First Republic Rescue May Rely on US Backing

Let's get to our Bloomberg News Finance reporter Shree Natarajan. He's here in our Interactive broker studio along with Herman Chance, senior analyst for US Regional banks at our Bloomberg Intelligence team. Because we did have pack West sharing up it's liquidity first, Republic again under pressure, and then you had Janet yell and want wanta sure. Let me start with you, what are the headlines as you look at this situation that you think we need to be sharing with our audience.

Look as I walked over to the radio booth, you could see the markets taking a nose dive into the close. But that's not all. When you look at someone like First Republic going down sixteen percent. That's a stock that's been beaten up this month, down ninety percent. This was a three digit stop. Now that long ago, the start of the month, this was around one hundred and thirty dollars. Why aren't things coming down for this one with all the assistance it's gotten so far? Well, the question is

is that enough? And we have a very good story on Bloomberg right now if you read it, which gives you a very good explainer as to why there is such reluctance in any sort of White Knight coming forward. There is a big gaping hole in that balance sheet. They break it down there. Their securities portfolio has taken a four billion dollar hit their loan book. And this is a bank, First Republic, that has a big presence in the real estate market, is a big player in

sort of that jumbo mortgage loans. Think about the dynamic there. They must have met so many major loans with two percent three percent fixed rate long term marketges that have obviously taken a hit. So you have a situation where there's this twenty six point five billion dollar hole, and tangible common equity is probably worth thirteen billion dollars, So there's still the hole that needs to be filled. So it's not quite easy for anyone to come in without

possibly some sort of government backing. We've talked about that idea. We believe that is at least being studied, but is a solution on the horizon that's unclear to us. And at three pm, in the middle of a market day, in the middle of the Treasury Secretary speaking to the Senate, in the middle of a J. Paul press conference, when the bank has to put out a filing that says their top executives, their CEO, the chairman, and a few other executive officers are going to zero their bonus for

the year, are going to take a salary cut. That doesn't really instill a lot of confidence, does it. Yeah? Three luck, I mean you know SVB signature first Republic Pack West term and feel free to jump in here. There are fifty banks in the KBW regional banking induction from Bank of Hay which is down thirty percent this year. That's, by the way, a few hours like I think I ran that thirty minutes ago to the New York Community Bank Work, which is up like ten percent in the year,

which other banks seem most vulnerable to you? That's a risky question to answer, and in fact I would I would probably sort of try and get at that by looking at what has happened to the stock So what are equity invest is seemingly most concerned. But and some of the names that we flagged, our names like pack West and Western Alliance Bank of why pack West at least some good news this morning they put out a detailed press release which a at least indicated that they

have showed ab liquidity measures. They've got help from Atlas sp fun fact backed and owned by Apollo, which recently bought the Securitized Products group from Credit SUAE rest in Peace and spun it off as the standalone investment firm that is now stepping in here to be a little bit of a rescue entity for pac West, if you may. They're not doing any of the capital race, but for now they have more cash than uninsured deposits, and that's

good news. Hermann a PacWest issue. The big deposit outflow was in the venture banking business, which is what SPB does, what Silicon Valley Bank does. So when PacWest had venture banking deposits down forty three percent. It just shows that the herd mentality of the VC community affected SVB is affecting Pac West. And we also did a rid across in our research today looking at Westerner Alliance, which also

has some technology related deposits. It's only fourteen percent of the total deposit base, which it should insulate them going forward if we do see a similar deposit outflow from the technology clients. So how are you guys? I mean, it's interesting because we were also just talking about kind of real estate exposure to and then you wonder, you know what that implications will be sore? The what do we need to be thinking about that should we expect

there's going to be more problems? Tree, I mean, I don't know what are you hearing from your sources, But the FED chair was out there talking about the fact that there are some small banks that they are concerned about. At this point, everyone is focused on First Republic because as as the term they all likely use is it's

a real bank. And the reason they say that it's not a small entity it has It had about one hundred and seventy five billion dollars in deposits at the end of at the end of the year, right, So it's a reasonably sized bank. It's clearly going through a lot of problems. Not just that, but it also had this consocium eleven of the country's biggest banks coming forward and trying to provide it. That might just have been financial hug. If you wear it is the ultimate financial hug.

