TheChek News Flow

The first six months were full of surprises, from surging inflation to a crypto implosion. Get ready for more shocks in the second half.

We’re halfway through the year, but markets are beginning to fear we’re not even halfway through the bad news 2022 has in store.

The first six months were full of surprises: Inflation. The biggest selloff in bonds in four decades. A plunge in tech stocks rarely matched in history. And the implosion of crypto.

The looming risk that investors ignored for months is recession. But whether the economy will slump or be just fine remains unknown. Attempts to put a probability on it range from 90% in a Deutsche Bank survey of clients to the spurious precision of 4.11% in the New York Federal Reserve’s recession forecasting model.

While investors are at last focused on recession uncertainty, risks elsewhere in the world could hit U.S. investors, too. Japan might finally be forced to relent and allow bond yields to rise, which would suck back cash the country’s investors had poured overseas. In Europe, the central bank has promised a new plan to support Italy—but we’ve seen this show before. If it follows the pattern of too little, too late, we could see a return of the eurozone debt crisis, something markets are not prepared for.

Almost any economic outcome is likely to prove a fresh surprise. If there’s a soft landing, stocks should do well as the recent recession panic reverses. If there’s a recession, there could easily be a big loss still to come, since only the drop of recent weeks appears to be related to recession risk.

There’s one sliver of good news: Prices are already down a lot, which brings them closer to wherever they will eventually bottom out. The S&P 500 has fallen by the most in the first half of a year since the 21% loss in 1970, when the economy was in recession. Long-dated Treasurys lost 10% even including coupon payments, the biggest six-month loss since Paul Volcker’s Fed forced the economy into recession in 1980.

There’s no sure way to work out what probability the market is putting on the Fed driving the economy into recession this time.

J.P. Morgan strategist Nikolaos Panigirtzoglou says the simplest way to extract probabilities from the price moves is to compare price falls with the average peak-to-trough fall of past recessions. Since the S&P 500 is down a bit over 20% and the average fall in the last 11 recessions was 26%, that suggests an almost 80% chance of recession is priced.

Yet, much of this year’s selloff wasn’t about recession risk. To see this we need to distinguish the direct and indirect effects the Fed has on prices of stocks and bonds.

The direct effect is to push up bond yields and push down valuations of stocks with profits far in the future, which means those with high valuations such as Big Tech. This is what dominated until June, with bond yields soaring and growth stocks crashing, while cheap “value” stocks were basically fine. Exclude the technology sector to strip out the bulk of this effect and economically-sensitive cyclical sectors of the stock market had only slightly underperformed defensives by June 7.

Then it all changed. Investors woke up to the indirect effect of the Fed, which is to weaken the economy. This has almost the opposite effect on asset prices. A weaker economy means less inflation than otherwise, justifying lower bond yields. It also hits earnings, particularly for cyclical companies, which tends to hurt stocks with relatively low valuations more than growth stocks.

Since June 7 cheap stocks have been hammered and cyclical sectors—especially oil stocks and miners—have plummeted. In the past two weeks recession fears showed up in Treasurys too, as investors bet that the Fed will have to cut rates aggressively next year. The drop of almost half a percentage point in the 10-year Treasury is the most over such a period since the first pandemic lockdown. Wall Street analysts have also been racing to cut their earnings forecasts, after ignoring recession risks and actually upgrading earnings predictions in the first five months of the year.

The markets now understand the outlook is clouded, so will be less bothered by a sudden shower. But investors will still get drenched if the storm of a deep recession washes away earnings.

There are clear risks that could be imported from abroad. Hedge funds are betting big that the Bank of Japan will abandon its bond yield controls, which have shielded it from tightening global monetary policy and crushed the yen. If the hedge funds are right—and there’s nothing forcing the BoJ to act, let alone soon—Japanese bond yields would leap and the yen’s extreme weakness go into sudden reverse, roiling markets globally.

Better yields at home, as well as the prospect of losses on the currency, would push Japan’s army of small investors to repatriate their money, pushing the yen up and prices everywhere else down – and adding more upward pressure to Treasury yields.

The risk from Europe is familiar: politics. The European Central Bank acted early to head off a crisis in Italy’s government financing. It now has the difficult job of persuading the frugal north to accept a deal underwriting the country’s bonds, without imposing unacceptable conditions on Italy. If it fails to come up with enough money, Italy and the eurozone could be in serious trouble again by the autumn.

I remain hopeful that recession will be mild, not hit until next year, and perhaps be avoided altogether. But the economic data are going the wrong way, and higher interest rates haven’t even begun to bite on ordinary households yet. The dangers are big, and the markets are still not fully prepared.

Ms. Hall, a model and actress, and Mr. Murdoch wed in March 2016

Jerry Hall filed for divorce from Rupert Murdoch on Friday, citing “irreconcilable differences” and seeking spousal support.

Ms. Hall, a model and actress, and Mr. Murdoch wed in March 2016. Mr. Murdoch, 91 years old, is executive chairman of News Corp, NWSA 1.09%▲ which owns The Wall Street Journal, and is also chairman of Fox Corp. FOX 3.00%▲ The filing was made in Los Angeles Superior Court.

Ms. Hall turns 66 on July 2.

A trust had been created to hold the Murdoch family’s substantial voting stakes in News Corp and Fox Corp. Mr. Murdoch controls the trust, while four children from his first two marriages—sons Lachlan and James and daughters Elisabeth and Prudence—also have votes. Two younger daughters from his third marriage, to Wendi Deng—Grace and Chloe—are beneficiaries of the trust but don’t have votes.

