>>> Barron’s Weekend Summary

Barron’s Weekend Summary: How should investors approach the new environment?

Cover Story:
-How should investors approach the new environment? Evercore ISI analyst Glenn Schorr thinks new regulatory rules could eventually lower banks’ return on equity by 10% to 15%, and possible more for smaller banks. The industry has been earning 10% to 15% ROE. Bank stock-buyback activity could be muted this year. Some of those negatives, however, are reflected in depressed stock prices and ample dividend yields throughout the industry. The KBW bank ETF is off 35% in the past year, and is trading back at 2016 levels. In the 12 months that followed both the 2008-09 financial crisis and the 2020 bank stock selloff, the KBW bank stock index rose by at least 75%. Investors can debate whether bank stocks have bottomed yet, but shares of the largest U.S. banks already reflect a lot of bad news.

Interview:
-This week Barron’s has published an interview with Mary Callahan Erdoes, who was a leader in the asset- and wealth-management industry during the financial crisis of 2008-09. In 2008, Erdoes was chief executive of J.P. Morgan Private Bank, where she had worked since joining the company in 1996 from Meredith, Martin & Kaye, a bond advisory firm. Erdoes would be promoted to chief executive of J.P. Morgan Asset & Wealth Management in 2009. The crisis, she said, was a “reminder of how important it is to take every single basis point of risk management seriously.” Erdoes’ skills were tested again in the past week as the failure of Silicon Valley Bank and two smaller banks sparked fears of a broader financial panic. Don’t bet on it: “Today’s financial system is stronger than at any time before us, and it will emerge even more resilient,” she said. Erdoes believes investors can’t ignore China, and the work that JPM is doing with the government of Ukraine. She also discussed the past week’s banking turmoil.

Tech Trader:
-As Silicon Valley Bank slid into receivership this month, one of the most unsettling disclosures was the large number of companies with bank deposits in excess of the $250,000 covered by federal deposit insurance. In the most startling example, the streaming video company Roku revealed that it had $487M parked there, about 26% of its total corporate cash. “At this time, the Company does not know to what extent the Company will be able to recover its cash on deposit at SVB” Roku said in a securities filing.

The Trader:
-The small-cap Russell 2000 has been decimated over the past two weeks—and it’s not hard to see why. Some 17% of the index is in financial stocks, and with every small bank under the sun facing scrutiny these days, investors are choosing to sell first and ask questions later. As a result, the Russell has fallen 8%, versus a 2% slide in the S&P 500, since March 3. That seems extreme—and it could be an opportunity for investors willing to search for baby banks thrown out with the bathwater. The volatile trading reflects a crisis of confidence among investors—both about troubled lenders’ ability to withstand customer deposit outflows and about the outlook for the stock market and the economy. Strangely, though, the S&P 500 finished the week up 1.4%, while the Nasdaq Composite gained 4.4%, as stocks like Apple and Microsoft stocks benefited from a flight to safety and falling bond yields boosted growth stocks. Only the Dow Jones Industrial Average, which fell 0.15%, finished the week lower. It was the first week the NASDAQ rose at least 4% and the Dow fell since 2001.

Features:
-Peloton Interactive shares extended their recent slide after the company advertised a temporary price cut for its refurbished bikes. Peloton said that “for a limited time” customers could buy a refurbished bike for $995—down from the $1,145 it typically charges for the reconditioned model. The company charges $1,445 for the bike in new condition. Its higher end Peloton Bike+ sells for $2,495. Peloton stock fell 5.3% to $10.08 on Friday. Shares are down about 26% over the last month, versus a 1% decline for the tech-heavy Nasdaq Composite. The sale price, which includes delivery and setup, is good through April 3.
--Oil prices fell on Friday, hitting their lowest levels since December 2021. It is becoming increasingly clear to analysts that bearish economic forces are outweighing the bullish impacts of China’s rebound and sanctions against Russia. West Texas Intermediate crude futures, the US benchmark, fell to $65.17 per barrel on Friday, down 4.7% from Thursday’s settlement levels. Brent crude, the international benchmark, fell as much as 4.4%, to $71.40 per barrel. Both products rebounded somewhat around midday, but were still trading down on the day. Brent is off by about 15% in just the past 10 days. The Energy Select Sector SPDR was down 1.5%.

European Trader:
-Shares of FanDuel parent Flutter Entertainment are beginning to find momentum after the company started exploring a US listing. There’s no doubting British FanDuel’s strength in the US sports betting market. It reached a 50% share of the online sportsbook market in the fourth quarter, Flutter says, citing data from the 17 states the brand operates in. Flutter’s full-year earnings reported earlier this month only served to accentuate that strength, flagging a record Super Bowl, adding 1.2M new customers in the first two months of this year, making progress on an additional New York listing, and remaining on track for its US business to turn profitable in 2023. It’s a significant, but very achievable, milestone. The segment generated positive EBITDA in the second and fourth quarters, when excluding investment in state launches in Maryland and Ohio.