But did it really? Not very heavy though? Exactly thirty billion dollars when we estimate the whole in their deposit outflow was eighty nine billion, So it gives them a short term bridge to a longer term solution, which we're still waiting to hear what that is. Janet Yellen's comments though, it took out the banking sector again today, So did she make a mistake? Why did she do that? She

had to know that there might be that impact. She spoke recently at the American Baker's conference on Tuesday and said that if there were a smaller institution that would fail, the regu layers would step in and guarantee of the deposits. So the market was working under the assumption that that was the case. But then she came out today near

the market closed and said there's no blanket guarantee. So those two concepts aren't directly opposed to each other, but it just doesn't instill a lot of confidence with the broader market. I will point out that it is a common that was made in Washington, d C. It is a common that was made in front of a lot of politicians, and in that city, every single word matters, and there is careful word choice going on their blanket.

For once, I am not considering for others, because we have reported that her stuff is actually considering measures on how they could perhaps have a temporary increase in deposits. They've certainly given a thought considering it. Not considering a blanket increase in deposit guarantee could well will mean that nothing zimminine. We're not planning to do that, but are the scenario planning perhaps so you mentioned Washington d C. Herman,

you mentioned Apolo. I have to ask this. Apolo's rescue of pack West comes on the heels of the UBS acquisition of CS. My question is this he got talked now Warren Bethett trying to get back involved with some of these bailouts, right, I mean, if you remember the GFC, I mean he was involved with all the ZACS and made a killing. How do you think these deals are going to work out for people like Ubs, for some of these other banks out there that are the acquirer.

I mean to me, it seems like things are setting up pretty nicely. Yeah. I would say that the UBS credit Sweet Steel. It was a bit different than what Apollo's doing. Apollo is doing a lunch back deal where if things go bad, they at least own the deposits and can monetize, so their risk is much lower versus taking an equity stake in a regional bank that is

feeling some pressure. So that there are going to be other types of deals like what Apolo was doing, but they're not putting equity skin in the game at this point. No surprise. First Republic haut to be from w by Fitch maybe cut further, No surprise. Surely if First Republic can figure something out and there is something done, um, does it start to calm down? Yes? Because if if, if, if, if, the current thinking across the spectrum is there is no

obvious solution, there is no easy solution. Suddenly tomorrow morning you come and tell me that they have found out

a solution that should help even with the broader sector. Yes, because when this is, this has been sparked by a crisis of confidence, not not sort of any obvious irresponsible risk taking to the hilt, right like these these people are talking about hits to their security s portfolio, which is which is not because they invest in the riskiest stuff out there, but afford to let First Republic fall real quick hard to say, but the obvious answer I would have to assume is no they would because then

if you have to find a whackamole solution, it then becomes a whackamle literally because then okay, then another FDIC has to step in. Then every investors then go and see which other bank would be most pressure. Then you go from one to one to one to one to the next, and that's not a fun game to play. I wish we had half an hour more, but folks, that's what you needed to know when it comes to banks. That's where we are. Four seventeen pm. Moll Street, Time Street,

Thank you so much. You're listening to the Bloomberg Business Week podcast. Catch us live week the afternoons from three to six Eastern Listen on Bloomberg dot com, the Ihard radio app, and the Bloomberg Business App or watch us live on YouTube. So, by one measure, do you know, at a bit of research ahead of this segment, the global cloud communication platform market likely to reach more than fifty one billion by twenty thirty compound annual growth rate

of nearly twenty percent. So one player in that market is the cloud based communications provider you know, the name Vantage are owned by Ericson and with us here in her Bloomberg Interactor Broker studio, Rory Reid, he is a CEO of on It. She's also a senior VP at Ericson. Welcome, Welcome, Nice to have you here with Damien and myself here in our studio. How are you and how do you feel the business environment is amid what we're seeing continued

volatility in parts of the financial market. Well, I'm great. So, first of all, thank you for having me here in New York at the beginning of spring tonight. And I suppose you know, in the macro level it's going to be choppy. There's no question and volatility, but there's choppy. There's financial crisis choppy, there's choppy, Like I'm not short choppy, you know, I'm you know, three four decades in the

tech space. I've seen all these cycles before. Yeah, one thing is the market's going to turn, particularly in tech, and when it does, it turns hard and it turns well. It's going to be choppy for a couple, a few more quarters, whatever it is. But in the meantime, what we have to do is focus on cash flow management. Make sure you're managing your cash. Invest where you can in market dislocations, in M and A and in your

product get differentiation right now because the market's there. The long term tech trend is intact, and the opportunities are right now to take advantage or right North America advantage is core market, right. I wonder if you could just help me understand what scares you more the thought of our recession or persistently higher inflation. You know, from a standpoint of the business, our business is actually a third

or third or third across the globe. I think from a business perspective, inflation has a long term negative impact on everything. It's just not good. You have to clean it up. A recession is temporary, it doesn't usually last a long time. I'm hopeful that we can move through this period of volatility and what you're going to see with Ericson support, we're in a very unique position. Many of our editors won't make it through this issue. We've

