Pressure grows on another US bank amid controversy over Credit Suisse takeover
Nick Beams, WSWS, Mar 21 2023
The desperate actions by governments, regulatory authorities, and banks in both the US and Europe have not only failed to stem the growing financial crisis but in some ways are making it worse. In the US, following the failure of the Silvergate bank, Silicon Valley Bank and Signature over the past two weeks, the latter two recording the second- and third-largest banking failures in US history respectively, attention has turned to the travails of the First Republic Bank with growing concerns that it could be the next to go. Last week, a consortium of 11 major banks, under the leadership of JPMorgan Chase CEO Jamie Dimon, with the collaboration of Treasury Secretary Janet Yellen, deposited $30b with the struggling bank. It was hoped this show of confidence would stop the outflow of depositors’ money, ease the pressure on its share price and stabilise it.
In just a few days, the operation has been revealed as a complete failure. While the outflows are reported to have slowed somewhat, First Republic has lost $70b out of the total of $176b it held at the start of the year. And despite the injection of cash, the company’s shares have continued to plummet. Its share price has fallen by 90 percent since the beginning of the month, closing 47% down yesterday. Long-term bonds that mature in 2046 were trading at 55 cents on the dollar, down from 75 cents in early March. First Republic took another hit before trading opened yesterday, when the ratings agency S&P Global downgraded its credit rating for the second time in a week. It said the $30b in deposits from the major banks “should ease near-term liquidity pressures, but it may not solve the substantial business, liquidity, funding and profitability challenges that we believe the bank is now likely facing.”
With the deposit operation having failed, a new plan is under discussion today in which the banks may convert a part or all their deposits into an infusion of capital. The failure of SVB and the deepening problems of First Republic have focussed attention on the role of small to middle-sized banks in the US financial system and their potential for setting off a systemic crisis. The limited regulatory measures introduced after the crisis of 2008 focussed on the large banks, characterised as “too big to fail.” In 2018, Congress removed many middle-sized banks from oversight with a decision that some regulations should only apply to banks with assets of $250b and above as opposed to the earlier stipulation of $50b. This posed no great danger so long as the Fed was continuing its policy of ultra-cheap money. But the situation has shifted sharply with interest rate hikes initiated by the Fed over the past year, lifting its base rate from near zero to 4.5%. This has meant that the assets held by these banks, which play a significant role in regional areas and in key sectors of the economy (there are some 4k banks in the US) have suffered a decline in their market value, such that they are well below the book value as recorded in the banks’ balance sheets. This applies not only to Treasury bonds and other financial assets, the value of which falls with interest rate rises, but also to other interest rate-sensitive assets such as commercial real estate. A divergence between market value and book value does not present a problem so long as money continues to flow in. But if it starts going in the other direction, as it did for SVB, then those losses must be recognized when the assets are sold to cover the cash outflow.
The situation recalls that which developed with regard to subprime loans, the spark that set off the 2008 crisis. When problems first came to the surface in 2007, Fed chair Ben Bernanke said they would not spread because the subprime market was so small relative to the total financial system. The circumstances of the present crisis are very different from those of subprime. But there are similarities in that a crisis that erupted in what might have been regarded as an inconsequential area of the system has been shown to have broad implications. And in some ways the present crisis is more serious than that which erupted with subprime. Subprime mortgages, which were sliced and diced to form bond packages and then sold off to investors, were in essence speculative assets. Today the crisis arises from the fact that many middle-sized banks have invested heavily in what are supposed to be the safest assets of all, Treasury bonds and mortgage-backed securities, which have fallen in value because of the Fed’s interest rate hikes. This is what led financial regulators to invoke the danger of “systemic risk” as they moved in to guarantee the money of wealthy individuals at SVB whose holdings went well beyond the limit of $0.25m automatically covered by insurance.
The issue now is: How far will these measures be extended? Are all deposits throughout the banking system now guaranteed? And what is going to happen to the value of the holdings of Treasury bonds and other financial assets held on the books of so many small and middle-sized banks if the Fed continues its rate rises? And if there is a pause in the rate hike cycle what does this mean for the Fed’s so-called “fight” against inflation? These are some of the issues which will confront the Fed’s policy-making body when it meets today and tomorrow. It will also have to consider the implications of the takeover of Credit Suisse, a globally significant bank, for the stability of the US and international financial system. One issue of immediate concern is the effect of the Credit Suisse takeover by UBS, organised at the insistence of the Swiss government and the country’s financial regulator FINMA, on the bond market.