Emerging Markets:
-The Islamic Republic and rival Saudi Arabia stunned the diplomatic world on March 10 by agreeing to restore diplomatic ties after seven years of estrangement. US media spun this as a coup for China, which mediated the accord, at Washington’s expense. The real winner is Tehran. “This is a great step forward for the Iranian position in the Middle East,” says Simon Henderson, director of Gulf and energy policy at the Washington Institute. “They change from the hated one to the respected one.” Six months ago, Ali Khamenei’s theocratic regime looked to be on the ropes. Young protesters swarmed the streets. Saudi Arabia and other Sunni Muslim neighbors were inching toward an alliance with Israel, threatening Shia Iran with a security vise. Tehran holds a trump card, though, in the armed proxies it supports across the Middle East. Key to the current situation are the Houthi “rebels” in Yemen, who have bested the Saudi-backed government in an eight-year civil war. They have also hit the Saudi homeland with drone attacks on oil refineries and other infrastructure.

Commodities:
-Gold miner Newmont, a Barron’s pick, has finally started to rise. Last September, Barron’s argued that the price of gold could rebound and that Newmont was cheap, both factors that would ultimately help lift the stock. Shares didn’t do much at first, dropping 4.5% from when we picked it to its low point in early March. That could be blamed on the price of gold, which rose a smidgen, but it didn’t necessarily help as the economy looked ready to rebound and investors started favoring riskier assets. Recently, though, Newmont stock has shown some life. It’s up about 9.6% since that March bottom, while the S&P 500 has been roughly flat. Credit gold prices, which got a boost from investors seeking havens amid trouble in the banking sector. It doesn’t hurt that the problems at Silicon Valley Bank and First Republic Bank (FRC) threatened to dent economic growth and force the Federal Reserve to pause interest-rate hikes—perhaps as soon as this coming week’s meeting. Gold gained 4.7% in March through Thursday’s close.

Streetwise:
-Jack Hough considers the fallout from Silicon Valley Bank, which spent four decades lending to venture capitalists and tech entrepreneurs only to be brought down by parking windfall deposits into typically safe bonds, but with dangerously long maturities. The idea was to pick up a smidgen of extra yield. When inflation roared and the Federal Reserve frantically raised rates, the bonds declined in value.
SVB planned to hold the bonds until maturity and collect full value, but when deposits from tech customers dried up, it was forced to sell at a loss. Customers, many of them over the limit for FDIC deposit protection, interpreted that as weakness, and demanded their funds. The bank folded in little more than a day. Panic spread, and Signature Bank failed soon after. Where were the early warning signs? In hindsight, they were on the ticker scroll and Twitter.

>>> Weekend Papers Summary

Weekend Papers Summary

NEW YORK TIMES
-In a highly symbolic move, the International Criminal Court has accused Russian President Vladimir Putin of war crimes.
-China’s Leader Xi Jinping will visit Putin under shadow of war-crimes warrant. China said Xi Jinping would go to Russia to help make peace, in a move widely seen as a sign of support for Putin.
-The World Health Organization (WHO) has accused China of hiding data that may link Covid’s origins to animals. Genetic research from China suggested to some experts that the coronavirus may have sprung from raccoon dogs in a Wuhan market. Now the data are missing.
-The banking crisis hangs over the economy, rekindling recession fears.
Borrowing could become tougher, a particular blow to small businesses — and a threat to the recovery’s staying power.
-First Republic and other banks seek to attract buyers. Private equity firms and other buyers have been circling failed and struggling banks that are desperately trying to sell off assets or even stakes.
-Wyoming becomes first state to outlaw abortion pills. Medication abortion providers could serve six months in prison under the law, one of the latest efforts by conservative states to target abortion pills.
-Prosecutors investigating Donald Trump’s handling of classified documents can compel his lawyer to answer more questions, a judge ruled.
-After the police killing of Walter Scott, a department tries to rebound. The North Charleston Police Department hired more Black officers, cut down on traffic stops and invited Mr. Scott’s brother to speak to recruits.
-Americans head to Europe for the good life on the cheap. Home sales to Americans on the continent have increased significantly, but the influx risks upsetting local residents.
-With a pocket of shamrocks, Biden celebrates St. Patrick’s Day. President Biden welcomed Ireland’s prime minister and confirmed he would visit the country to mark the 25th anniversary of the Good Friday Agreement.
-The Met Opera has been ordered to pay soprano Anna Netrebko $200,000 for Canceled Performances
The company cut ties with the Russian soprano for her refusal to denounce Vladimir Putin after the invasion of Ukraine. An arbitrator said it must pay her.