got the support of a company like Ericson. We can double down, we can build in the better products at differentiations. Why won't they make it down, make it through. Well, many of them in the tech space have lived off of cheap money for a long time, so they've been very speculative. So this big moving rate to the past hurt them and then the Valley Bank, right, I mean,

how does that impact that? It hurts them, So you want what you're seeing is we've always had a positive cash flow and we've managed because we had that historic voiceover of IP business. And then we have the vantage communication platform business. That's the future, that's the cloud. We'll use that cash flow to make sure we have the support. Now you also have a huge corporate parent, right right, Ericson waters for six point two billion dollars last year.

They then give us the support underneath that we make the investment. Not only can we grow a core business now it's not growing at the same rate it was a year ago, probably half, but we'll see somewhere between fifteen and twenty business and residential both not growing equally or residentials definitely on a decline. That's just a cash flow engine for us. The cloud is the future that have been growing at thirty thirty five percent right now,

it's probably grown somewhere between eighteen and twenty percent. Still a great business, yeah, and it's going to continue to be critical because those multimodal communications you interact with companies now twenty four to seven anywhere around the world, whether it's voice, video, you want support, you want commerce, that's just the way of the future. Every industry, you know, every vertical is going to need this, and that's why we got to invest now to create the differentiation for

our audience and those who are unaware. Eric's inquired voltage just last year in July, right for six point two billion dollars. My question is, you know, talk to us about the AGM that's coming up next week for Ericson. Where does vantage fit into the company's you know, the company enterprise five G market, Where does that fit into the company's future plans. You know, Ericson's amazing company. They're they're they're driving almost half of the traffic and the

five G space outside of China around the world. I mean this is a technology leader. They see an opportunity to take our communication APIs that's really the cloud base, bits of code that allows every enterprise to interact with customers, whether it's telling you your coffee's ready or having a telemedicine environment. What they see is now we can take the network. What's in the network that we can expose to these APIs so we can create better quality of service,

we can create location, we can create silent authentication. Now instead of you just having to type in six digits, it'll know who you are by traversing the information that's in the network. We're going to create a whole new generation of APIs based on the network. That's a first mover. And if you were at Mobile World Congress in Barcelona a couple of weeks ago, yeah, this was a big theme in the industry. This is going to drive that

TELECOO space for the next five ten years. API you mean application programming interface right, what they are is, that's exactly what it is, Carol. And there bits of code that allows enterprises like you know, chocolate companies, ride sharing companies, telemenacing companies to embed video voice messaging into their applications to reach anyone around the world who has a smartphone, and the smartphone what five billion of them? Yeah, there's a few out there, Okay, just a few. I want

to ask you, because you were talking about geography. You are global, so when you look around the world, it's great when we have somebody like you in studio when we are at this moment of we talk recession, we talk hard landing, we talk soft landing, certainly here in the US, but we're looking around the world. Are the stronger markets geographically we're the weaker markets. Sure, in the tactical time frame. I still like the US it's strong

because it's growing. It's definitely growing. All our businesses are growing in all geographies right now. Where the rate? Okay, where's it not growing there as strongly? I think if you thought about it in terms of Europe and China are probably the most under pressure. For sure. Would you think that that has something to do with data privacy concerns and piracy issues and all the things that are

going Yeah. Sure, where Europe, I think there's been more pressure because of the inflation, the Ukraine Russia war, that's put some pressure on it. Still growing India, strong, Africause, reasonably strong, parts of Asia good. But it's all temporary. There's definitely kind of a dislocation that's occurring, but it's going to turn and we have to be prepared for that term. Even China and Gia politically, we certainly have lots of conversations around this table about that. It's a

different relationship with China going forward. Certainly between the United States and ship it seems that way. But we have a good you know, we're going to continue to deliver messages for multinationals wherever they need to get that multimodal communication out there. You know, it seems like a problem, but again, thirty forty years things change rather quickly. Two years from now, I think things could be very different than they are today. I'm an optimist, for sure, but

I also plan. I'm an optimist. I cover emergent markets and I'm a I'm a New York Jet fan, so I'm a I'm an ever optimist, but I've managed by opics and I make sure I keep the headcount under continent political pressures between the US and China. And yet as a global company, you guys still have a lot of business in China or with China. We have a reasonable presence in China, but you can say that the course, even though there can be that disconnect between you never know.