People familiar with the ownership structure of the trust said that the pending divorce won’t affect control of the trust.

In addition, one of the people said there is a prenuptial agreement in place. The terms of that agreement couldn’t be immediately learned.

The marriage to Ms. Hall is Mr. Murdoch’s fourth.

The New York Times in June reported that the couple was seeking a divorce.

The famous psychoanalyst’s granddaughter spent much of her life publicly opposing his theories

The things that might have emerged if only Sophie Freud had just once hauled herself on to a couch for a session of psychoanalysis. There was the wartime escape from Europe, the estrangement from an uncaring father and the conflicted feelings for her mother. Looming over it all was the shadow of her famous family name, both elevating and tormenting her.

But Freud spent much of her life in opposition to her famous grandfather, Sigmund, and his theories, and so took pride in a life-long refusal to submit to psychoanalysis. “I’m very sceptical about much of psychoanalysis,” she told the Boston Globe in 2002. “I think it’s such a narcissistic indulgence that I cannot believe in it.”

Freud died earlier this month, aged 97, after a long life shaped by the great tumult of the 20th century and the enduring tension between a weighty family legacy and an independent spirit.

Miriam Sophie Freud was born to a wealthy Jewish family in Vienna in 1924. Her father was Sigmund’s eldest son, Martin, a lawyer who would take charge of his father’s publishing house. Her mother, Ernestine, was a speech therapist. Growing up, every Sunday featured a visit to her grandfather’s apartment on 19 Berggasse.

A governess would lead Sophie to the study for a 15-minute audience with the great professor, whom she loved and understood from a young age was God-like — even if she could not quite say why. Sigmund was stern, and by then suffering from cancer, but would give his granddaughter money to go to the theatre. “He would say: ‘Are you a good girl?’” Sophie recalled. “I was taught to be very much in awe of him.”

Her own family life was miserable. Her parents were ill-matched, and Sophie later wrote that “quarrels, tears and violent hysterical scenes were the background music of my childhood.”

In 1938, after a Nazi-ruled Germany annexed Austria, Sophie and her mother relocated to Paris. They were forced to flee again when the Nazis invaded two years later. Mother and daughter made a close escape by bicycling some 400 miles to Nice. From there they journeyed to New York.

Though they were poor, the patronage of an uncle, the pioneering publicist Edward Bernays, meant Sophie attended Radcliffe College and studied psychology. She would go on to earn a masters in social work, and then a doctoral degree, working at clinics, mental hospitals and as an adoption specialist. She placed a special emphasis on helping single mothers.

Sophie also taught for decades at Simmons College in Boston, where she chaired the human behaviour programme. Until she reluctantly gave it up aged 77, she could be seen riding around campus on a red motor scooter.

If Sigmund Freud believed in probing the unconscious to understand the adult, his granddaughter leaned on fate. She once said she believed people only held 5 per cent control over the course of their lives — the rest was chance.

She dismissed Freud’s concept of penis envy as silly and called the Oedipus Complex “outdated”. An early feminist, she seemed to take particular umbrage at Sigmund’s claim that only men could experience true passion. In 1998, she published a book, My Three Mothers And Other Passions, that served as a rebuttal.

“In my eyes, both Adolf Hitler and my grandfather were false prophets of the 20th century,” she said in 2003. So wedded was Sigmund Freud to what he viewed as a singular truth, she said, that “never could he be wrong”. To some observers, the intensity of her disagreement with her grandfather was, itself, Freudian.

Her own marriage, to Paul Loewenstein, a fellow Jewish émigré who had escaped from a French concentration camp, fared better than that of her parents. They raised three children — Dania, Andrea and George. Still, she asked for a divorce after 40 years, coolly deciding the union was no longer satisfying.

Later on, Sophie made a determined effort to reconnect with her aunt Anna, Sigmund’s daughter and appointed successor, even taking a sabbatical in England to do so. “I needed Tante Anna’s blessing before I could rightfully reclaim the family legacy that I had betrayed, and yet remained faithful to, in its core,” she explained in her memoir.

Even after her retirement, Sophie continued to teach at Simmons. She travelled widely, often on her own. For exercise, she walked regularly around the nearby Walden Pond and swam in its waters — the same ones where another eccentric, Henry David Thoreau, famously pondered independence and self-reliance. Joshua Chaffin

Cory Klippsten is a big fan of Bitcoin. But his affinity for cryptocurrencies ends there. Klippsten, head of a company called Swan Bitcoin, sees a growing minefield of scams, fraud, and risky products throughout the industry. As the market retreats, he sounds embarrassed to be associated with it.

“I’m a Bitcoiner who believes Bitcoin is transforming the world,” says Klippsten, 44. “I’m so sick of having my name and business associated with the crypto industry. It’s exhausting.”

There’s no small irony in a Bitcoin purist taking shots at the rest of crypto. Bitcoin is no paragon of virtue; mining the stuff is energy-intensive and environmentally costly. And it’s failing miserably as a store of value or an inflation hedge—two heavily promoted uses. Down 70% in seven months with $900 billion in lost market value, the king of crypto looks more naked than ever.

But Bitcoin isn’t crypto’s biggest problem these days. It’s the token’s progeny and the industry’s freewheeling financial practices. Rather than revolutionizing Wall Street, the crypto industry has adopted many of its products and reinvented them, largely with rules of its own making. Now, thanks to a cocktail of unbridled leverage, automated liquidations, and collapsing prices, it’s also reinventing a financial crisis.

