Asset Management: BlackRock’s risk control warnings to SVB

One scoop to start: Billionaire trader Chris Rokos and Goldman Sachs are among big-name investors that have been hit hard in the market upheaval following the collapse of Silicon Valley Bank.

And another thing: Yesterday UBS agreed to buy Credit Suisse for $3.25bn after a frantic weekend of negotiations brokered by Swiss regulators to safeguard its banking system and attempt to prevent a crisis spreading across global financial markets.

SVB collapse heralds ‘slow rolling crisis,’ says Fink

BlackRock has emerged as a behind-the-scenes protagonist in the saga of Silicon Valley Bank, the California-based lender whose failure helped spark a banking crisis.

The world’s largest asset manager warned SVB that its risk controls were “substantially below” its peers in early 2022, revealed by my colleagues Antoine Gara and Brooke Masters in New York.

SVB hired BlackRock’s Financial Markets Advisory Group in October 2020 to analyse the potential impact of various risks on its securities portfolio. It later expanded the mandate to examine the risk systems, processes and people in its treasury department, which managed the investments.

The January 2022 risk control report gave the bank a “gentleman’s C”, finding that SVB lagged behind similar banks on 11 of 11 factors considered and was “substantially below” them on 10 out of 11. The consultants found that SVB was unable to generate real time or even weekly updates about what was happening to its securities portfolio.

SVB listened to the criticism but rebuffed offers from BlackRock to do follow up work. SVB was taken over by the Federal Deposit Insurance Corporation on March 10 after it announced a $1.8bn loss on sales of securities, sparking a share price collapse and a deposit run. It accentuated fears over larger paper losses the bank was nursing in long-dated securities that lost value as the Fed raised interest rates.

Last week BlackRock chief executive Larry Fink used his closely watched annual letter to weigh into the collapse of SVB. He raised the spectre of a “slow rolling crisis” in the US financial system following the failure of the California-based lender, “with more seizures and shutdowns coming”. 

The founder of the $8.6tn money manager said SVB’s collapse was an example of the “price we’re paying for decades of easy money”. (Another was the liability-driven investing strategies that blew up in UK pension funds last autumn.)

Rapidly rising interest rates were “the first domino to drop” while SVB was an instance of the second, Fink wrote as he warned that other regional banks and investors who rely on leverage could also follow suit.

Fink said that swift regulatory action had helped stabilise markets after the biggest bank failure since 2008. But he nonetheless compared recent events to the 1980s savings and loan crisis, when more than 1,000 lenders collapsed. He wrote:

“We don’t know yet whether the consequences of easy money and regulatory changes will cascade throughout the US regional banking sector (akin to the S&L Crisis) with more seizures and shutdowns coming.” 

Where else in the financial system do you see cracks appearing? Email me: harriet.agnew

Griffin vs Ackman

Last week two prominent hedge fund billionaires offered opposing views of how regulators should have handled the collapse of Silicon Valley Bank.

Ken Griffin, founder of Citadel, said the rescue package for SVB unveiled by US regulators shows American capitalism is “breaking down before our eyes”.

Griffin told the Financial Times that the US government should not have intervened to protect all SVB depositors. “The US is supposed to be a capitalist economy, and that’s breaking down before our eyes,” he said in an interview on Monday, a day after US regulators pledged to protect all depositors in SVB — even those with balances above the $250,000 federal insurance limit.

“There’s been a loss of financial discipline with the government bailing out depositors in full,” Griffin added.

SVB was shut down by US regulators on Friday after customers raced to withdraw $42bn — a quarter of its total deposits — in one day and a failed effort to raise new capital called into question the future of the tech-focused lender.

Critics of the rescue package have pointed to the risk of moral hazard that comes from making all depositors whole on the money they have with SVB, while regulators have faced questions over missed warning signs. “The regulator was the definition of being asleep at the wheel,” Griffin said.

The billionaire Citadel founder, whose fund this year became the most successful hedge fund firm ever, said the strength of the US economy meant the US government did not have to take such forceful action. “It would have been a great lesson in moral hazard,” he said.

“Losses to depositors would have been immaterial, and it would have driven home the point that risk management is essential. We’re at full employment, credit losses have been minimal, and bank balance sheets are at their strongest ever. We can address the issue of moral hazard from a position of strength.”

Griffin’s stance contrasts starkly with that of Bill Ackman, another high-profile hedge fund manager, who on Monday called for the Federal Deposit Insurance Corporation to “explicitly guarantee all deposits now”, warning that “hours matter”. Ackman said on Twitter that “our economy will not function effectively without our community and regional banking system”.

He said that neither he nor his hedge fund Pershing Square had any exposure to Silicon Valley Bank, adding that his personal exposure to the venture capital industry was “less than 10 per cent of my assets”.

Chart of the week

As shares in their companies were tanking last week, a small group of European bank bosses sat down in London for a dinner of saffron risotto, salmon and asparagus and agreed that the market reaction to the collapse of a Californian lender 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.

Europe’s banks “are the strongest they’ve been for 30 years — if ever there was a moment to panic, it’s not now”, Serra added.

Until US federal regulators took over Silicon Valley Bank last week, after rising interest rates blew a hole in its balance sheet, some bankers in Europe were only dimly aware of the tech-focused bank’s 40-year existence. Since then the fallout has been swift and brutal as investors dumped European banking shares.

“The rise in rates has been so rapid that you see cracks starting to appear,” said Kevin Thozet, a member of the investment committee of French asset manager Carmignac. “Risk management at large European banks is very different from that of regional US banks. The risks are lesser, because they are largely covered and hedged. But all the same, where has that risk been passed on to? We don’t know that yet.”

Credit Suisse was the catalyst for much of the pain that rippled through Europe, from France’s BNP Paribas and Société Générale to Spain’s BBVA and Britain’s Barclays.

Five unmissable stories this week

Baillie Gifford’s flagship Scottish Mortgage Investment Trust asked one of its non-executive directors to resign at a board meeting on Thursday, following what he said was a disagreement over the appointment of new board members at the £13.4bn FTSE-listed company.

Are hedge funds partly to blame for the tumult in the Treasuries market? A historic rally in world’s most liquid market may have reflected a “short squeeze,” writes markets editor Katie Martin.

David Tepper has snapped up bonds of SVB Financial Group, the parent company of Silicon Valley Bank, in a bet that the value of the debt will rise as parts of the group are auctioned off. Tepper acquired the bonds along with preferred stock via Appaloosa, which for the most part manages his family’s multibillion-dollar fortune.

Chancellor Jeremy Hunt’s sweeping boost to UK pension tax breaks looks set to benefit many higher earners, including doctors, lawyers and bankers. But last week’s announcements raise as many questions as they give answers. Here’s what the tax-free pension changes mean for you 

The world’s largest private investment firms, including Blackstone Group, Apollo Global Management, KKR, Ares Management and Carlyle Group, are exploring the purchase of loans from the remains of Silicon Valley Bank following its collapse. They are examining SVB’s $74bn loan book for pieces that might fit into their credit portfolios.

And finally

As this current exhibition at the Barbican demonstrates, American artist Alice Neel paid attention to those whose lives, as poet Adrienne Rich put it, were “cheap poor quick unmonumented”. On until May 21.

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