THE FINANCIAL TIMES
-UBS is in discussions to take over all or part of Credit Suisse, with the boards of Switzerland’s two biggest lenders set to meet separately over the weekend to consider what would be Europe’s most consequential banking combination since the financial crisis, according to multiple people briefed on the talks.
-First Republic Bank stock tumbled yet again on Friday after a financial lifeline from large US banks that deposited $30B into its accounts failed to calm investor fears. Shares in the San Francisco-based lender closed down 32.8% in the first session after 11 of the largest US banks, spearheaded by JPMorgan Chase, said they would deposit $30B with the California-based lender in an effort to shore up its finances.
-The International Criminal Court has issued an arrest warrant for Vladimir Putin for the war crime of deporting children from Ukraine to Russia.
Pre-trial judges of The Hague-based International Criminal Court said the Russian president was “allegedly responsible” for the forced transfer of children from occupied areas of Ukraine to Russia during the two countries’ conflict, which has been documented by human rights groups.
-French President Emmanuel Macron has a catchphrase he often uses with ministers and political allies as they plot a course of action: “You have to take your risk.” Macron did just that on Thursday as he staked the future of his second term on ramming through his unpopular plan to raise the retirement age without a vote in parliament. When his prime minister failed to secure a majority for the reform, Macron chose to invoke a special constitutional power, known as article 49.3, to effectively override lawmakers. Now Macron’s government faces the risk of a brewing political crisis spilling on to the streets, with a no-confidence vote likely on Monday and another nationwide protest planned by unions on Thursday.
-Slovakia has said it will join Poland in sending its Soviet era MiG-29 fighter jets to Ukraine, widening the west’s military contributions aimed at bolstering the country’s air defences against a barrage of Russian missile attacks.

Prime Minister Eduard Heger said in a tweet on Friday that his country would send 13 MiG-29s to Ukraine, following Warsaw’s announcement that it would dispatch at least four of its own aircraft.
-Turkey has dropped its opposition to Finland joining NATO, paving the way for the military alliance to expand its direct border with Russia but leaving neighbor Sweden still struggling to gain approval for its bid. Turkish president Recep Tayyip Erdogan informed his Finnish counterpart Sauli Niinistö that he would instruct parliament to ratify Finland’s accession to NATO.
-As shares in their companies were tanking this week, a small group of European bank bosses sat down in London for dinner and agreed that the market reaction to the collapse of a Californian lender Silicon Valley Bank was overblown. The chief executives were adamant that investors were “underestimating” the strength of European banks’ balance sheets “in terms of liquidity, capital, earnings and asset quality”, said Davide Serra, the founder of investment boutique Algebris Investments and host of the dinner.
-An explosion of volatility in US Treasuries following the collapse of Silicon Valley Bank has provided the sternest test of a market that underpins much of the global financial system since a dramatic meltdown in the early stages of the Covid-19 pandemic.
-Deutsche Bank chief executive Christian Sewing’s annual bonus took a hit after the supervisory board of Germany’s largest bank issued a rare rebuke over missed milestones and delays in improving internal controls.
-Russia’s Sberbank will send $3.6B to the state coffers this spring as part of a record dividend payout, even as its profits collapsed last year due to western sanctions imposed over Moscow’s invasion of Ukraine. This marked a record in terms of share of profit paid out. In previous years, the bank distributed just 40-56% of its profits to shareholders, whereas Friday’s recommendation equated to about 200% of the bank’s 2022 net profit of Rbs270.5B.
-The London Metal Exchange has found bags full of stones at one of its warehouses instead of the nickel they were supposed to contain in the latest drama to hit the scandal-stricken metals market. The exchange said in a notice to the market on Friday that it had “received information that a number of physical nickel shipments, out of one specific facility of an LME-licensed warehouse operator, have been subject to such irregularities”. The supposed nickel consignments were actually filled with stone, said a person familiar with the matter.
-The World Health Organization said data from China suggesting Covid-19 arose from animals in Wuhan’s wet market should have been shared with the world three years ago, adding that the findings “do not provide a definitive answer” as to the origin of the virus.
-The OECD has urged central banks to “stay the course” and continue raising interest rates despite turmoil in financial markets, warning that inflation was still the main threat to the world economy. In an update to its November economic forecasts, completed as tensions mounted this week in the banking sector, the Paris-based international organization upgraded its outlook for growth this year from 2.2% to 2.6%.
-Top Democrats in Congress have called for a federal investigation into the role Goldman Sachs played in the collapse of Silicon Valley Bank, and urged regulators to examine whether the investment bank’s profits handling a $21B trade for SVB should be repossessed.
-Joe Biden is calling on Congress to make it easier for regulators to punish executives at failed banks, including by recouping gains from share sales and banning disgraced bosses from working in the industry. The US president said he was “firmly committed to accountability for those responsible for this mess”, in a statement released on Friday, just one week after the collapse of Silicon Valley Bank.
-Top Republicans are urging the White House to crack down on nuclear co-operation between Russia and China following reports that Moscow’s state-owned nuclear energy company is providing highly enriched uranium to Beijing. In a letter sent to US National Security adviser Jake Sullivan on Thursday, the chairs of the House armed services, foreign affairs and intelligence committees expressed concern that Russia’s Rosatom is supplying uranium for Chinese fast-breeder reactors.

