A weekend topic starting with the Telegraph. “Shadow banking is the dog that has not barked during the latest global spasm of financial stress. They behave like banks but cannot tap the emergency window of major central banks in a liquidity crisis. There is no lender of last resort standing behind them. Nor are they protected from financial runs by government deposit insurance. This is a recipe for a self-feeding doom loop when things go wrong.”
“‘As we saw in 2008 and 2020, runs and fire sales can spread like a contagion. The financial stability risks posed by money market and open-end funds have not been sufficiently addressed,’ warned US Treasury Secretary Janet Yellen last Thursday. Her tone has changed. Five years ago, she told a forum in London that we would never see another financial crisis ‘in our lifetimes.’ The collapse of Silicon Valley Bank and the rescue of First Republic under her watch has been a sobering check to regulatory hubris.”
“Shadow banks could get into trouble in any number of jurisdictions, including the Cayman Islands or Luxembourg, which host even larger shadow liabilities than Ireland. Or skeletons could emerge in some of the more exotic corners of the cross-border market. ‘I am convinced there must be large losses on bond holdings of all sorts of funds which are being disguised,’ said Professor Philip Turner, who used to track shadow lenders at the Bank for International Settlements.”
“There are worries about insidious practices within the $1.2 trillion US debt private debt market, where players ‘mark-to-myth’ whole portfolios by arranging bilateral trades with each other to overvalue each leg of the transaction. ‘You overpay for my rubbish and I’ll overpay for yours,’ he said. At some point this will be exposed. ‘Once they nail one firm with this, they will quickly nail their immediate counterparts. Word will spread, and force hurried re-statements of values. So it’ll be like dominos,’ Prof Turner said.”
From USA Today. “In February, a PIMCO-owned office landlord defaulted on an adjustable rate mortgage on seven office buildings in California, New York and New Jersey when monthly payments rose due to high interest rates. Brookfield, the largest office owner in downtown Los Angeles, that month chose to default on loans on two buildings rather than refinance the debt due to weak demand for office space. They are a bellwether for what is likely to come, as more than half of the $2.9 trillion in commercial mortgages will be up for refinancing in the next couple of years, according to Morgan Stanley.”
“In the short term, poorly structured, capitalized and financed buildings are probably either undergo some sort of change of ownership or go through foreclosure, says Mark Grinis, EY Americas Real Estate, Hospitality & Construction leader. ‘You’re gonna see some eggs broken as these things (mortgages) mature and come due,’ says Grinis. ‘And they either have to find somebody that’ll give them additional equity capital, they have to get their lender to be flexible or it will go back to the bank.’”
The Real Deal. “New York Community Bank’s decision to pass on buying Signature Bank’s commercial real estate loans set off alarm bells in the multifamily sector and left the city’s landlords in financial limbo. Industry insiders laid the blame on the rent-regulated buildings backing most of that debt. Of the $19.5 billion in multifamily loans Signature had on its books, $11 billion was on rent-stabilized buildings, which have seen valuations plummet after changes to the state rent laws in 2019 made rent increases far more difficult.”
“‘[NYCB] didn’t buy their New York City multifamily loans because they knew they were shit,’ said Joe Tahl of Manhattan-based landlord Tahl Properties. Jennifer Recine, who co-chairs the real estate practice at Kasowitz Benson Torres, said NYCB’s decision suggested that the bank ‘believes the demand for the underlying collateral … may be collapsing.’ ‘[Rent-stabilized] properties have come down as high as 50 percent,’ said Lev Mavashev, principal at investment sales brokerage Alpha Realty. ‘So many are definitely underwater now.’”
From Observer Today. “In reading Marie Tomlinson’s column last week on the recent banking troubles the main emphasis of the article was, as it always is, ‘it’s the GOP’s or conservatives fault.’ Interestingly she fails to mention the bank that actually started our most recent bank troubles, Silicon Valley Bank. I’m quite sure this was not just a simple omission. SVB is based in the heart of California’s leftist base where 97% of all political contributions go to Democrats. Let’s review what we know about this bank and the 2018 bank changes she references.”
“On their Board of Directors only one, yes one, had actual investment banking experience. The rest included several large Democratic supporters. One of which flew to Japan on Thanksgiving weekend 2016 to pray to the Shinto shrine in Kyoto because Donald Trump was elected President as she donated $50,000 to the Clinton campaign. They touted their ESG and DEI initiatives along with bringing in experts on use of ‘personal pronouns’ in the workplace.”
The Los Angeles Times in California. “Cecilia Montoya saw body bags being pushed out of her skid row apartment building on gurneys after three people were found dead of drug overdoses, possibly related to fentanyl, on Wednesday. The sight was disturbing but not shocking to Montoya. On the sixth floor, where the deaths of the woman and two men occurred, she often sees people using drugs, both in hallways and in apartments. Montoya said that since she moved there about a year ago, three other people have died of overdoses at 649 Lofts, which provides housing to underprivileged people and is owned by the nonprofit Skid Row Housing Trust, whose 29 residential buildings have fallen into extreme disrepair.”
“‘I had never seen a row of body bags like that, other than on the TV,’ said Montoya, 52, a recovering meth addict.”
