Morning Coffee: Is this a crisis? What does it mean for banking jobs? It's ok, Credit Suisse bonuses are still being paid
What now? Mohamed El Arian has deployed the B-word (bailout) about yesterday's takeover of Credit Suisse by UBS, implying that the two C-s of contagion and crisis may not be far behind. It's hard to see how events of the weekend can be good news for jobs in the banking sector.
As we reported yesterday, Credit Suisse's sales and trading jobs look precarious by virtue of being moved into the newly invigorated non-core unit. Credit Suisse's European investment bankers face an uncertain future too. Only Credit Suisse's US investment bankers, and in particular its US tech investment bankers, look welcome at the juiced-up UBS, along with its Asian wealth managers, maybe. But what happens to all the Credit Suisse tech staff and to the thousands of employees in the enormous corporate centre? - $8bn of additional cost cuts don't happen on their own.
The real danger, though, is that after the bailout the first C takes centre stage and that contagion leads to a broader shakedown. HSBC and Standard Chartered stock fell in Asian trading overnight and major European banks including Deutsche Bank, SocGen, and Credit Agricole are down this morning. UBS is down 14%. Martin Arnold at the Financial Times suggests a few reasons to worry: Credit Suisse had healthy capital and liquidity ratios — both only slightly below eurozone averages last year — but that did not save it once confidence evaporated; and many European banks have been generating returns below their 9% cost of capital.
There are intimations, too, of further losses on balance sheets. As Robert Peston, doyenne of British reporting in the previous financial crisis, notes, it's "striking" that UBS only agreed to buy Credit Suisse if the Swiss government first agreed to absorb $10bn of losses on unspecified assets, even though $17bn of Credit Suisse's capital in the form of its additional tier one (AT1) bonds had already been written off. What does this mean for rivals? Credit Suisse was effectively sold for 30% of its market value just two days earlier, and even then no one really wanted to buy it.
The typhoon in Europe comes amidst a gail in the US regional banking sector, where the FDIC is under pressure to guarantee deposits above $250k, possibly up to $10m, following the collapse of Silicon Valley Bank and Signature Bank and the attempt at propping-up First Republic Bank last week.
Central banks are already taking action. Weekly dollar liquidity swap lines have already been changed to daily. The crisis may well be averted now, but problems may be being stored up for the future. - As Reuters notes, the combination of Credit Suisse and UBS has created a behemoth with combined assets worth more than 140% of Swiss GDP in a country heavily reliant on financial services.
It's too early to talk jobs at other banks, but events of the weekend are very likely to cast a pall over hiring in 2023. They may, however, be good for a few people: this looks like a good time to be a Financial Institutions Group (FIG) banker; and compliance and regulatory professionals thrived post-2008. It's worth remembering, too, though, that employment in the New York Securities industry fell by around 10% in 2009 as nearly 20,000 jobs disappeared; it has never reached the same level again.
Separately, Bloomberg reports that Credit Suisse staff are being informed that the coming tranche of their bonuses will be paid on March 24th and that those eligible will also receive the cash component of the "transformation award" (no mention of their stock). Credit Suisse insiders tell us, though, that it's not about March."Senior bankers get cash bonuses vesting in April 2023, July 2023 and October 2023," says one, and we may be paid up to two months after those days. We're wondering if we'll get that at all now."
Meanwhile...
At least two major banks in Europe are examining scenarios of contagion possibly spreading in the region's banking sector and looking to the Federal Reserve and the ECB to step in with stronger signals of support. (Reuters)
Global bank stocks lost $459bn in value in March through to the end of last week. Goldman Sachs' rates desk also lost $200m as expectations of rate rises were recalibrated. (Financial Times)
Millennium fell almost 2% in March. (Bloomberg)
Credit Suisse was complacent after the financial crisis. ‘They thought we are the winner from the financial crisis, and everyone else is hurt. So they doubled down on these kinds of businesses and on investment-banking exposure in general.” (WSJ)
BlackRock's Larry Fink, who used to work for CSFB, thought about buying Credit Suisse. (Financial Times)
Reasons to worry, or not. Credit losses are low, capital levels are strong, but .... rising rates will push loan losses higher and eat into capital buffers. And what about less regulated areas of the financial system that are used to low rates? - Private equity, private credit and hedge funds? (Financial Times)
The standard threshold for vaporising AT1s is 7%, but regulators can trigger them at their discretion and Finma used its discretion yesterday. (Financial Times)
One banker said the decision could lead to a “nightmare” in European debt markets, particularly given bondholders were having heavier losses forced on them than shareholders in Credit Suisse. (Financial Times)
"You'll get nothing...and like it."
— Compound248 💰 (@compound248) March 19, 2023
Below are recent trading prices of the $CS 9 3/4 AT1s that the Swiss regulators just zeroed (despite leaving equity with residual value: ie, the junior survived the ostensibly senior security).
~90 a week ago
Today?
"Read my lips: Z E R O." pic.twitter.com/9AjkehQdga
Silicon Valley Bank was full of nice guys. “They were a mixture of a real bank that could handle transactions and lend money, but they also were fun people to hang out with at parties.” (WSJ)
Silicon Valley Bank's UK arm made between £15m and £20m in bonus payments after being taken over by HSBC. (Sky)
Deutsche Bank right now. pic.twitter.com/wVV3ktHoFc
— Five Minute Macro (@5_min_macro) March 19, 2023
The recent rally in bonds should have significantly reduced stress in the banking system. The value of all bonds has increased $2.1tn since the banking stress erupted 10 days ago. pic.twitter.com/1U76XliBHD
— Holger Zschaepitz (@Schuldensuehner) March 19, 2023
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