Why is UBS asking for a 6bn legal backstop , is it reasonable amt & can it stop the deal?

I *think* a) it's higher than the actual risk b) it's unlikely to stop a deal and c) CS could pay a price for that w/o reducing equity too much.

A thread.

JUST OPINION, I COULD BE WRONG CS has 1.17bn of litigation provisions, they took an additional net of 1.5bn in 2022, but also settled 2bn so this is actively managed.

Here's a list of the main matters left & you'll see why I think 6bn is reasonable (probably too high for just legal)

Let me answer this cos' it's important & I've heard many errors. So AFAIK (I'm not an accountant) here's what banks are allowed to do to hedge a bond book:

1. ofc your're legally allowed to hedge, question is whether the accounting treatment is ok or creates vol

https://twitter.com/LucioMM1/status/1636518277961637894

2. There's a big difference in US & Europe. Technically in US GAAP you can't fair value hedge a fixed-rate HTM bond (you can with a loan) so if you hedge you have P&L, Equity and CET1 volatility which banks want to avoid. There are tricks around this though.

Probably foolish of me to make forecasts about the future, but what do I think will happen with SVB next week? $SVIB #SVB

(I know this will horribly backfire but never mind) 1st, I truly think SVB had a horrible business model.

Volatile & correlated sight deposits & long-term fixed rate bonds with no hedge: truly a recipe for disaster.

Fed & FDIC will be keen to avoid moral hazard there. I don't see a bailout. This is not the 1990s anymore.

We’re all talking about gvt bonds, unrealized losses, bank runs, liquidity etc. so now is the time to reveal my most hilarious professional anecdote ever.

Context: Dexia was a large bank, short term funding (deposits + interbank) & long term assets (mostly govies-like risk). Rings a bell? The kind of biz where access to emergency backup (CB) funding is crucial.

The story now.

This is the peak of the GFC/EZ liquidity crisis. We’re a group of banks summoned by the central bank to discuss ways out the mess and avoid a meltdown.

Commercial real estate is the kingdom of bullshit & there are not that many specialized banks - so it’s useful to hear what they have to say (more useful than “conferences” 😊) if you want to split signal & noise.

Here’s the global big picture, from PBB.

@kittysquiddy @kittysquiddy Volumes: US going down sharply, but from absurd levels - so not sure it's a bad thing!

Europe more stable. Sentiment is very weak

It is this time of the year...

NEW ECB/EBA Stress Tests klaxon!

Scenario, list of banks, etc, all released today.

Like during Covid, the macro outlook is very uncertain but UNLIKE Covid, no public support will be considered. This make a big difference.

A few very hot takes. First, the scenario is severe. Really. More severe than all previous ECB/BOE/Fed tests (Covid quick and dirty analysis excluded).

The combined EZ GDP deviation is -9.6%, it was -7.9% in the 2020 ST that never happened.

I must confess this chart & numbers surprised me because it seemed wrong but also it was tweeted by reliable accounts afaik. So what’s going on? Are corporate treasurers in panic mode because of hikes? I did a deep dive & the outcome is fascinating but NOT what you would expect!

https://twitter.com/dlacalle_IA/status/1616541241478447136

1st, the data is not accurate, but no far off either.

Using Bloomberg database, excluding sovereign bonds I get 51.6% of bonds issued in December 2022 expiring in 2023.

That’s a lot indeed! And in 2021 the equivalent share was 8.5%. Clearly something is going on. What?

Silvergate was one of the major #FTX bank. They are facing possible class actions & regulator sanctions.

globenewswire.com/news-release/2…

But aside from that, I’m not sure people realize how bad their latest results were! 1) $4.7B reduction in deposits (crypto customers -68% qoq!), they had 14.3bn$ total deposits YE 2021

2) They had to monetize ($5.2B sale) huge losses ($718mm, from an equity of 1.6bn$ YE 2021) on securities to match redemptions

I think i know what happened in the very last minutes of that France England game yesterday, and that dramatic penalty miss.

Hear me out, because it’s been a fascinating psychology battle!

A thread. It’s been reported that Kane is maniac in the way he prepares for penalties.

A few days before a big game, he will choose a way to kick (top left corner, bottom right, etc.) and train frantically only for that very specific kick - to be reproduced during the game if needed.

The true nature of crypto was revealed a few years ago, but few people noticed. Billionaire investor William James was giving a conference on yield farming / DeFi. He said this would fail because of the lack of underlying cash flows. You’ll never believe what happened next. James was accosted by a little old lady. "Your theory that yield farming will fail because there are no cash flows & new investors are needed to remunerate old ones has a very convincing ring to it, Mr. James, but it's wrong. I've got a better theory," said the little old lady.