“The industry and these companies are shrouded in mystery. In that situation, history tells us that there will be all sorts of risky behavior, fraud, and deceit,” says John Reed Stark, a former chief of the Securities and Exchange Commission’s Office of Internet Enforcement. “It’s not the Wild West. It’s a Walking Dead-like anarchy with no law and order.”

Beyond Bitcoin are legions of other tokens, trading platforms, and quasi-banks offering stupendously high yields on deposits. This parallel world of shadow banking and trading is straining to stay above water amid a series of crises, including the failure of a major “stablecoin,” a hedge fund collapse, and a liquidity crunch at some large crypto lenders.

A tougher macro climate has put the industry on its heels. Rising interest rates and tighter financial conditions have triggered a stampede out of anything related to crypto, amid a broader selloff in tech overall.

But the industry has hardly steeled itself to pass a market stress test. Crypto start-ups and exchanges expanded in a regulatory vacuum, establishing their own governance rules or dispersing them through open-source software “protocols.” Crypto advocates have long pitched these homegrown practices as an improvement over Wall Street—breaking finance from the shackles of banks and brokerages. But in some ways, the industry adapted a Wall Street playbook to a new technology. And its supervision has been almost entirely by those with a financial interest in the outcome.

Two of the biggest worries now are a crypto bank and a hedge fund. Celsius Network, a major crypto lender that had taken in $11 billion of deposits, has frozen withdrawals as it tries to prevent a run on the bank that would likely put it out of business. On June 30, Celsius said it’s taking steps to preserve assets and is exploring options that “include pursuing strategic transactions as well as a restructuring of our liabilities, among other avenues.” Celsius did not respond to requests for comment.

Hedge fund Three Arrows Capital, known as 3AC, meanwhile, has been ordered to liquidate by a court in the British Virgin Islands after being sued by creditors. The fund had borrowed heavily to build a portfolio that it said was worth $18 billion. And it had built a large position in Grayscale Bitcoin Trust GBTC +1.58% (ticker: GBTC), a closed-end trust that trades publicly and was a popular vehicle for crypto arbitrage.

For years, GBTC traded at a significant premium to its underlying Bitcoin holdings—sporting a value 35% higher than its tokens holdings at one point in 2020. That meant hedge funds could make easy money by borrowing Bitcoin, giving them to the trust in exchange for shares, and then selling the shares for a profit once a waiting period expired.

But in 2021, that premium flipped to a discount, and it has widened as the price of Bitcoin declined—GBTC recently traded at a discount of 29% to its net asset value. That trapped investors like 3AC, listed as one of the trust’s largest owners in June.

Yet even as the discount widened, 3AC kept buying, in a “classic case of a bettor at the table that keeps losing and doubling down,” said Sean Farrell, head of digital asset strategy at Fundstrat Global Advisors. Ultimately, “3AC could no longer hold its daisy chain of leverage together, causing illiquidity issues across the crypto lending space,” said Farrell, who compares 3AC to Long-Term Capital Management, a massively leveraged hedge fund that required a government-arranged bailout in 1998.

3AC didn’t respond to a request for comment. Grayscale CEO Michael Sonnenshein says the trust’s main holders are long-term investors.

Lenders and brokers with exposure to 3AC included Voyager Digital VOYG –17.14% (VOYG.Canada), which said in a news release that 3AC defaulted on a $675 million loan consisting of Bitcoin and USDC, a stablecoin pegged to the dollar. Voyager has since curtailed withdrawals from its platform. The company had no comment.

Without government backstops, crypto’s white knights have been other crypto people. The billionaire founder of the exchange FTX US, Sam Bankman-Fried, agreed to extend a $400 million revolving line of credit to BlockFi, with an option to buy the company. BlockFi suffered around $80 million in losses due to exposure to 3AC. Bankman-Fried, through his trading firm, Alameda Research, has also bailed out Voyager with lines of credit worth around $500 million.

“We spent decades evolving rules that were designed to prevent abuses on Wall Street,” says Eric Kaplan, senior advisor to the center for financial markets at the Milken Institute. “Some in the crypto markets are turning their backs on that.”

How much longer that free-for-all lasts is the subject of much debate in Washington. The Biden administration, Congress, and agencies like the SEC are working on rules. Yet regulators and lawmakers are at odds over whether to apply established rules to crypto or to write new ones.

Regulators see systemic risks if crypto isn’t reined in. The European Central Bank recently warned that the crypto market was similar in size to securitized subprime mortgages before the 2008 financial crisis. Crypto assets “will pose a risk to financial stability,” the ECB said in a report, if they keep growing and banks increasingly get involved.

“The market at this point isn’t big enough to trigger a systemic risk event, but these are not static markets. They are continuously evolving and growing,” says Lee Reiners, who heads the Global Financial Markets Center at Duke University. “It’s time to sound the alarm bells.”

For much of the past decade, crypto evolved in a regulatory gray zone. Products and marketing that would never be allowed on today’s Wall Street—thanks to a century of financial regulations—found homes in crypto. The industry is now packed with Wall Street alumni, traders, and others from the financial industry.

The heads of major companies such as Galaxy Digital Holdings GLXY –10.39% (GLXY.Canada), Grayscale Investments, and Genesis Trading all worked on Wall Street before coming to crypto. At Coinbase Global COIN +4.30% (COIN), the head of global financial operations came from Goldman Sachs. Celsius was founded by Alex Mashinsky, a serial tech entrepreneur, but its senior team includes alumni of Royal Bank of Canada, Citigroup, and Morgan Stanley.