NY POST
Fourteen people, including two New Jersey deli workers, were busted for drug trafficking and other charges in a sting operation law enforcement officials dubbed “Operation Cold Cuts.” Two men who operate the G & M Market in Sewell, Brett Carerro and Roy Lucas, were both charged with drug trafficking and conspiracy after they were arrested on March 8, WPVI reported. The Gloucester County Prosecutor’s Office alleges that Carrero, 29, was the leader of the operation.
-The CEO of the company behind ChatGPT, likely the world’s most famous AI chatbot, admitted that he was “a little bit scared” of his company’s creation during an interview with ABC News.
“We’ve got to be careful here,” OpenAI CEO Sam Altman said during an interview Thursday.
That’s because the technology itself, he explained, was extremely powerful and could be dangerous. “I think people should be happy that we are a little bit scared of this,” the 37-year-old tech guru said. When pressed about why he was “scared” of his company’s creation, Altman argued that if he wasn’t “scared” then “you should either not trust me or be very unhappy that I’m in this job.”
He continued: “It is going to eliminate a lot of current jobs, that’s true. We can make much better ones. The reason to develop AI at all, in terms of impact on our lives and improving our lives and upside, this will be the greatest technology humanity has yet developed.”

Business Of Fashion : What the Collapse of Silicon Valley Bank Means for Fashion

What the Collapse of Silicon Valley Bank Means for Fashion
Start-ups that banked with the failed lender still have their money after regulators stepped in, but the crisis will change how brands approach their finances going forward.
At the end of last week, most people across the globe received their first introduction to Silicon Valley Bank when US regulators took it over after it faced a run on deposits.

In the fashion start-up world, the financial institution was a familiar name. For decades, the Santa Clara, Calif.-based regional bank has been a favourite of venture capital firms and the companies they back. Many start-up founders and executives found themselves unable to access cash they needed to pay employees and suppliers. With the government only guaranteeing deposits up to $250,000, some companies feared they could lose the vast majority of their capital.

Fashion companies directly impacted by the collapse included publicly-traded firms like StitchFix and Etsy, the inclusive apparel brand Universal Standard and sustainable shoe label ThousandFell. The fallout was potentially much broader, as many fashion brands that didn’t bank with SVB rely on payment processing firms that did.

By Sunday, the worst-case scenario had been averted. The Federal Reserve, the Treasury Department and the Federal Deposit Insurance Corporation, a banking regulator, announced that they would protect all deposits at Silicon Valley Bank, as well as those at New York Signature Bank, another financial institution that regulators shut down due to risk. This ensured that companies would be able to make payroll even if their bank failed.

In the end, the immediate business impact of the whole affair for fashion companies may be minimal, though it was a traumatic 72 hours for many.

“I’ve been running this business through Covid, the war in Ukraine, inflation, supply chain disruptions; there’s been crisis after crisis,” said Melanie Travis, founder and CEO of swimwear brand Andie Swim, which kept its capital in SVB. “This one left me speechless. I thought, ‘Oh, my God, this company just went bankrupt. We just lost everything.’”

Like many recent economic woes, SVB’s collapse can be directly linked to high inflation. As the preferred bank of start-ups receiving venture capital-funded cash infusions, SVB was able to grow quickly. (From November 2014 to November 2021, its stock price multiplied six-fold.) It invested its deposits in bonds, normally a safe investment, but as inflation, and interest rates, began to climb, they lost value. When the market caught wind of this, it triggered an old-fashion bank run.

The ripple effects are still playing out in the wider economy, and they will have implications for the fashion industry.

The inflation threat hasn’t gone anywhere — US prices rose 6 percent from a year ago in February, above the Fed’s 2 percent target. If interest rates continue to rise, it may expose problems at other banks; also this week, Credit Suisse, a giant Swiss bank, needed a cash infusion from its home country’s central bank.

But the biggest impact for fashion may be what SVB’s collapse represents: perhaps the biggest signal yet that the era of venture-backed fashion start-ups may be coming to an end.

As recently as 20 years ago, venture investors were wary of funding consumer-focussed businesses like apparel or beauty, preferring sectors like health care and technology. Social media changed that, as performance marketing there allowed companies to more quickly build a customer base and obtain more in-depth data on the customer they’re targeting.

