National

News of a new $30 billion financial lifeline for First Republic sparked a broad market reversal that bolstered stocks and drove down bond prices, while momentarily allaying simmering investor fears about a banking crisis. 

Why it matters: With interest rates soaring across the world, the embattled regional bank has been the focus of widespread fears about financial contagion. Inflationary pressures are boosting rates, which in turn are exposing cracks in the foundation of the global financial system.

Along with Credit Suisse’s operational woes, the failures of Silicon Valley and Signature Banks have converged with interest-rate risk stemming from the Federal Reserve’s offensive against inflation — all of which are roiling Wall Street.

Driving the news: On Thursday, banking crisis jitters pushed the KBW Bank Index to a new 52-week low, but it rebounded with blue-chip and technology stocks as reports emerged of First Republic (FRB) getting a new backstop from JPMorgan Chase and Morgan Stanley, along with 9 other banks.

However, the fate of Silicon Valley Bank (SVB) remains a glaring issue, with no formal takeover offers having emerged nearly a week after the institution was backstopped by the FDIC and the Fed in a dramatic weekend rescue.

Zoom out: Over the last week, policymakers have been forced to intervene in order to save or buttress at least four different financial institutions, in ways that recall the extraordinary response to the 2008 crisis.

Cody Lott, Director of North American Corporate and REIT Solutions, at Clearwater Analytics, tells Axios in an email that “if these banks do not come out of this alive in some capacity there could be significant consequences that ripple out. Not to mention, competitors to these banks are probably licking their chops to gain more market share.”

What they're saying: In a joint statement, leaders of the FDIC, Treasury, Fed and Office of the Comptroller of the Currency (OCC) said the "show of support by a group of large banks is most welcome, and demonstrates the resilience of the banking system."

The bottom line: Market observers have worried about the current turmoil being a sign “the ghosts of 2008 have made a sudden reappearance,” Capital Economics wrote in a note on Thursday.

“Many metrics of core market functioning have worsened worryingly fast, but the overall situation is still long way short of the type of strains seen during the worst parts of the Global Financial Crisis or the early stages of the COVID-19 pandemic,” the firm added.

Editor's note: This story has been corrected to state that the news of First Republic's $30 billion rescue drove down bond prices, not yields.

Big banks inject $30 billion to rescue First Republic, but worst not over yet

Inflationary pressures are boosting rates, which in turn are exposing cracks in the foundation of the global financial system.

Illustration of a stock trend line bouncing upward from a safety net with the Federal Reserve seal in the center

Wall Street

Economy & Business

World

Axios World

Two decades after the U.S. launched Operation Iraqi Freedom, Iraq is "not free," at least according to the latest Freedom House analysis.

The big picture: The U.S.-led invasion that began 20 years ago this week and swiftly toppled one of the world's most repressive regimes did not, as its architects in the George W. Bush administration hoped, herald a new dawn for democracy in the region.

Rather than the anniversary, most Iraqis are focused on "the frustrations of current reality: the kleptocracy, the lack of services," says Omar Al-Nidawi, director of programs at the Enabling Peace in Iraq Center.

The invasion elevated a new class of politicians, many of them exiles who returned to vie for power and continue to do so today, Al-Nidawi says.

"They got their foot in the door, they acquired resources, they acquired positions. So when the country transitioned to a democratic system, they had an advantage," he says. Patronage networks, state resources and militias helped entrench their power.

State of play: Corruption and sectarianism have been endemic to Iraqi politics since the invasion, with Shiite, Sunni and Kurdish parties divvying up the top jobs and government ministries, and using their share of the budget to enrich themselves and employ their supporters, says Jonathan Lord, director of the Middle East security program at CNAS.

That budget is almost entirely funded by oil. "There is almost no private sector economy to speak of in Iraq," Lord says.

Around half of Iraq's population was born after the invasion. But young Iraqis unable to secure a job in the government or oil industry have few options for work.

A Gallup index of global sentiment ranks Iraq as the third most unhappy country, behind only Afghanistan and Lebanon.

