It is kind of silly to see what is going on in the banking sector – you have got to know that short sellers are planting rumors and reaping the benefits. The more folks talk and digest the rumors the more deposits leave the vulnerable banks.
PacWest (PACW) and Western Alliance (WAL) are todays targets–but the sector in total is taking a spanking. Just like yesterday we are seeing a solid sea of red in the preferreds. PacWest common is now at $6.14 – down $2.87 while WAL is trading at $28.59 which is down $7.93.
As folks have said in the comments – every bank is a potential target of a ‘run’ – no matter what their financials said for the quarter ending 3/31/2023. I have looked through many of the financial statements of the community/regional banks and on the surface they looked pretty damned good.
When the carnage is over there will be some dandy ‘bargains’ – unfortunately that won’t be anytime soon.
The banking preferreds are here.
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I thought I had a low ball bid in for ONBPP and it not only hit, it blew past it and hit a new 52 week low before rebounding. Only consolation is I pick up the dividend in a couple weeks to make up some of the loss.
I wonder is this a panic or is it a rational response?
Consider the following:
FRC common, preferred and sr unsecured debt all got zeroed out on a Sunday in negotiations between regulators and JPM (we are told). Meanwhile uninsured depositors are made whole. The fact that JPM was an uninsured depositor is a significant element.
The same happened at SFV and Signature banks. Albeit w/o the complexity of the $30B deposits.
I saw no due process and no consideration whatsoever to the interests of the bondholders.
So one must ask – what is the actual credit quality of regional bank sr debt?
What is the credit rating of a bond if a acquirer and regulators can get into a conference room on a Sunday and decide that it is worth $0?
My answer is that it is effectively B+ credit at best and might be lower.
It’s possible that markets have woken up to this fact and are repricing regional banks across their entire capital structures. Short equity positions are possibly being used to hedge pre existing regional bank debt positions.
It’s just notable that Sr debt is getting zeroed out, but uninsured depositors (which include JPM) are not getting even a $0.01 haircut.
Is it really possible that the balance sheet math worked out such that Sr bond holders get $0 and unsecured depositors get 100%. Markets are pricing this risk IMO.
August, you ask a great question about what the true value of regional bank senior debt is. The two most recent cases I think are:
SIVB (Silicon Valley Bank) which was A2 not long ago and is now defaulted
FRC( First Republic) was Fitch A- before the SIVB meltdown and is now defaulted
So both of these went from investment grade to belly up in a heartbeat. To me that says that bank ratings that are investment grade are close to worthless. Even if both of these had been rated single B, the historic one year default rate would be very low. So that would not have been very useful either.
Sometimes in investing we just have to admit, that nobody knows or can predict certain asset classes with reasonable success. I did post a link to someone that pointed out SIVB’s issues about two months before they failed. The Stanford study I posted about today says:
“Even if only half of uninsured depositors decide to withdraw, almost 190 banks with assets of $300 billion are at a potential risk of impairment, meaning that the mark-to-market value of their remaining assets after these withdrawals will be insufficient to repay all insured deposits.”
Several III’ers posted positive remarks about VLY and why it will survive. My comment is that VLY might be the best bank on the face of the earth, but still fail if a bank run starts, ratings be darned.
The Comerica bond 3.7% CUSIP 200340AS6 maturing 7/30/23 that several of us own was hard hit today, falling from ~ 99.2 down to 97.5, which gives a YTM= ~14%+ It and several Credit Suisse issues had the highest YTM’s amongst 0 to 2 year IG rated corporates. All of us that own it accept the fact that the market perceives a higher default risk, despite its IG Baa1 rating.
I am surprised it is even at 97…with this environment, a price closer to 50 is what I would pay for it, since it is either a full payment or nothing.
The problem with PACWest and Western Alliance is that both have the Fair Value (FV) of their loan book signifcantly less than carrying value (this was the cause of First Republic to go under) whereas with SVB is was the FV of their HTM securities which inflicted the damage.
Western Alliance is particularly in bad shape with a 4bn MTM loss on FV loans being 80% of its equity and those 295m Pfd Equity is has issued are in my opinion worth zero in a forced sale.
PACwest has more pfd securities 499m and equity of 2.3bn and MTM on FV loans of -1.8bn so it has actual equity left of 500m hence the share price.
The preferred here are for the brave as you are banking on the equity being wiped out and you collect your $25.
