-footed as the Fed engaged in its most aggressive rate hiking campaign in decades, leaving them with unrealized losses on bond holdings. Bond prices fall as interest rates rise.
It’s likely other institutions will face upheaval in the coming weeks, Citigroup CEO Jane Fraser said during an interview on Wednesday.
“There could well be some smaller institutions that have similar issues in terms of their being caught without managing balance sheets as ably as others,” Fraser said. “We certainly hope there will be fewer rather than more.”
Market Movers rounds up the best trade ideas from investors and analysts throughout the day. Jim Cramer talked about Deutsche Bank . Shares were down 14% during intraday trading after its credit default swaps jumped without an apparent catalyst , but the stock rebounded to close down 3% Friday. Despite the slide, JPMorgan defended the European bank, noting investors shouldn’t be concerned and should instead focus on its “solid” fundamentals . The pros also discussed Netflix as Bank of America reiterated it as buy. The firm emphasized the streaming service is poised to outperform and has significant subscriber runway . Other names mentioned included Microsoft and Apple . Both are currently held in Cramer’s Charitable Trust portfolio.
Sen. Cory Booker (D-NJ) speaks during Attorney General nominee Merrick Garland’s confirmation hearing before the Senate Judiciary Committee, Washington, DC, February 22, 2021.
Al Drago | Pool | Reuters
WASHINGTON — Sens. Cory Booker and Raphael Warnock have urged the CEOs of 10 major banks to waive overdraft and nonsufficient fund fees that could cost some Americans more than $100 a day in the wake of the failures of Silicon Valley Bank and Signature Bank.
“Disruptions across the banking industry this month rattled consumers and threw into jeopardy the paychecks of millions of American workers,” wrote Booker, who is a member of the Senate Committee on Small Business and Entrepreneurship, and Warnock.
The fees, which can reach up to $111 a day for low account balances or up to $175 on low account fees, “compound the difficult financial situation customers find themselves in, particularly when their lack of funds is due to an unprecedented, unexpected delay,” the senators added.
JPMorgan declined to comment. The other banks that received the letters did not immediately respond to requests for comment.
The Federal Deposit Insurance Corporation closed SVB on March 10 after the bank announced a nearly $2 billion loss in asset sales. The agency said SVB’s official checks would continue to clear and assets would be accessible the following day.
Regulators shuttered New York-based Signature Bank days later in an effort to stall a potential banking crisis. Many of its assets have since been sold to Flagstar Bank, a subsidiary of New York Community Bankcorp.
Booker and Warnock said banking customers whose paydays fell between March 10 and March 13 were unable to receive or deposit checks from payroll providers banking with SVB and Signature Bank. They also noted that online merchant Etsy notified customers of payment delays because it used SVB payment processing.
The senators also cited an unrelated, nationwide technical glitch on the 10th that caused missing payments and incorrect balances for Wells Fargo customers.
“These delays will disproportionately harm the impacted customers who are part of the sixty-four percent of Americans living paycheck-to-paycheck, who are often ‘minutes to hours away from having the money necessary to cover’ expenses that lead to overdraft nonsufficient fund fees,” Booker and Warnock wrote.
They praised steps taken by the Treasury and the FDIC to stem a possible economic catastrophe by ensuring access to depositor funds over the $250,000 FDIC-guarantee threshold and creating a new, one-year loan to financial institutions to safeguard deposits in times of stress.
Treasury Secretary Janet Yellen on Tuesday said the Treasury is prepared to guarantee all deposits for financial institutions beyond SVB and Signature Bank if the crisis worsens.
“In line with quick, decisive government response to assist the businesses and individuals who were helped immediately in order to contain the broader fallout of these bank failures, we urge you to act with similar urgency to backstop American families from unexpected and undeserved charges,” the senators wrote.
Image taken with a drone) A Tesla collision center is seen in this aerial view in Orlando.
Paul Hennessy | Lightrocket | Getty Images
Check out the companies making headlines in midday trading Tuesday.
