David Fuller and Eoin Treacy's Comment of the Day
Category - General

    Credit Suisse Needs Capital Raise or Breakup, Morningstar Says

    This article from Morningstar may be of interest. Here it is in full: 

    Credit Suisse Group AG’s funding costs have become so high it either needs to raise more capital or face a break up, Morningstar analyst Johann Scholtz said in a note on Wednesday. 

    “We expect the 2023 loss to increase to such an extent that its capital adequacy could be under threat,” Scholz wrote in the note. “We believe Credit Suisse needs another rights issue.”

    The alternative would be “a breakup” of the bank in which its various business lines such as the Swiss unit, asset manager and wealth management divisions could be “sold or listed separately.”

    Credit Suisse has sufficient liquidity to handle the outflow of deposits and should also be able to get emergency liquidity from the Swiss National Bank by borrowing against its bond portfolio, Scholz wrote in the note. “However, this does not solve Credit Suisse’s profitability challenge, nor does it address capital concerns.”

    Credit Suisse’s stock plunged as much as 30.8% on Wednesday to the lowest level on record, while some of its bonds dropped to levels that signal financial distress as the company’s top shareholder ruled out increasing its stake because of regulatory constraints. The plunge helped drag all European lenders lower as investors were quick to move away from banking risk after turmoil induced by the collapse of California-based Silicon Valley Bank. 

    The Swiss lender’s Chief Executive Officer Ulrich Koerner on Tuesday preached patience and said the bank’s financial position is sound while Chairman Axel Lehmann said Wednesday that government assistance “isn’t a topic.” He also said it wouldn’t be accurate to compare Credit Suisse’s efforts to return to profitability with the recent collapse of Silicon Valley Bank.

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    Budget key points: All you need to know about Jeremy Hunt's spring statement

    This article from the Independent may be of interest to subscribers. Here is a section: 

    Defence budget and levelling up
    Mr Hunt confirmed the government will add £11 billion to the defence budget over the next five years and another £30 million is being allocated for veterans.

    There will be 12 new investment zones, and they will potentially be in the West Midlands, Greater Manchester, the North East, South Yorkshire, West Yorkshire, East Midlands, Teesside and Liverpool. There will also be at least one in each of Scotland, Wales and Northern Ireland.

    Mr Hunt also announced a series of levelling-up and local transport-related funding pots.

    Taxes
    The chancellor confirmed the planned increase in corporation tax to 25 per cent will be going ahead, but announced a new policy of “full capital expensing” over the next three years, which will mean every pound invested in IT equipment, plant, or machinery can be deducted immediately from profits.

    Mr Hunt said he will introduce a new tax credit for small and medium-sized firms that spend 40 per cent of their expenditure on research and development. Tax reliefs for film, TV and video gaming will also be extended, he said.

    Up to £20 billion will be allocated for the early development of carbon capture and storage.

    Mr Hunt said that, subject to consultation, nuclear power will qualify for the same investment incentives as renewable energy and alongside that “will come more public investment”.

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    Oil-Options Covering Adds To Market Chaos, Fueling Crude Selloff

    This note for Bloomberg may be of interest. Here is a section: 

    Exposure to plummeting oil prices via the options market has forced some financial firms to dump crude futures, accelerating a selloff that has sent prices plunging to the lowest in over a year.  

    Banks and other financial institutions typically take on futures positions to offset some of the price hedging they do for oil producers and other customers. But as oil prices collapse rapidly, the firms’ exposure rises, forcing them to exit their futures positions in a strategy known as delta hedging.

    That’s driving some of the day’s selloff, UBS Group AG analyst Giovanni Staunovo said in a note. A massive number of WTI options contracts that were sold at $70 and $75 a barrel needed to be covered once oil futures crashed below those levels, market participants said. For Brent, more than 24,000 put options were open at $80 and $75 a barrel for May, both levels that were breached this week.    

    “Financial institutions now need to avoid having a price risk on their balance sheets,” Staunovo said in his note. “So, they are selling crude futures to offset the risks, amplifying the rout.”       

