REACTION: Import Anthony Peters

First Citizens: who is the new owner of SVB’s skeleton?

Iain Martin — Tue, 28 Mar 2023 12:37:21 GMT

There is a 10-hour time difference between Melbourne in Australia and London. Thus it is that as we are approaching bedtime here, our Aussie friends are already tooling up for the new day. One of my last reads before turning in tends to be the brief morning comment sent out by my old mate and mucker, Alex Moffatt of J Palmer & Sons in Melbourne. Although now a multi-asset wealth manager, his background is in rates and bonds so I know that I can rely on him for a pragmatic take on how the US markets had closed and what he expects of the coming day. None of the customary hype and optimism of more conventional equity geeks whose base case seems to be that today presents the best buying opportunity since yesterday.

This morning “Moff” simply summarises what Down Under is the overnight news – under the headline of “Markets are calming down…for now” – as follows: “The American bourses have just closed for normal daytime trade with the Dow up by nearly 200 points, 0.6%, the S&P500 up by 0.2% and the Nasdaq dragging its heels closing down by 0.5%.

“News that the skeleton of Silicon Valley bank has been sold to First Citizens Bancshares gave investors heart. The Federal Deposit Insurance Corporation (FDIC) announced the deal in which First Citizens bought circa US$72 billion of Silicon Valley Bank’s assets at a discount of US$16.5 billion. Silicon Valley Bank’s branches will all be renamed First Citizens with the changeover expected to happen quickly. Deutsche Bank shares recovered about 6% overnight as investors weighed the chances of another disaster.

“For those trading in the debt markets, it would not have gone unnoticed that the cost of insuring Deutsche’s debt (credit default swaps) has skyrocketed in recent days. Deutsche’s additional tier one paper has also been sold off sharply.”

It tells you everything you need to know, other than what First Citizens BancShares actually is. There must be something in the water in North Carolina, home of First Citizens. It is based in Raleigh. Up the road to the Northwest is Winston Salem where Wachovia had once been at home until it was subsumed by Charlotte-based First Union and ultimately by Wells Fargo, and down the road to the Southwest lies Charlotte, home of NCNB, later NationsBank which in turn had acquired the San Francisco based Bank of America which, after having changed its name, became America’s largest deposit taker. I worked for a goodly while for Bank of America and when I first joined, the principal trading floor was still in Charlotte. Only later did the bank close down the old BofA’s trading hub in California and move it, along with many of the Charlotte bunch, to 9, West 57^th in New York. The move to consolidate was completed only a few weeks before the tragic events of 9/11.

Those of us who had come from outside of the traditional North Carolina base were always aware that at the head of the business sat not Wall Street trained bankers but a cabal of what we referred to as “good ole boys”, led by Ken Lewis with his over whitened-teeth and perma-tan.

During the GFC, Lewis’s last major act chairman and CEO was to snap up the rapidly failing Merrill Lynch which was perchance also the country’s premier retail broker. Taking over the investment banking activities of ML was to Lewis a necessary evil if he wanted to get his grubby mits on the huge retail network and whist flashing his cheque book at Merrill Lynch, he left Lehman Brothers standing at the altar. We came very close to BofA rescuing Lehman and if it had done, we would today instead most probably be talking of the catastrophic collapse of Merrill Lynch.

First Union and NationsBank had both grown by acquisition. At the time at which First Union, now called Wachovia, had got itself into deep trouble in the variable rate mortgage market and had been rescued by Wells Fargo, it was America’s fourth largest deposit taker. Yes, North Carolina was home to two of the country’s four largest banks. And North Carolina is where First Citizens is to be found.

Much is being written and spoken about with respect to the problems and issues concerning corporate governance in general and that of banks in particular. Then up pops First Citizens., which is to all intents and purposes a family business. It is in the hands of the third generation of the Holding family. Frank B Holding is Chairman and CEO. Both Vice Chairman Hope Holding Bryant and President Peter Bristow are close family. At a time when diversity at board level is right up there in the headlines, the FDIC is selling the remnants of Silicon Valley Bank to a firm which is anything but. More “good ole boys”?