Tesla — Shares popped 5% after Moody’s upgraded Tesla to Baa3 rating from its junk-rated credit. Moody’s called the electric-vehicle maker the “foremost manufacturers of battery electric vehicles” and said the upgrade reflects Tesla’s prudent financial policy and management’s operational track record.
JPMorgan, Bank of America — Shares of larger U.S. banks rose on Tuesday as investors showed increased optimism after Yellen’s remarks. JPMorgan gained about 3% and Bank of America rose by 3.5%.
Foot Locker — Foot Locker gained 6% after Citi upgraded the retail stock to a buy from neutral after its investor day on Monday. The firm said the company’s move away from malls and toward digital, kids and loyalty projects is a step in the right direction.
UBS — U.S.-listed shares of the Swiss-based bank gained 12% during midday trading following its agreement over the weekend to buy Credit Suisse for $3.2 billion. Credit Suisse rose 5% after taking a nearly 53% plunge on Monday.
Roblox — Shares rose more than 3% after D.A. Davidson said the online game platform has an “underappreciated” opportunity in artificial intelligence.
Emerson Electric — Shares added nearly 2% after Morgan Stanley said shares of the multinational tech company are too attractive to ignore. The firm upgraded the stock to overweight from equal weight.
Exxon Mobil — The oil and gas giant’s stock price gained 3% after Morgan Stanley said it likes the company’s robust “competitive positioning.”
— CNBC’s Alex Harring, Jesse Pound, Tanaya Macheel and Michelle Fox Theobald contributed reporting.
General view of First Republic Bank in Century City on March 17, 2023 in Century City, California.
AaronP/Bauer-Griffin | GC Images | Getty Images
This report is from today’s CNBC Daily Open, our new, international markets newsletter. CNBC Daily Open brings investors up to speed on everything they need to know, no matter where they are. Like what you see? You can subscribe here.
UBS’ planned takeover of Credit Suisse calmed the market slightly. Broader market conditions, however, still look unstable.
U.S. markets staged a relief rally as all major indexes made minor gains Monday. Asia-Pacific markets rose on Tuesday too. South Korea’s Kospi added 0.42% as the country’s producer price index for February increased 4.8% year on year, a slight decline from the previous month.
Japan’s Prime Minister Fumio Kishida is on his way to Ukraine for a surprise visit to Ukraine’s President Volodymyr Zelenskyy, Japan’s Ministry of Foreign Affairs confirmed. Kishida’s unexpected trip overlaps with Chinese leader Xi Jinping’s official state visit to Ukraine’s nemesis, Russia and its leader Vladimir Putin.
The “Minsky moment,” named after the economist Hyman Minsky, is a sudden collapse of the market after a long period of aggressive speculation brought on by easy money. Markets might face a Minsky moment soon, warned Marko Kolanovic, JPMorgan Chase’s chief market strategist and co-head of global research.
Markets haven’t collapsed. Some bank stocks are in the doldrums, yes, but the SPDR S&P Regional Banking ETF, a fund of regional bank stocks, rose 1.11% on Monday. Major indexes were up yesterday too. The Dow Jones Industrial Average gained 1.2%, the S&P 500 added 0.89% and the Nasdaq Composite increased 0.39%.
But there are signs market instability is increasing. The banking crisis is causing regional banks — which account for around a third of all lending in the United States — to reduce their loans, said Eric Diton, president and managing director of The Wealth Alliance. In other words, the availability of money in the economy is slowing even without the Federal Reserve increasing interest rates.
Speaking of interest rates, analysts seem to think there’s no good path forward for the Fed. An interest rate hike “would be a mistake,” MKM Partners Chief Economist Michael Darda told CNBC. On the other hand, a pause would cause “panicked reactions by equity and bond investors,” according to Nationwide’s Mark Hackett. This suggests markets are already so jittery that whatever the Fed does — even if it’s nothing — it might cause instability to spread.
With that in mind, investors might want to heed Kolanovic’s warning that a Minsky moment could be on the horizon.
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A First Republic Bank branch is pictured in Midtown Manhattan in New York City, March 13, 2023.
