March 16, 2023
Good morning. Questions about banks continue to swirl, with Credit Suisse turning to the Swiss central bank for cash, and First Republic essentially hanging the "for sale" sign in the window.
Today's newsletter is 1,115 words, 4.5 minutes.
1 big thing: Not now, Credit Suisse
The Fed isn’t the only central bank doing rescues this week. Credit Suisse said late last night that it's borrowing up to $54 billion from the Swiss National Bank.
The big picture: The 167-year-old banking behemoth is not a domino falling in reaction to bank failures in the U.S. — its troubles are of its own making, and have been cascading for over a decade. Still, its current dire predicament could hardly come at a worse time for the global financial system, Axios' Felix Salmon writes.
Why it matters: Credit Suisse is one of just 30 global financial institutions designated as being systemically important by the international Financial Stability Board. In other words, it's too big to fail.
By the numbers: Credit Suisse had total assets of $574 billion at the end of 2022 — down 37% from $912 billion at the end of 2020. Its asset-management arm supervises another $1.7 trillion in assets. Those numbers dwarf anything seen at Silicon Valley Bank, which had total assets of $212 billion.
- Credit Suisse's assets are almost certainly lower today. The specter of a messy nationalization looms over it, and clients have long been departing it for institutions seen as being much more stable.
Flashback: Credit Suisse has been scandal-prone for decades, with a long history of involvement in bribery, money laundering, tax evasion, corporate espionage, subprime shenanigans, and terrible risk management. (Archegos? Greensill? Madagascan tuna bonds? Credit Suisse was right in the middle of both of them.) The Guardian and Reuters have good summaries of how we got here.
- Most recently, Credit Suisse's delayed annual report not only showed a loss of $8 billion — equal to roughly its entire market capitalization — but also revealed "material weaknesses" in its accounting for 2021 and 2022. Needless to say, that's not a good look for a global systemically important bank.
- Then yesterday, Credit Suisse's largest shareholder, Saudi National Bank, said that it couldn't provide any more capital because of regulations preventing it from owning more than 10% of the bank.
Between the lines: The balance-sheet problems that took down SVB are probably even bigger at Credit Suisse. While SVB bought mortgage bonds at 1.5% yields, big European banks were forced to buy sovereign debt at sharply negative yields.
- Now that those yields have moved back into positive territory, it is certain that European banks are sitting on massive unrealized losses. But no one really knows how big the numbers are.
What they're saying: Credit Suisse is "too big to fail and too big to be saved,” says economist Nouriel Roubini.
The bottom line: Credit Suisse can't be allowed to fail. But in recent days, the market was pricing in something pretty close.
2. Catch up quick
3. 🛑 Betting on no hike
Does the still simmering banking crisis mean the Fed will hit pause on rate hikes? More of the market now seems to think so, Matt writes.
Driving the news: Numbers derived from the Fed Funds futures markets suggest more than 50% odds that the Fed won't fiddle with its key monetary policy rate at all, when its next statement comes out on March 22.
Context: Just a few days ago — before the collapse of Silicon Valley Bank and Signature Bank — the markets were pricing in a half-point hike next week to counter stubbornly high inflation.
- Yes, but: That doesn't mean investors overwhelmingly agree the romp of rate hikes is completely done. They're still putting roughly 50% odds on a quarter-point hike at the Fed's following meeting, in May.
The bottom line: The Fed is arguably the most important player in financial markets. The flurry of rate increases it delivered last year pummeled stocks, sending the S&P 500 down 19.4%, the worst annual drop since 2008.
- So, if the Fed shifts from hiking to holding steady, that's a big deal.
4. The office reckoning has begun
Office vacancy levels are approaching highs last seen during the savings and loan crisis in the 1980s, Emily writes.
Why it matters: It appears that a reckoning in the office market, widely anticipated since the start of the pandemic, is upon us.
- "We're not ready to say that this is a cliff for the office sector. But I think right now we're finally entering the true turbulent times," Thomas LaSalvia, director of economic research at Moody's Analytics, told Axios.
- Context: Vacancies refer to the share of office space that is not leased by a tenant — as opposed to leased office space that’s mostly deserted.
Zoom out: This was always going to be a slow-moving trend. Remote work drove folks home, but companies didn't instantly give up on their office spaces. Typical leases run for at least 10 years.
- And for property owners dealing with rising vacancies, there's a new wrinkle: They're getting hit with rising costs thanks to higher interest rates on their floating rate debt.
State of play: At the end of last year, even Class A buildings saw a drop in occupancy, per a new report from Moody's.
- Some office landlords are showing signs of distress, as the WSJ reported. Brookfield Asset Management last month defaulted on $750 million in debt on two 52-story office towers in Los Angeles. (It still holds hundreds of properties.)
- These properties were Class A, but faced competition from even-fancier Class A+ properties with better amenities, according to Moody's report. Brookfield's moves might "spur other landlords," it says.
- Meanwhile, Columbia Property Trust recently defaulted on a $1.7 billion loan backed by seven office properties, mainly due to the rise in interest rates.
- The company took out a floating-rate loan in December 2021, according to Moody's. It's gone from paying around 3% on the loan to 6%.
The bottom line: Office space is a good place to start cutting back if you're a CEO looking to batten down the hatches in a turbulent time.
5. 🛢Oil tumbles
U.S. oil prices fell to their lowest level since Russia's attack on Ukraine upended global energy markets early last year, Matt writes.
By the numbers: Prices for West Texas Intermediate crude oil tumbled more than 4% to about $68 a barrel yesterday.
What happened: U.S. crude oil inventories grew a lot more than expected last week, suggesting that the country's economic engine is slowing as the Federal Reserve tightens rates.
Why it matters: Falling oil prices — down roughly 29% from where they were one year ago — should lower inflation in the coming months, a factor that could help clear the way for the Fed to slow rate hikes.
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Markets is edited by Kate Marino and copy edited by Mickey Meece.