With SVB’s business strapped on, First Citizens becomes the 15^th largest bank in America and in balance sheet terms larger than either Morgan Stanley or American Express. Well, beggars can’t be choosers and the FDIC is not here to run banks. And don’t scoff. The Holdings have built their bank from a local, to a regional to a super-regional by carefully and assiduously buying failing or defunct banks and although the move on Silicon Valley Bank is by far their largest, they look sound and experienced. But then so did Wachovia until it burnt its fingers on subprime mortgage lender Golden West which in effect took it down.

For the moment, however, the worst of the fears concerning a burgeoning systemic crisis within the banking sector would seem to have been allayed to which Monday’s relative calm in markets would attest. Deutsche Bank, in the aftermath of CS’s having tripped up very much in the crosshairs of short-sellers, now also looks to back out of intensive care. Deutsche and Credit Suisse suffered very similar fates when it came to being raped and pillaged by hired gun bankers although as I had noted less than a week ago, Deutsche had in the hands of Christian Sewing already begun to focus on rebuilding its domestic banking franchise which by dint of if its being German is potentially many times larger than that which would have been available to Credit Suisse.

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Equity markets: best understood through Looney Tunes

Iain Martin — Tue, 07 Mar 2023 13:05:20 GMT

I grew up with the work of Friz Freling and Chuck Jones. Never heard of ‘em? Don’t know what they did? I doubt that. They were part of that ingenious collective of animators at Warner Bros who gave us the much loved characters of Bugs Bunny, Daffy Duck, the Road Runner and of course Wile E Coyote, the latter of whom sprung off Jones’s pen. Wile E Coyote is much in the headlines of late with his habit of running over a cliff edge and keeping on running until he suddenly notices that there is no ground there and he eventually drops through the air, to end up in a little wee puff of dust hitting the bottom of the canyon far below. Mr Coyote is at the current time, when risk asset markets refuse to let themselves be spooked by the elusive recession, a favoured friend of analysts. The coyote’s frantic peddling in thin air has become a ubiquitous – and a little overused – illustration.

I have myself over the years drafted in the unfortunate coyote and his fate as an analogy but wonder whether it might not now be the turn of Bugs Bunny who got his name when Ben ‘Bugs’ Hardaway sketched a rabbit which became Bugs’ bunny and eventually Bugs Bunny. His nemesis is the hapless hunter Elmer Fudd. Think of those who look at and write about Wile E Coyote as the Elmer Fudds vainly tracking equity markets which are as elusive as Bugs Bunny and who keep on popping up coolly remarking “What’s up, Doc?”

It’s certainly not easy. Should we be hoping for a strong economic backdrop, in which case the Fed and its peers will, if not keep their foot on the interest rate accelerator, then at least keep it well away from the brake? Or do we look with irrational optimism to a slowdown in which case that elusive pivot might itself become a tad less elusive? It’s hard to believe that we are already in the month of March and that as we head into its second week, we are only a month away from the first companies reporting Q1 numbers. Equity investors can, I suppose, look with confidence towards quarterly reporting. Inflation is supposedly unacceptably high, although seeing as that the inflation number is nothing other than a measure of prices which in turn translate into earning and profits, shareholders can surely be confident that a bumper earnings season lies ahead. No wonder they are calmly standing there chewing on a carrot and declaring “What’s up Doc?”

Jay Powell gave testimony on Capitol Hill yesterday to the rather expansively named Committee on Banking, Housing and Urban Affairs and will do so again today to the House Financial Services Committee. The Elmer Fudds will be hunting for the bull trap which one investment bank after the other has been pointing towards, and yet the investment community is still showing few signs of wanting to disengage itself from risk and to take advantage of risk-free front end rates wrapped around 5%.

Some years ago, I found myself pursuing a line of argument which was predicated on the observation that the 21st century socio-economic edifice is far too complex to be managed under the auspices of simple left and right politics. In fact, I concluded, democratic government which is largely populated by enthusiastic amateurs is entirely unsuited to running a modern state. That said, and holding with the old adage that democracy is the worst form of government, with exception of all the others, we might just have to tough it out. But what we must not do is to expect it to provide all the answers. It appeared to me that even the politicians had, for a while at least, acknowledged that they had lost control and thus it was that they relinquished power and handed it over to the central banks.