One of the largest equity market makers, Jane Street Capital, is part of the crypto plumbing, providing liquidity to exchanges like Robinhood Markets (HOOD) and trading crypto for itself. “What’s going on in crypto is a pretty wonderful sandbox for a lot of different experiments,” said Thomas Uhm, a member of Jane Street’s crypto sales and trading team, on a podcast in February.

Without a regulator like the SEC in charge, crypto companies set many of their own rules. Industrywide listing requirements for tokens don’t exist. Binance.US lists more than 100 tokens, from ApeCoin to Zilliqa. Coinbase offers around 170 tokens, including some issued by entities that the company’s own venture-capital arm has funded. Coinbase says its token investments don’t influence listings.

Crypto traders aren’t just going up against sophisticated investors like hedge funds or high-frequency trading firms. They may be trading against companies that act as their broker, custodian, market maker, and exchange—all rolled into one entity.

Market makers, stock exchanges, and brokerages have long been separated on Wall Street due to conflicts of interest that would arise if they handled it all—such as making it possible to trade against their own customers or front-run orders. In crypto, that separation often doesn’t exist, leaving investors vulnerable, according to regulators such as SEC Chairman Gary Gensler.

“There’s no prohibition against wash-trading on crypto exchanges, no prohibition against proprietary trading, no best-execution rules, and no standardized reporting,” says Timothy Massad, a former chairman of the Commodity Futures Trading Commission. “It’s this whole lack of a framework where you can’t compare it to securities that concerns me.”

Crypto trading platforms say some of the concerns are overblown or stem from a lack of clarity around the rules. A Coinbase representative said the company doesn’t trade against customers or act as a market maker. “We will continue to call for a regulatory framework for the crypto-economy that ensures consumer protections and expands access for all,” the representative said in a statement.

“Many exchanges serve multiple functions out of necessity as the industry is still in its infancy,” Binance said in a statement to Barron’s. “As a leading exchange, Binance takes user protection and responsible trading seriously.” FTX declined to comment.

Yet centralized exchanges account for only some of the trading. Billions of dollars worth of crypto also sits on decentralized finance, or DeFi, platforms. Traders, borrowers, and lenders set their own terms in DeFi, matched by algorithms or software protocols that automate all aspects of a transaction. Positions may be automatically liquidated if collateral levels fall below preset thresholds.

Investors often plow money into DeFi to capture advertised double-digit or even triple-digit yields. Nothing like that exists in traditional finance—bank savings rates now hit 1.6% at best. Junk bond yields average 8%. But in DeFi, since there aren’t companies standing behind the trading and borrowing protocols, there’s scant recourse if deposits vanish due to a hack or software glitch.

Theft on DeFi isn’t trivial. Protocols accounted for 97% of the $1.7 billion of crypto stolen in 2022 as of May 1, according to blockchain analytics firm Chainalysis. “It’s a major consumer protection issue that you don’t have recourse if you have funds stolen on DeFi,” says Chainalysis Director of Research Kim Grauer, adding that she’s optimistic protocols will get more secure over time.

With stablecoins, crypto is reinventing financial wallpaper that started in the 1970s: the money-market fund. Stablecoins, like money-market funds, aim to maintain a fixed $1 price. But unlike regulated funds, stablecoins can own whatever assets they want as reserves, including other tokens like Bitcoin.

The perils of this approach became apparent with the recent crash of an “algorithmic” stablecoin called TerraUSD, wiping out $60 billion in a few weeks. The episode highlighted the system’s fragility and contagion risks as Tether, the largest stablecoin, briefly “broke the buck,” raising concerns that the industry wasn’t prepared for a classic run on the bank.

The term stablecoin is “an effective marketing strategy but could really hurt if the stablecoin were to fail,” says Hilary Allen, a law professor at American University who has written critically about crypto. Money-market funds have broken the buck in stressful markets, such as the 2008 financial crisis, requiring bailouts and market stabilization measures, she adds. In stablecoins, owners of the tokens don’t even have ironclad redemption rights, let alone a federal backstop.

Crypto companies are elbowing into another Wall Street club: home loans. Start-ups like Milo are offering zero-down mortgages, backed by crypto as collateral. The company, along with others, aims to chip off even a tiny slice of the multitrillion-dollar home loan market. Some traditional mortgages have already been traded on a blockchain. Securitizing crypto mortgages may be next. “We talk to a number of regulators and are trying to get them to understand what we’re doing,” says Milo CEO Josip Rupena.

To understand why Bitcoin purists object to all this, it’s helpful to know some history.

Bitcoin, launched in 2009, was developed as a peer-to-peer system for transferring a currency without using intermediaries like banks. The technology, dubbed “permissionless,” was designed as if corporations and governments were the enemy of individual economic rights.

Yet the Bitcoin blockchain—a network of computers whirring endlessly to solve math problems that validate transactions—wasn’t built to scale up. Transaction processing is glacial compared with card networks like Visa (V). Nor was the blockchain designed for uses beyond payments. That opened the floodgates to other blockchains. Today, hundreds of them form the backbones for trading platforms, tokens, financial products, videogames, and online worlds.

Crypto also took advantage of a lack of regulation to raise capital and set up corporate structures on its own terms. Rather than issuing equity, blockchain companies would raise money from venture capital and then airdrop tokens—distributing them free to build support—or engage in an “initial coin offering.” Exchanges and brokerage firms received state licenses to operate as money-transfer businesses, partly because there was no clear path to register the business or tokens with the SEC.

