Lenders of Last Resort

If anything is clear -- there are new ways to think about how money works.

Banks have been knocking at the door of the Federal Reserve to borrow money from its discount window or the emergency facility set up after Silicon Valley Bank’s failure. Data released late Thursday showed a "sharp increase" in emergency borrowing, according to Moody's, and also suggested more deposits were leaving the banking system for money-market funds. Some of the moves are “a headwind to Fed efforts to reliquefy the banking sector,” the ratings company said.

Investors are worried, too. They're parsing granular data points, including one Fed report expected late Friday called an H.8, which shows deposit outflows. Bruce Richards, the chief executive officer of Marathon Asset Management, in an interview with Bloomberg Television cited concerns around First Republic Bank in particular: “What is a bank worth when you have depositors that all flee and all you have is the Fed and JPMorgan left?”

"A bank without deposits is more like just a leveraged hedge fund," he said.

In the absence of regular lending, Wall Street steps up—at a price. Marathon is looking to extend loans to battered banks at big discounts, with a lot of collateral so it can own the assets if the loans can’t be paid back. PacWest Bancorp—a bank with $41 billion assets in California—said clients pulled 20% of deposits this year before it announced a $1.4 billion financing facility from a firm called Atlas SP. That lending business was borne out of Credit Suisse's ashes just weeks ago through a deal made by credit giant Apollo Global Management. (Apollo is the majority shareholder of Atlas SP.)?

The entrance of some Wall Street firms doesn't mean investors are lining up to lend banks money.?

And that's true across the world. The move by Credit Suisse’s regulator to wipe out “additional tier 1” bondholders may freeze up a market that had helped banks in Europe boost capital during the 2008 financial crisis. AT1 bondholders typically hold notes higher up in the capital structure and expect priority over shareholders. In this case, those AT1 investors were burned. So if they were treated “unfairly,” according to Bloomberg Intelligence, “this may have knock-on effects further up the capital structure in terms of lower investor demand, higher spreads, and increased cost of funding.”

Citigroup CEO Jane Fraser, in a conversation with David Rubenstein at the Economic Club of Washington this week, said she believes that “the banking system is pretty sound and we’re talking about a few banks,” she said. “This is not something that is spread across the entire banking system. This isn't like it was last time. This is not a credit crisis.”

You can read the full newsletter here for Bw Daily, and you can sign up here to get it in your inbox each day. The bank system worries are continuing on. Some of the things we are watching for include:?

• The fate of First Republic, given how large the bank is and the worries about the ripple effects across the economy if the situation were to deteriorate. Any deal may involve US backing , Bloomberg has reported.
• How the US government treats depositors, after a series of changes in the language from Treasury Secretary Janet Yellen this week and the promises from Fed Chair Jerome Powell to investigate the oversight lapses at Silicon Valley Bank that led to the second largest bank failure in US history.?
• The investor fall out. Huge hedge funds have lost a lot of money, here is just a glimpse of some of the pain as told by Bloomberg's Nishant Kumar as we head into the end of the month.?
• European bank fallout, after Deutsche Bank sank the most since 2020 and the cost to insure against default soared after an announcing a plan to buy back debt, usually a signal of strength among banks.?
• UBS is moving forward. The bank is looking to cherry pick dealmakers , preferring to boost its own investment bank rather than support Michael Klein's plan for a new firm (previously expected to become CS First Boston). Meanwhile UBS's wealth head vowed retention plans for certain staff in Asia at Credit Suisse. Rivals such as Deutsche Bank and JPMorgan are among banks seeking to hire wealth managers and dealmakers from Credit Suisse -- some banks are even easing hiring freezes to capitalize on the situation.?

We'll be reading all the tea leaves. I have a week off next week—it's a really hard time for me to take it, but I'm certain I'll come back stronger for it. Unfortunately, my sources have promised me that these issues will still be here when I'm back. Have a restful weekend, and see you on the other side.

(Still tips, opinions and feedback is welcome at [email protected]!)