Banks try to avoid ending up like SVB

This is an audio transcript of the FT News Briefing podcast episode: ‘Banks try to avoid ending up like SVB’

Marc Filippino
Good morning from the Financial Times. Today is Thursday, June 29th, and this is your FT News Briefing. 

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Sterling had itself a rough day. And midsized US banks are trying to become more liquid. 

Brooke Masters
They looked at what happened to Silicon Valley Bank and First Republic, and they’re thinking, “I don’t want to be there”. 

Marc Filippino
Plus, there’s more fallout from the sexual assault allegations against Crispin Odey. I’m Marc Filippino, and here’s the news you need to start your day. 

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Sterling had its biggest one-day fall against the dollar in more than a month. The pound dropped eight-tenths of a per cent yesterday. The FT’s bonds and currencies reporter Mary McDougall explains what triggered the sell-off. 

Mary McDougall
Well, I think the interesting thing about it is that it’s been on a downward trend since last Thursday when the Bank of England unexpectedly raised interest rates by half a percentage point to 5 per cent. And normally, higher borrowing costs translate to a stronger currency because the higher rate means a higher return. But what the market is telling us here is that investors are worried that the Bank of England’s rate increases are going to result in some economic pain. I think an important point in all of this, sterling has been very strong this year. It’s been, it’s off about four and a half per cent. So we’re really just seeing it start to weaken in the last week. 

Marc Filippino
Mary says that’s not very helpful for the Bank of England. 

Mary McDougall
Because a weaker currency can be inflationary because it drives up the cost of imported goods and the UK has a bit of an inflation problem. We had last month core inflation, which is what the Bank of England tracks, rose 7.1 per cent year on year. 

Marc Filippino
This dip in sterling happened as central bankers from around the world were at a conference in Portugal that included Federal Reserve chair Jay Powell and Bank of England governor Andrew Bailey. 

Mary McDougall
The key takeaway was that they were all pretty firm in their messaging that rates are going to stay higher for longer and they will keep rates higher until they bring inflation back down to target. Andrew Bailey, he definitely hinted that perhaps the peak of UK rates would last for longer than the market is currently pricing in. So that probably have a downward effect on sterling too. 

Marc Filippino
That’s the FT’s bonds and currencies reporter Mary McDougall. 

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Regional and midsized US banks are working to sell off their loan portfolios. They want to raise cash after seeing Silicon Valley Bank and First Republic fail this spring. Here to explain is the FT’s US financial editor Brooke Masters. Hi, Brooke. 

Brooke Masters
Hey, Marc. 

Marc Filippino
So, Brooke, why are banks doing this right now? 

Brooke Masters
Basically for two different reasons. You can kind of think about this as a bit of a barbell. On one side, they looked at what happened to Silicon Valley Bank and First Republic, which were hit by big deposit outflows and then suddenly had to sell assets to come up with cash to meet them. And they’re thinking, “I don’t want to be there”. And so they are selling off high-quality assets that they can get cash or very liquid assets for, so that they have them in case of a problem. They’re basically upping their liquidity. The other thing they’re doing is they’re thinking, “OK, in a new, more straitened world where I have to have more cash, and I’m probably gonna have higher capital requirements once the Fed gets through with its response to the Silicon Valley Bank crisis, I need to think really hard about which of these loan portfolios I want to keep. Which businesses can I afford to be in?” Because if there are tougher capital requirements, some kinds of lending are more expensive than others. And so they are starting to get rid of the things they’re not gonna stay in. 

Marc Filippino
Yeah. But Brooke, are investors actually interested in what these banks are selling?

Brooke Masters
Well, yes, there is demand on the private credit side for good assets. I think there’s a bit of a paralysis in that the banks would like to sell their portfolios for as close to face value as possible, and the investors would like a great discount, as always happens. And so there’s a bit of time needed to agree on these deals because, you know, people have to, the bid-ask spread has to get narrower. And so a sort of a debate among the investors, like, how much risk do you take on the borrower? How much of a discount do you want? And so it’s a slow-moving market. But we hear from places like Ares and KKR, which are big, big players in this market, that they are much busier than they were, say, a year ago or two years ago. 

Marc Filippino
So, Brooke, what are you looking for as these sales get under way? 

Brooke Masters
I think I’m gonna be looking for banks selling off big portfolios that suggest that they are no longer gonna do certain kinds of business. I mean, commercial real estate is an obvious area, which, we’re in a cyclical period, some banks may just decide, “I’m not doing this anymore”. I think I’m also be watching the discount levels because right now the discounts are not that big, which suggests that these are high-quality assets and people are not yet worried about credit quality. If the discounts start to get wider, that means the banks are more stressed, they’re more worried about the economy, and investors may get a great deal. But there may also be real trouble ahead economically. 

Marc Filippino
Brooke Masters is the FT’s US financial editor. Thanks, Brooke. 

Brooke Masters
Thanks for having me.

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Marc Filippino
Things are looking bleak for British hedge fund titan Odey Asset Management. The firm has been in crisis since the FT exposed a series of sexual misconduct allegations against its founder, Crispin Odey. He denies the allegations but has been kicked out of the firm. The firm’s banking partners have severed ties, making it hard to protect investors against market moves and losses. And as clients rush for the exit, the firm has been forced to suspend trading in some of its main funds. FT reporter Emma Dunkley has more on the fallout from the scandal. 

Emma Dunkley
So they halted trading in five funds a couple of weeks ago and they said that one of them, the Odey Swan fund, would be liquidated and the money returned to investors. Now, the latest development this week is the two hedge funds that Crispin Odey until recently ran himself, have also now been suspended. So that’s the firm’s flagship Odey European Inc fund and the OEI Mac funds. 

Marc Filippino
Emma says Odey Asset Management has also been in discussions with other firms. They’ve been talking about offloading some of the funds and fund managers to rival companies. 

Emma Dunkley
This, in a way, should help to contain some of the reputational damage because it might allay client concerns if they see that their money is no longer managed by Odey Asset Management, but in fact another company with another brand but under the existing fund manager. So we wrote the news after seeing a letter from Odey Asset Management, noting that four funds are potentially being transferred to another company called SW Mitchell. And these funds are run by a manager called Oliver Kelton. And the idea being that if these talks succeed, these funds are moved to this rival firm, if you will, underneath Oliver Kelton, the existing fund manager. But hopefully investors’ concerns will be allayed by the fact that it’s now housed by a different company that isn’t impacted by any of the issues that Odey Asset Management is currently facing. 

Marc Filippino
The UK’s Financial Conduct Authority has been in contact with the company to try and make sure investors are protected. 

Emma Dunkley
This would involve them keeping an eye on and being on top of conversations that Odey Asset Management is having with other companies about transferring funds to some of these so-called rivals. But they’ve also potentially expanded an investigation that they launched a few years ago into Crispin Odey himself. So that’s something else we’ll be keeping an eye on. 

Marc Filippino
That’s the FT’s Emma Dunkley. 

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You can read more on all of these stories at FT.com. This has been your daily FT News Briefing. Make sure you check back tomorrow for the latest business news.