Early inefficiencies in the market lured Wall Street veterans. Take Dave Weisberger, who worked on quantitative trading and market structure at firms like Salomon Brothers and Two Sigma Securities. Weisberger went on to co-found a firm called CoinRoutes that imports crypto market data from dozens of exchanges.

In a presentation at a crypto event in October, Weisberger said the crypto markets had “plenty of dumb traders for you to see on the tape and take advantage of.” Crypto, he added, offers “so much more inefficiency than other markets that it’s very exciting. It’s one of the reasons that so many traders are flocking to it.”

With more sophisticated firms now in the space, market efficiency is improving, Weisberger said in an interview. But retail traders aren’t getting anything close to the national “best execution” standard for equity trades, according to Massad. A small investor on Coinbase is trading only against other investors or market makers on the platform. Institutional investors use firms like CoinRoutes to send orders to whatever exchange offers the best price.

Moreover, there’s also more arbitrage opportunity in crypto. A hedge fund could buy Bitcoin on one platform and sell it at a higher price on another, or use publicly traded equities and spot crypto markets to make that bet. That type of trade is much tougher to pull off in stocks, where bid/ask spreads are generally tight and prices don’t deviate much across national exchanges.

“In equity markets, retail gets the best deal,” says Weisberger. “In crypto, generally retail traders pay higher fees or trade outside of where the actual spread is.”

The crypto crash has been a wake-up call, even for people in the industry who thought they weren’t taking big risks by taking out a loan.

Shahar Abrams is one such investor. A 30-year-old industry consultant, he had taken out a $140,000 loan last December with Celsius. As collateral, he had posted $560,000 worth of a token called CEL, a proprietary coin originally issued by the company. He used the proceeds to help buy a condo and grand piano. “My dream piano and a place to put it,” said Abrams, who lives in Atlanta.

What he didn’t expect was a collapse of his collateral. As Terra plunged, prices sank for other tokens. CEL’s price halved in one day and fell another 50% the next. That prompted a margin call from Celsius to post more collateral within 24 hours. Abrams decided not to throw more money into it, but it wouldn’t have mattered. Celsius liquidated his collateral to repay the loan before its own deadline. In the end, borrowing against his collateral instead of selling it cost him about $420,000.

“Clearly there’s a lot more risk to the platform than people realized,” says Abrams, who consulted for Celsius and recommended it to friends. “I always thought Celsius was the absolute safest one, and that’s why I steered people there.”

Celsius and other lenders now face a regulatory storm. Even before the company seized up, it had been accused by state regulators of violating securities laws and had stopped offering its interest accounts to new U.S. retail investors. Regulators in at least five states are probing its deposit freeze. Celsius in legal proceedings has disputed that it violated securities laws and has said it is “working closely with U.S. states to provide clarity about our business operations.”

Other crypto lenders sound undeterred, arguing that they’re safeguarding depositors while meeting demand for loans that banks won’t provide.

Ledn, a lender based in Toronto, says its typical borrower doesn’t want to sell his or her Bitcoin, and can’t find a traditional lender. “With Bitcoin, we can offer people in Mexico a loan at the same interest rate that a client in Canada or the U.S. can get,” says Ledn co-founder Mauricio Di Bartolomeo. The typical loan is for $15,000, he says, used for things like buying a home or school tuition.

Ledn also advertises high-yield savings accounts, including 7.5% on the stablecoin USD Coin and 5.25% on Bitcoin. Di Bartolomeo says that liquidations and withdrawals have increased recently, but he’s confident the platform can weather the crisis.

Companies like Milo, the mortgage lender, say they’re issuing home loans to the “crypto-rich,” providing credit they couldn’t get through a traditional lender. Milo doesn’t check credit scores or require much income and asset documentation, other than requirements for anti-money-laundering purposes. And while few banks take crypto as collateral, Milo bases its loans on a borrower’s Bitcoin or other crypto holdings.

Rupena, who founded Milo after working on Wall Street, says a home buyer can put zero down for a loan. A borrower could get a $1 million mortgage for a house priced at $1 million, backed by $1 million worth of Bitcoin and the house itself. If the crypto collateral drops below a preset threshold, the company could require the borrower to add more; if prices continue to drop and the borrower doesn’t add more crypto, Milo may liquidate the collateral or foreclose on the property.

For now, traditional lenders like Wells Fargo (WFC) and Rocket Cos.’ (RKT) Rocket Mortgage don’t have much to fear. The crypto-rich market is small. Milo issued its first mortgage in April, funding a set of rental properties in Coral Gables, Fla., secured with Ether and Bitcoin, then worth around $600,000. Since then, Milo says it has closed about $10 million in loans.

If zero-down mortgages take off, they would revive a product that evaporated for most buyers after the 2008 financial crisis. Rupena was in his early 20s back then, following a stint as an intern on Lehman Brothers’ mortgage desk. That experience taught him to “think about the world a little differently and the downside in a different lens,” he said, adding that the company hasn’t had to issue any margin calls as the crypto market crashed.

Crypto industry executives say many of their innovations will make finance faster, cheaper, and more accessible. When an investor buys or sells a stock, for example, it typically takes two business days for the transaction to settle. Crypto transactions are often completed within minutes, once they’re recorded on a blockchain.

Traditional cross-border payments can be even more burdensome, requiring multiple banks to coordinate transfers over several days or wire transfer services that charge steep transaction and currency-exchange fees. International crypto payments happen almost immediately, wallet-to-wallet, and may be less costly.

