Goldman issues recession warning as shares in US regional banks plunge

Troubled US regional bank First Republic is reportedly in rescue talks with major US financial institutions as a banking crisis unfolds on both sides of the Atlantic.

The largest US bank, JPMorgan Chase, along with Morgan Stanley, Citigroup and others, are in discussions to deposit $20 billion with ailing First Republic, according to a CNBC report citing sources.

A rescue deal could be announced as soon as today, though the details of the plan are fluid and nothing is yet certain, people familiar with the matter told the Wall Street Journal.

The deal could involve capital infusion to bolster the troubled lender after the collapse of SVB Financial last week triggered fears of a contagion, the report said, adding that a full takeover is also a possibility, though less certain. 

Shares of First Republic jumped positive on reports of the potential deal, gaining up to 15 percent after dropping as much as 35 percent on Thursday morning.

A possible lifeline to the hard-hit bank sent Wall Street higher in afternoon trading, with the Dow Jones Industrial Average rising 357 points, or 1.12 percent, shortly after 1pm. 

Overall, Wall Street opened lower Thursday but climbed into positive territory in midday trading, with the Dow Jones Industrial Average gaining 173 points, or 0.54 percent, shortly before noon. 

Shares of the Big Four trillion-dollar US banks also posted gains, after the Swiss National Bank offered troubled Credit Suisse a $54 billion lifeline on the other side of the Atlantic. 

In afternoon trading, shares of JPMorgan, Bank of America, Citigroup, and Wells Fargo all gained more than 2% after days of wild swings. 

Regional banks also turned positive, with Western Alliance gaining more than 13 percent and PacWest Bancorp up more than 3 percent.

After the collapse of SVB, contagion fears have centered most heavily on First Republic, since it is the regional lender with the largest chunk of uninsured deposits, totaling $119.5 billion according to Reuters. 

First Republic, which has a similar client base to failed SVB, on Wednesday had its bond rating cut to Junk status by Standard & Poors. 

A spokesman for First Republic declined to comment on reports of a possible sale when reached by DailyMail.com on Thursday morning. 

The risk for First Republic — as is true at any other bank — is that depositors might pull their cash out faster than the bank can liquidate its assets, which typically include loan portfolios and long-dated bonds and mortgage-backed securities. 

In a statement on Sunday, First Republic said it had unused liquidity of more than $70 billion following additional liquidity injections from the Federal Reserve and JPMorgan Chase.

‘First Republic’s capital and liquidity positions are very strong, and its capital remains well above the regulatory threshold for well-capitalized banks,’ said CEO Mike Roffler and executive chairman Jim Herbert in a joint statement.

Meanwhile, citing stresses on small and mid-sized regional banks, Goldman Sachs raised its probability of a recession this year — while the New York Times revealed the investment bank will likely make a $100 million profit from the trove of bonds it bought from SVB days before the smaller bank’s collapse. 

Banks across the globe slumped following the closure of SVB and Signature Bank in the past week, with worries about stresses in the global banking system exacerbated by troubles at Swiss lender Credit Suisse. 

Credit Suisse’s shares soared 30 percent on Thursday after it announced a $54 billion loan from Switzerland’s central bank to shore up its finances, bolstering confidence as fears about the banking system moved from the US to Europe.

It was a massive swing from a day earlier, when shares of Switzerland’s second-largest commercial bank plunged 30 percent on European exchanges after its biggest shareholder said it would not put more money into Credit Suisse.

Meanwhile, Goldman Sachs analysts say pressure on small and mid-sized US banks following the collapse of Silicon Valley Bank significantly raises the probability of a recession this year. 

In a report on Thursday, Goldman Sachs dramatically increased its probability of the US economy entering a recession in the next 12 months to 35 percent, a 10-point increase, citing the stress on small banks. 

Smaller US regional banks continued to see sharp declines in valuation, with First Republic stock dropping as much as 30 percent in the premarket and raising questions about whether it would seek a buyer.

Goldman Sachs analysts, led by chief economist Jan Hatzius, warned that the collapse of SVB and Signature Bank highlights the delayed effect of the Federal Reserve’s aggressive rate hike campaign. 

‘Ongoing pressure could cause smaller banks to become more conservative about lending in order to preserve liquidity in case they need to meet depositor withdrawals, and a tightening in lending standards could weigh on aggregate demand,’ said economists at Goldman Sachs led by Jan Hatzius. 

As well, analysts at JPMorgan said the crisis at smaller banks will hamper business loans and trim one-half to one percentage point from gross domestic product over the next year.

JPM notes that small banks, as defined by the Fed, account for 30 percent of aggregate banking system assets, and 38 percent of the system’s loan book in the US. 