Mike Segar | Reuters
First Republic Bank saw its credit ratings downgraded deeper into junk status by S&P Global, which said the lender’s recent $30 billion deposit infusion from 11 big banks may not solve its liquidity problems.
S&P cut First Republic’s credit rating three notches to “B-plus” from “BB-plus,” and warned that another downgrade is possible. Other ratings were also lowered.
The agency said First Republic likely faced “high liquidity stress with substantial outflows” last week, reflecting its need for more deposits, increased borrowings from the Federal Reserve, and the suspension of its common stock dividend.
It said that while the deposit infusion should ease near-term liquidity pressures, it “may not solve the substantial business, liquidity, funding, and profitability challenges that we believe the bank is now likely facing.”
Sunday’s downgrade by S&P was the second in four days for First Republic, which previously held an “A-minus” credit rating.
It could add to market concerns about the San Francisco-based bank, which has scrambled to assure investors and depositors about its health following this month’s collapses of Silicon Valley Bank, which also served many wealthy clients, and Signature Bank.
Another rating agency, Moody’s Investors Service, downgraded First Republic to junk status on Friday.
In a statement following the S&P downgrade, First Republic said the new deposits and cash on hand leave it “well positioned to manage short-term deposit activity. This support reflects confidence in First Republic and its ability to continue to provide unwavering exceptional service to its clients and communities.”
First Republic shares plunged 32.8% on Friday to $23.03, reflecting concern that more trouble lies ahead.
The shares have fallen 80% since March 8, when Silicon Valley Bank’s parent SVB Financial Group shocked investors by revealing big investment losses and a need for new capital, sparking a bank run.
ChartHop CEO Ian White breathed a major sigh of relief in late January after his cloud software startup raised a $20 million funding round. He’d started the process six months earlier during a brutal period for tech stocks and a plunge in venture funding.
For ChartHop’s prior round in 2021, it took White less than a month to raise $35 million. The market turned against him in a hurry.
“There was just a complete reversal of the speed at which investors were willing to move,” said White, whose company sells cloud technology used by human resources departments.
Whatever comfort White was feeling in January quickly evaporated last week. On March 9 — a Thursday — ChartHop held its annual revenue kickoff at the DoubleTree by Hilton Hotel in Tempe, Arizona. As White was speaking in front of more than 80 employees, his phone was blowing up with messages.
White stepped off stage to find hundreds of panicked messages from other founders about Silicon Valley Bank, whose stock was down more than 60% after the firm said it was trying to raise billions of dollars in cash to make up for deteriorating deposits and ill-timed investments in mortgage-backed securities.
Startup executives were scrambling to figure out what to do with their money, which was locked up at the 40-year-old firm long known as a linchpin of the tech industry.
“My first thought, I was like, ‘this is not like FTX or something,’” White said of the cryptocurrency exchange that imploded late last year. “SVB is a very well-managed bank.”
But a bank run was on, and by Friday SVB had been seized by regulators in the second-biggest bank failure in U.S. history. ChartHop banks with JPMorgan Chase, so the company didn’t have direct exposure to the collapse. But White said many of his startup’s customers held their deposits at SVB and were now uncertain if they’d be able to pay their bills.
While the deposits were ultimately backstopped last weekend and SVB’s government-appointed CEO tried to reassure clients that the bank was open for business, the future of Silicon Valley Bank is very much uncertain, further hampering an already troubled startup funding environment.
SVB was the leader in so-called venture debt, providing loans to risky early-stage companies in software, drug development and other areas like robotics and climate-tech. Now it’s widely expected that such capital will be less available and more expensive.
White said SVB has shaken the confidence of an industry already grappling with rising interest rates and stubbornly high inflation.
Exit activity for venture-backed startups in the fourth quarter plunged more than 90% from a year earlier to $5.2 billion, the lowest quarterly total in more than a decade, according to data from the PitchBook-NVCA Venture Monitor. The number of deals declined for a fourth consecutive quarter.