SVB was the go-to option for many start-ups and entrepreneurs, offering access to services like venture debt financing and lines of credit that larger banks would not normally offer to small companies with unpredictable cash flow.

“They made it very easy for a founder to have a turnkey access to a banking partner who grow with them as their company grew, and that was incredibly valuable,” said Jason Stoffer, partner at the venture capital firm Maveron, who estimated that half of his portfolio companies banked with Silicon Valley Bank.

In the last year, start-up valuations have plummeted, reflecting concerns that funnelling investor cash into Instagram ads would never lead to profitable growth. Inflation and interest rates played a role here too, both by suppressing consumer demand and by making it more expensive for venture capital firms to fund money-losing brands. SVB’s failure was, in that sense, more a symptom than a cause of fashion start-ups’ problems.

Stoffer said that going forward, the whole incident — and the generally unfavourable economic climate — may lead more fashion businesses to stick to bootstrapping, or self-funding their businesses. For brands that do decide to go the venture funding route, they will likely diversify their banking mix.

Chloe Songer, the founder of the retail circularity platform SuperCircle and ThousandFell, said that the company now has two accounts at two much larger banks. Travis, similarly, moved Andie’s capital over to Chase for the time being.

“I have a new bar and that is just to keep my money,” said Travis.

FT : UBS and regulators rush to seal Credit Suisse takeover deal

UBS and regulators rush to seal Credit Suisse takeover deal
Daily deposit outflows at troubled Swiss bank topped Sfr10bn last week as fears for its health mounted

Credit Suisse, UBS and their key regulators are racing to thrash out a deal on the historic merger of Switzerland’s two biggest banks as soon as Saturday evening, people familiar with the situation told the Financial Times.

The Swiss National Bank and regulator Finma have told international counterparts that they regard a deal with UBS as the only option to arrest a collapse in confidence in Credit Suisse. Two people said deposit outflows from the bank topped Sfr10bn ($10.8bn) a day late last week as fears for its health mounted.

Boards at the two banks are meeting this weekend. Credit Suisse’s key regulators in the US, the UK and Switzerland are considering the legal structure of a deal and several concessions that UBS has sought.

UBS wants to be allowed to phase in any demands it would face under global rules on capital for the world’s biggest banks. Additionally, UBS has requested some form of indemnity or government agreement to cover future legal costs, one of the people said.

Credit Suisse set aside SFr1.2bn in legal provisions in 2022 and warned that as yet unresolved lawsuits and regulatory probes could add another SFr1.2bn.

UBS, Credit Suisse, the SNB and the Federal Reserve declined to comment. Finma and the Bank of England did not immediately respond to requests for comment.

The race for a deal comes days after the Swiss central bank was forced to provide an emergency SFr50bn ($54bn) credit line to Credit Suisse.

This failed to arrest a slide in its share price, which has fallen to record lows after its largest investor ruled out providing any more capital and its chair admitted that an exodus of wealth management clients had continued.

Shares of other European banks were also hit hard by the crisis in confidence which was triggered by the collapse of Silicon Valley Bank last weekend.

The prospective takeover reflects the sharp divergence in the two banks’ fortunes. Over the past three years, UBS shares have gained about 120 per cent while those of its smaller rival have plunged roughly 70 per cent.

The former has a market capitalisation of $56.6bn, while Credit Suisse closed trading on Friday with a value of $8bn. In 2022, UBS generated $7.6bn of profit, whereas Credit Suisse made a $7.9bn loss, effectively wiping out the entire previous decade’s earnings.

Swiss regulators told their US and UK counterparts on Friday evening that merging the two banks was “plan A” to arrest a collapse in investor confidence in Credit Suisse, one of the people said. There is no guarantee a deal, which would need to be approved by UBS shareholders, will be reached.

The fact that the SNB and Finma favour a Swiss solution has deterred other potential bidders. US investment giant BlackRock had drawn up a rival approach, evaluated a number of options and talked to other potential investors, according to people briefed about the matter.

A full merger between UBS and Credit Suisse would create one of the biggest global systemically important financial institutions in Europe. UBS has $1.1tn total assets on its balance sheet and Credit Suisse has $575bn. However, such a large deal may prove too unwieldy to execute.

The Financial Times has previously reported that other options under consideration include breaking up Credit Suisse and raising funds via a public offering of its ringfenced Swiss division, with the wealth and asset management units being sold to UBS or other bidders.

UBS has been on high alert for an emergency rescue call from the Swiss government after investors grew wary of Credit Suisse’s most recent restructuring. Last year, chief executive Ulrich Körner announced a plan to cut 9,000 jobs and spin off much of its investment bank into a new entity called First Boston, run by former board member Michael Klein.

