Because First Citizens Bank acquired all of the deposits and loans but none of the securities, presumably the only way for the FDIC to complete the deal is to pay First Citizens Bank the difference in cash, which is roughly $63.5 billion (napkin maths: the $119B in deposits are assumed one-to-one, and $72B loans are acquired at $16.5B discount, resulting in a cash outlay of -$63.5B for the acquirer for a bundle of net assets worth -$47B on paper).
If depositors start withdrawing money from the new bank, they at least have access to this amount of extra liquidity from the acquisition.
I was initially surprised about this because AT1 notes are supposed to rank higher than equity. It seems that almost no one saw this coming (CS AT1 bonds traded higher this weekend before the write-down announcement), and traders presumed that bondholders should be made whole if equity holders get something.
However then I looked at the information memorandum of these AT1 bonds (e.g. https://www.credit-suisse.com/media/assets/about-us/docs/inv...). Credit Suisse titled their issues as "Perpetual Tier 1 Contingent
Write-down Capital Notes". Note that it's "contingent write-down" rather than the more typical "contingent convertible". The IM also doesn't contain an explicit conversion price or conditions.
Almost everyone would call this a "CoCo bond", even though its terms are exceedingly clear -- if CET1 falls below 7%, a Contingency Event, which is a Write-down Event, occurs, and "the full principal amount of the Notes will automatically and permanently be written-down to zero on the Write-down Date." In other IM issued by other banks I've seen, usually such event is followed by a mandatory conversion to ordinary shares rather than an immediate write-down. I wonder if this nuance was fully considered and priced in the trading of such instruments.
Between this and Janet Yellen's shaky answer to the Senate regarding deposit flight from community banks on Thursday, I think regulators are prolonging this crisis. Each solution seems designed to address the localized problem but does not consider systemic effects.
1: With this weekends actions in Europe, how will the AT1 bond market react tomorrow?
2: With Yellen's uninspiring answer on Thursday regarding deposits in mid sized banks, what will depositors / bondholders / shareholders do?
Yellen really fumbled the answer and she should have had some slick thing prepared but at the end of the day it isn’t the answer that was the problem. It was that the apparently no one thought through the second order consequences of the SVB depositor bailout. This even though the explicit legal requirement was that the government actors determine it was necessary to prevent systemic risks to the financial system.
Everyone's trying to prop the banks up enough, but not too much; there's a fundamental tension between preventing a panic and ensuring that those who were prudent or otherwise are fairly compensated.
Except that the CET1 is above 14%. I think what happened wasn't related the coco trigger but a bailin, i.e. the regulator forcing losses on bond holders to create equity. So the terms of the coco feature aren't really relevant.
Upon further reading I found that the Viability Event (which is also a Write-down Event) is probably the applicable one in this case:
> (b) customary measures to improve CSG’s capital adequacy being at the time inadequate or unfeasible, CSG has received an irrevocable commitment of extraordinary support from the Public Sector (beyond customary transactions and arrangements in the ordinary course) that has, or imminently will have, the effect of improving CSG’s capital adequacy and without which, in the determination of the Regulator, CSG would have become insolvent, bankrupt, unable to pay a material part of its debts as they fall due or unable to carry on its business.
Clearly this deal required non-customary, extraordinary support from the Public Sector, so if the regulator determines that without such a transaction CSG would have liquidity issues, then this event would occur.
However I think my point stands that the terms of these CS AT1 notes should be understood as materially different from similar securities. For example, this note from ING (https://www.ing.com/MediaEditPage/XS2122174415-ING-Groep-N.V...) has a single Trigger Event that will cause mandatory conversion into ordinary shares, and a more general provision for Statutory Loss Absorption which may be a conversion or a write-down. The terms of CS AT1 notes do not seem to provide for any automatic or discretionary conversion, only automatic write-down.
I completely agree that in situations like this, the regulators have a lot of discretion on these bail-in securities, but I consider this "automatic permanent write-down" feature to be of a materially higher risk than "automatic mandatory conversion" variant because it could be a difference between getting back something (or everything) vs nothing. What the regulators do are, by definition, not "automatic", and an automatic write-down should be a much lower hurdle than an explicit regulatory action.
Effectively there are two banks (Silicon Valley Bridge Bank, N.A. and Signature Bridge Bank, N.A.) with de facto unlimited FDIC insurance, as there's explicit guarantee for all existing and new deposits.