Flashback: U.S. troops withdrew after eight years of war — in which an estimated 200,000 Iraqis died along with nearly 5,000 U.S. troops — but returned in 2014 to help confront the rise of ISIS. Around 2,500 U.S. troops remain in the country to help prevent a resurgence.

They also keep an eye on Iran, which grew increasingly powerful inside Iraq as Saddam fell and the U.S. withdrew. Powerful militias inside Iraq have links to both Tehran and to political parties in Baghdad.

Yes, but: Even by surviving this long, Iraq has defied many expectations, notes the International Crisis Group's Joost Hiltermann.

"Iraqi society came to enjoy a modicum of freedom. The country has a multiparty system for the first time in its history, repeated and relatively fair parliamentary elections, and a free (but easily intimidated) press."

But plunging voter turnout and waves of protest, often driven by a lack of basic services like reliable electricity, underscore the disillusionment with the current system.

The latest: Current Prime Minister Mohammed Shia al-Sudani took office in October 2022 following a long and volatile post-election power struggle. Sudani was backed by a bloc of pro-Iran parties, but he has tried to dispel claims he's loyal to Tehran and referred to the U.S. this week as a "strategic partner."

In addition to balancing the outside powers, he's trying to quickly demonstrate progress at home, particularly in the power supply, Lord says. "He understands that he doesn't have long before he's going to be facing protesters in the streets again."

What to watch: Al-Nidawi doesn't believe the old guard will change its stripes, but he's encouraged that an unusual number of new parties and independent candidates won seats in the 2021 elections.

"I don't expect much good to come out of this government, left to its own devices," he says. "But I am optimistic about what ordinary voters can do."

Iraq's politics are chaotic and corrupt 20 years after U.S. invasion

Two decades after Operation Iraqi Freedom, Iraq is "not free."

U.S. Marines topple a statue of Saddam Hussein in Baghdad in April, 2003. Photo: Wathiq Khuzaie /Getty Images

Iraq

China is becoming the most formidable rival America has faced, and the risk of confrontation with Russia, North Korea or Iran still looms. Authoritarians are rising, the chaotic Afghanistan exit revealed the limits of U.S. power, and the pandemic, climate change and other critical challenges continue to pose grave threats.

Emergency loans to banks spiked to a new record in the week through Wednesday, surpassing previous highs reached during the 2008 financial crisis. 

Why it matters: The details came in a weekly Federal Reserve report released Thursday, which is sure to attract more attention for what it may reveal about stresses in the banking system after the failures of Silicon Valley Bank and Signature Bank.

By the numbers: As of Wednesday, banks had $153 billion in loans at the "discount window," a longstanding tool through which the Fed provides cash to banks in need of liquidity by lending against solid collateral.

The previous record for discount window borrowing was $111 billion in 2008. It also reached $51 billion in the early days of the pandemic.

Banks also had $12 billion in credit from the Bank Term Funding Program, announced Sunday night, to make bank lending available on highly favorable terms. The report does not say which (or how many) banks tapped the facility and won't do so for another year.

The Fed also extended $143 billion to support the FDIC's guarantee of all depositors in failed Silicon Valley Bank and Signature Bank.

Between the lines: Banks looking to access loans through the emergency facility can pledge long-term securities like Treasury bonds at their original value, allowing them to borrow against that even if those assets have fallen in volume.

The total value of the securities pledged was about $16.9 billion, as of Wednesday — higher than the loan value, which suggests banks have not borrowed as much as their collateral allows yet.

The bottom line: The report sheds light on banks' demand for short-term cash in the early days of the fallout from the Silicon Valley Bank crisis. Further reports will be looked at for more evidence on how banks are doing.

Also on Thursday, a group of large banks, including JPMorgan, Bank of America and Citigroup, said they would infuse $30 billion in First Republic Bank, another West-coast regional lender that's been an emerging focus of widespread fears about financial contagion. 