“Use of the blockchain and distributed ledgers definitely brings efficiency to many financial products and processes. There’s no doubt that that’s the case,” says former SEC Chairman Jay Clayton, now an advisor at crypto firm Fireblocks and senior policy advisor at law firm Sullivan & Cromwell. The issue, Clayton says, is that some in the industry don’t so much want clearer rules of the road as they don’t want to obey what’s on the books: “The calls for so-called clarity in many ways are just calls to change the applicable law.”

Some software engineers say it’s high time for governments to take charge.

Bitcoin “was this financial populist movement as a reaction to the speculative excesses of Wall Street,” says Stephen Diehl, one such critic now urging Congress to crack down. “Imagine if Occupy Wall Street was an equivalent movement,” he said, referring to the populist protest against income inequality. “Now, imagine if everyone on Occupy Wall Street was replaced with a hedge fund manager. That’s what we have with crypto.” b

Danish vaccine maker Bavarian Nordic is still in the trials stage with its Covid shot, making it a latecomer and dragging down its stock price.

But its smallpox vaccine, alone in having been approved for use against monkeypox, gives the Copenhagen-listed firm a virtual monopoly. This could make the shares a buying opportunity.

The stock (ticker: BAVA.Denmark) has tumbled from its March 2021 peak of 356 Danish kroner ($50.41) to a recent DKK243.

The company released midstage data at the end of last year for its Covid-19 vaccine, ABNCoV2. But it needs to surmount more research and regulatory hurdles. Bavarian Nordic also has failed to find a partner for its flu shot, which has the potential to be a blockbuster in many markets. Meanwhile, the company is raising funds for the Phase 3 study of its MVA-BN RSV vaccine candidate for respiratory syncytial virus.

On the upside, Bavarian Nordic has signed a number of deals for its Imvanex vaccine, which was originally developed to combat smallpox under the brand name Jynneos. The U.S. Biomedical Advanced Research and Development Authority (Barda) has authorized it for use in the U.S. and Canada as the only vaccine for monekypox, a viral infection endemic in some parts of the world.

The European Union’s drug regulator is now reviewing use of Imvanex for monkeypox, and the U.S. said it would expand the availability of the vaccine and broaden testing capacity.

The World Health Organization will soon decide whether monkeypox is a global health emergency. As of June 27, the Centers for Disease Control and Prevention puts the number of confirmed cases at 4,357 globally.

While Bavarian Nordic has jumped 41.3% over the past three months, the shares could have further to go. Demand has been strong—Barda has ordered 500,000 doses for 2022. The European Health Emergency Preparedness and Response Authority (HERA) has ordered 110,000 doses.

The number of new monkeypox cases “will need to be carefully monitored,” Frédéric Gomez, an analyst at Pharmium Securities, wrote in a note, adding that if cases rise and the company gets more orders for the vaccine, “it would not be surprising if Bavarian Nordic revises upwards the financial guidance provided.”

Analysts at broker Nordea estimate Bavarian Nordic shares could jump to a price target of DKK400. For the 2021 calendar year the company reported a loss before interest and tax of DKK313 million from a profit of DKK379 million in 2020. Sales were flat at DKK1.8 billion.

Chief Executive Officer Paul Chaplin said when reviewing annual results that Bavarian Nordic expects to launch its Covid vaccine in 2023, while the flu shot has a projected 2025 launch.

“At Bavarian Nordic, we are working tirelessly to make novel vaccines available to counter threats, whether big or small, thus helping to improve public health globally,” he told Barron’s in a statement.

Bavarian Nordic says it expects overall sales for the year—previously forecast for a range of DKK1.4 billion to DKK1.6 billion—to now reach DKK1.9 billion to DKK2.1 billion.

Monkeypox is less contagious than Covid, and the current global outbreak is likely to be brought under control by next year. But it’s endemic in Africa, so the need for vaccines will likely continue into the future.

There’s a good chance Bavarian Nordic will raise its fiscal year revenue guidance because “Jynneos is the best vaccine option based on its safety and efficacy profile,” Boris Peaker, an analyst at Cowen, tells Barron’s.

With mergers getting increased scrutiny, Microsoft MSFT +1.07% picked a tough time to buy Activision Blizzard ATVI +0.91% . But the regulatory uncertainty might give investors an opportunity for some easy upside in the gaming company’s stock.

Microsoft (ticker: MSFT) announced its $69 billion all-cash deal for Activision Blizzard (ATVI) in January, and in normal times there wouldn’t be much concern about the acquisition going through. Though Activision is among the largest videogame publishers, with its Call of Duty titles regularly topping sales charts, its $8.8 billion in 2021 revenue makes up a fraction of the estimated $192.7 billion global games market, according to market research firm Newzoo. In the past, that probably would have been too small to catch the attention of the Federal Trade Commission, which traditionally focused on how deals affect consumer pricing.

Many on Wall Street are betting the Biden administration is different. Activision stock is trading at $77.86 a share, $17.14 below the $95 deal price, but up $12.47 from where the stock was trading prior to the deal. Chris Pultz, a portfolio manager at merger arbitrage shop Kellner Capital, reckons that the current price implies a 50-50 chance the deal goes through.

Blame the regulatory environment. Seven months before the deal was announced, Lina Khan, a vocal critic of big tech, took over as FTC chair, though Democrats didn’t get a majority until May. Khan has long argued that the FTC and Justice Department should consider the effect on labor and other stakeholders before approving deals.

