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WE covered the Silicon Valley Bank (SVB) last week, and the perfect storm of risk that knocked it off its perch. For the record, there were several hundred venture capitalist firms who had signed a letter to keep their deposits there. Those venture capital firms with an interest in destabilising the dollar and banking system via Crypto, may not have. Read that as you will.
The column last week, as well as this one, are examples of understanding an investment before you go anywhere near it. These details weren’t/aren’t widely available, but their impact is significant.
And so to Europe and Credit Suisse/Deutsche and the rolling question from last week of: ‘Are banks really in trouble?’
Following SVB’s demise, markets and companies started to look around for any systemic risk. Is that domino number one? Much to the delight of the newspaper hyena headlines, Switzerland’s second largest bank got into trouble. That would be a big domino. Think 2008 and chaos.
We don’t know what we don’t know, so its risk.
However, it was always well known it was a badly run bank and had just started a dubious three-year turnaround plan. Its shares were trading at 30 per cent of its book value. That is just obscene. Even banks that are not great like Barclays, trade at around 50 per cent of book value. Banks shares should trade at book value, but, if they are growing fast, maybe a bit above that. If they are a bit sluggish, maybe at 90 per cent, but never 30 per cent. There is a clue in the price.
The bank had received capital bailouts. Three big shareholders were from Qatar and Saudi Arabia and the main shareholder was the Saudi National Bank.
Stay with me for this howler.
The chair of that bank, Al Khudairy (who has since resigned, because of….well, read on) went on Bloomberg and said we wouldn’t give Credit Suisse any more money, even if we could. (They were close to the 10 per cent limit they are allowed).
He didn’t say it over a bag of crisps down the local boozer at 23:05 when the only people in were the cleaner and two stragglers. This was on Bloomberg. So, within seconds, this was over every trading screen in the world. Nice touch mate, right after the Silicon Valley Bank issue.
The Swiss National Bank offered Credit Suisse help (around $64billion) which went in around two days. There are a lot of incredibly wealthy people in Switzerland just sucking their money out of banks. Those two days give you the scale. The Swiss National Bank looked at the options and told UBS, you are taking over Credit Suisse.
Remember who the shareholders are?
Normally on a takeover, the shareholders get nothing, but the Saudis and Emiratis have vast sums in Switzerland. Read on.
And so, to AT1 bonds (it will make sense, trust me). The 2008 banking crisis was to never happen again, so a class of bond was introduced which paid a high income of c10-14 per cent if the bank was functioning. If the bank went into trouble, the shareholders took the hit first then the next set of junior debt – Cocos (contingent convertibles, or AT1). Stay with me.
In Switzerland, however, these bonds had a special clause. If the regulator thinks it’s a systemic risk, it can make those bonds worthless. So, they did. They wiped out these bondholders and kept their major depositors sweet. See note above re: the money held in Switzerland and by whom.
A bond prospectus issuance (big book) is as thick as a politician, and so markets scurried around everywhere seeing which European banks had these cocos, meanwhile there is a sell off, just in case there are. Headlines are everywhere, and shares plummeted.
Arise, Christine Lagarde who reassuringly speaks up: hey, we will follow the normal protocol and pecking order, so chill out, it’s not like Switzerland.
Markets relaxed from that, then, like hyenas around the base of a tree looked for the next weakest bank. They get to Deutsche, cackling.
It’s not the same though. 70 per cent of Deutsche bank customers are covered by deposit insurance, it had its highest profit in 15 years of €5.7bn, Credit Suisse lost €6.6bn.
Deutsche had fallen 14 per cent at its worst point. It only makes sense under the term of fear and hyenas, so go away.
:: Peter McGahan is chief executive of independent financial adviser Worldwide Financial Planning, which is authorised and regulated by the Financial Conduct Authority. If you have a financial query, assistance with investments or a question for Peter to cover, call Darren McKeever on 028 6863 2692 or email info@wwfp.net or visit www.wwfp.net
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