In February, funding was down 63% from $48.8 billion a year earlier, according to a Crunchbase funding report. Late-stage funding fell by 73% year-over-year, and early-stage funding was down 52% over that stretch.
CNBC spoke with more than a dozen founders and venture capitalists, before and after the SVB meltdown, about how they’re navigating the precarious environment.
David Friend, a tech industry veteran and CEO of cloud data storage startup Wasabi Technologies, hit the fundraising market last spring in an attempt to find fresh cash as public market multiples for cloud software were plummeting.
Wasabi had raised its prior round a year earlier, when the market was humming, IPOs and special purpose acquisition companies (SPACs) were booming and investors were drunk on low interest rates, economic stimulus and rocketing revenue growth.
By last May, Friend said, several of his investors had backed out, forcing him to restart the process. Raising money was “very distracting” and took up more than two-thirds of his time over nearly seven months and 100 investor presentations.
“The world was falling apart as we were putting the deal together,” said Friend, who co-founded the Boston-based startup in 2015 and previously started numerous other ventures including data backup vendor Carbonite. “Everybody was scared at the time. Investors were just pulling in their horns, the SPAC market had fallen apart, valuations for tech companies were collapsing.”
Friend said the market always bounces back, but he thinks a lot of startups don’t have the experience or the capital to weather the current storm.
“If I didn’t have a good management team in place to run the company day to day, things would have fallen apart,” Friend said, in an interview before SVB’s collapse. “I think we squeaked through, but if I had to go back to the market right now and raise more money, I think it’d be extremely difficult.”
In January, Tom Loverro, an investor with Institutional Venture Partners, shared a thread on Twitter predicting a “mass extinction event” for early and mid-stage companies. He said it will make the 2008 financial crisis “look quaint.”
Loverro was hearkening back to the period when the market turned, starting in late 2021. The Nasdaq hit its all-time high in November of that year. As inflation started to jump and the Federal Reserve signaled interest rate hikes were on the way, many VCs told their portfolio companies to raise as much cash as they’d need to last 18 to 24 months, because a massive pullback was coming.
In a tweet that was widely shared across the tech world, Loverro wrote that a “flood” of startups will try to raise capital in 2023 and 2024, but that some will not get funded.
Federal Reserve Chair Jerome Powell arrives for testimony before the Senate Banking Committee March 7, 2023 in Washington, DC.
Win Mcnamee | Getty Images News | Getty Images
Next month will mark 18 months since the Nasdaq peak, and there are few signs that investors are ready to hop back into risk. There hasn’t been a notable venture-backed tech IPO since late 2021, and none appear to be on the horizon. Meanwhile, late-stage venture-backed companies like Stripe, Klarna and Instacart have been dramatically reducing their valuations.
In the absence of venture funding, money-losing startups have had to cut their burn rates in order to extend their cash runway. Since the beginning of 2022, roughly 1,500 tech companies have laid off a total of close to 300,000 people, according to the website Layoffs.fyi.
Kruze Consulting provides accounting and other back-end services to hundreds of tech startups. According to the firm’s consolidated client data, which it shared with CNBC, the average startup had 28 months of runway in January 2022. That fell to 23 months in January of this year, which is still historically high. At the beginning of 2019, it sat at under 20 months.
Madison Hawkinson, an investor at Costanoa Ventures, said more companies than normal will go under this year.
“It’s definitely going to be a very heavy, very variable year in terms of just viability of some early-stage startups,” she told CNBC.
Hawkinson specializes in data science and machine learning. It’s one of the few hot spots in startup land, due largely to the hype around OpenAI’s chatbot called ChatGPT, which went viral late last year. Still, being in the right place at the right time is no longer enough for an aspiring entrepreneur.
Founders should anticipate “significant and heavy diligence” from venture capitalists this year instead of “quick decisions and fast movement,” Hawkinson said.
The enthusiasm and hard work remains, she said. Hawkinson hosted a demo event with 40 founders for artificial intelligence companies in New York earlier this month. She said she was “shocked” by their polished presentations and positive energy amid the industrywide darkness.
