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https://www.pd.co.ke/news/ruto-cabinet-asks-mps-to-raise-public-debt-cap-to-sh17-trillion-171332/By December, Kenya’s total debt stood at Sh9.6 trillion, which was only Sh400 million shy of the borrowing ceiling set by legislators. This effectively meant that the Ruto administration, which came to power after the August election, has had little headroom to borrow for either development or recurrent expenditure.
https://www.atlanticcouncil.org/blogs/econographics/the-us-debt-limit-is-a-global-outlier/Other countries have avoided deadlocks through one of these four routes:
- The ceiling is intentionally set sufficiently high such that it will not plausibly be crossed.
- The law is either amended or suspended during periods of heightened stress necessitating indebtedness.
- No punishments are tied to the legislation, meaning states often cross the limit with impunity.
- The law was scrapped altogether when it was severely curtailing the government’s policy space.
Envestnet, Inc. is an American financial technology corporation which develops and distributes wealth management technology and products to financial advisors and institutions.[2][non-primary source needed] Their flagship product is an advisory platform that integrates the services and software used by financial advisors in wealth management.[3]
Envestnet received controversy in 2020 when it was sued in a class action for its collection of consumer financial data. The company filed a motion to dismiss in November of 2020, which was partially granted but partially denied by the court.[4][5]
Those are, I think, the main answers. But there is one other sort of dumb accounting answer. Most of SVB’s interest-rate risk came in its portfolio of “held to maturity” bonds. The idea here is that SVB bought a lot of bonds and planned to hold them until they matured. If it did that, the bonds — which were mostly US-government backed and so very safe — would pay back 100 cents on the dollar. So SVB didn’t need to worry about mark-to-market fluctuations in their value. If interest rates went up, and the value of these bonds dropped from 100 to 85 cents on the dollar, SVB could ignore it, because the value would definitely go back up to 100, as long as it held the bonds to maturity. (The problem is that it couldn’t: There was a run on the bank long before the bonds matured.)• 1) SVB had expenses, and it needed to make money. It had to invest its depositors’ cash to make that money. In 2022, if it had been earning short-term interest rates on that cash, it would not have made enough money to cover its expenses. The way that it made money was by investing at long-term interest rates, which were higher.[1] So it invested in long-term bonds, earned higher rates, and made enough money. “Hedging” would have meant swapping its long-term rates to short-term rates, which would have defeated its main purpose, making money. And in fact SVB did have some interest-rate hedges in place in early 2022; it took them off, though, to increase its profits.
• 2) SVB thought that it was hedged: It was buying long-term bonds, yes, but it was funding those purchases with deposits. Those deposits are technically very short-term: Depositors could take their money back at any time, and eventually they did. But it is traditional in banking to think of them as long-term, to think that the “deposit franchise” and the deep relationship between banker and customer would make customers unlikely to take their money out. SVB invested a lot in good customer service and good relations with its depositors; it also made loans to startups that required them to keep their cash on deposit at SVB. So it figured it had pretty long-term funding, and it matched that long-term funding with long-term assets. If it had swapped the assets to short-term rates, and then rates fell, it would lose money, and SVB thought that was the bigger risk. When SVB got rid of its interest-rate hedges in early 2022, it did so because it had become “increasingly concerned with decreasing [net interest income] if rates were to decrease”: It worried that the hedges would hurt it if rates fell.
Again, here the accounting standards line up with the way banks have historically thought about themselves, which is basically that they are in the business of holding long-term assets for the long term. “Why would a bank hedge interest-rate risk on its held-to-maturity portfolio,” the accountants ask, “if it is just going to hold that portfolio to maturity?”The notion of hedging the interest rate risk in a security classified as held to maturity is inconsistent with the held-to-maturity classification under ASC 320,[4] which requires the reporting entity to hold the security until maturity regardless of changes in market interest rates. For this reason, ASC 815-20-25-43(c)(2) indicates that interest rate risk may not be the hedged risk in a fair value hedge of held-to-maturity debt securities.