Fed's emergency bank lending soars to new record

The report sheds light on banks' demand for short-term cash in the early days of the fallout from the Silicon Valley Bank crisis.

Photo: Al Drago/Bloomberg via Getty Images

Federal Reserve

Silicon Valley Bank

President Biden has made the COVID-19 crisis and a post-Trump return to national unity and traditional democratic ideals his top priorities. From vaccinations to stimulus to schools, Biden is seeking bipartisan compromise while showing a willingness to use executive authority and bare Democratic majorities in the U.S. House and Senate to implement his policies. Republican leaders are navigating deep party divisions over if and how to move beyond former President Trump.

Politics & Policy

A handful of large, troubled U.S. regional banks — and maybe one really big European one — may well accomplish what the mighty Federal Reserve couldn't on its own: tightening the financial screws enough to slow down economic activity in a meaningful way.

That, at least, is the takeaway from financial market moves since the federal seizure of Silicon Valley Bank less than one week ago.

Why it matters: Just a couple of weeks ago, we mused about why a series of Fed hikes have not affected the economy more. But now, there are early signs that banking troubles will constrict credit and damage confidence in ways that rate hikes alone have not.

It is a fast-moving, highly uncertain situation in which Fed officials will have to rely more on gut instinct than backward-looking hard data.

Should the Fed continue its long-telegraphed tightening campaign to bring down inflation, or conclude that a seize-up in lending conditions triggered by banking problems will do the job for them?

Between the lines: Stress in the financial system tends to have powerful effects on growth. Part of the reason rate hikes haven't slowed the economy more over the last year is that, while borrowing costs have been higher, credit has mostly remained readily available.

That would change if the failures of SVB, Silvergate and Signature Bank (and troubles at several others) lead banks writ large to adopt greater caution, curtailing lending.

Similarly, it could make buyers of corporate bonds more risk-averse, lending on less favorable terms and at higher interest rate premiums relative to safe assets.

Even if there are no further bank failures, notes JPMorgan Chase's Michael Feroli, there could be an outflow of deposits from smaller banks that causes them to try to shrink their loan book; they could also constrain lending in anticipation of tighter regulation or a recession.

What they're saying: "Even prior to this shock, bank lending conditions had begun to tighten to levels that typically precede recessions," Matthew Luzzetti, chief U.S. economist at Deutsche Bank, tells Axios.

"We anticipate this shock is likely to lead to further risk aversion that will accelerate the tightening through this channel, making a recession by year-end even more likely," he said.

By the numbers: Swings in the bond market are consistent with a story of tighter credit and a gloomier outlook for the remainder of 2023 than was the case a week ago.

The two-year Treasury yield, 5.06% just eight days ago, was at 3.93% Thursday morning. That implies the Fed will soon be cutting its target rate from the current levels of around 4.6% — something it will only do if there is clear evidence of economic deterioration and falling inflation.

Spreads between rates on riskier corporate debt and equivalent Treasuries have widened, as have measures of anticipated market volatility.

Yes, but: When markets are in turmoil, as they are this week, extreme volatility can reflect more a sense of momentary panic and shifts caused by large investors unwinding positions than any considered reassessment of the likely path of the economy.

Moreover, this economy has proven strikingly resilient over the last year; even as the Fed has hiked, the stock market has swooned, while housing and tech faced real challenges. Perhaps underlying momentum is strong enough to handle a banking panic, too.

What to watch: A range of institutions publish a financial conditions index to capture all this in a single number. We'll be paying attention to what they show.

Also, the Fed releases every Friday afternoon a report on the assets and liabilities of American commercial banks, known as the H.8 report. It will be worth paying special attention to in the coming weeks.

The bottom line: One week ago, it looked like the open questions for the economy would be answered with data on jobs and inflation. Now we are in a murkier, more uncertain world with greater risks of real economic pain.

How the banking crisis changes the economic outlook

A handful of large, troubled U.S. regional banks may well accomplish what the mighty Federal Reserve couldn't on its own.