Surely this is the ideal time for planning to split SVB into multiple banks, if the actual intent is to diversify risk (well is it?).
Why do regulators never split banks up? [0] For people who talk so much about managing risk. Reminiscent of GHW Bush's complaint about eating broccoli.
Also, talking about concern about job losses and wider economic impact, compare to in 2020/1 when Congress was fetishizing daily about stimulus packages to save the airline industry, yet long-distance coach companies Greyhound/Boltbus and Megabus were simply quietly allowed to cease business.
> 1/17/2023 The Office of the Comptroller of the Currency and other regulators would consider breaking up big banks that repeatedly fail to correct bad behavior, according to acting Comptroller Michael Hsu.
> Though financial regulators have long had the power to split up banks for incessant violations, Hsu's remarks at the Brookings Institution on Tuesday were the most explicit warning in recent memory of regulators' willingness to break apart large, chronically delinquent financial institutions.
My guess is they are probably looking for a buyer, who will likely roll everything into their offering. So, the more they can get back, the higher the sale price.
I think they should reuse some brands that are available again instead of wasting a new name. I could suggest MCI, Charter, Blackwater, etc as all names that would be befitting for these "oops" rebrands.
Somewhere between "$250k" and "infinite" would have been less moral hazard.
Feels like we've set a dangerous precedent, but only for depositors who are politically connected and can instill panic.
When does the de facto unlimited FDIC insurance expire/ When does Silicon Valley Bridge Bank go back to normal?
Second: IIUC, any shortfall in making SVB depositors whole will come from a levy on the rest of the banking system (and maybe small (<$400m) clawbacks from execs' share sales). How much will that levy cost the rest of us? Can it be legally or politically challenged? Are any Congressmen challenging it? (Where are the libertarian Republicans on this?)
When was the last time non politically connected depositors lost money from their checking accounts?
The only “moral hazard” being created here is encouraging people to deposit money in smaller banks.
If the govt hadn’t created the “moral hazard” then people and businesses would simply have chosen to do all their banking with the much safer big banks like Chase and Citibank.
The reality is that Americans don’t want all banking to be concentrated in the hands, but smaller banks are significantly more risky and inefficient. Depositing money in the smaller banks and not just the top handful is the “moral hazard” that has been created by government intervention.
> The only “moral hazard” being created here is encouraging people to deposit money in smaller banks.
Or everyone, nationwide, starts moving every penny they have into whichever bank, anywhere, offers the highest interest rates, without regard to how they accomplish that. Let's call it "risk intensification".
The only appropriate thing to do would be to levy a haircut on only the uninsured deposits elsewhere in the banking system. And that's already unfair because it should be retroactive to some degree.
The rest have already been paying for this insurance all along. Wouldn't make sense to levy a fee on fire insurance policyholders when someone without fire insurance has their house burn down.
In fact, in a monopolistic market, perfect price discrimination (every consumer pays exactly their individual marginal utility) results in allocative efficiency.
The consumer surplus is zero, but the producer surplus is the maximum possible value.
In other words, the monopolistic supplier would otherwise charge a higher price for everyone if it is unable to price discriminate. If price discrimination is successful, more consumers can afford the product.
Except in this case it's the Hong Kong stock exchange with the lower share price. Almost all A-H dual-listed companies are relatively overvalued in A-share market and undervalued in H-share market, and it has been the case for the last 10 years.
There's no effectively way to arbitrage this other than waiting for "all future cash flows" to be realised and discounted to present. It's the same share in the same company, with equal voting and distribution rights, but you just can't take one share bought in Hong Kong to Shenzhen to sell.
Among the Chinese investors, it's commonly accepted that A-share has a price premium because its price is likely to go up more in a bullish market. Given the largely speculative nature of the Shanghai/Shenzhen markets (compared to the more "rational" western-style Hong Kong market), having the same voting and distribution rights is far from enough to cause a convergence in share price.
"Almost all A-H dual-listed companies are relatively overvalued in A-share market and undervalued in H-share market, and it has been the case for the last 10 years."
This may reflect the lower value of non-exportable yuan.
China is a huge captive market with few investment options, actually. Your choice is either to figure out how to get your money out into a convertible currency, invest in bubbly real estate, or play in a market with heavy insider trading problems.
>it's commonly accepted that A-share has a price premium because its price is likely to go up more in a bullish market.
Unless the government decides to suspend trading in them, in which case you're stuck with the shares with no way to trade them even if their value drops through the floor. It's market distortions on top of market distortions.