It has $3.9 billion of swaps to hedge $3.9 billion of available-for-sale securities, out of a total of about $141 billion of available-for-sale and $170 billion of held-to-maturity securities.Charles Schwab Corp. started using derivatives to hedge interest rate-related risk during the first quarter.
The derivatives had a notional value of $3.9 billion as of March 31, the Westlake, Texas-based company said in a regulatory filing Monday.
Schwab, which runs both brokerage and bank businesses, has been ensnared in the tumult ravaging US regional banks after the Federal Reserve embarked on its most aggressive interest rate tightening cycle in decades last year.
The firm confronted swelling paper losses on securities it owns and grappled with dwindling deposits as customers moved cash into accounts that earn more interest. Schwab executives have said those withdrawals will abate. The pace of cash withdrawals is already starting to slow, Chief Financial Officer Peter Crawford said in a recent statement.
MSCI, ESG Ratings Methodology, April 2023.Our assessment is industry relative, using a seven-point AAA-CCC scale.
Hess press release, Oct 11, 2021.Hess Corporation (NYSE: HES) has received a AAA rating in the MSCI environmental, social and governance (ESG) ratings for 2021 after earning AA ratings from MSCI ESG for 10 consecutive years.
Bloomberg, ESG Investors' Best Intentions Slam Into Surging Oil Stocks, March 15, 2023 (via FA-Mag, no paywall)BlackRock remains a signatory to the net zero initiative and its iShares ESG Aware MSCI USA ETF holds a host of oil and gas producers, including Exxon, which has a larger weighting than Facebook owner Meta Platforms Inc., and Chevron, which has a larger weighting than Walt Disney Co. Similarly, Exxon is the seventh-largest holding in the SPDR S&P 500 ESG ETF, which also owns Schlumberger, ConocoPhillips and EOG Resources Inc
One thing that I would say is that if this is right and you take it seriously, then it is pretty bad news for US regional banks. “Banking is an inherently fragile business model” is a thing that people say from time to time (when there are bank runs), but nobody quite means it. They mean something like “from a strictly financial perspective, looking at a balance sheet that mismatches illiquid long-term assets with overnight funding, banking is insanely fragile, and the whole business model of banking is about building long-term relationships with slow-moving price-insensitive depositors so that the funding is not as short-term, and the business is not as fragile, as it looks.” But if the relationship aspect doesn’t work anymore, then banking really is just extremely fragile. Without the relationships, banks are just highly levered investment funds that make illiquid risky hard-to-value investments using overnight funding. That can go wrong in lots of ways!In a world of electronic communication and global supply chains and work-from-home and the gig economy, business relationships are less sticky and “I am going to go into my bank branch and shake the hand of the manager and trust her with my life savings” doesn’t work. “I am going to do stuff for relationship reasons, even if it costs me 0.5% of interest income, or a slightly increased risk of losing my money” is no longer a plausible thing to think. Silicon Valley Bank’s VC and tech customers talked lovingly about how good their relationships with SVB were, after withdrawing all their money. They had fiduciary duties to their own investors to keep their money safe! Relationships didn’t matter.
The whole relationship aspect of banking is devalued; rational economic decisionmaking based on mark-to-market asset values has become more important. This makes banks fragile. What makes banks something other than highly levered risky investment funds is their relationships, and that support is weakening.For retail, for a period of years—years!—we took the sweat and smiles business, the work of literal decades, and we—for the best of reasons!—said We Do Not Want This Thing. That very valuable thing was, like other valuable things like churches and birthday parties and school, a threat to human life. And so we put it aside. We aggressively retrained customers to use digital channels over the branch experience. We put bankers at six thousand institutions in charge of teaching their loyal personal contacts that you can now do about 80% of your routine banking on their current mobile app or 95% on Chase’s. And then we were shocked, shocked how many people denied the most compelling reason to use their current bank and shown the most compelling reason to bank with Chase switched.