FT : UBS and regulators rush to seal Credit Suisse takeover deal

UBS and regulators rush to seal Credit Suisse takeover deal
Daily deposit outflows at troubled Swiss bank topped Sfr10bn last week as fears for its health mounted

Credit Suisse, UBS and their key regulators are racing to thrash out a deal on the historic merger of Switzerland’s two biggest banks as soon as Saturday evening, people familiar with the situation told the Financial Times.

The Swiss National Bank and regulator Finma have told international counterparts that they regard a deal with UBS as the only option to arrest a collapse in confidence in Credit Suisse. Two people said deposit outflows from the bank topped Sfr10bn ($10.8bn) a day late last week as fears for its health mounted.

Boards at the two banks are meeting this weekend. Credit Suisse’s key regulators in the US, the UK and Switzerland are considering the legal structure of a deal and several concessions that UBS has sought.

UBS wants to be allowed to phase in any demands it would face under global rules on capital for the world’s biggest banks. Additionally, UBS has requested some form of indemnity or government agreement to cover future legal costs, one of the people said.

Credit Suisse set aside SFr1.2bn in legal provisions in 2022 and warned that as yet unresolved lawsuits and regulatory probes could add another SFr1.2bn.

UBS, Credit Suisse, the SNB and the Federal Reserve declined to comment. Finma and the Bank of England did not immediately respond to requests for comment.

The race for a deal comes days after the Swiss central bank was forced to provide an emergency SFr50bn ($54bn) credit line to Credit Suisse.

This failed to arrest a slide in its share price, which has fallen to record lows after its largest investor ruled out providing any more capital and its chair admitted that an exodus of wealth management clients had continued.

Shares of other European banks were also hit hard by the crisis in confidence which was triggered by the collapse of Silicon Valley Bank last weekend.

The prospective takeover reflects the sharp divergence in the two banks’ fortunes. Over the past three years, UBS shares have gained about 120 per cent while those of its smaller rival have plunged roughly 70 per cent.

The former has a market capitalisation of $56.6bn, while Credit Suisse closed trading on Friday with a value of $8bn. In 2022, UBS generated $7.6bn of profit, whereas Credit Suisse made a $7.9bn loss, effectively wiping out the entire previous decade’s earnings.

Swiss regulators told their US and UK counterparts on Friday evening that merging the two banks was “plan A” to arrest a collapse in investor confidence in Credit Suisse, one of the people said. There is no guarantee a deal, which would need to be approved by UBS shareholders, will be reached.

The fact that the SNB and Finma favour a Swiss solution has deterred other potential bidders. US investment giant BlackRock had drawn up a rival approach, evaluated a number of options and talked to other potential investors, according to people briefed about the matter.

A full merger between UBS and Credit Suisse would create one of the biggest global systemically important financial institutions in Europe. UBS has $1.1tn total assets on its balance sheet and Credit Suisse has $575bn. However, such a large deal may prove too unwieldy to execute.

The Financial Times has previously reported that other options under consideration include breaking up Credit Suisse and raising funds via a public offering of its ringfenced Swiss division, with the wealth and asset management units being sold to UBS or other bidders.

UBS has been on high alert for an emergency rescue call from the Swiss government after investors grew wary of Credit Suisse’s most recent restructuring. Last year, chief executive Ulrich Körner announced a plan to cut 9,000 jobs and spin off much of its investment bank into a new entity called First Boston, run by former board member Michael Klein.

FT : Cost of insuring Credit Suisse debt dwarfs that of other banks

Cost of insuring Credit Suisse debt dwarfs that of other banks
The price of Swiss lender’s credit default swaps climbs to record high this week

The cost of buying insurance to protect against Credit Suisse defaulting on its debt soared to a record high this week, in a sign of growing jitters about the lender’s financial position after the failure of two US banks sent shockwaves through global markets.

As Credit Suisse’s stock and bond prices have whipsawed in recent days, the price of credit default swaps (CDS) tied to the bank — derivatives that act like insurance and pay out if a company reneges on its borrowings — have rocketed. The Swiss bank’s five-year US dollar CDS has now topped 1,000 basis points — up from less than 400 basis points as recently as early March — with similar moves for euro-based contracts.

That escalation in the price of insuring against default follows a series of setbacks that have weighed on Credit Suisse’s equity and debt, culminating in the group turning to the Swiss National Bank on Wednesday to borrow SFr50bn ($54bn) and announcing a SFr3bn debt buyback.


“With [Credit Suisse], it’s just been one headline after another for the better part of the last five years,” said John McClain, portfolio manager at Brandywine Global Investment Management. “It’s just one thing after another here.”

The recent moves in Credit Suisse’s CDS also follow the failure of US lenders Silicon Valley Bank and Signature. Rating agency Moody slashed its outlook for the whole US banking system from “stable” to “negative” on Tuesday because of the “rapid deterioration in the operating environment”.

