Why Ajay Banga got the nod to lead the World Bank

1 big thing: Why Ajay Banga got the nod

Photo illustration of Ajay Banga in front of a row of his shadows, surrounded by bright colors

Supply and demand in the collectibles market

2. Know your edition size

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Home values grew faster in majority-white neighborhoods in 2022, Redfin finds

3. Where the cheap(er) homes are

4. Building of the week: Casa das Historias Paula Rego, Portugal

I was initially very surprised when I heard that Ajay Banga had been nominated to be the next president of the World Bank; in this week's newsletter I try to tease out how he held off what was surely stiff competition. 

Also: The problem with collecting watches or sneakers; and a new breakdown of real estate values from Redfin. The whole thing is 1,477 words, a 5.5-minute read.

*Technically, Banga's appointment is not yet certain — voting hasn't happened, there might be other contenders, and so on. In practice, however, it's a foregone conclusion, and he'll probably be unopposed. 

Thanks to Kate Marino for editing this newsletter, and to Lisa Hornung for copy-editing. 

Markets

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Stay on top of the latest market trends and economic insights

Axios Markets

1 big thing: When a savings account is very risky

Illustrated collage of a hand balancing a stack of piggy banks. 

2. The regulatory arbitrage

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3. How regulators could crack down

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4. A trillion-dollar pool of deposits

On Feb. 8, a pitch came over the transom with a startling subject line: "The New Guaranteed 7% Return On Investment is REAL."

This week's newsletter — 1,659 words, a 6-minute read — is the result of what I found after I hit "reply." 

Thanks to Kate Marino for editing this newsletter, to Lisa Hornung for copy-editing it, and to Brian Westley for legal review. 

What banks are good at

1 big thing: What banks are good at

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Why First Republic shares went on a rollercoaster ride

2. Adventures with bank stocks

Americans are piling into T-bills

3. A contest for Axios Markets readers

A theory on T-bills and the debt ceiling

4. The debt-ceiling upside

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Building of the week: Bab Mansour, Meknes

Phew what a week! Congratulations on making it to the weekend. I hope you managed to sleep in. 

In this week's newsletter: Why bankers often aren't experts on banking; why their stocks are so volatile; what deposit flight means for the debt ceiling — and, a chance to win my new book. All in 1,338 words, a 5-minute read.

*Just, closest. None of this "Price is Right" stuff about not going over. That's just silly. 

Thanks to Kate Marino for editing this newsletter, and to Lisa Horning for copy-editing. 

Investors get caught in political crossfire in ESG fight

1 big thing: Investors get caught in political crossfire

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Silvergate Bank’s balance sheet problem is a warning

2. Insolvent banks

Why studying English makes increasingly little sense

3. Why studying English makes increasingly little sense

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4.  Words

Happy March! The days are getting longer, at least for those of us in the northern hemisphere, the first shoots of spring are arriving, and optimistic equities investors are going underweight carbon-intensive industries as they buy into the vision of a net-zero future. 

In this newsletter, 1,567 words, a 6-minute read: Politics is interfering with those investors. Also: banks struggling with solvency issues; colleges losing humanities students; and investor-day words from Goldman Sachs.

🚨 Breaking news on the Compound Banc front: The "Banc," which I wrote about two weeks ago, has disappeared from the company’s name, and compoundbanc.com now redirects to a site offering “Compound Real Estate Bonds.”

Many thanks to Kate Marino for editing this newsletter, and to Lisa Hornung for copy-editing it. 

Crypto's bedrock bank implodes

1 big thing: Crypto's bedrock implodes

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How Silicon Valley Bank's rescue plan backfired

2. How SVB's rescue plan backfired

How Americans are using their homes to fund retirement

3. When your house funds your retirement

4. Building of the week: Inagawa Cemetery Chapel, Japan 

Bank failures are like buses: You don't see one for ages, and then two arrive at once. This week's were broadly foreseeable, but still came as a surprise to the markets. 

In this week's newsletter, I talk a bit about both Silvergate and Silicon Valley Bank — and also about using housing as a funding source for retirement. It's 1,467 words, a 5.5-minute read.

Many thanks to Kate Marino for editing this newsletter, and to Lisa Hornung for copy-editing it.

National

Good bankers know the industry they serve. They know its idiosyncrasies, its cast of characters, its business cycles. They help their clients through good years and bad — and are rewarded with deep loyalty and fat deposit accounts. 