With regards to sophisticated customers, the answer is not primarily about mobile apps or how difficult it is to wire money out of an account. It is about businesses making rational decisions to protect their interests using the information they had. Sophisticated businesses are induced to bring their deposit businesses, which frequently include large amounts of uninsured deposits, in return for a complex and often bespoke bundle of goods they receive from their banks. The ability to offer that complex and bespoke bundle is part of the sweat and smiles of building a deposit franchise. …
Why did they suddenly trust their banks less about the near-term availability of the bundle? Contagion? Social media? I feel these are misdiagnoses. Their banks suffered from two things: their ability to deliver the bundle was actually impaired. They had “bad facts”, in lawyer parlance. Insolvency is not a good condition for a bank to be in.
And those bad facts got out quickly, not because of social media and not because of a cabal but simply because news directly relevant to you routes to you much faster in 2023 than in 2013. There is no one single cause for that! Media are better and more metrics-driven! Screentime among financial decisionmakers is up! Pervasive always-on internetworking in industries has reached beyond early adopters like tech and caught up with the mass middle like e.g. the community that is New York commercial real estate operators.
Transaction economics include the flow of object-level decisions—do we buy this Google click, spin up that EC2 instance, or accept this Stripe transaction—and a stock of expectations and trust slowly built up on both sides. It's essentially a form of reputational capital, and a company that's betting most of its revenue or operations on a counterparty that they can't have a conversation with is, in some abstract sense, undercapitalized.
You don’t have to believe this theory, but something like it seems to be pretty popular. In particular, environmental, social and governance investors often express some version of this; they talk about the need to transition to green energy and question the long-term viability of fossil fuels.
• The world runs on oil right now, demand for oil is high, the price of oil is high, and getting oil out of the ground is lucrative.
• In X years — pick a number — the world will not run on oil, because the environmental effects of burning oil are bad, and eventually, through some combination of better green-energy technology, consumer demand and government regulation, the world will stop burning oil.
• Therefore the oil-drilling business will produce a series of cash flows that is large now and will, over the next X years, decline to zero.
Answer 1 seems wrong, on this theory: If you make long-term oil investments, and oil is doomed in the long term, then your investments are wasteful. You are taking profits that belong to shareholders and wasting them on inertia.
1) Do what you’ve always done. Drill lots of oil, acquire new leases, explore the deep ocean, make long-term investments in drilling technology, keep being an oil company, hope it all works out.
2) Pivot to renewables.[1] Drill oil for now, but make your long-term investments in green energy; build wind farms or drill geothermal wells or whatever, so that in X years, when the world stops using oil, you will be able to sell whatever it does use.
3) Drill the oil you’ve got, but plan for decline. Stop making lots of new long-term investments in oil fields. Maximize current cash flow, and spend it on stock buybacks. Eventually, in X years, your cash flows will be zero, and you will close up shop gracefully. But in the meantime there is money coming in, and rather than waste it on drilling new oil fields, you give it back to shareholders.
I should add that, like, pure-play wind-farm companies might have another advantage over oil companies in building wind farms: Their cost of capital might be lower. ESG investors tend to reward companies with good ESG scores (like green-energy companies) and penalize companies with bad ESG scores (like oil companies). This can have the (intended) result of lowering the cost of capital of green companies (lots of ESG investors want to buy their stock) and raising the cost of capital of polluting companies (nobody wants their stock). We talked a few weeks ago about a paper on “Counterproductive Sustainable Investing: The Impact Elasticity of Brown and Green Firms,” by Samuel Hartzmark and Kelly Shue, arguing that this has the effect of making polluting companies more short-term-focused: If your cost of capital is high, near-term projects are worth relatively more and long-term projects are worth relatively less, so you will focus on the short term. Hartzmark and Shue argue that in particular this means that polluting oil companies who get little love from ESG investors will decide to drill more oil to maximize short-term cash flows, but it does also suggest that polluting oil companies might decide to do less oil exploration and other long-term oil-focused investment, and spend more of their cash flows on stock buybacks. Your model could be something like “ESG lowers the cost of capital of green firms and raises the cost of capital of polluting firms, to encourage green firms to invest more for the long term and encourage polluting firms not to plan to stick around.” And then a lot of stock buybacks from oil firms would be a reasonable ESG outcome.Oil-and-gas companies have built up a mountain of cash with few precedents in recent history. Wall Street has a few ideas on how to spend it—and new drilling isn’t near the top of the list. ...