In any liquidation or takeover, as financial interests salvage what they can from the carcass, bond holders are further up the line from shareholders. But in the takeover of Credit Suisse, the Swiss National Bank declared that holders of $17b worth of so-called additional tier ones (AT1s) would get zero. The AT1s are a variant of contingent convertible bonds, known as cocos, which were introduced after the 2008 crisis in which debt could be converted into equity. The pecking order in the event of liquidation was that shareholders would be wiped out first, followed by cocos and then senior creditors. In return for increased risks, the holders of the coco bonds were paid a higher rate of interest. However, in the takeover of Credit Suisse these rules were overturned. While equity holders may get something, AT1 holders will get nothing. Financial Times columnist Gillian Tett pointed to some of the motivations for the decision. She wrote:
It is hard to escape the suspicion that the Swiss authorities decided to make (modest) payments to equity holders, but not to bond investors, because the former included a powerful Saudi shareholder that Bern did not want to offend.
This “powerful Saudi shareholder” was the Saudi National Bank. Protectionism, geopolitical self-interest and state intervention, wrote Gillian Tett, “seem to have over-ruled free-market principles.” But she went on to note:
There is uncertainty about the legal structures surrounding US finance too.
When SVB and Signature failed, protection was given to all depositors despite the mandate of the Federal Deposit Insurance Corporation that it only applied to the first $0.25m of deposits. The net result, she concluded, is that investors are in limbo land, not knowing whether capital market laws apply as a “pillar of faith” for the future or whether governments in the US and Europe have the desire or the means to stand behind all banks. It was, she said, “no wonder fear abounds.” The Bank of England (BoE) and the European Central Bank (ECB) both issued statements criticising the Swiss decision, with ECB president Christine Lagarde pointedly telling the European parliament:
Switzerland does not set standards in Europe.
The ECB statement said:
Common equity instruments are the first ones to absorb losses, and only after their full use would Additional Tier 1 be required to be written down.
The BoE set out its opposition, saying there was a “clear statutory order” in which shareholders and creditors should bear losses. There are important political conclusions to be drawn from this incident. One of the central tenets of bourgeois ideology is that the capitalist system, and above all its financial mechanisms, are a rules-based order to which the working class must submit and obey as if it derives from Nature itself. In fact, the financial system is not some natural and therefore eternal mechanism but a product of class society in which supposedly immutable rules are overturned overnight in a time of crisis as the conflicting interests of the ruling elites come to the surface. A product of society, it can therefore be changed by society, but only if the working class intervenes politically into the mounting crisis and fights for a socialist program to completely remake the socioeconomic order.
Twenty years since the US invasion of Iraq
Patrick Martin, WSWS, Mar 20 2023
Fallujah, Jun 19 2004
Twenty years ago, on Mar 20 2003, the government of the United States embarked on one of the greatest crimes of the 21st century, launching an unprovoked and illegal war against Iraq. It began with saturation bombing of the defenseless country (“shock and awe”), which annihilated the bulk of its armed forces and much of its social infrastructure, including electrical power and water supplies, food processing, and the production of medical supplies. This was followed by the invasion of the devastated country by more than 130k American troops, armed with the most technologically sophisticated weapons, who cut through what little remained of organized Iraqi resistance and reached Baghdad in only two weeks. After another week of slaughter, US forces captured the capital, suffering only 34 casualties in this final one-sided battle, compared to countless thousands of Iraqi dead.
The methods employed by the Bush administration in Iraq were entirely criminal, in keeping with the nature of the whole enterprise. The war began with a sneak attack: cruise missile strikes against government buildings where Iraqi ruler Saddam Hussein was believed to be, in an effort to assassinate him. It continued with the use of weapons banned by international law, like white phosphorus bombs, which set cities on fire and cause horrific burns to human flesh. In addition, US and British forces fired an estimated 440k depleted uranium shells, which cause long-term cancer rates to skyrocket and produce hideous birth defects. In the course of the war, the most horrific forms of torture were employed by US forces, revealed in shocking images from the Abu Ghraib prison. The authorization of torture was drawn up by Bush administration lawyers, who asserted that the president had virtually unlimited powers as Commander-in-Chief.
The result of the invasion, followed by an eight-year occupation, was what the WSWS branded as “sociocide,” the deliberate destruction of an entire society. The imperialist conquest reduced one of the most advanced countries in the Middle East to conditions of medieval barbarism, not only economically, but also politically. The US rulers systematically promoted religious divisions and ignited sectarian warfare between Sunni and Shi’ite Muslims and between Muslims and smaller religious minorities, in an effort to prevent any united resistance to the US occupation. In deliberately embarking on an aggressive war, the US government and its leading officials, including George W Bush, Richard Cheney, Donald Rumsfeld, Condoleezza Rice, and Colin Powell, were guilty of war crimes. Along with allies like UK Prime Minister Tony Blair, they violated the core principle laid down by the Nuremberg Tribunal after WW2, which found that the central crime of the Nazis, from which all their other crimes flowed, was the launching of unprovoked and aggressive wars.