“It’s entirely possible that this is a high-enough-profile transaction, and, now that she’s at full strength at the FTC, that this provides an opportunity,” says Brian Quinn, a professor at Boston College Law School.

Activision disclosed in March that it and Microsoft received a second request for information, which requires companies to turn over documents and answer business questions.

The antitrust concerns seem overblown. If labor was ever a concern, it might no longer be one. The Communications Workers of America initially opposed the deal. But a group of workers at Activision-owned Raven Software voted in favor of the company’s first U.S. union under the CWA. Now, after reaching a labor neutrality pact with Microsoft related to Activision that kicks in 60 days after the deal closes, CWA President Chris Shelton says the union supports the deal.

“Getting the CWA on their side is definitely a good endorsement,” says Kellner’s Pultz.

The other worry: that Microsoft will keep Activision games off rival devices, particularly Sony 6758 –2.57% ’s (SONY) PlayStation 5. Microsoft has said it plans to honor existing deals and release coming Call of Duty titles on Sony’s consoles. “We believe the deal will benefit gamers, developers, and the industry,” Rima Alaily, deputy general counsel for Microsoft’s Competition Law Group, said in a statement to Barron’s.

Cutting off competition would do little to help Microsoft attain its goals. To maximize Activision’s profits, the tech giant will want to reach gamers on Sony systems. Microsoft is also trying to bolster its Xbox Game Pass subscription service, and adding Call of Duty and World of Warcraft would help justify its cost and possibly bring new users into the Xbox ecosystem. That suggests the possibility that Microsoft could win in court, if it comes to that.

“I don’t think the FTC has a chance,” says Wedbush’s Michael Pachter. “And Microsoft knows that.” If he is right, Activision stock would trade at $95 when the deal closes, up 22% from Thursday’s close.

That doesn’t mean there aren’t risks. While Westchester Capital Management’s Roy Behren, who co-manages the Merger FundMERFX +0.12% (MERFX), with $4.3 billion in assets, believes there’s a greater likelihood that the deal goes through than the price suggests, he’s reluctant to advise investors to play it. “If you like gambling, the market is implying it’s better than a coin toss,” Behren says. “But it’s very, very difficult to recommend to a retail investor to make only a single arbitrage investment.”

If nothing else, investors need to be comfortable owning the stock if the deal falls through. Analysts expect overall bookings, a measure of sales, to dip 5.5% to $7.9 billion in 2022 after Activision delayed key games, before returning to growth, rising 20% to $9.5 billion in 2023. Earnings should fall 22% to $2.91 a share in 2022, before increasing 34% to $3.90 in 2023.

The stock is reasonably priced—it trades at 19.8 times estimated 2023 earnings, compared with a five-year average of 21.7, though above rivals Electronic Arts EA +0.89% (EA) and Take-Two Interactive Software (TTWO), which trade at 15.4 and 17 times, respectively. If the deal fell through and Activision’s multiple fell to 16.2—midway between its peers—its price would be $63.18, down 19%.

But even a failed deal could be an opportunity. Benchmark analyst Mike Hickey noted in May that the offer bought Activision time to rebuild its culture after a wave of lawsuits and a settlement over charges of sexual harassment and gender discrimination. In a statement, Activision said it has “always been committed to a safe, welcoming workplace.”

Getting back to creating top games could lift the stock toward his fiscal 2023 $100 price target, Hickey wrote.

Microsoft has said it’s confident the deal will close in the fiscal year ending in June 2023. The vast majority of 27 analysts listed by FactSet give it a $95 price target. Even Berkshire Hathaway (BRK.A) has bet the deal will close by upping its stake to 9.5% of Activision’s shares. b

A G7 Summit photo op featuring world leaders without neckties had the internet buzzing about the decline of the go-to men’s accessory. But the story of the tie is an evolution, not an outright death.

Sale marks $140 million loss in investment that led to trial of 10 defendants on charges of embezzlement and other crimes

ROME—The Vatican sold a London commercial building at the hub of one of the biggest scandals of Pope Francis’ reign, at a loss of some $140 million.

The Vatican said Friday that it had sold 60 Sloane Avenue to Bain Capital LP for 186 million pounds, equivalent to around $225 million.

The investment in the building, a former Harrod’s auto showroom in London’s wealthy Chelsea district, has led to a trial at the Vatican of 10 defendants, including a once-powerful cardinal, on charges of embezzlement and other alleged crimes. All of the defendants deny wrongdoing.

The trial, which will soon enter its second year, is seen by many as a test of the pope’s overhauls aimed at bringing more transparency to the Vatican’s finances and of the Vatican criminal justice system’s ability to enforce accountability in its highest ranks.

Pope Francis has cited the probe as evidence that his overhauls have been effective. Defense attorneys, at times with support from the Vatican judges, have quarreled with prosecutors about whether the rights of the accused have been respected.

Prosecutors have said that the Vatican paid some 350 million euros, the equivalent of about $365 million, to acquire the London property through a series of complex transactions involving middlemen.

The scandal prompted the pope to remove hundreds of millions of dollars in assets from management by the Vatican Secretariat of State, which had acquired the property, undermining what has traditionally been considered the Vatican’s most powerful office.

The secretariat’s assets came largely from an annual collection from Catholics known as Peter’s Pence, long promoted as destined for charitable works though also available for the pope’s ministry.

Friday’s Vatican statement said that the losses incurred in the sale of the Sloane Avenue building wouldn’t affect Peter’s Pence.

The Vatican also said that the sale, which it said had been completed in recent days, was handled with the assistance of real-estate broker Savills and came after the Vatican received 16 initial bids.