Even as an uncertain economic outlook has weighed on crude in 2023, making the energy sector the S&P 500’s worst performer, cash has continued flowing. Companies that previously chased growth and funneled money into speculative drilling investments, weighing down their stocks, have instead tried to appease Wall Street by boosting dividends and repurchasing shares.
The cash has helped make up for stock prices that often seesaw alongside volatile commodity markets. Steady returns also buoy an industry with an uncertain long-term outlook as governments, markets and the global economy gradually shift toward cleaner energy. …
President Biden has called on producers to ramp up output in a bid to lower prices at the pump. “These balance sheets make clear that there is nothing stopping oil companies from boosting production except their own decision to pad wealthy shareholder pockets and then sit on whatever is left,” White House Assistant Press Secretary Abdullah Hasan said. ...
“U.S. oil-and-gas producers are less focused on capital spending than they have been in years,” said Mark Young, a senior analyst at Evaluate Energy.
The cash buildup owes itself to other factors as well. Many companies have paid off debt racked up during growth mode, when they dug much of the top-tier territory for wells. While some companies have pledged huge sums to carbon-capture technology or hydrogen production, clean-energy investment has been slowed by lower expected returns and the wait for yet-to-be-finalized regulations in Mr. Biden’s climate package.
This is the #1 reason why I refuse to hold bank preferreds. In good times, they're fine - but when the banks get into trouble (often at their own doing) they can nix or suspend the preferred dividend and treat our money (likely now trading for a capital loss on OUR books) like an interest-free loan that's likely going to remain (until it recovers value to us) on THEIR books.Long-term PFF chart from Twitter LINK. It is underperforming financials by a lot because of the concerns that noncumulative bank preferred may be worthless in the FDIC or other bank rescues.
On Tuesday March 7, Sen. Elizabeth Warren, D-Mass., chair of the Subcommitee on Economic Policy, held a hearing on the debt limit, in which experts assessed its economic and financial consequences. In prepared testimony at the hearing, Mark Zandi, chief economist of the financial services company Moody's Analytics, said a default would be "a catastrophic blow to the already fragile economy."
Zandi warned of consequences akin to the Great Recession, including a roiled stock market that would cause market crashes, high interest rates and tanking equity prices. He said even if the default is quickly remedied, it would be too late to avoid a recession. Waiting too long to act could cause severe economic turmoil with global impacts.
The testimony included Moody's simulations of what an economic downturn could be, should the government default, casting a bleak view of the prospect that includes:
• Real GDP declines over 4% and diminished long-term growth prospects.
• 7 million jobs lost.
• Over 8% unemployment.
• Stock price decreases by almost a fifth, with households seeing a $10 trillion decline in wealth as a result.
• Spiking rates on treasury yields, mortgages and other consumer and corporate borrowing.
Further, Zandi expressed skepticism that lawmakers would be able to resolve their impasse quickly, as evidenced in part by the difficulty House Republicans had in electing McCarthy as speaker of the House. It took 15 rounds of voting for McCarthy to succeed.
"Odds that lawmakers are unable to get it together and avoid a breach of the debt limit appear to be meaningfully greater than zero," Zandi said in the testimony.