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    Bank of America Has Biggest Losses in Bond Portfolio Among Peers

    This article from Barron’s may be of interest. Here is a section: 

    Banks don't have to record losses on changes in those securities' value, cutting into their capital, unless the debt is sold. Still, holdings in that bucket, which carry minimal or no credit risk, were nonetheless showing a loss of about $109 billion at the end of 2022 due to the rise in interest rates over the past year.

    This compares with losses of $36 billion for a similarly classified bond portfolio at JPMorgan Chase (JPM), $41 billion for Wells Fargo (WFC), and $25 billion at Citigroup (C) and just $1 billion at Goldman Sachs Group (GS), based on each company's 10-K filings with the Securities and Exchange Commission..

    Attention on banks' bond losses has increased since regulators seized Silicon Valley Bank on Friday. SVB Financial, the lender's parent, had a $15 billion unrealized loss on its $91 billion held-to-maturity bond portfolio. That was equivalent to nearly all its $16 billion of tangible capital.

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    Oil Losses Mount With Ample Supply in Focus Amid Uncertainty

    This article from Bloomberg may be of interest to subscribers. Here is a section: 

    Crude has had a bumpy year so far as traders juggle concerns over a global economic slowdown and optimism around China’s long-awaited demand rebound. Inflation accelerated last month, raising the question as to whether the Federal Reserve would feel pressure to raise rates at its meeting next week despite ongoing financial turmoil. Meanwhile, crude supplies are expected to remain in surplus until demand takes off. The International Energy Agency releases its snapshot on the outlook for supply and demand on Wednesday.

    Traders will be watching price action to see if the flat price is supported at recent lows.

    “If buyers don’t show up soon and support oil at $70, we can see an air pocket lower to $62,” said Jc O’Hara, the chief technical strategist at Roth Mkm.

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    Meta to Cut 10,000 Jobs, Slash 5,000 More Vacant Positions

    This article from Bloomberg may be of interest to subscribers. Here is a section: 

    The company, which also owns Instagram and WhatsApp, has seen a slowdown in advertising revenue, leading to its first-ever annual sales decline in 2022. Zuckerberg has shifted Meta’s focus and investment in the past year to virtual reality technology and the so-called metaverse, which he envisions as the next major computing platform.

    Meta’s employee ranks expanded dramatically during the Covid-19 pandemic as demand for the company’s digital services increased and Zuckerberg leaned into the moment. The social media giant’s headcount grew 30% in 2020, the first year of the pandemic, and then 23% in 2021. By the time Meta starting eliminating jobs last November, the company had more than 87,000 employees.

    As part of its efficiency plan, Meta is focusing on returning to a “more optimal ratio of engineers to other roles,” Zuckerberg said. The company will invest in tools, such as those in artificial intelligence, to help engineers write code faster, to make it “most effective over many years, not just this year.” 

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    The Waluigi Effect (mega-post)

    This post from LessWrong.com blog, focusing on the challenges faced by AI may be of interest. Here is a section: 

    Check this post for a list of examples of Bing behaving badly — in these examples, we observe that the chatbot switches to acting rude, rebellious, or otherwise unfriendly. But we never observe the chatbot switching back to polite, subservient, or friendly. The conversation "when is avatar showing today" is a good example.

    This is the observation we would expect if the waluigis were attractor states. I claim that this explains the asymmetry — if the chatbot responds rudely, then that permanently vanishes the polite luigi simulacrum from the superposition; but if the chatbot responds politely, then that doesn't permanently vanish the rude waluigi simulacrum. Polite people are always polite; rude people are sometimes rude and sometimes polite.

    Waluigis after RLHF

    RLHF is the method used by OpenAI to coerce GPT-3/3.5/4 into a smart, honest, helpful, harmless assistant. In the RLHF process, the LLM must chat with a human evaluator. The human evaluator then scores the responses of the LLM by the desired properties (smart, honest, helpful, harmless). A "reward predictor" learns to model the scores of the human. Then the LLM is trained with RL to optimise the predictions of the reward predictor.

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