Firm says it is exploring strategic alternatives, after issuing notice of default to crypto hedge fund Three Arrows Capital

Crypto broker Voyager Digital VOYG -17.14%▼ said on Friday afternoon that it is temporarily suspending trading, deposits, withdrawals and loyalty rewards.

“This decision gives us additional time to continue exploring strategic alternatives with various interested parties while preserving the value of the Voyager platform we have built together. We will provide additional information at the appropriate time,” Stephen Ehrlich, chief executive of Voyager, said in a statement.

On Wednesday, Voyager issued a notice of default to crypto hedge fund Three Arrows Capital after it failed to repay a loan of 15,250 bitcoin and $350 million in USD Coin, a stablecoin whose value is pegged to the dollar. The loan is equivalent to about $646 million based on bitcoin’s current price.

Other crypto firms have been hampered by a recent plunge in prices. Crypto lender BlockFi said on Friday that it signed a definitive agreement with crypto exchange FTX for a $400 million credit facility and the option to buy the company for $240 million. BlockFi said it lost $80 million from its exposure to Three Arrows Capital.

Voyager said it intends to pursue all available remedies for recovery from Three Arrows, including through the court-ordered liquidation process in the British Virgin Islands. Crypto exchange Deribit is among the creditors that sued the hedge fund there for debts owed, The Wall Street Journal reported.

Shares of Voyager, which are traded on the Toronto Stock Exchange, are down more than 96% this year, according to FactSet data. The stock, which was trading at $25 in November, has plummeted to 58 cents, giving the company a market value of $114 million.

The crypto brokerage was midsize. In a May business update, Voyager said it had 3.5 million verified users and $5.8 billion in assets, a decline from November’s $7 billion.

In June, Voyager Digital said it secured a loan from crypto-trading firm Alameda Research that includes $200 million in cash and USD Coin and 15,000 bitcoin to meet customer liquidity needs.

On Monday, the firm said it had used $75 million from the line of credit to facilitate customer orders and withdrawals and may use more. The two lines of credit expire at the end of 2024 and carry an annual interest rate of 5% payable on maturity.

The company has hired Moelis & Co. and the Consello Group as financial advisers, and Kirkland & Ellis LLP as legal advisers.

Klarna valuation crashes to $6.5bn from $46bn

The Swedish fintech’s decline highlights how investors are souring on the ‘buy now, pay later’ sector

Payments fintech company Klarna is set to raise fresh capital at a valuation of about $6.5bn, a fraction of the $46bn it was valued at just a year ago, three people with direct knowledge of the matter said.

The $600mn deal, which is being finalised, will involve investors including Sequoia Capital and Abu Dhabi’s Mubadala putting money into the Swedish company, two of these people added.

The dramatic decline in the worth of what was one of Europe’s most valuable private companies highlights the extreme reversal in sentiment for cash-guzzling, growth-chasing start-ups.

It also shows how investors have soured on “buy now, pay later” companies such as Klarna, which provide a form of short-term credit.

Only a year ago, Klarna was able to double its valuation to $46bn after a $639mn funding round amid a boom in ecommerce during the coronavirus pandemic. That funding round was led by Japan’s SoftBank, the investment group behind a disastrous bet in office-sharing group WeWork.

Klarna; its adviser Goldman Sachs; and Sequoia, whose partner Michael Moritz is also the chair of Klarna, each declined to comment. Mubadala did not immediately respond to a request for comment. The Wall Street Journal first reported the new funding terms.

The company was founded in 2005 and is a pioneer of the buy now, pay later business, which allows customers to delay payments or divide them into instalments. However, 40 per cent of its transactions are now paid in full through its “Pay Now” option.

The new valuation would be Klarna’s lowest since August 2019, when it was worth $5.5bn, and follows a series of efforts to raise cash this year, according to people briefed about the matter.

In May the company was tapping investors, including institutional investment firms and family offices, for new cash at a $25bn valuation. However, it failed to get any significant traction, according to those people.

Klarna also cut 10 per cent of its more than 7,000-strong workforce, with chief executive Sebastian Siemiatkowski describing 2022 as a “tumultuous year”.

A month later, some investors were approached with the opportunity to invest at a valuation below $20bn, according to the same people.

The reduced valuation reflects a wider rout in the fintech market. Surging inflation has lead investors to take a more cautious approach, stemming the flow of easy money which helped boost the sector to staggering heights.

Buy now, pay later providers have been particularly badly affected as falling discretionary spending, the risk of rising defaults and higher interest rates squeeze already tight margins.

In its first-quarter results, Klarna reported net losses of SKr2.5bn ($254mn), quadruple the amount in the same period a year earlier, while cash flow dropped from positive SKr7.6bn to negative SKr7.3bn in a year.

Shares of the US-listed buy now, pay later provider Affirm, which has partnered with big retailers such as Amazon and Walmart, are down close to 90 per cent from their high in November. Australia’s Zip has fallen more than 95 per cent since its peak in February 2021.

They are also facing pressure from competitors such as Apple, which is launching its own Apple Pay Later product in the US, and growing regulatory scrutiny over whether adequate checks are in place to ensure that customers can afford their loans.

In June the UK government outlined its plans to strengthen rules on the sector, including requiring lenders to carry out affordability checks and allowing consumers to take complaints to the Financial Ombudsman Service.

Buy now, pay later providers have already taken some steps to allay regulatory concerns. From June, Klarna began reporting information to credit agencies, allowing other lenders to see data on customers’ payments.