Why it matters: The industry that bankers know differs from bank to bank — but it's never banking. A wine-industry relationship banker at Silicon Valley Bank has to know much more about malolactic fermentation than about Tier 1 capital adequacy ratios. 

Even at the CEO level, someone like SVB's Greg Becker found himself on the board of the San Francisco Fed not because he was an expert in banking, but because he had extraordinary visibility into California's technology industry. 

With hindsight, that was an egregious conflict, given that the San Francisco Fed was SVB's primary regulator. All the same, bankers really do have an unrivaled level of insight into what's going on with companies that are too small to have gone public — including Silicon Valley startups.

The big picture: Capital markets and investment banks are very good at providing banking services to big public companies — but only about 15% of American jobs are at big public companies. 

Commercial banks therefore provide a crucial and irreplaceable service — and, as is natural in all industries, they tend to specialize. 

Silicon Valley Bank banked Silicon Valley, as its name implied, as well as the California wine industry. Signature Bank banked Broadway. Silvergate banked crypto. 

Such relationships take time to build and nurture, which is one reason the federal government is keen to sell SVB and Signature as going concerns — and is a reason it's not trying to rescue Silvergate, which operated in an industry that authorities broadly want to be cut off from the regulated financial system. 

Between the lines: In countries dominated by three or four massive universal banks, there's less idiosyncratic industry risk when a single mid-sized bank fails. But the U.S. has made a policy decision that it doesn't want its biggest banks to get any bigger than they already are — which means many more smaller banks with a broad range of specialties.

Where it stands: Risk management is a cost center for banks, not a profit center. The way to rise up the ranks at a commercial bank is to make money for your employer — and the way to do that is to know your customers and their needs really well. 

When commercial banks fail, outsiders are often shocked at how badly they handled things like interest rate risk or deposit concentration risk. But those jobs are done only at the top of the org chart — and the people who rise that far tend to do so not because of their understanding of how banking works, but because of their understanding of other industries entirely. 

The bottom line: There's an obvious financial-stability reason for regulators to want to minimize bank failures. But there's also a grassroots economic reason. Regional banks like SVB and Signature are deeply embedded in local industry, and without them many industries would find themselves in deep trouble. 

They're experts on many things — but not on banking

Banking

Stock market

Good bankers know the industry they serve. They know its idiosyncrasies, its cast of characters, its business cycles. They help their clients through good years and bad — and are rewarded with deep loyalty and fat deposit accounts. Why it matters: The industry that bankers know differs from bank to bank — but it&#x27;s never banking. A wine-industry relationship banker at Silicon Valley Bank has to know much more about malolactic fermentation than about Tier 1 capital adequacy ratios.

After a record economic expansion, the coronavirus pandemic sent the U.S. economy into a recession as unemployment soared to staggering heights. The country now faces urgent questions about how much stimulus is needed for reeling consumers and businesses, and what a recovery might look like.

Economy & Business

The spike in the number of individuals directly holding Treasury bills makes it more likely that the government will find its way to raising the debt ceiling. 

Why it matters: The biggest reason the debt ceiling is such a big political problem is that most Americans don't care about it, and most of those who do think that its existence is a good thing and that it shouldn't be raised. 

Holders of T-bills, by contrast, are acutely aware of the necessity that the government pays its debts in full and on time. 

Between the lines: The kind of people who are engaged enough to buy T-bills also tend to be voters with relatively unfettered access to their local member of Congress. After all, very few people buy T-bills unless they're first maxed out on their $10,000 allocation of I-bonds. 

The bottom line: Raising the debt ceiling is still not going to be easy. But the current flight to quality out of bank deposits and into Treasury securities definitely helps.

Debt ceiling

The spike in the number of individuals <a class="gtmContentClick" data-vars-link-text="directly holding Treasury bills" data-vars-click-url="https://www.axios.com/2023/03/18/americans-are-piling-into-t-bills" data-vars-content-id="5ef94cfb-c7a1-467b-a79d-183d36e75812" data-vars-headline="A theory on T-bills and the debt ceiling" data-vars-event-category="story" data-vars-sub-category="story" data-vars-item="in_content_link" href="https://www.axios.com/2023/03/18/americans-are-piling-into-t-bills" target="_self">directly holding Treasury bills</a> makes it more likely that the government will find its way to raising the debt ceiling. Why it matters: The biggest reason the debt ceiling is such a big political problem is that most Americans don&#x27;t care about it, and most of those who do think that its existence is a good thing and that it shouldn&#x27;t be raised.

