Axios Markets

March 28, 2023
👋 Mornin'. It’s going to be a busy day. More on that below.
Let's get into it. Today's newsletter is 1,092 words, a 4-minute read.
1 big thing: Badwill hunting


When government intervened to save Credit Suisse and Silicon Valley Bank, a lot of people lost a lot of money — shareholders and some bondholders are zeroed out; senior executives are unceremoniously fired.
- The acquiring banks, on the other hand — UBS and First Citizens — both ended up with extraordinary gains on their balance sheets, Axios' Felix Salmon writes.
Why it matters: This is the first banking crisis since the global financial crisis of 2008-09 — and it's easy to see what lessons have been learned. Governments are acting swiftly and aggressively, with the aim of strengthening the overall system rather than leaving it weak.
The big picture: Banks are public-private partnerships. Governments need banks to create money and economic growth; banks need government to prevent runs and act as a lender of last resort.
- In banking crises of yore, government was reluctant to support private sector banks. In the late 19th century, however, it became obvious to the British government that the cost of bank failures was vastly greater than the cost of keeping them alive.
- Over successive crises, more governments got involved earlier and with increasing aggression.
Where it stands: Credit Suisse and SVB were both effectively sold for a negative sale price — $60.7 billion and $16.5 billion, respectively. This so-called "badwill" represents the difference between the amount that the acquiring bank is paying for its new assets, and the book value of those assets.
- In both cases, much of that money was taken out of the hands of shareholders and bondholders.
Between the lines: Badwill of this magnitude is largely unprecedented in banking.
- In 2008, none of the largest bank failures were resolved in this fashion. Lehman Brothers was allowed to file for a chaotic bankruptcy; JPMorgan was arm-twisted into buying Washington Mutual for a sum that kept bondholders intact; Royal Bank of Scotland was nationalized.
- Other banks, including Goldman Sachs and Morgan Stanley, were kept alive through forced capital injections that kept executives in situ and bondholders unscathed.
- Such solutions did little to address festering problems that lasted for many years, and often cost billions of extra dollars before they were resolved.
What changed: The financial crisis introduced the world to the idea that investor money — or “loss-absorbing capital” — should go to zero in the event of a banking crisis. That's exactly what happened at Credit Suisse and SVB.
- While regulators cared deeply that bondholders be unscathed in 2008, they now seem almost eager to inflict losses on bondholders.
- And by structuring the deals in such a way that the acquirers get billions of dollars of new "badwill" equity capital, regulators are also demonstrating that they care about the strength of the remaining banks.
The bottom line: The post-GFC regulatory architecture created "crumple zones" around banks that were designed to hurt shareholders — and bondholders — while protecting depositors and the system as a whole. Those zones seem to have worked exactly as designed.
3. đź’¬ Quoted: SVB hearings edition
Michael Barr appears before Congress last year. Photo: Ting Shen/Bloomberg via Getty Images
"SVB's failure is a textbook case of mismanagement."— Michael Barr, vice chair for supervision at the Federal Reserve
Why it matters: Today kicks off two days of congressional hearings into the collapse of Silicon Valley Bank.
State of play: Barr, who released his prepared testimony yesterday, is among the regulators who will testify before the Senate Banking Committee at 10am ET this morning.
- The officials, including from the FDIC and the Treasury Department, are set to appear as questions swirl about whether tougher rules and oversight could have prevented the collapse, Axios' Courtenay Brown reports.
The intrigue: Barr will lay out repeated warnings by Fed supervisors that were ignored by the bank — including a meeting with bank officials late last year where supervisors expressed "concern with the bank's interest rate risk profile."
- "It is not the job of supervisors to fix the issues identified; it is the job of the bank's senior management and board of directors to fix its problems," Barr plans to say.
Of note: Barr is leading a review by the Fed of possible supervisory and regulatory missteps that failed to prevent the bank's failure. The results will be released by May 1.
- But, but, but: Critics say the Fed can't investigate itself, and they're calling for an independent review.
The bottom line: Regulators and supervisors may stiffen up oversight in the wake of the bank collapse.
- "The failure of SVB illustrates the need to move forward with our work to improve the resilience of the banking system," Barr's remarks say.
4. "Latent vulnerability"


The chart above shows what amounted to a time bomb on banks’ balance sheets, Axios' Kate Marino writes.
- As interest rates rose violently over the course of last year, unrealized losses on banks' long-term, fixed-income assets piled up — losses that would be realized if banks had to sell them en masse to fund deposit withdrawals.
Why it matters: FDIC chair Martin Gruenberg includes this chart in his prepared testimony for today’s Senate hearing — and calls the historic level of paper losses a “latent vulnerability” that helped trigger systemic stress in the banking system.
- "[F]ire sales driven by deposit outflows could have further depressed prices," according to his remarks.
Go deeper: For a play-by-play of events surrounding the collapse, read Gruenberg's full testimony.
5. Human composting is a thing now
Illustration: Natalie Peeples/Axios
Six states have legalized human composting(!) — and it’s turning into a new industry targeting the climate-conscious set.
The big picture: This form of afterlife care is exactly as it sounds — human remains are turned into soil that can be used in gardening or in forests — and it’s starting to catch on among people seeking a more environmentally friendly funeral option, Axios’ Alex Fitzpatrick reports.
One example: Seattle-based Recompose, the country's foremost human composting startup, is looking to raise $5 million in a crowdfunding round.
- The company previously raised $16.75 million across two traditional venture capital funding rounds.
- Recompose has transformed more than 250 individuals so far, the company says, while more than 1,300 people have signed up to be composted when they die.
The cost: Recompose charges $7,000, including pickup, composting and soil donation — generally more expensive than cremation, but cheaper than burial.
State of play: New York, Washington, Colorado, Oregon, Vermont and California have all legalized the practice.
What they're saying: Human composting saves about 1.2 metric tons of carbon compared to traditional burial or cremation, says Recompose founder and CEO Katrina Spade.
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Today's Markets was edited by Kate Marino and copy edited by Bill Kole.
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