The crisis comes after Silicon Valley Bank collapsed last Friday, followed by Signature Bank over the weekend. Crypto-focused lender Silvergate also entered voluntary liquidation last week.

Silicon Valley Bank’s collapse was the second largest in US history, behind only the 2008 collapse of Washington Mutual Bank. 

Goldman Sachs could see $100M profit in the bond sale that led to Silicon Valley Bank’s collapse

Goldman Sachs could make up to $100 million from its previously undisclosed role as the buyer in the fire-sale of bonds that spurred Silicon Valley Bank’s collapse last week.

As SVB Financial Group wrestled with a capital shortfall and the prospect of a downgrade to its credit rating last week, it went to Goldman Sachs and worked out an unusual two-part plan, according to people familiar with the discussions.

The investment bank would buy a $21.5 billion bond portfolio from SVB to boost its coffers, after startups began pulling their deposits from the technology-focused lender, which does business as Silicon Valley Bank.

But there was a hitch. Goldman’s offer for the portfolio was worth $1.8 billion less than the book value SVB had assigned to it, because a rise in interest rates had made it less valuable. SVB would have to book a loss on the portfolio, which was made up of US Treasuries and related bonds.

The next step was for Goldman to put together a solution. It would help organize a $2.25 billion stock sale for SVB to fill the funding gap caused by the bond portfolio sale, two of the sources said.

Goldman delivered on only the first step of that plan. Once the bond portfolio deal was completed, the storied investment bank didn’t have time to convince investors to lock in capital and overcome concerns about depositors pulling money out of SVB.

The tight turnaround left insufficient time to prepare materials for investors by early last week, one of the sources said. The stock sale collapsed and SVB became the largest U.S. bank to fail since the 2008 financial crisis, fueling concern about other lenders and prompting regulatory interventions to backstop customer deposits.

Yet for Goldman, the botched deal had a silver lining. The bond portfolio it acquired from SVB is now worth more, based on the drop in Treasury yields since the transaction happened. 

Traders not affiliated with the deal that were interviewed by Reuters estimated the gain in value to be in the hundreds of millions of dollars. 

A source familiar with details of a hedge that Goldman’s trading desk put on the deal said the gain would be less than $100 million. The Times cited 

It is unclear whether Goldman has held onto all or part of the bond portfolio or sold it. Goldman declined to comment. SVB did not respond to a request for comment. In a regulatory filing on Tuesday, SVB said its bond portfolio sales to Goldman were done at ‘negotiated prices’.

Goldman was not paid the underwriting fee it had agreed for the stock sale because that deal fell through, two of the sources said. SVB has not disclosed how much that fee would have been.

Details provided by six people familiar with the attempted capital raise show that Goldman and SVB underestimated the challenges of pulling off the capital raise in terms of timing and investor interest. 

Only two private equity firms were ultimately invited to participate in the capital raise last week – General Atlantic and Warburg Pincus. SVB and Goldman hoped stock market investors would chip in for the remainder, four of the sources said.

Warburg Pincus turned down the deal, however, because it needed more time to carry out due diligence after it became concerned that SVB could still face long-term funding issues, two of the sources said. General Atlantic pledged $500 million, but walked away when the capital raise fell through.

Warburg Pincus and General Atlantic declined to comment.

The banks also miscalculated how investors would react to the stock sale. One of the sources said the company believed that investors would welcome the plan as a boon to SVB’s financial health, but it backfired and instead sent a worrying signal that triggered a 60 percent plunge in the bank’s shares. 

The mood of investors was already tense after another bank advised by Goldman, cryptocurrency-focused bank Silvergate Capital Corp, collapsed the day before.

The handling of the SVB deal by Goldman, the most prolific dealmaker based on league table data, has attracted Wall Street’s fascination and invited scrutiny.

Michael Ohlrogge, associate professor at the New York University School of Law, said that while Goldman may not have handled everything ‘exactly right’, it had taken on a difficult assignment to begin with. 

‘(SVB) had gotten themselves into such a risky position,’ Ohlrogge said.

SVB did not disclose in its stock sale prospectus to investors that Goldman was the acquirer of the bond portfolio it sold at a loss. 

But in the prospectus, SVB did mention other relationships and potential conflicts of interest, such as SVB’s investment banking arm underwriting the deal.

SVB disclosed Goldman’s role as acquirer of the bond portfolio only on Tuesday, the last day of a four-business day window that the US Securities and Exchange Commission (SEC) affords companies to make such disclosures. Five securities lawyers interviewed by Reuters said that SVB’s handling of the disclosure appeared to comply with the rules.

An SEC spokesperson did not respond to a request for comment.