Illustration of the grimacing emoji as a gold coin.

Economy

Communicators

Axios Communicators

The tech and startup community has a major perception problem that has been highlighted by the Silicon Valley Bank fallout. 

Why it matters: The spread of anti-tech sentiment is a PR issue that could do permanent damage to the industry's reputation and make it even harder for American founders to build and innovate.

The big picture: Those in the VC and tech world recognize this has given fodder to the narrative that they are bad for society, so they are doing more to engage in Washington and beyond. 

State of play: In the thick of the SVB crisis this weekend, close to 100 climate-focused venture executives joined a call with former White House officials Saturday night to talk messaging, Axios Pro's Alan Neuhauser reports.

Comms pros are also rethinking how they educate the general public.

What they're saying: "The average person's understanding of what the tech industry looks like holistically is really poor and they can't be blamed for that," one communications professional within the VC world told Axios. "We haven't done a good job of telling the hero's journey of people who are trying to make a difference in the earlier stages of tech."

Yes, but: "It's not just about telling the founder's story. Who founded them is interesting, but also who's on the team? How many people in your state or district are employed by tech? There's a sense that we're all here in California or New York, when in fact, that's not true. ... Many are in your backyard."

Zoom in: These comms pros also recognize that solely placing stories in tech and finance trades isn't enough. 

"These stories are ripe for local media. Getting something placed in Forbes or Fortune isn't necessarily going to move the needle because that's not what most folks are reading. ... We have to do more to meet people where they are," says one PR professional in the tech space. 

The bottom line: VC firms, PR agencies and the tech industry as a whole must do a better job of explaining who they are, what they do and how they help the world.

SVB's collapse highlights tech's PR problem

Anti-tech sentiment is a PR issue that could damage the industry's reputation and curb innovation.

Illustration of a unicorn with a bandaid.

Communications

The rate of eviction filings has returned to or exceeded pre-pandemic levels in many U.S. cities in recent months, amid the historically high cost of housing and other basic necessities.

That's according to data from the Eviction Lab — a Princeton University project aiming to fill an "information hole in the center of the evictions crisis" by collecting data from court filings and other sources, research specialist Jacob Haas told Axios.

Driving the news: Sweeping local and national eviction moratoriums helped keep many families in their homes through the heart of the COVID-19 pandemic. 

With those moratoriums long since over, many Americans are once again exposed to the threat of displacement — especially as high rent costs have renters spending a record share of their paychecks on their monthly housing bills.

The eviction crisis tends to disproportionately affect minority groups — particularly Black women, says Haas.

Zoom in: In the Twin Cities, for example, an average of nearly 300 evictions per week have been filed over the last four weeks. That's compared to 20 per week while moratoriums were in effect

Eviction filings in the Twin Cities

Reproduced from the Eviction Lab; Chart: Axios Visuals

What they're saying: "We've seen a return to or beyond pre-pandemic averages in a large number of areas where we've been tracking [eviction] data," says Haas.

"To return to that is disappointing given all of the initiatives that were taken to prevent housing instability."

The big picture: Some cities, such as Philadelphia and Cleveland, have recently launched or expanded programs meant to help tenants access financial relief, stay in their homes amid eviction disputes, or mediate disputes between renters and landlords.

"Good cause" bills, meanwhile, aim to restrict evictions to cases where tenants violate their lease agreements, as well as limit major rent increases.

Housing issues and homelessness are shaping up to be especially potent issues in local elections nationwide, Axios Local authors John Frank, Jessica Boehm and Kim Bojórquez report.

Of note: The Eviction Lab's data set doesn't capture illegal evictions, nor does it include cases where renters are effectively forced out by large rent hikes.

The bottom line: The Eviction Lab's data set, which includes 34 cities, is the closest thing available to a nationwide evictions database.

While the U.S. Department of Housing and Urban Development is working on new data-collection efforts, "there's still no government database nationwide with full coverage," says Haas.

That data void makes it all but impossible to adequately track — and therefore address — the problem at scale.