“The majority of them ended up staying till 11 p.m.,” she said. “The event was supposed to end at 8.”
But in many areas of the startup economy, company leaders are feeling the pressure.
Matt Blumberg, CEO of Bolster, said founders are optimistic by nature. He created Bolster at the height of the pandemic in 2020 to help startups hire executives, board members and advisers, and now works with thousands of companies while also doing venture investing.
Even before the SVB failure, he’d seen how difficult the market had become for startups after consecutive record-shattering years for financing and an extended stretch of VC-subsidized growth.
“I coach and mentor a lot of founders, and that’s the group that’s like, they can’t fall asleep at night,” Blumberg said in an interview. “They’re putting weight on, they’re not going to the gym because they’re stressed out or working all the time.”
VCs are telling their portfolio companies to get used to it.
“In this environment, my advice is pretty simple, which is — that thing we lived through the last three or four years, that was fantasy,” Gurley said. “Assume this is normal.”
Laurel Taylor recently got a crash course in the new normal. Her startup, Candidly, announced a $20.5 million financing round earlier this month, just days before SVB became front-page news. Candidly’s technology helps consumers deal with education-related expenses like student debt.
Taylor said the fundraising process took her around six months and included many conversations with investors about unit economics, business fundamentals, discipline and a path to profitability.
As a female founder, Taylor said she’s always had to deal with more scrutiny than her male counterparts, who for years got to enjoy the growth-at-all-costs mantra of Silicon Valley. More people in her network are now seeing what she’s experienced in the six years since she started Candidly.
“A friend of mine, who is male, by the way, laughed and said, ‘Oh, no, everybody’s getting treated like a female founder,’” she said.
CORRECTION: This article has been updated to show that ChartHop held its annual revenue kickoff at the DoubleTree by Hilton Hotel in Tempe, Arizona, on Thursday, March 9.
Expectations are high that the Federal Reserve will raise interest rates by a quarter point next week, but the central bank could still swiftly change policy if the financial system becomes stressed. After a wild ride, fed funds futures Thursday reflected more than 80% odds that the central bank would raise rates by 25 basis points next Wednesday. A basis point equals 0.01 of a percentage point. Ethan Harris, head of global economic research at Bank of America, said the firm expects the Fed to hike by a quarter point, but the central bank could change course if necessary. “We have the Fed hiking three 25-basis point hikes, including next week,” he said. “That’s on the assumption that the regulatory efforts to support the banking system are effective and that the further negative news is limited, so the Fed can shift its focus back to inflation. It’s a close call for next week because it really depends on what the markets are doing when the Fed meets.” On Thursday, stocks closed higher, with shares of regional banks climbing. Treasury yields also rose as investors learned that a consortium of 11 banks agreed to deposit $30 billion into First Republic Bank . Participating institutions include JPMorgan , Citigroup , PNC and Truist. Earlier, the European Central Bank went ahead with a half-point rate hike . Concerns about the health of Credit Suisse were also calmed after t he Swiss National Bank Wednesday said the bank is well capitalized and that it would provide liquidity if needed. A fluid situation Worries about bank contagion following the failure of Silicon Valley Bank drove buyers into Treasurys and pounded risk assets, like stocks and oil. The 2-year Treasury yield has traded with big swings since then. The yield, which most reflects Fed policy, rose to 4.17% in late trading Thursday, from a low below 3.9% in morning trading. Yields move opposite price. Market odds for a Federal Reserve rate hike rose sharply Thursday, up from 50% Wednesday. Those expectations have swung wildly. They were at 50% after big swings Wednesday, but there had also been traders who expected a half percentage point hike prior to the failure of Silicon Valley Bank. As news came out on First Republic, the odds were at one point above 85% Thursday afternoon before falling back to closer to 80%. Economists have varying views on how the central bank will respond to recent U.S. bank failures and worries about Credit Suisse. JPMorgan economists expect the Fed to raise rates next week and one more time in May. But Goldman Sachs economists said they think the