CBS Bay Area in California. “As tech companies continue to layoff tens of thousands of workers and downsize their office space, there’s a glut of office furniture left behind. Reseat.com, an office furniture reselling business based in San Jose, is helping companies find an environmentally-friendly solution. A San Francisco company just gave Reseat founder Brandi Susewitz dozens of office chairs for free. She often gets hundreds. As companies downsize and say goodbye to office space, Susewitz inks contract after contract, to either sell, donate, or throw away most of their furnishings.”
“‘I’ve seen the waste happen for 25-plus years and it’s absolutely mind blowing,’ said Susewitz. San Francisco’s office vacancy rate shot up to nearly 30% in the first quarter, nearly eight times the pre-pandemic level according to CBRE.”
From ABC Business. “A significant group of borrowers are at serious risk of default, but Australian banks will be able to comfortably survive any losses, argues the Reserve Bank. ‘In the baseline scenario, the share of borrowers with negative spare cash flow – that is, those whose scheduled mortgage repayments and essential living expenses are projected to exceed their household disposable income – would reach around 15 per cent by the end of 2023, with many of these borrowers already projected to be in this position,’ the RBA noted.”
“This ‘baseline scenario’ also assumes that unemployment rises only slightly from current levels, that incomes rise by 4.25 per cent and living costs increase 4.75 per cent this year. But things could get even worse. The bank also modelled an ‘adverse scenario’ where, even though rates remain at 3.75 per cent, unemployment climbs a couple of percentage points to 5.5 per cent by year’s end, underemployment also rises 2 percentage points and both wages growth and inflation are lower than the baseline forecast, by 0.75 and 1 percentage point respectively. ‘In the adverse scenario, the share of borrowers experiencing negative spare cash flows by December 2023 would increase slightly to 17 per cent,’ the bank forecast.”
“Canberra-based public servant Tess and her family are among those feeling the pressure. Having been eroded by soaring inflation and big rises in mortgage payments, her part-time wage and her husband’s full-time salary are not covering what they used to. ‘For us, it’s sitting down and saying, ‘OK, we’re going to not go to the major supermarkets, we’re going to cut back on brand-name things, we’re going to skip anything that’s considered discretionary’,’ she told The Business. ‘And that’s tough, especially with little kids.’”
“Despite being a dual-income family on solid pay packets, they have rapidly shifted from being comfortable to feeling like ‘there isn’t really a lot of padding’ in their life. ‘It’s getting to each pay cheque and going: ‘OK, pay that bill and pay that bill and how much have we got left?’ Tess explained. ‘I don’t think I’ve ever like spent this much time looking at the finances and really saying, ‘Can we afford life insurance? Can we afford to go to the dentist? I kind of feel like our income is reasonable. I don’t know what’s happening to people that are on a lower income – it must be really, really hard for some of those people.’”
From Reuters. “Haruhiko Kuroda delivers his last press conference as Japan’s central bank chief on Friday, ending a decade of unconventional policy that included ‘bazooka’ stimulus and a push to change public perceptions with a wall of money and Peter Pan metaphors. Hand-picked by then premier Shinzo Abe to break Japan out of deflation, Kuroda will see his second, five-year term end on Saturday and hand over the baton to his successor Kazuo Ueda.”
“Shock therapy was among the key features of Kuroda’s monetary experiment, under which the BOJ deployed a huge asset-buying programme in 2013 partly to convince the public that prices will finally start to rise after decades of deflation. Kuroda was not the first BOJ chief to attempt to influence public perceptions with monetary easing. Toshihiko Fukui, who presided from 2003 to 2008, frequently expanded quantitative easing to ‘show the BOJ’s determination to beat deflation’ and ‘exert stronger influence on public expectations.’”
“Simple communication was also a key feature of Kuroda’s policy. In 2015, he alluded to the Peter Pan fairy tale in explaining that to fire up inflation, the BOJ needed to have the public believe in its monetary magic with massive stimulus. ‘I trust that many of you are familiar with the story of Peter Pan, in which it says, ‘the moment you doubt whether you can fly, you cease forever to be able to do it’,’ he said back then. ‘Yes, what we need is a positive attitude and conviction.’”
“In another speech that year, Kuroda described how, like a spacecraft attempting to move away from Earth’s gravitation, ‘tremendous velocity’ was needed to end Japan’s deflationary equilibrium. When allusions to Peter Pan and spacecraft failed, the BOJ shifted to a defensive, long-term approach in 2016 with the introduction of yield curve control (YCC). The hope was that by capping long-term rates around zero and patiently reflating the economy, inflation would eventually perk up.”
“The shift to YCC also sought to stop super-long yields from falling too much, a nod to growing concern that prolonged low rates could hurt financial institutions’ profits enough to discourage them from boosting lending. ‘The BOJ’s thinking on interest rate changed dramatically in 2016. It abandoned the idea that the lower the borrowing costs, the better,’ said former BOJ board member Takahide Kiuchi.”
“While the BOJ continues its battle propping up inflation and wages, other major central banks have seen their credibility on the line as they struggle to tame soaring inflation. ‘During Kuroda’s era, the BOJ put in place a mix bag of unconventional measures,’ Kiuchi said. ‘The BOJ’s failure to change public expectations raises a lot of questions about the effectiveness of unconventional monetary policy.’”