What would happen if the U.S. defaulted on debt?
If the default lasts for weeks or more, rather than days, it could trigger a fire-and-brimstone, Armageddon-level financial crisis for the U.S. and global economies.
A report from the White House Council of Economic Advisors in October 2021 warned of the possible effects of the U.S. defaulting, which include a worldwide recession, worldwide frozen credit markets, plunging stock markets and mass worldwide layoffs. The real gross domestic product, or GDP, could also fall to levels not seen since the Great Recession.
The U.S. has only defaulted once, in 1979, and it was an unintentional snafu — the result of a technical check-processing glitch that delayed payments to certain U.S. Treasury bond holders. The whole affair affected only a few investors and was remedied within weeks.
But the 1979 default was not intentional. And from the point of view of the global markets, there's a world of difference between a short-lived administrative snag and a full-blown default as a result of Congress failing to raise the debt limit.
A default could happen in two stages. First, the government might delay payments to Social Security recipients and federal employees. Next, the government would be unable to service its debt or pay interest to its bondholders. U.S. debt is sold to investors as bonds and securities to private investors, corporations or other governments. Just the threat of default would cause market upheaval: A big drop in demand for U.S. debt as its credit rating is downgraded and sold, followed by a spike in interest rates. The U.S. government would need to promise higher interest payments to justify the increased risk of buying and holding its debt.
Here’s what else you can expect to see if the U.S. defaults on its debt.
A sell-off of U.S. debt
A default could provoke a sell-off in debt issued by the U.S. government, considered among the safest and most stable securities in the world. Such a sell-off of U.S. Treasurys would have far-reaching repercussions.
Money market funds could sell out
Money market funds are low-risk, liquid mutual funds that invest in short-term, high-credit quality debt, such as U.S. Treasury bills. Conservative investors use these funds as they typically shield against volatility and are less susceptible to changes in interest rates.
In the past, investors have sold out of money market funds when the U.S. ran up against debt ceiling limits and signaled potential government default. Yields on shorter-term T-bills go up because they are impacted more compared with longer-term bonds, which give investors more time for markets to calm down.
Federal benefits would be suspended
In the event of a default, federal benefits would be delayed or suspended entirely.
Those include:
Social Security; Medicare and Medicaid; Supplemental Nutrition Assistance Program, or SNAP, benefits; housing assistance; and assistance for veterans.
Stock markets would roil
A default would likely trigger a downgrade of the United States’ credit rating — the S&P downgraded the nation’s credit rating only once before, in 2011 when it was approaching default. The default combined with the downgraded credit rating would in turn cause the markets to tank, the White House’s Council of Economic Advisors said in 2021.
If current debt ceiling talks continue for too long, the markets are likely to become more volatile than they already are.
Interest rates would increase
As debt ceiling negotiations linger, Americans could see rates increase on consumer lending products, including credit cards and variable rate student loans.
Credit lenders may have less capital to lend or may tighten their standards, which would make it more difficult to get credit.
Depending on the timing of a default and how long the effects are felt, rates could increase on new fixed auto loans, federal or private student loans and personal loans.
Tax refunds could be delayed
If the debt ceiling isn’t raised, it could take more time for tax filers to receive their refunds — usually within 21 days of filing. If the government defaults, those who file late run a risk of not receiving their refund.
Housing rates would increase
A debt ceiling crisis won’t impact those with fixed-rate mortgages or fixed-rate home equity lines of credit, or HELOCs. But adjustable-rate mortgage, or ARM, holders may see rates rise even further than they already have — more than four percentage points on rate indexes since spring 2022. Those in the fixed period of their ARM can expect to see rates rise when reaching their first adjustment.