So who REALLY has a vendetta against California Banks? It’s a valid question. Sounds like a bear raid:
A bear-raid target is generally a company that is going through a challenging period, since its vulnerable position makes it easy fodder for short sellers. While short selling is legal, coordinated short selling is viewed as market manipulation by the Securities and Exchange Commission (SEC), and spreading false rumors is tantamount to fraudulent activity.
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– The Fed couldn’t do this??? This is EXACTLY why certain sectors want TOTAL DEREGULATION.
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– CNOBP, which I own 300 shares, is hammered by the BEAR RAID tactic. Sounds like fraud to profit should be investigated and widespread publicity as to destabilization of ‘our proud American Banking traditions of Stability for all citizens’ put on open trial. Who’s zoomin’ who? Criminals are criminals and should be found, put on trial and serve time after due process.
Where’s the Fed working WITH the FTC, SEC, Justice Dept? Fair questions!
It’s probably Peter Thiel.
“We’re monitoring the situation closely”
Translation. “if there’s a meltdown, nobody could see it coming”
Watch out for short sellers. Hedge funds that bet stocks will fall scored a mammoth return on First Republic’s demise. (By last Friday, over a third of the bank’s shares were held by short sellers.)
NYT article today listed short sell percentages against banks. All banks I have avoided: OZK, Zion, Western Alliance, etc.
Considering purchasing some debt and shorting the common.
Those investors have also taken aim at other regional lenders, including Bank OZK, Western Alliance and Zions Bancorp, and have booked $5.3 billion in mark-to-market profits on such stocks in the year through last Friday, according to data from S3 Partners.
FRC’s stock, preferreds, and debt all went to zero. Why do you think being long the bonds and short the stock is a good strategy? Just curious.
well, I bought FRC preferreds at 6 bucks and matching puts for every 100 shares of the preferred that paid off more than 6 bucks when they got seized. I just need to wait about a few weeks until the options settle.
I’ll probably rinse and repeat on any bank that has the preferreds trading for the net amount of the option.
I only wish I had backed up the truck to do it.
I believe everyone here will find this quite interesting
Credit Suisse – The Worst Bank on Earth?
https://www.youtube.com/watch?v=1sebelxpDDI
Thanks for the link Ab very interesting watch. Two thoughts came to mind, maybe 3. Two big to fail and J.P Morgan
Third is what would happen if our government had to make a choice between the economy and rescuing a TBTF bank? It would be dammed if you do, dammed if you don’t.
On their Q1 CC, Redwood Trust (RWT) said they saw large opportunities as the banks stop being able to hold Jumbo loans in portfolio funded with 0% deposits. Anyone looking at those 10% preferreds now trading ~22/23?
Just looked at RWT, raising a $65m 10% pfd issue to pay off 5% convertible shows the stress they are under. a 10% loss on their loan portfolio and the preferreds are wiped out. This is another one for the brave. I think a 6% yield on closed end preferred is much safer and you can sleep at night.
Wild day out there, if this doesn’t force the fed to hold off tomorrow, then they must want this collapse. Because I don’t see what else will stop the carnage.
Foolishly perhaps, I started a small long in KEY/J and am looking at ZIONL.
Anyone else looking around here?
I’ve been nibbling on some banks over the past few weeks but don’t want to start taking big bites until the sword of Damocles debt ceiling is resolved.
Bought small positions in several banks last month. Mostly even or modest gain. Held on to large CUBI-F position. Last weeks rise was the time to sell, 20/20 hindsight
Wall Street Journal reports May 1, 2023 that Chase Bank will earn an extra $500 million dollars a year and earn an internal rate of return of twenty percent. First Republic stockholders will lose everything just like Silicon Valley Bank and Signature Bank stockholders lost everything. Jerome Powell, during his term, now has had the second, third and fourth largest bank failures in US History. Meanwhile, news reports indicate Congress members were selling out there regional bank stocks. Shareholders in regional and community banks looking to the First Republic outcome have to be extremely concerned if they are going to survive. What bank client of regional banks and community banks can be certain of their credit lines not being terminated? What construction borrower, now and in the future, is certain to be funded in any project requiring a construction loan? Fortunately, Jamie Dimon and Jerome Powell will still earn a healthy paycheck while most of society goes into a very rough economic situation. When there are very few lenders available to finance and/or refinance commercial, multifamily and other projects, everyone will see a job market and a society that has taken a major downturn.
This is exactly what happens and what HAS happened when corporate cartel and their marketing magician lobbyists take control. We have HAD community based and focused banking for decades, focused on local needs and real citizens, real businesses and local bankers who knew those needs. As soon as we turned citizens into consumers and applied PhD economics/marketing/lobbying..well read up on it.