Evictions have returned to — or exceeded — pre-pandemic levels

With moratoriums long since over, many Americans are once again exposed to the threat of displacement.

Illustration of three rows of identical houses on a blue background, with one of the houses replaced with a lock.

Housing

Login

Axios Login

Microsoft on Thursday unveiled its effort to build generative AI into Office tools, including Word, Excel, PowerPoint, Outlook and Teams, as well a new Business Chat app that works across corporate data. 

Why it matters: Companies are racing to add the latest generative AI technologies into their products.

Details: Dubbed Microsoft 365 Copilot for Work, the software will be able to help with a range of tasks, from drafting e-mails to crafting budgets to summarizing a meeting if participants arrive late. 

Microsoft also demoed how AI can easily turn a Word document into an animated PowerPoint presentation, complete with speaker notes.

The company said these new features are now being tested with 20 customers (including 8 that are in the Fortune 500) in order to find and fix problems that might arise. It says it will expand access in the coming months and share details on pricing soon.

What they're saying: Microsoft pitched the new technology as a way to remove the drudgery from work.

"We have become separated from the soul of our work,” said corporate VP Jared Spataro. "We don’t just need a better way of doing the same things. We need a whole new way of working."

Of note: Microsoft sees the new Copilot as not just a way for people to make better use of their data, but also to harness more of the capabilities of Microsoft's software. 

Most people, for example, only use about 10% of PowerPoint's capabilities; the company sees AI as an easier way to access the other 90%.

Between the lines: Microsoft has had a leg up thanks to its commercial relationship with OpenAI.

For example, GPT-4 was only announced this week, but Microsoft revealed that the new version is actually what has been powering its AI-enhanced Bing search engine.

Of course, the company has poured billions of dollars into OpenAI in exchange for that early access.

The big picture: Others, including Google, are developing and deploying their own generative AI systems. 

Google announced earlier this week it was also building AI into its Google Docs apps, now known as Workspace. 

Salesforce last week said it would incorporate such tools throughout its customer relationship software and partner with OpenAI to bring ChatGPT to Slack.

Microsoft details how AI will change its Office apps

AI tools inside Office will help users take advantage of more of the software's features, the company hopes.

Illustration of the Microsoft logo with binoculars viewing the OpenAI logo

Microsoft

From the Valley to D.C., Big Tech players like Facebook, Google and Amazon are under more scrutiny than ever as new technology develops and privacy and antitrust concerns grow in lockstep with companies’ ambitions.

Technology

Treasury Secretary Janet Yellen sought to reassure Congress Thursday that the U.S. banking system remained "sound" after a week of market tumult.

Driving the news: Yellen's testimony comes days after the government moved to fully guarantee depositors in failed Silicon Valley Bank and Signature Bank, helping stem the immediate panic, Axios' Neil Irwin writes.

Worries about the financial system persisted after Credit Suisse — an institution deemed too big to fail — saw its share price tumble Wednesday.

The big picture: In testimony before the Senate Finance Committee Thursday, Yellen touted the government's "decisive and forceful actions" to shore up confidence in the banking system.

"I can reassure the members of the committee that our banking system is sound and that Americans can feel confident that their deposits will be there when they need them," Yellen said.

She argued that the government's actions demonstrate its commitment to ensuring "that depositors' savings remain safe" and allowed bank customers to make payroll and pay their bills.

Editor's note: This article has been updated with new remarks from the hearing.

Yellen tells Congress that U.S. banking system is "sound"

"Americans can feel confident that their deposits will be there when they need them," she said.

anet Yellen holds up a copy of the Treasury Departments Greenbook

Janet Yellen testifies during a House Ways and Means Committee hearing on March 10. Photo: Drew Angerer/Getty Images

Janet Yellen

Pro Rata

Axios Pro Rata

So goes Silicon Valley, so goes the world.

Driving the news: Credit Suisse last night said it would borrow up to $54 billion from the Swiss government, which took a page out of the U.S. "backstop" playbook.