So you never know. But what we have to do is continue to grow, continue to deliver the value to our multinationals, the digital natives around the planet, and continue to create the differentiated product solutions that they need. Well, let's bring it back today. I mean, let's bring it back close at a home there. Let's talk about the reason the US banking system and SVB in particular. You know, I mean, are there any lasting damage that you see, maybe not to your company, but to your clients that

this is going to leave them with? I mean, do you see do you potentially see some of these venture in early stage growth companies going under because of US? Well, I don't think Silicon The bank issue, particularly that one, is huge. I think what they have to do is contain it now, and I think they're working to make sure they do that. I think the bigger pressure is companies that were able to survive on a very marginal

business model. Yeah, because money was so cheap. They need to create business models that are more cash flow positive and with less burn, and I think because of the market entreprenturnialists will adjust so orrige just ten seconds or does that mean because of some of the cracks you may be seeing with a smaller competitors, I think there's an acquisition move potentially as a result, real quickly. There's no question, there's absolutely you need to take advantu Yes,

And there's always an opportunity. These market issues and volatility, they're opportunities. Find them. The market will change and it will return, and it will return fast and strong. Well, you were fun with us, and we were a little bit of a rapid fire, but we really appreciate it. Thank you so much. Rory Reid, Chief Executive Officer A vantage. Here in our Bloomberg Interactive Broker studio, you're listening to

the Bloomberg Business Week Podcast. Catch us live weekday afternoons from three to six Eastern on Bloomberg Radio, the Bloomberg Business App and YouTube. You can also listen live on Amazon Alexa from our flagship New York station. Just say Alexa play Bloomberg eleven thirty. I'm bro bloom a journal. How about you let me drive? Oh no, no, no, no, who's going to drug home, honey, please, I'll do the bride rebels. Lest I want to drive. It's good question drives.

This is the Drive to the closet. Punk music. Well, jog down on Bloomberg Radio. All right, very good afternoon, everybody. You are listening and watching Bloomberg Business Week Karl Masser along with Damien's ass hour watching the markets making sense of the FED decision. And it's been an interesting trade, no doubt about it. Yeah, yeah, no, all right, all right, all right, I mean we are down across the curve.

The two year is down below four percent again, I mean a twenty three basis point move on the two year, but it's also extending into the belly. I mean the five years down another twenty three BIPs. So yeah, you know, I mean we're seeing you know, we're seeing buying a bonds. Yeah, it's really interesting, right, and you look at the markets and I feel like the treasury trade telling you one thing.

The equity trade, which rallied initially on that FED decision, has come on down and now we're below the levels and we're seeing losses across the board. So let's get to it with Aaron Kennon, co founder and chief executive at the registered investment advisory firm, Clear Harbor Asset Management. They've got over a billion in assets under management. Aaron back with us on the phone in Stanford, Connecticut. Actually, I think via zoom, Hey Aaron, good to have you here.

Market reaction. What is it telling you in terms of what we've seen with stock reaction? And then the Treasury trade post fed decision. Well, I wouldn't call today a pivot earl, but certainly a pause, and I think a justified one. And I say a pause because yes, they went twenty five basis points, but if you look at the SEPs or their dot plot or predictions for future rate moves, they're essentially saying we're on hold here and

we're going to monitor economic conditions. There's some natural tightening occurring in the market due to the banking crisis, due to prior policy prescriptives, ie higher rate heights, and this really is something that I think the market welcomed, and you could see that on the Treasury front. Certainly a

devish posture. And yeah, I mean, as as Damien just indicated, rates have moved about eight to twenty odd basis points across the curve today, equities are under pressure, and that's because there's a real concern that we've passed sort of the peak growth cycle and the curve is still inverted. And when the curve is inverted ahead of in a cycle like the one we've been in, which is a tightening cycle, you tend to it tends to signal a recession. And and even though the curve is less inverted today,

that's often the case just before a recession. And so I don't think that should be a positive signal that we're now at forty five basis points two is tends and not one hundred and ten was for just a couple of weeks ago. Right, Yeah, if we're not at the depths we once were, but you know, you mentioned this interest rate vall move and it's still pretty high. I'm wondering if you could focus. I mean, let's go back to your days at RBC and CIT group. Your

day is treading ig credit. Talk to me about spreads. You know, what are you taking from the gap wider and spreads? And then you know the correction we're seeing right now. Yeah, Well, you know we've gone from you know, we're sort of past the peak inflationary period. Damion, and I also think we're past you know, peak tight spread levels and for the most part we're seeing spreads trend wider.