There was much moaning at the time that the fate of the economy had been placed in the hands of, horror of horrors, unelected powers. Decisions taken by the central banks which affected millions of people were being justified by the heads of central banks in endless appearances before parliamentary committees but they were not subject to the sort of scrutiny to which a functioning parliament can subject them. That said, given the quality of some of the questioning by parliamentary committee members, it might be best if they are kept at arms’ length from the action. But are the technocrats who sit in the central banks now also in it beyond their depth?

In an exchange of correspondence between a reader and a leading academic, triggered by one of my recent musings on central banks and a copy of which was shared with, me the following opinion was expressed “…central banks are what I would call a basic assumption group subject to groupthink – everyone comes from similar backgrounds, thinks using the same simplistic (neo-classical economic highly political) theoretical models to deal with the anxiety that in reality the real world is too complex easily to grapple with. Consequently, they impose standard ‘solutions’ even if this makes things worse. They are also highly defensive against any challenges to their orthodoxy and deny any evidence that their often very destructive actions only make things worse.”

Remarkably, or maybe not so, the professor in question referred to former Bank of England Governor Sir Mervyn King and his love of fan charts. Fan charts do exactly what they say they do. Instead of forecasting a specific result, they spread out like a fan, offering a range within which the outcome can be expected. On the assumption that it is better to be more or less right than precisely wrong, fan charts offered the Bank of England a fistful of get-out-of-jail-free cards.

I attended a small lunch party yesterday at which, when the prospect of tightening monetary policy until the economy hit recession was being mooted, one of the table guests remarked “But they can’t to that….especially not now!” Longer term readers will know that from more or less 2012 onwards I had appealed for an end to QE and for a normalisation of monetary policy. With growth rates at above 4% when long term trend growth had been assumed to be 3%, the time had come to remove William McChesney Martin’s legendary punchbowl. And what did they do? They simply decided that 4% was the new trend growth rate and therefore there was no need to cool the economy. There is always a fallacious argument to be made for “….especially not now”.

Commodity prices on the way down…

Moving on, shock horror, the Beijing administration has not kicked the man when he was down but has waited until he was getting up. In the opening session of the 14h National People’s Congress, outgoing prime minister Li presented the much-anticipated 2023 GDP growth target. Analysts – that’s Western ones – had forecast current growth to be at between 5% and 5.5% and had forecast it to grow, with the tail wind of post-lockdown spending and a bit of stimulative help by the powers that be, to 6%. Li wasn’t having any of it and has set the target for this year at 5%. That does not, however, mean that 6% is not the tacit aim.

Li Keqiang’s successor – he has resigned and will step down at the end of the year – has yet to be confirmed although Li Qiang looks to be lined up for the job. Li Keqiang – easy to confuse the two – in his address yesterday explained that it would be wrong to set illusory growth targets. In plain-speak, it’s better to play the pragmatist and then exceed a lower target rather than to set and miss a higher one. I’m sure that not even Beijing can command its economy as it would like to. Geopolitics don’t only affect Europe. But the strongest element in the forecast will be the administration’s expectation for the strength and duration of the post-Covid consumer boom. Some of the strongest indicators are already showing first signs of softening, not least of all commodity prices.

Over the week-end I was treated to a list of 12 month price changes in the commodity complex. Other than sugar, they are all lower and some by a significant amount. The shock of the Russian invasion of Ukraine and the spike in prices for any commodity must be included in one’s thinking so the raw year over year figures can be misleading. The reversion to mean of commodity prices is, in the immortal words of the late Donald Rumsfeld, not a known unknown but a known known. Whenever armed conflict breaks out commodity markets go bonkers although before long, irrespective of what is happening on the field of battle, they eventually calm down again. My guiding experience was the price formation of crude oil when Saddam Hussein invaded Kuwait in 1990. The spike was epic and I well recall exchanging impressions several times a day on the phone with a client – now long retired and living in the Valais in Switzerland but still a reader and frequent correspondent – when we watched it go up by the elevator but then begin to come down again by the escalator. We are now generally experiencing the same phenomenon except that since then China has emerged as a huge force in global markets which adds a completely new dimension to the equation and added to that we have the rippling and multi-layered aftereffects of the pandemic.

The commodity markets are talking to us but, I suspect, in a language which the majority of us don’t understand. And China declaring, contrary to expectations, that it has no intention of pushing growth for growth’s sake will not make it any easier.

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