A thread on a major political issue in the US & current litigation about it: the Biden plan on student debt relief.

Interestingly, it’s connected to the debate about inflation and banks… You’ve all heard of the plan.

Legally, it’s not watertight. It’s based on the HEROES Act (a 9/11 legacy) which allows for debt waivers in case of national emergency but

a) covid is (kind of) over and
b) waiver isn’t cancellation

How do global 10y yields jointly move?

Fairly basic stats tools tell us two factors are enough to have a good view on those movements.

I compared those factors on the long term (2000+) and since 2021 (inflation + higher yields). Here's the 1st factor : long term, this factor influenced less peripheral Europe & Japan.

Interesting to point out that Portugal & Italy are now well in the pack and move along global rates.

Japan still different.

But wait for the next factor

The UE is not only the Eurozone, and the action is not only “lo Spread” in Italy.

Hungary and Poland are also important items on the agenda of EU leaders.

Let's look at their situations and the challenges. In Hungary, the HUF has collapsed -11% YTD, CPI is at 19.8% & 2023GDPe is only +1.2%

The MNB had to launch emergency overnight facility at 18% with upper end of the corridor at 25% and has committed to provide FX from its FX reserves to buy gas! (Highly unusual move for a CB).

A LOT has been written about LDIs, but I haven’t seen much about actual numbers.

How much money are we talking about exactly ? Is there a pension black hole ?

Here are a few estimates. You might be surprised. 1) +100bps in 10Y Gilts --> +£160bn of collateral required 😱 And look at YTD Gilt yields.
2) Approx ~£200bn already delivered.
3) At least £120bn still missing --> more selling pressure

That's for liquidity. But what about "solvency" ? (Or net economic situation)

I haven’t tweeted much about Credit Suisse mayhem over the weekend – mostly because I found the tweet that triggered the whole thing a bit silly.

Btw the tweet has been deleted and if I were the journalist, I wouldn’t feel very at ease.

But the price action warrants a thread! What happened? Credit Suisse has had a rough time recently.

Greensill, Archegos and other litigations plagued the bank and eroded confidence. CS has also changed management several times.

Effectively, CS is the new Deutsche : every time shit hits the fan it's for them!

The Bundesbank is the new Dexia - a (not so) funny thread.

For the youngsters, what's Dexia? A shitty bank that borrowed on the 3m market and lent on the 30y market and unsurpringly exploded during the Greek crisis.

What's the connection with the Bundesbank ? Well, the Bundesbank bought long term Bunds (at fabulous negative yields - really a bargain) and borrowed short, with banks depositing excess reserves.

Classic long term / short term transformation

Today's the sale of 5bn£ tap of 2053 Gilt. It was planned for mid Sept but postponed after the queen's death (weird if you ask me)

Since then, you might have noticed slight market movements on GBP/Gilts

By my calculation, this postponement will cost:

2 480 000 000 £ @bbclaurak @Peston @faisalislam

This is overdue but very important: what’s going on with the ECB & reverse tiering & what’s the impact on short term rates & banks?

Well, it’s complicated 😊 No one knows what exactly the ECB has in mind, but there are 3 problems:
i)ECB Assets are LT bonds badly underwater; liabilities are ST deposits paying more. Ouch.

ii)Politically, it looks like the ECB is the new Santa Claus for banks

Charts galore from Morgan Stanley today about EU banks - I'll just share a few snippets which I found particularily interesting.

The 1st one is very straightforward:

EPS keeps increasing in a very steady way despite the uncertain macro outlook. WHY ? You alread know the answer. Rates, rates, rates. Banks have this "countercyclical" structural thing which is that, in this case, worse macro goes with higher rates. You take on one side but make a lot on the other side.

Little bombshell in the EP's proposed amendments on Basel 4 for banks: several proposals to severely penalise fossil fuels.

1) Exposures to existing fossil fuel at 150% risk weight
2) Exposures to new fossil fuel at 1250% risk weight! Crucially, "new fossil fuel" includes "exposures to companies active in fossil fuel sectors, which invest in expansion and exploration and plan to add fossil fuel
resources", so pretty much all of them...

BUT Some version of the amendment include an escape route...

Something fascinating will happen in Q3 on the French mortgage market.

How will French banks be able to make money at all on new loans?

Follow me for a quick thread, because I think it's big.

@kittysquiddy @kittysquiddy Here is how 25y mortgage rates have moved compared to French OAT yield (June is my est).

Strikingly, mortgage rates are now below OAT yields.

French borrowers (such as yours truly) are borrowing cheaper than the government!

WHY?