Credit Suisse failed this weekend — or at least it would have, were it not too big to fail. Instead, Switzerland's banking regulators cobbled together an emergency solution that leaves nobody happy — but at least prevents a catastrophe for the global financial system.

Why it matters: The 30 G-SIBs — global systemically important banks — are the financial institutions that global regulators have determined are too big to fail. As such, they operate under stricter capital standards and regulatory scrutiny than anybody else. Nevertheless, as Credit Suisse shows, they can still end up being worth a negative amount of money.

By the numbers: UBS is buying Credit Suisse for roughly negative $14 billion. It's paying $3.2 billion to Credit Suisse shareholders, but only because Swiss regulators are wiping out $17.2 billion of the bank's liabilities, leaving those bondholders with nothing. 

Between the lines: In the normal world of mergers and acquisitions, that wouldn't be possible. Bondholders are senior to shareholders, meaning that they get paid out first, and only once they're paid out in full do shareholders get anything.

In the real world of rescuing a too-big-to-fail bank, however, such niceties can end up being sacrificed for the sake of managing to get a deal done. 

The intrigue: UBS management and shareholders didn't particularly want to buy Credit Suisse, while Credit Suisse management and shareholders certainly didn't want their bank to be sold for peanuts. It's unlikely this deal would receive shareholder approval from either side — which is one reason why Swiss authorities changed the law to enable the deal.

The interests of international financial stability ended up overriding the interests of shareholders.

Where it stands: Swiss regulators forced the two banks together, threw Credit Suisse shareholders a $3.2 billion bone, and zeroed out a tranche of junior contingent convertible (CoCo) bonds that are supposed to convert into equity when a bank gets into trouble. 

The big picture: Credit Suisse shareholders ended up losing about $17 billion in equity value over the past year. At that point, there wasn't another $17 billion left to lose — so the next tier up had to take a hit.

In the interests of expedience, it was easier to just zero out the CoCos and leave shareholders with $3.2 billion than it would have been to convert the CoCos to equity and then pay them out at pennies on the dollar. Just finding a conversion price would have been incredibly fraught.

The bottom line: Banks are a huge pile of assets offsetting another huge pile of liabilities. Shareholders only own the sliver between the two, which in the case of Credit Suisse was nonexistent. When a bank is failing, they generally have no say in what happens to it.

CoCo bondholders have more reason to feel aggrieved. But they were going to lose most of their money anyway — and besides, CoCos are supposed to behave like equity in a crisis.

In that sense, it shouldn't come as a complete surprise that they've been wiped out. 

Credit Suisse is an unavoidably messy bank failure

Credit Suisse

Credit Suisse failed this weekend — or at least it would have, were it not too big to fail. Instead, Switzerland&#x27;s banking regulators cobbled together an <a class="gtmContentClick" data-vars-link-text="emergency solution" data-vars-click-url="https://www.axios.com/2023/03/19/credit-suisse-buyout-banking-crisis-ubs" data-vars-content-id="81283e1f-b902-4371-b261-b995f99be876" data-vars-headline="Credit Suisse is an unavoidably messy bank failure" data-vars-event-category="story" data-vars-sub-category="story" data-vars-item="in_content_link" href="https://www.axios.com/2023/03/19/credit-suisse-buyout-banking-crisis-ubs" target="_self">emergency solution</a> that leaves nobody happy — but at least prevents a catastrophe for the global financial system.Why it matters: The 30 <a class="gtmContentClick" data-vars-link-text="G-SIBs" data-vars-click-url="https://www.fsb.org/wp-content/uploads/P211122.pdf" data-vars-content-id="81283e1f-b902-4371-b261-b995f99be876" data-vars-headline="Credit Suisse is an unavoidably messy bank failure" data-vars-event-category="story" data-vars-sub-category="story" data-vars-item="in_content_link" href="https://www.fsb.org/wp-content/uploads/P211122.pdf" target="_blank">G-SIBs</a> — global systemically important banks — are the financial institutions that global regulators have determined are too big to fail. As such, they operate under stricter capital standards and regulatory scrutiny than anybody else. Nevertheless, as Credit Suisse shows, they can still end up being worth a negative amount of money.

Here's a riddle for you. Shares in First Republic Bank closed at $31.21 on Monday, and opened at $49.69 on Tuesday — an overnight spike of 59%. There was no news about the bank over the course of the intervening hours. So why did the stock move so much?

