If UBS Backs out, then Credit Swiss will fail, enter Bankruptcy, and that will mean a Bulge-Bracket-Bank (a.k.a. “too big to fail”) has gone under.
The effects on the Global Financial System are, right now, incalculable. A Credit Suisse Default would trigger Credit Default Swaps, and would put the bank in DEFAULT on all its Derivative Contracts.
This could be a “Black Swan Event” that sets in motion a Domino effect, taking out BIG banks all over the world.
🏴☠️ BREAKING NEWS 🏴☠️ Credit Suisse #CS – #UBS deal was a conditional offer. #UBS chairman has already stated that the deal is considered as TOO BIG TO SWALLOW. After #GME beating expectation by posting 16cents profit per share #UBS is considering to terminate the deal. Stay tuned! pic.twitter.com/5DOyuLdHsv
Fury at top Credit Suisse managers. Lament over damage to Switzerland’s image as a stable, reliable banking center. Relief that authorities stepped in to help protect deposits, but worry about keeping cash invested in a bank that failed to manage its own money adequately.
On Swiss streets, emotions were running the gamut among Credit Suisse customers after the government this weekend orchestrated a takeover of the country’s second-largest bank by rival UBS — a bid to prevent further upheaval in the global financial system that began with the collapse of two U.S. banks.
How the merger, with a fire-sale price of 3 billion Swiss francs ($3.25 billion), will play out and its impact on worldwide finance are largely unknown. That has left those stuck in the middle — customers and bank workers — uncertain about what comes next in the deal to create one Swiss megabank.
CAUTION!! More Bank Failures To Come Yet… (IT’S NOT OVER!)
Well, it wasn’t a joke, and as we repeatedly noted today, while Jerome Powell was busting his ass to prevent a violent market reaction – in either direction – to his “most important Fed decision and presser of 2023”, the Treasury Secretary, with all the grace of a 76-year-old elephant in a China market, uttered the phrase…
YELLEN: NOT CONSIDERING BROAD INCREASE IN DEPOSIT INSURANCE
… and the rest was silence… or rather selling.
Commenting on our chart, Bloomberg’s Mark Cudmore noted it was Yellen who was “to blame for the stock slump”, pointing out that “the pessimistic turn in US stocks began within a minute of Janet Yellen starting to speak.”
The S&P 500 rose almost 1% in the first 47 minutes after the Fed decision. Powell wasn’t the problem either: the index was 0.6% higher in the first 17 minutes after his press conference started.
Why am I picking that exact timing of 2:47pm NY time? Because that is the minute Yellen started speaking at the Senate panel hearing. The high for the S&P 500 was 2:48pm NY time and it fell more than 2.5% over the subsequent 72 minutes. Good effort.
Picking up on this, Bloomberg’s Mark Cranfield writes that banking stocks globally are set to underperform for longer after Janet Yellen pushed back against giving deposit insurance without working with lawmakers. He adds that “to an aggressive trader this sounds like an invitation to keep shorting bank stocks — at least until the tone changes into broader support and is less focused on specific bank situations.” Earlier, we addressed that too:
*YELLEN: NOT CONSIDERING BROAD INCREASE IN DEPOSIT INSURANCE
Looking ahead, Cranfield warns that US financials are likely to be the most vulnerable as they are the epicenter of the debate. Although European or Asian banking names may outperform US peers, that won’t be much consolation for investors as most financial sector indexes may be on a downward path.
The KBW bank index has tumbled from its highs seen in early February, but still has a way to go before it reaches the pandemic-nadir in 2020. Traders smell an opening for a big trade and that will fuel more downside. Probably until Yellen blinks.
And if Bill Ackman is right, she will be doing a whole lot of blinking in days if not hours.
Yesterday, @SecYellen made reassuring comments that led the market and depositors to believe that all deposits were now implicitly guaranteed. That coupled with a leak suggesting that @USTreasury, @FDICgov and @SecYellen were looking for a way to guarantee all deposits reassured the banking sector and depositors.
This afternoon, @SecYellen walked back yesterday’s implicit support for small banks and depositors, while making it explicit that systemwide deposit guarantees were not being considered.
We have gone from implicit support for depositors to @SecYellen explicit statement today that no guarantee is being considered with rates now being raised to 5%. 5% is a threshold that makes bank deposits that much less attractive. I would be surprised if deposit outflows don’t accelerate effective immediately.
Ackman concluded by repeating his ask: a comprehensive deposit guarantee on America’s $18 trillion in assets…
A temporary systemwide deposit guarantee is needed to stop the bleeding. The longer the uncertainty continues, the more permanent the damage is to the smaller banks, and the more difficult it will be to bring their customers back.
… but as we noted previously, absent bipartisan Congressional intervention – which is very much unlikely until the bank crisis gets much, much worse – this won’t happen and instead the Fed will continue putting out bank fire after bank fire – even as it keeps hiking to overcompensate for its “transitory inflation” idiocy from 2021, until the entire system burns down, something which Ackman’s follow-up tweet was also right about:
Consider recent events impact on the long-term cost of equity capital for non-systemically important banks where you can wake up one day as a shareholder or bondholder and your investment instantly goes to zero. When combined with the higher cost of debt and deposits due to rising rates, consider what the impact will be on lending rates and our economy.
The longer this banking crisis is allowed to continue, the greater the damage to smaller banks and their ability to access low-cost capital.
Trust and confidence are earned over many years, but can be wiped out in a few days. I fear we are heading for another a train wreck. Hopefully, our regulators will get this right.