Frankly been surprised with the move index as high as it has been for many years, and not really the levels since seeing since two thousand and eight two thousand and nine financial crisis, which I remember quite quite well. My view is as the probability of recession hits our shores, we will continue to see high yield spreads widen. An investment great spreads wide, but certainly not as much as the high yield sector. So can high yield s frends

move back out to eight hundred bases points over? You bet they can. And I think I was going to just say sorry to cut you off, But to me, what that means is that, you know, when spreads widen like this, I mean it means that borrowers are reassessing the external funding environment. Right, So does that mean that as investors we should be pacing greater emphasis on you know, coverage,

ratio's repayment risk and the like. Absolutely, you know, you look at the regional bank outflow of deposits and what does that really mean? That means lending standards are tightening. That means there's less credit availability. When that happens, it tends to be by about a delay of two or three quarters prelude to a recessionary period. Higher rates have huge consequences for public funding. But of course you just

alluded to, you know, the commercial real estate market. We have almost a trillion dollars of commercial real estate debt

coming due within the next twelve months. That needs to be you know, repriced, repriced wear at higher levels and higher spreads, wider spreads well, and I have to say that if you take a look towards the end of that press conference, j Pale specifically talked about financial conditions tighter than index is indicated, and talked about how many of the indexes that we all talk about are all about the equity trade and that he said, in terms of talking to banks and so on and so forth,

you're seeing those tighter conditions. He also mentioned commercial real estate. Is that potentially Aaron, We all talk about it a lot here at Bloomberg, and I don't want to be kind of alarmist, if you will, but we are kind of wondering coming off the pandemic, you know, ultimately, with commercial real estate being used differently, vacant if you will, is that the next big shoe to drop in the

financial community. What was interesting today during the Q and A Chairman Powell sort of put a rather rather rosy picture on commercial commercial real estate in the risk that it may pose to the economy. And I understand why he's the FED chair and cracks do not appear at least in the public domain yet. But we look at the vacancy rates. Of course, the most magnified issue is probably still in New York. But I think, um, you know, there's and not all commercial real estate is created equal.

You have office, you have distribution segments, you have multi family, which still is reasonably strong. So you guys left New York, right, you left New York during the pandemic. Forget me, but go ahead, we did, um, and we're here in Connecticut and Fairfield County, and we still make our way in New York. We still have our many meetings in New York. But you know, certainly big fan of New York wanted

to thrive. But certainly the current concern, as it should be for real estate exists in the marketplace due to higher rates wider spreads and tighter lending standards. Not to mention too, the consumer out there is experiencing tighter you know, spreads. You look at your credit card. If you pay it off every month, that's great, but if you look below where the amount is, it tells you you're probably going

to be charged an APR rate of twenty percent. And the problem with that is the revolving lines of credit are increasing. People are more more leveraged at the household level over the last several quarters. And you look at the household savings rate and it has a two odd percent handle, which is below any sort of historic norm. So you know, we're certainly aligning for a period of uncertainty.

And I think the FED was very justified in signaling verbally and in their written statement, and that was a nice thing to see too, the written statement and the Q and A was a little more consistent this time. Totally. Yeah, No, I mean, Aaron, I aged up one really question. You mentioned that one trillion dollars of the commercial real estate loan that are supposed to be maturing between now and the end of next year. That seems to be a huge maturity wall. I mean, what are your thoughts on

cap rates. I mean, what are your thought if you know banks can't extend and there's no equity cushion available. I mean sponsors that own the property, you're going to have to come up that with that additional equity. No, I mean are they capable of doing that? Well, we'll have to see, Damian. I think that is the Yeah, the short the short answer um cap rates certainly our problem. But you're gonna have adjustments in price, and so the

question is by by how much? And you know, I think the leverage ratio is a big question, you know, loaned to value on a refinance. Yes, Aaron, sorry, I mean we have a million questions for you were venting at a time, so twenty seconds left here, So how what are you doing differently with your investors portfolio right now?

Just quickly? Well, you know it in a stormy period, we hope and we do ensure that our clients asset allocations are not just reflective of their risk tolerants, stirring the rosiest periods of the ecout, but also during these these more uncertain moments. So the half sufficient liquidity are we positioning them for that and for the long term needs that they have, so I'm gratified that we try to do that work beforehand. We don't always get it

perfectly right, but we've done it. We've done it quite well here and really proud of the team. Aaron Kennon a Clear Harbor Asset Management. Thank you so much. This is the Bloomberg Business Week podcast, available on Apple, Spotify, and anywhere else you get your podcast. Listen live week afternoons from three to six Easterning on Bloomberg dot com, the iHeartRadio app, tune In, and the Bloomberg Business App.

You can also watch us live every weekday on YouTube and always on the Bloomberg jermital of them