Other big banks have also seen their CDS prices climb, but the moves are dwarfed by the moves in Credit Suisse contracts. Five-year dollar CDS for US lender JPMorgan added 15 basis points in the week to Thursday, reaching 94 basis points, according to Bloomberg data. The same measure of CDS for Citi rose around 20 basis points to 113 basis points.

Five-year euro CDS for Deutsche Bank, one of Credit Suisse’s European peers that has faced its own stresses in recent years, climbed more emphatically in price, rising more than 70 basis points to over 160 basis points.

“The recent failure of two US banks has made investors much more cautious on the sector, bringing ‘problem’ banks under even more scrutiny,” Joost Beaumont, head of bank research at ABN Amro, wrote this week, referring to the “CS situation as a special case” and not a sign of “broader weakness in the banking sector”.

Beaumont added that the “special case” argument was reflected by spreads of other banks’ bonds widening by less than Credit Suisse, referring to the gulf in yields between bank bonds and less risky government debt.

Single company name CDS are often very thinly traded, helping to exaggerate market moves. Broadly, “when a company is under stress, their CDS comes under significant strain, but it gets amplified by the fact that it’s a very, very shallow market”. said a bank credit analyst at a big US asset manager.

WSJ : China’s M&A Star Told His Employees to Be Bold—Then He Disappeared

China’s M&A Star Told His Employees to Be Bold—Then He Disappeared
Beijing’s detention of tech rainmaker Fan Bao rattles an industry that thought the crackdown was over

In mid-January, star Chinese investment banker Fan Bao, architect of the deals that created some of China’s most dominant technology companies, appeared at his bank’s annual party in Beijing. He brought along his children, who played instruments and performed a rendition of the Coldplay hit “Yellow.” He exhorted the hundreds of staffers in attendance to “Go Forward Boldly.”

A few weeks later, he disappeared.

For the past month, the 52-year-old banker—who set out to build the JPMorgan of China and successfully straddled the divide between China and the West—has been held incommunicado in a detention system run by the Communist Party’s anticorruption agency.

He vanished just as hopes were building in China’s battered technology sector that a long-running government crackdown was ending. Former economic czar Liu He had also recently told the elite audience at Davos that China was open to business again. But the seizure of Mr. Bao wiped out that goodwill and sent shivers through China’s business and finance community.

“Mr. Bao is like thousands of other people who seized the opportunities of China’s embrace of market economy, and relied on their professional capability to achieve success,” said Chongyi Feng, an associate professor in China Studies at the University of Technology, Sydney. “So now, everyone who has achieved success that way feels that they are at risk…. The threat is very real.”

Privately, close associates of Mr. Bao have been dismayed by his detention. China Renaissance Holdings Ltd. , the boutique investment bank he founded and ran, is a relatively small firm, making it unusual that it would draw this manner of government scrutiny. Colleagues, business partners, friends and acquaintances of Mr. Bao are worried about his safety and are hoping he will soon resurface publicly. “I feel utterly disillusioned,” said a person close to Mr. Bao.

The jolt to business people’s confidence also comes as anxiety over China’s direction, its curtailing of people’s rights, and the way it managed the Covid-19 pandemic is leading more middle-class and wealthy Chinese citizens to relocate to other countries. Global investors have been rethinking their exposure to the world’s second-largest economy following a selloff over the past two years that was largely caused by Beijing’s regulatory crackdowns and policy decisions. The MSCI China Index fell 23% in 2021 and 24% in 2022.

“Confidence has been very much shattered,” said Zhiwu Chen, a professor and chair of finance at the University of Hong Kong’s business school. “The government’s desire to have private equity and venture capital invest more is very much undermined,” he added.

China Renaissance, which helps companies raise money and invests in startups, has been trying to reassure clients and employees that business is operating normally. Its shares lost more than a quarter of their value in a single day after the firm disclosed on Feb. 16 that it had been unable to contact or locate Mr. Bao, who is also its chairman and controlling shareholder.

Some Chinese entrepreneurs who previously went missing have reappeared quickly. Guo Guangchang, the billionaire chairman of Shanghai-based conglomerate Fosun Group, emerged days after a mysterious detention by authorities in late 2015. He continues to run Fosun and was never charged with any wrongdoing.

Xiao Jianhua, a Chinese financier who ran a conglomerate called the Tomorrow Group, was taken from Hong Kong in 2017 and didn’t reappear for five years. He turned up in a Shanghai court last year to face corruption charges and was sentenced to 13 years in prison.

Mr. Bao was taken in to assist in a corruption probe involving Cong Lin, a former president of China Renaissance who joined the firm in 2020 after leaving a subsidiary of Industrial & Commercial Bank of China Ltd. , one of the country’s biggest state-owned banks, The Wall Street Journal has reported.