At least in Mandarin, given enough context, each Chinese character has one correct pronunciation. It's frequently the "context" that trips up non-native speakers.
The capitalization was lost in translation because in German all nouns are capitalized, whereas in English only proper nouns are capitalized. Perhaps Google Translate assumes "Seafile" to not be a proper noun, so it was downcased in English.
Both of you are wrong...
Let's say there are 100 shares, John owns 25 and Mark owns 75.
Stock splits 3:1, there are now 300 shares, John owns 75 and Mark owns 225.
2/3 of 225 is 150, if Mark sold 2/3 of that he would not retain his percentage.
Instead what is happening is a new class of stock will be created that is valued differently and has different voting rights.
Actually, you are wrong. FB is doing a 3-1 stock split, but the newly issued shares don't have voting rights. So, in your case, Mark would own 225 shares, but only 75 of those would have voting rights, and 150 would be non-voting. Thus, he could sell the 150 non-voting shares and still retain the same percentage of voting control despite only having 1/3 of the "income" rights.
"Income" that won't be distributed as dividend until he decides so. When he needs some cash he might prefer to increase the CEO compensation package instead. Why share the profits with the rest of the owners?
1. Legally, Zuckerberg still bears fiduciary responsibility for all shareholders. If he decided to pay himself all the profits as CEO, he would get sued, and lose.
2. Almost all of Zuckerberg's wealth is tied up in his FB shares. If he starts acting in a way such that other investors don't believe he will support their interests, the value of those shares will go down. It would hurt Zuckerberg a lot more than anyone else.
He can't give himself all the profits, but he can easily raise his compensation from $5mn to $50mn without raising an eyebrow. He can also untie his wealth from fb shares while keeping control, as we have seen.
(Actually it seems the $5mn are security expenses and use of corporate planes... It seems he doesn't really get any compensation beyond the $1 salary? Poor boy...)
Well, no each shareholder would get 3 stocks for every one they have now. But each stock would represent 1/3 of the stake in the company it used to. Sorry for a purely negative comment, just wanted to clarify. If you think about it, if every shareholder could sell, make money, and retain the same percentage ownership, someone on the other end of the deal is paying something for nothing.
Just how undervalued could it be with a market cap of 13.37 billion yuan ($2.15 billion)? And it appears to have been going up 10% daily since March 27 when it launched (it's up over 1000% already).
And if it was so incredibly underpriced... why was it so underpriced?
Because the IPO prices in China are heavily regulated. Tech companies often raise little money in an IPO because it will always be significantly underpriced (generally 100%-300%).
The authorities will make sure your IPO is oversubscribed by at least 50 times to protect the investors, or they will not approve the IPO.
Weird considering the rationale they gave for approving this last batch of IPO's: "a move which could cool a stock market rally that has seen the benchmark blue-chip index surge 13 percent since the start of this year."
Not contradictory at all. Because IPO is such a lucrative investment, each round of IPOs can draw as much as several trillion CNY. This amount of money would have to be withdrawn from the stock market to "cool it down".
If the profit is guaranteed (which it seems like, with the government restrictions), investment firms should be able to simply borrow the money to buy the newly issued shares.
Yes, and it's exactly what's happening. There's no market inefficiency here. During the few days when IPOs are available, the overnight interbank interest rates usually increase significantly compared to other days. On average you can expect to make about 10% p.a. almost-risk-free from IPOs, similar to gearing A-grade corporate bonds.
Anyone and everyone. Real estate investment has bottomed out, now Chinese cash is being funneled into the Shenzhen Stock Exchange.
Lots of free money flowing around in China, they're sniffing in the US too. Investment in Chinese tech companies is booming at a rate that dwarfs the dot-com bubble.
The use of margin debt to trade mainland shares has climbed to all-time highs, while investors are opening stock accounts at a record pace. More than two-thirds of new investors have never attended or graduated from high school, according to a survey by China’s Southwestern University of Finance and Economics.
Because if it tanks, it will likely go to -10% instantly, making it really hard to sell. The thing about price restrictions is that you can never be sure what the real market price is because no one has the information, especially in a bubble.
Most of the volume happens around market opening, because at that time no one is sure whether the stock will end the +10% strike that day.
If you want to sell at an all-time-high, you would have to risk losing out to sell at one of the +10% days.
If depositors start withdrawing money from the new bank, they at least have access to this amount of extra liquidity from the acquisition.