DHUnplugged #646: COCO Bond Rug-Pull

DHUnplugged #646: COCO Bond Rug-Pull

DHUnplugged Podcast

No rest for bankers - weekend overload to quiet markets.

COCO bond rug pull - billions lost

The Fed in a no-win position this week. Rate decision meeting Wednesday.

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Follow John C. Dvorak on Twitter
Follow Andrew Horowitz on Twitter
Warm Up
- Full blown banking crisis - S&P P/E  still above 17+
- Fed has big decision tomorrow
- Fed/Treasury dusting off financial crisis playbook
- Bond yields move - largest since '87
--- Banks joining in the charade - $30 billion
- Whatever you do - don't say bailout!


Market Update
- Banks failing - forced merger over weekend
- Fire sale for deposits - big win for some banks
- COCO / ATI Bond massacre - RUG PULL
- Tech favored over most other sectors
- Goldman says rates hikes over

FED GAME - What will the do tomorrow?
- ECB Playbook (raise like nothing happening)
- Powell Playbook - raise 0.25% and keep pushing that the data is what they look at - try to save face...
- Volker Playbook - ram it
- Bernanke Playbook - zero or cut

GAME ON
- We are playing the real life Monopoly
- Treasury Secretary Yellen says the govy could backstop more deposits if necessary to stop contagion
- - Trillions in deposits  - how would that work?
- - - Monopoly Rules: The Bank: The Bank newer "goes broke." If the Bank runs out of money, the Banker
may issue as much more as needed by writing on any ordinary paper.
----- Why would Yellen need to say that ???

Asked on Twitter this week: Why do so many investors enjoy throwing hard earned money into dumpster fires?
(Follow John at @therealdvorak and Andrew at @andrewhorowitz)

Dust off the playbook
- Plenty of financial crisis moves being made
---- Have I mentioned that this group of Fed leaders could be the worst in my lifetime?
- $30 billion from consortium of banks into First Republic
---- NON insured accounts was the push
--- NO WAY is this not backstopped by Fed/Treasury as a attempt to boost confidence. TOTAL BS
----- Meanwhile - investors are not impressed. (Stock down from $29 to $17 since announcement)
---- WAIT - NEWS BREAKING MONDAY - JPMorgan Chase's (JPM) Dimon is leading talks with bank executives of others banks about new FRC plans; deal could involve converting previously announced $30 bln in deposits into a capital infusion, according to WSJ
----- NO Correction out - that may bot be the way they want to go .... Just spitting at the wall with ideas it seems
-- Meanwhile after 47% drop yesterday, FRC up 36% Tuesday (still down 90% from peak)

Remarkable
- Yields up from ZERO
- Earnings down and falling
- Global banking crisis
- S&P 500 forward P/E at 17.9
- PEG at 1.8!

Credit Suisse  COCO
- UBS buys for pennies on the dollar
- COCO bonds (Contingent Convertible bonds) - wiped out
- $17 billion lost as regulators write down bonds to ZERO
- COCOs - high-yield investments with a hand grenade attached (AKA ATI bonds)
--- They’re essentially a cross between a bond and a stock that helps banks bolster capital to meet regulations designed to prevent failure. They’re contingent in the sense that their status can change if a bank’s capital levels fall below a specified level; they’re convertible because in many cases they can be turned into equity

Forced Merger
- Credit Suisse bought by UBS
- In a package orchestrated by Swiss regulators on Sunday, UBS Group AG will pay 3 billion Swiss francs ($3.23 billion) for 167-year-old Credit Suisse Group AG  and assume up to $5.4 billion in losses. (80% discount)
- The Swiss central bank said Sunday's deal includes 100 billion Swiss francs ($108 billion) in liquidity assistance for UBS and Credit Suisse.

Fed Decision
- Holding 2-day decision on rates today and tomorrow

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