While Mr. Cong was at ICBC, one of its units extended a $200 million credit facility to China Renaissance. One question investigators have is whether Mr. Bao gave Mr. Cong a position at China Renaissance as part of a quid-pro-quo arrangement, the Journal reported. ICBC’s international division was also one of the sponsors of China Renaissance’s 2018 IPO and received fees from the company’s share sale.

None of this has been disclosed formally by Chinese authorities, which didn’t reply to a request for comment for this article.

“It’s really a due process risk in China,” said Andrew Polk, co-founder of Trivium China, a consulting firm. “The problem is not the CEOs or chairmen of these companies getting hauled away for questioning. It’s that nobody knows where they went, and it’s done with no forewarning, with secrecy, and we only know afterwards.”

Born in Shanghai to a pair of diplomats, Mr. Bao grew up in China’s financial capital and often spent long periods apart from his parents while they were stationed overseas, he said in a television interview with American journalist Nancy Merrill in 2011.

He said he was a troublemaker during his elementary-school years and was often ordered by his teachers to write self-criticism letters for picking fights with other students, making noises in classrooms or turning up late.

Mr. Bao spoke English fluently and embraced Western culture early on. In high school, he donned Nike sneakers, which were relatively uncommon in China in the 1980s. He studied English literature at the country’s prestigious Fudan University, then went to Europe, where he earned a degree in business and economics at the BI Norwegian School of Management.

He started working on Wall Street in the mid-1990s, joining Morgan Stanley Dean Witter and then Credit Suisse First Boston before returning to Morgan Stanley to help arrange mergers and finance deals. As a junior banker, he worked on deals for clients that included China’s state-owned telecom carriers and Huawei Technologies Co., according to people familiar with the matter.

Mr. Bao founded China Renaissance in 2005 and set out to help technology businesses in China raise capital for growth. In private, Mr. Bao told close associates that he wanted to make his firm into China’s J.P. Morgan—the original empire-building operation where John Pierpont Morgan financed and merged companies in industries like steel and railroads to create the giants of America’s Gilded Age.

“He was just very hardworking and very knowledgeable. Even at a junior level he commanded a lot of respect,” said Duncan Clark, who worked with Mr. Bao for a few months at Morgan Stanley and now runs BDA China, an investment-advisory firm. Mr. Clark said Mr. Bao was a hustler who didn’t take himself too seriously and who put in exceedingly long hours.

A Chinese television show in 2008 featured Mr. Bao as “the investment banker who looks most unlike an investment banker,” referring to how he was recently filmed wearing a flowery shirt and ripped jeans while smoking a cigar.

Mr. Bao believed China was on the cusp of a new-economy revolution and connected early on with young entrepreneurs who were trying to get their internet-technology startups off the ground. In a video marking China Renaissance’s 10th anniversary in 2015, he said the firm’s goal was to become the “most awesome” investment bank in China in the next 10 years.

That year, China Renaissance was the sole financial adviser behind the mergers that created ride-hailing service Didi Global Inc., a company that eventually forced Uber to retreat from China, and food-delivery operation Meituan. The internet platforms had all been locked in cash-burning battles as they vied for more market share. Mr. Bao used his deep connections with company founders and their shareholders to bring archenemies in business to the negotiating table.

In 2018, China Renaissance raised about $350 million in an IPO in Hong Kong that drew investments from high-profile institutions including fintech firm Ant Group Co. It was often the only non-state-owned Chinese bank on multibillion-dollar IPOs, such as those of PDD Holdings Inc., Meituan and short-video app operator Kuaishou Technology.

As he became more successful, Mr. Bao sported modish glasses and crisp tailored business suits, and was a regular speaker at international conferences. He used to drive a Ferrari and sometimes let his business partners take his collection for spins in Beijing, according to people who interacted with him. Friends remember him joking about how he once wore a leather jacket to a formal gathering and was mistaken for a driver by the valet.

Meanwhile, many of the companies he worked with became targets. The government stopped Ant Group’s 2020 IPO at the last minute and forced a wholesale restructuring of the company. It forced Didi to unwind its U.S. IPO, which China Renaissance had helped underwrite. Meituan was fined the equivalent of more than $533 million for antitrust violations.

Mr. Bao tried to adapt to the new environment, shifting his attention to pursuing deals in industries like semiconductors that remained in Beijing’s good graces.

In May, Mr. Bao left the country and visited investors in the Middle East, Southeast Asia and the U.S., according to people familiar with the matter. He returned to China in July and underwent weeks of quarantine.

Mr. Bao’s last post on Chinese social media WeChat was on Jan. 9, a few days before the China Renaissance party. He congratulated Fenbi Ltd. , a vocational training provider and a portfolio company in his firm’s fund, on its Hong Kong listing. Under his personal status, Mr. Bao had written: “Dream as if u’ll live forever, live as if u’ll die today.”