policymakers will hold off on a hike. Moody’s Analytics expects no rate increase and anticipates the Fed could signal it is finished with hikes. “This is a fluid situation. If you’re the Fed, you want to be very flexible here,” said Bank of America’s Harris. “If you go into the meeting with the markets under stress, there’s a pretty good case for not hiking. On the other hand, if things are calm and you feel good about containing the crisis, you probably go ahead with the hike. The hike is a positive signal to markets. It says the Fed is not panicking.” An opportunity to reverse course, if needed Harris said if the Fed hikes, there is precedent for the central bank to temporarily reverse course if things go bad. “Let’s say regulatory measures and the targeted approach of supporting individual institutions doesn’t seem to be working,” he said. “At some point, the Fed can cut rates to deal with the financial problems.” For instance, in 1987, the central bank cut rates immediately after the stock market crash and then resumed hiking again, Harris noted. Also, the Fed trimmed rates in 1998 because of the demise of Long-Term Capital Management, but then it went back to hiking. “That’s a good example of where the Fed can juggle two problems at the same time,” he said. “You deal with the immediate crisis, and once things are calmed down and things are less fragile, you go back to your regularly scheduled program.” Harris said the economy could see some impact. “I think it would be surprising if there wasn’t some negative impact on the growth picture, even if the crisis gets resolved quickly,” he said. “It’s kind of another little warning sign to people that the economy is likely to be weak going forward.” If the economy is strong enough, the Fed could send the wrong message if it does not hike. “If they don’t hike when the economy is strong, they make it look like there’s some skeleton in the closet,” Harris said. He said that unlike during the great financial crisis in 2008, the financial system does not look vulnerable, and consumers are in better shape. “In the current period, you don’t have a big sector like the housing market with a big collapse in credit standards,” Harris said. “You’re stress-testing the economy and the markets when you hike rates… It’s like Warren Buffett’s expression: You find out who is swimming naked when the tide goes out.” Harris said it’s not surprising there was some fallout from the speed and magnitude of the Fed’s policy moves, which began a year ago when the central bank lifted rates from zero for the first time. The fed funds rate range is now at 4.50% to 4.75%. “The Fed went from being remarkably dovish to extremely hawkish. Some institutions are going to get into trouble when there’s that dramatic a shift in the interest rate environment,” he said.
Traders work on the floor of the New York Stock Exchange (NYSE) in New York City, March 13, 2023.
Brendan McDermid | Reuters
Bank stocks were under pressure on Wednesday as the sharp drop of Credit Suisse rattled a segment of the market that was already reeling from two large bank failures in the past week.
Shares of the Swiss bank fell more than 27% after its biggest backer said it won’t provide further financial support. Credit Suisse announced on Tuesday that it had found “material weakness” in its financial reporting process from prior years. Other European banks also slid, including an 8% drop for Deutsche Bank.
The move appeared to be hitting large U.S. banks as well. Shares of Wells Fargo and Citi fell more than 4% each in premarket trading, while Bank of America dipped 3%. JPMorgan and Goldman shed more than 2%.
Shares of Wells Fargo were under pressure on Wednesday.
While Credit Suisse’s struggles appear unrelated to the mid-tier U.S. banks, the combination of the two issues could spark a broader reexamination of the banking system among investors, according to Peter Boockvar of Bleakley Financial Group.
“What this is telling us is there’s the potential for just a large credit extension contraction that banks are going to embark on [to] focus more on firming up balance sheets and rather than focus on lending,” Boockvar said on CNBC’s “Squawk Box.”
“It’s a balance sheet rethink that the markets have. Also you have to wonder with a lot of these banks if they’re going to have to start going out and raising equity,” he added.
In that vein, Wells Fargo on Tuesday filed to raise $9.5 billion of capital through the sale of debt, warrants and other securities. The bank said the new cash will be used for general corporate purposes.
The fallout from the collapse of SVB could also lead to more regulation and rising costs for the U.S. banking sector, including the potential for higher fees to regulators to pay for deposit insurance.