We just want to believe TV, talk-radio and smarter wise-guys.
The alarm is going off folks. Get safe.
sjc, Bot full position KEY, Oct ’25 bond at 91.29. They have survived worse than this a few times and are a spread out into retail land.
Recently got slivers filled in CLF and SWN bond further out ’27 and ’29. Hope to collect and sell as their duration shorten and that end of the curve is crying. ?
Gotta ask why didn’t the Fed in all their regulation fantasies just limit withdrawals to average business needs for thirty days? Not very creative if you ask me in the face of all the other bs they have made up over the decades. It would be really easy to verify, esp since it’s all electronic transfer and considering computing now-a-days. If you’re going to have favorite sons at least make it look even and considered.
A computer could run the system better, there is no need for superior human-touch arrogance.
Self-fulfilling indeed.
“One new point of pressure on these banks could be short sellers who are betting on certain lenders to go down in value. These investors made a tidy profit from such bets on First Republic and Silicon Valley Bank.
“The antelopes are being prowled by the lions here and the lions are going to find other ones to attack and bring down,” Dick Bove, financial strategist with Odeon Capital Group, told Yahoo Finance Monday, predicting other banks would still fail.
Investors, he said, are looking for banks that have large portfolios of fixed-rate mortgages, a lot of commercial real estate, and a gap between the bank’s real values and published values.”
https://finance.yahoo.com/news/pacwest-western-alliance-crash-as-regional-bank-fears-continue-to-shake-markets-151815103.html
Landlord:
And now behemoth bank preferred investors like Cohen & Steers aren’t waiting around any longer for a recovery and are getting out of all their regional bank preferreds. Other institutional investors likely to follow?:
From Bloomberg:
US Regional Bank Stress Urges Big Preferred Investor to Sell
Cohen & Steers cuts regional bank preferred share holdings
Small lenders’ preferreds have slumped compared to large banks
May 2, 2023 at 4:56 AM PDTUpdated onMay 2, 2023 at 7:37 AM PDT
A major buyer of securities issued by US banks to bolster capital is cutting exposure to regional issuers due to concerns about their ability to quickly recover from the current stress.
Cohen & Steers Inc. has sold regional banks’ so-called preferred shares in recent weeks, senior portfolio manager Elaine Zaharis-Nikas said in an interview with Bloomberg News. The collapse of Silicon Valley Bank in March and subsequent failures of other small lenders have exposed vulnerabilities that require a change in tack, she said.
“We have to take a step back and do a different type of analysis,” said Zaharis-Nikas, pointing to her firm’s expanded focus on metrics like liquidity, loans and assets. The firm has reduced exposure to preferred shares issued by US regional lenders as a result.
Since SVB’s demise, exchange-traded preferreds by banks with a market capitalization of under $10 billion have lost more than a fifth of their value on average, according to data compiled by Bloomberg.
By contrast, similar preferred shares by Wall Street heavyweights, including Bank of America Corp, Morgan Stanley and Goldman Sachs Group Inc, have gained about 0.5% over the same period.
Cohen & Steers is within the top 10 investors in exchange-traded preferred shares issued by US banks, based on Bloomberg-compiled data. These securities are issued by US lenders to fill regulatory requirements, in the same manner that European banks have been selling so-called additional tier 1 notes since the global financial crisis.
Investors were this week dealt another blow as JPMorgan Chase & Co. agreed to acquire First Republic Bank but not to assume ownership of either its preferred shares or its unsecured bonds. Trading in First Republic Bank preferreds, the price of which had already slumped more than 90% since early March, was suspended. The New York Stock Exchange announced on Tuesday that it will start delisting proceedings for eight First Republic securities.
While the JPMorgan acquisition supports deposit stability, it “risks pushing up bank funding costs as creditor burden sharing becomes more common,” wrote Suvi Platerink Kosonen, a senior financials credit analyst at ING Bank NV, in a research note following the deal.
Prices of preferred shares by regional banks fell anew on Tuesday. A 7.75% perpetual issue by Pacwest Bancorp tumbled $4.74 to $10.8 as of 10:10 a.m. in New York, according to data compiled by Bloomberg. A Western Alliance Bancorp 4.25% issue was down $2.45 to $12.8.
Cohen & Steers is not in a hurry to build up exposure to US regional banks again, amid concerns that more distressed lenders could still emerge. “We want to see some more stability,” said Zaharis-Nikas. “We are waiting to see if the deposit flight has stabilized.”