The American media paid only perfunctory attention to the Iraq War anniversary. What has been said is aimed at covering up for the colossal scale of the crime, and of the media’s own role in it. The cynicism, as always, found its most perfidious expression in the pages of the NYT. A news analysis by Max Fisher under the headline, “20 Years On, a Question Lingers About Iraq: Why Did the US Invade?” treats the motives of the Bush administration in launching the war as uncertain and even “fundamentally unknowable,” in the words of one “scholar” interviewed by Fisher. The NYT article flatly rejects the “once-prevalent theory that Washington invaded to control Iraq’s vast oil resources,” without referring to the prominence of former oilmen like Vice President Cheney and Bush himself in driving the decisions for war. And it attributes the systematic lying about Saddam Hussein’s possession of “weapons of mass destruction” to a form of groupthink, concluding:
A critical mass of senior officials all came to the table wanting to topple Mr Hussein for their own reasons, and then talked one another into believing the most readily available justification.
The NYT’s “analysis” carefully avoids any discussion of the role of the NYT itself as one of the main promoters of the “weapons of mass destruction” campaign. Reports written by Judith Miller and Michael Gordon, most notoriously a Sep 2002 front-page exclusive under the headline, “US Says Hussein Intensifies Quest for A-Bomb Parts,” parroted the claims of top Bush administration officials, and were taken up by the corporate media as a whole. White House officials then cited these reports as “evidence” against Iraq, which they themselves had planted. The motivations for the war are not “unknowable.” Indeed, they were known at the time, with tens of millions throughout the world participating in demonstrations in advance of the invasion, rejecting the lies of the administration and demanding “no blood for oil.” The size and breadth of the demonstrations were so large that it prompted the NYT to comment that there were “two superpowers,” the US and “world public opinion.” On Mar 21 2003, the day after the invasion began, WSWS International Editorial Board Chairman David North published a statement laying out the nature of the war:
The unprovoked and illegal invasion of Iraq by the United States is an event that will live in infamy. The political criminals in Washington who have launched this war, and the wretched scoundrels in the mass media who are reveling in the bloodbath, have covered this country in shame. Hundreds of millions of people in every part of the world are repulsed by the spectacle of a brutal and unrestrained military power pulverizing a small and defenseless country. The invasion of Iraq is an imperialist war in the classic sense of the term: a vile act of aggression that has been undertaken on behalf of the interests of the most reactionary and predatory sections of the financial and corporate oligarchy in the United States. Its overt and immediate purpose is the establishment of control over Iraq’s vast oil resources and reduction of that long-oppressed country to an American colonial protectorate.
The war was part of an unending series of invasions and occupations initiated by the United States in the midst of and following the dissolution of the Soviet Union, under both Democrats and Republicans. This includes the First Gulf War (1990-91); the bombing of Serbia (1999); the invasion of Afghanistan (2001); the bombing of Libya (2011) and the US-backed civil war in Syria (2011). Far from expressing the strength of American capitalism, the effort of the American ruling class to use military force to conquer the world arises out of extreme crisis. As the WSWS statement explained:
Whatever the outcome of the initial stages of the conflict that has begun, American imperialism has a rendezvous with disaster. It cannot conquer the world. It cannot reimpose colonial shackles upon the masses of the Middle East. It will not find through the medium of war a viable solution to its internal maladies. Rather, the unforeseen difficulties and mounting resistance engendered by war will intensify all of the internal contradictions of American society.
The 20th anniversary of the Iraq war is being marked now amidst an escalating US-NATO war against Russia, which threatens to become a much wider war, involving the whole of Europe and risking the potential use of nuclear weapons for the first time since the Truman administration carried out the nuclear incineration of Hiroshima and Nagasaki. While the former middle class critics of the Bush administration’s war against Iraq have become the most fervent advocates of the war against Russia, the basic interests driving US policy remain the same. American imperialism, now led by the Biden administration, instigated the war and is determined to pursue it to the military defeat of Russia, whatever the consequences. Facing intersecting crises, enormously exacerbated by the pandemic, the ruling class toboggans toward catastrophe.
The media which yesterday promoted the lies of “weapons of mass destruction” peddles the “Wuhan lab leak” hoax to blame China for the coronavirus pandemic, and the claims of “unprovoked Russian aggression” and ludicrous allegations of Nazi-style atrocities in Ukraine. The lies of 2023 are even greater and more brazen than the lies of 2003. Putin’s reactionary invasion is a desperate effort by the Russian oligarchy to defend its class interests against a real threat: the far more powerful forces of American and European imperialism. Twenty years after the invasion of Iraq, all those responsible for it remain free. But the colossal growth of the class struggle throughout the world provides the powerful objective foundation for a mass movement that will hold them to account and put an end to imperialist war, as part of the socialist reorganization of world society.
Niqnaq 