The Swiss bank has been crumbling and stumbling for years, so it's not fair to draw a straight line to it from SVB. But it also would be naive to ignore the psychological crisis of confidence that SVB sparked last week, and that the U.S. government failed to extinguish on Sunday night.

Elsewhere: Bloomberg reports that First Republic is exploring options that could include a sale.

It adds that the San Francisco-based bank also is "weighing options for shoring up liquidity," which is strange given that it just got a $70 billion backstop from JPMorgan.

First Republic shares got crushed at today's open, as did shares of many other regional U.S. banks. Credit Suisse stock, on the other hand, climbed.

The big picture: It feels like we're on the brink of a bank merger wave. And maybe need to be. But a giant caveat is that U.S. banks don't have a clue what the White House will, and won't allow.

Remember, big banks and private equity were basically told "need not apply" to the FDIC auction for SVB last weekend. But the administration hasn't discussed it publicly — not even explaining why it rejected the one takeover bid it did receive.

The perception is that there is strong WH opposition to acquisitions by too-big-to-fail banks, even though last weekend suggests the threshold for that descriptor has been significantly lowered. How can First Republic look for a buyer, if it doesn't know the acceptable buyer universe?

Meanwhile, the startup financing world is returning to something close to normal.

For example, Stripe yesterday completed its massive secondary deal, raising $6.5 billion at a $50 billion valuation.

VCs are telling portfolio companies (and themselves) to be wiser with corporate treasury management, but that's more a technical change than an activity change.

There's still some finger-pointing over the SVB bank run, and ongoing questions over where to bank, but no reason to expect that such recriminations will prevent firms from working with one another in the future.

The bottom line: This week has been a month. And it's not over.

The global banking system is on edge

Illustration of a hand putting a hundred dollar bill in a piggy bank with lines on it like a butcher diagram

Markets

Axios Markets

Data: Moody's Analytics; Chart: Axios Visuals

Office vacancy levels are approaching highs last seen during the savings and loan crisis in the 1980s. 

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. 

Rather than lay off workers during a time of labor shortages, companies are looking to real estate as a way to cut costs, said LaSalvia.

"The low-hanging fruit is definitely that office space," he said.

The long-anticipated office reckoning is upon us

"We're entering the true turbulent times."

Real estate

U.S. military releases video of Russian jet intercepting drone

The Pentagon released declassified footage Thursday that it says shows a Russian jet conducting "an unsafe and unprofessional intercept" with a U.S. drone over the Black Sea earlier this week.

Driving the news: The 42-second video shows a Russian Su-27 jet approaching the MQ-9 Reaper drone and releasing fuel as it neared the U.S. aircraft on Tuesday.

A jet is then seen approaching the drone for the second time and colliding with it before the feed cuts out.

The footage appears to show damage to the drone's propeller.

The big picture: The collision led to the "complete loss" of the drone, the U.S. European Command said

The incident followed a "pattern of dangerous actions by Russian pilots while interacting with U.S. and Allied aircraft over international airspace," it added.

Thursday's top stories

Big banks inject $30 billion to rescue First Republic, but worst not over yet

Iraq's politics are chaotic and corrupt 20 years after U.S. invasion

Fed's emergency bank lending soars to new record

How the banking crisis changes the economic outlook

SVB's collapse highlights tech's PR problem

Evictions have returned to — or exceeded — pre-pandemic levels

Microsoft details how AI will change its Office apps

Yellen tells Congress that U.S. banking system is "sound"

The global banking system is on edge

The long-anticipated office reckoning is upon us

U.S. releases footage of Russian jet intercepting drone

Two Americas Index: Ukraine divides conservatives

Drone delivery is about to get real

Democrats now sympathize more with Palestinians than Israelis, poll finds

NASA reveals spacesuit for new Moon mission that better fits women

U.S. tells TikTok owners to sell app or face a ban

Credit Suisse to borrow up to $54 billion from Switzerland's central bank

Abortion pill ruling looms over FDA's drug approval process