I decided a long time ago it’s best to view asset allocation in terms of percentages. So, theoretically, it doesn’t make any difference whether you’re managing $50,000, $500,000, or $5,000,000 when designing a portfolio and maintaining the desired allocation among different asset classes. There are some caveats: Fees tend to be higher for lesser amounts invested. And some lucrative investments may not be available for smaller sums. In that sense, dollar amounts may well influence investment decisions.“Have you noticed how easy it is to tell yourself that you would be comfortable with a 10% drop in the value of your portfolio until you are seeing it losing $50,000, $100,000 or $150,000 or more . Dollars seem to have a greater impact on your tolerance.”
And here’s Bloomberg News this morning:PacWest Bancorp, which has been hit hard since the collapses of several banks, dropped by about 50%. The stock started falling in after-hours trading Wednesday evening, after a report that it was considering selling itself.
PacWest said in a statement after midnight Eastern Time Thursday that its core customer deposits were up since the end of the first quarter, and that it hadn’t experienced any unusual deposit flows since the collapse of First Republic.
And:PacWest Bancorp led a rebound across US regional banking stocks after a bruising week of losses, amid signals that some of the selling has been overdone.
PacWest’s shares soared as much as 88% in US trading Friday, their biggest intraday gain ever, after multiple trading pauses for volatility, while Western Alliance Bancorp rose as much as 43%.
The stock market has been pretty panicky about these banks, but their depositors, for the most part, have not been. How do you reconcile that tension? I think there are about four possibilities.Take Western Alliance, the Phoenix, Arizona-based bank whose shares tanked as much as 27% on Tuesday, the day after JPMorgan Chase & Co.’s emergency rescue of First Republic Bank. While the deal failed to quell investor concerns the upheaval would spread, depositors were a little less fazed: Between Monday and Tuesday, they added $600 million of cash to the bank.
“The bank has not experienced unusual deposit flows following the sale of First Republic Bank and other recent industry news,” Western Alliance said in a statement, outlining that deposits had increased to $48.8 billion.
The same was true for rival lender PacWest Bancorp., which said it experienced no “out-of-the-ordinary” deposits flows following First Republic’s sale. Through Tuesday, deposits had increased since the end of March, it said.
And here’s Alexandra Scaggs at FT Alphaville:In a Friday morning note upgrading Western Alliance, Comerica and Zions to overweight, JPMorgan analyst Steven Alexopoulos said that the sell-off had fed on itself. “With sentiment this negative, in our view it won’t take much to see a significant intermediate-term favorable re-rating of regional bank stocks,” he wrote.
Sometimes the stock market just gets too excited, and then walks it back.If a new challenge to regional banks has surfaced just this week, it’s a tough one to find. …
“The thing I can’t wrap my brain around is that we have zero evidence — and if anything we have contrary evidence — that there is still concerted deposit flight in the system”, CreditSights’ Jesse Rosenthal told Alphaville this week.
This is the most straightforward possibility: This week the stock market noticed, not that the regional banks are failing, but that they are unprofitable, so their stocks went down. (Also they are up today, which could just be “the stock market noticed that a little too hard yesterday,” or “the stock market got a little too optimistic today,” or some combination.)Since mid-March smaller US banks have had to compete ever harder for deposit funding because of the safe-haven attractions of the biggest lenders plus the higher returns already available from money market funds. The result is a sharp rise in funding costs for lenders like PacWest.
PacWest has become more reliant on higher cost consumer and brokered time deposits, which lifted its total deposit cost to 1.98% in the first quarter of 2023 from 1.37% in the previous three months. It has also borrowed more from costlier sources like the Federal Home Loan Banks, the Federal Reserve’s Bank Term Funding Program and capital markets. Taken together these changes helped to slash its net interest margin to 2.89% in the first quarter from a fairly consistent 3.4% last year. Analysts expect it to fall further to about 2.5% on average for this year, according to data complied by Bloomberg.
The squeeze on lending margins hurts revenue and profitability. The last two quarters have produced its lowest pre-tax profits since the third quarter of 2020. Its next two quarters are forecast to be even worse.
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