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UBS and Credit Suisse Merger Receives $173 Billion Guarantee from Swiss National Bank with US Fed Support through Dollar Swap Lines.
Bigger Isn't Always Better, the Harsh Reality of 'Too Big to Fail'.
Here is what we will be getting into today:
Swiss National Bank Race to Save Credit Suisse With Shotgun Merger.
Dodd-Frank Legislation and the "Too Big to Fail" Problem. Why The Federal Reserve Independence Needs to End.
ECB's Historic Rate-Hike Cycle Continues with 50 Basis Point Increase in Policy Rate.
Let's Dive In!
Website: Wall Street On Parade
Title: UBS Was Quietly Bailed Out in 2008; Now Its Getting a $173 Billion Backstop to Buy Credit Suisse at 82 Cents a Share
Here are the key highlights:
The Swiss banking industry is in chaos as UBS and Credit Suisse merge in a shotgun wedding prompted by a massive banking panic. The central bank of Switzerland, Swiss National Bank, has committed $173 billion in loans and guarantees to the combined firm, aided by the US Federal Reserve Bank of New York, which has provided emergency dollar swap lines.
This is possible due to the Swiss National Bank receiving permission from the Federal Reserve Board to use dollars from their swap line agreement in order to aid UBS in 2008. To accomplish this, the Swiss National Bank announced that it would create a Special Purpose Vehicle and use dollars obtained through the swap line with the Federal Reserve Bank of New York to purchase up to $60 billion of illiquid assets from UBS.
The UBS bailout in 2008 was unusual as the swap line was initially designed to help central banks provide dollar loans for institutions facing dollar funding strains. The US Federal Reserve pumped $29 trillion in cumulative loans into bailing out US and foreign banks, including derivative counterparties to banks supervised by the New York Fed.
Credit Suisse, unfortunately, is also interconnected via derivatives to the mega banks on Wall Street. This is highly likely why this weekend shotgun marriage came together so quickly sans a vote by shareholders.
Credit Suisse has been involved in multiple scandals that have caused financial and reputational damage. In one instance, the bank lost $5.5billion due to highly-leveraged and concentrated stock positions for a hedge fund. The bank was accused of focusing on short-term profits and enabling risky behavior.
Additionally, the bank paid a settlement of $547 million for fraudulent loans made in Mozambique, and is facing legal battles over selling low-risk debt to investors. Credit Suisse also engaged in multiple spying operations on Board members and third parties, according to a report by FINMA. These scandals have raised concerns about the banks interconnectedness with other Wall Street mega banks, and their future repercussions.
Holders of the Credit Suisse convertible will be wiped out of $17.3 billion. The century-old concept that bondholders get priority treatment over common stock holders is being flipped on its head.
Title: Fire the Fed.
Here are the key highlights:
The 1970 Amendments to the Bank Holding Company Act were essential for preserving middle-class protection from financiers. This act enabled the Federal Reserve to stop big banks from buying their way into industries such as insurance, land development, data processing, and management consulting, among others.
The move was necessary as it prevented banks from using the special government guarantees for cheap credit as a competitive advantage over industrial firms. Although the Federal Reserve has always been the most bank-friendly regulator, it was critical in recognizing that the rapid development of the one-bank holding company movement could lead to concentrated economic power, which could dominate economic life in the United States.
Despite public reporting of the bank's insolvency, Fed examiners at the San Francisco Federal Reserve Bank failed to see serious problems until the fall of the bank was imminent. The Fed's belief that placing constraints over banks will hinder American strength is misguided and has led to a lack of aggressive regulation. To prevent future collapses, the Fed needs to change its regulatory approach and prioritize prudence over innovation to ensure the stability of the financial system.
The 2008 financial crisis exposed flaws in the American banking system, leading to the Dodd-Frank legislation. However, this legislation has failed to end the "Too Big to Fail" problem and favors large banks at the expense of smaller ones. To treat banking as a public utility and increase accountability, it's necessary to end Federal Reserve independence and return to first principles. Despite the Dodd-Frank bill's intent to regulate large banks, the Fed has not done enough to ensure their stability and manage potential risks.
Still, this regulation was all pretend. Despite the stress tests and living wills, and despite constant assurances that the Too Big to Fail issue had been addressed, no one believed that banks would ever be allowed to fail. Furthermore, recent developments suggest that the Fed has been pushing to relax regulatory requirements, with disastrous outcomes.
An example can be seen with Silicon Valley Bank (SVB) lobbying for S. 2155, a bill that would give the political cover of relaxing regulatory requirements for large regional banks like SVB. When the bill was passed, SVB immediately announced a $500 million stock buyback program, and it soon began taking in deposits and making bets which led to its undoing.
The Fed's short-term mindset and focus on maximizing profits and executive compensation rather than long-term stability and accountability have led to a lack of preparation for normalizing interest rates and preventing insolvencies. The current situation is an injustice to the ordinary people who are essentially funding a bailout of the wealthy.
Sustainable banking practices must center around regulatory requirements rather than avoidance, to avoid the repetition of mistakes and protect the average citizen from its consequences. The Federal Reserve's role is to regulate banks and prevent economic downturns, not to cater to their whims.
Website: Wolf Street
Title: Defying Pivot-Mongers, ECB Hikes by 50 Basis Points, QT Continues, Explains Tools to Calm a Bank Panic while Fighting Inflation Simultaneously
Here are the key highlights:
The European Central Bank (ECB) has hiked its policy rates by 50 basis points, defying predictions that it would end its rate hikes. Since July 2022, the ECB has hiked by 350 basis points, the biggest rate-hike cycle in its history, to combat inflation.
With this 50-basis-point hike, the ECB stuck to the rate-hike indications it gave at its last meeting, stating that inflation is projected to remain too high for too long. The bank remains determined to return inflation back to 2% in the medium term.
ECB president Christine Lagarde emphasized that there is no trade-off between price stability and financial stability. The ECB policy is if underlying inflation persists, more tightening would be needed. The Eurozone banking sector is resilient, with strong capital and liquidity positions, the ECB said.
Energy prices in the euro area have been declining, but inflation has shifted to services, with the Eurozone CPI without energy spiking 7.7%. Lagarde said that underlying price pressures remain strong, and that wage pressures have strengthened.
The ECB raised its projection for core CPI (without food and energy) to an average of 4.6% in 2023, and projections for economic growth in 2023 to an average of 1.0%. The financial turmoil added greater uncertainty to the baseline projections, and risks to economic projections are tilted to the downside, Lagarde said.
The ECB's balance sheet, which tracks its assets and liabilities, has been a topic of significant interest among economists and policymakers alike. One of the primary tools it uses to manage the economy is quantitative easing, which involves purchasing large quantities of government bonds and other securities. Since the start of this two-part quantitative easing program in 2015, the ECB has purchased an estimated 2.6 trillion euros (approximately $3.08 trillion USD) worth of assets, including government bonds, corporate bonds, and asset-backed securities. This has caused its balance sheet to increase significantly, as the ECB became the largest purchaser of eurozone government bonds.
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