The answer: The stock moved so much because there was no news about the bank over the course of the intervening hours. But also, once banks start to get into trouble, the share price naturally becomes incredibly volatile, just because their balance sheet leverage is so enormous at that point.  

Between the lines: There are a lot of possible futures for any given company, and a stock price can be thought of as a kind of weighted average of all of them, discounted by a similarly probabilistic range of discount rates. 

At times like these, certain banks start to become the subject of worries that they might get taken over by the FDIC overnight and ultimately sold to a new owner.

When that happens, depositors (account holders) are generally unaffected, while shareholders are generally wiped out. The bank lives on — do a blood test on JPMorgan and you'll find WaMu DNA in there somewhere — but that's no solace to its former owners.

In other words: It doesn't matter how valuable Signature Bank or SVB end up being to their future owners, whoever that might be. All that value accrues to the new shareholders, while the old shareholders remain zeroed out.

How it works: When markets closed on Monday, there was some non-negligible chance that federal authorities would look at First Republic's deposit outflows and take it over before markets opened on Tuesday. 

That possibility was reflected in its Monday share price — so when Tuesday morning arrived and nothing had happened, the stock price, no longer reflecting the probability of a Monday-evening failure, went up. 

The big picture: Banks are some of the most levered businesses in America — they have vastly more debt than equity. That's just how fractional-reserve banking works. 

Debt is normally a combination of total deposits, bonds outstanding, and various other instruments like repos; equity is normally gauged using measures like Tier 1 capital.

Take a typical boring bank like PNC Bank. Its capital is about $43.5 billion, while its deposits alone — all of which are unsecured liabilities of the bank — are ten times that sum. 

The bottom line: Because equity value is such a small sliver of a bank's overall capital stack, bank shares tend to be particularly volatile, especially when market capitalization falls well below book value. 

Banking is a high-leverage business — volatility comes with the territory

Here&#x27;s a riddle for you. Shares in First Republic Bank closed at $31.21 on Monday, and opened at $49.69 on Tuesday — an overnight spike of 59%. There was no news about the bank over the course of the intervening hours. So why did the stock move so much?The answer: The stock moved so much because there was no news about the bank over the course of the intervening hours. But also, once banks start to get into trouble, the share price naturally becomes incredibly volatile, just because their balance sheet leverage is so enormous at that point.

Data: U.S. Treasury; Chart: Axios Visuals

With T-bills yielding 5%, it's hardly any wonder there's been a huge surge of enthusiasm for them, even when the main website for purchasing them feels like it's stuck in 1998.  

State of play: The above chart shows the number of people buying T-bills on TreasuryDirect through February, before the banking crisis. 

In March, of course, millions of Americans with deposit accounts holding more than $250,000 realized that (a) a lot of their money was uninsured; and (b) they could get much better interest rates just by buying T-bills. 

Here's a contest: The number of people buying T-bills through TreasuryDirect was 189,823 in February. 

What do you think it's going to be in March? Reply to markets@axios.com with your best guess, and the person who comes closest* will win a signed copy of my forthcoming book. 

The winner will be announced on either April 15 or April 22, depending on when Treasury releases the March data.

*Just, closest. None of this "Price is Right" stuff about not going over. That's just silly.

Bond markets

Illustration of a pile of money in front of abstract shapes.

With T-bills yielding 5%, it&#x27;s hardly any wonder there&#x27;s been a huge surge of enthusiasm for them, even when the main <a class="gtmContentClick" data-vars-link-text="website" data-vars-click-url="https://www.treasurydirect.gov/log-in/" data-vars-item="in_content_link" href="https://www.treasurydirect.gov/log-in/" target="_blank">website</a> for purchasing them feels like it&#x27;s stuck in 1998. State of play: The above chart shows the number of people buying T-bills on TreasuryDirect through February, before the banking crisis.

Felix Salmon

Stories

Credit Suisse is an unavoidably messy bank failure

What banks are good at

A theory on T-bills and the debt ceiling

Why First Republic shares went on a rollercoaster ride

Americans are piling into T-bills

Newsletter editions

🏦 Markets Weekend: Subject-matter ignorance

🪦 Markets Weekend: A crypto death blow

🎓 Markets Weekend: Capitalism beats college

🏦 Markets Weekend: World Bank change agent

🐖 Markets Weekend: When is a Banc not a bank?