Bank failures, X-dates and economic uncertainty hit Milken

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BEVERLY HILLS — Monday started with a bank failure and ended with an X-date. In between, attendees at the Milken Institute Global Conference put on a brave face as red lights flashed on the economic dashboard.

JPMorgan Chase CEO Jamie Dimon told reporters on Monday morning after his bank’s takeover of First Republic – which finally entered FDIC receivership shortly before dawn — that he was hopeful that the weekend’s events marked a conclusion of “this mini-bank crisis.”

IMF Managing Director Kristalina Georgieva isn’t so hopeful. The strain being felt by certain institutions in the financial sector “should not be a surprise,” she said during a fireside chat.

“What was a surprise, though, was that it happened in the banking sector, not in the non-banking institutions where we feared that may occur,” Georgieva added. Just because it didn’t “happen in the non-banking sector doesn’t mean we have a free pass. It doesn’t mean that we won’t have more vulnerabilities to come.”

The events of the last two months will prompt a “ratcheting up of regulation” on regional lenders that will ultimately constrain capital, said PGIM CEO David Hunt. That will inevitably cause credit conditions to tighten, which will create even more challenges for real estate businesses that rely on regional banks for finance.

There’s “a lot of pressure in that area, and this is only going to be exacerbating that,” Hunt added.

Now, none of that is to say that economic pessimism ruled the day. The vibe, in classic Morning Money parlance, was neither bear nor bull. But the ratatat of worrying news from the banking sector and Treasury — Secretary Janet Yellen said the U.S. could run out of runway to pay its debts as soon as June 1 — injected a level of trepidation that was impossible to escape even in the coziest of Beverly Hilton cabanas.

“We don’t know exactly what the next shoes to drop are,” said Bridgewater co-CIO Karen Karniol-Tambour.

IT’S TUESDAY — I’ll be at Milken for the next two days and my offer to grab a drink still stands. Make sure to read Zach’s conference dispatches in Global Insider. Send tips, gossip and suggestions to Sam at [email protected] and Zach at [email protected].

Driving the Day

Today at Milken: Michael Milken will moderate a panel on credit conditions … Former Treasury Secretary Steven Mnuchin and Wells Fargo CEO Charlie Scharf will talk about the economy … SEC Commissioner Mark Uyeda is on a panel about capital markets … Reps. Michael McCaul (R-Texas) and Seth Moulton (D-Mass.) cover the U.S.-China relationship …

What else: Job openings data will be released at 10 a.m. … Senate Agriculture has a hearing on commodity programs and credit at 9 a.m. … Senate Banking has a flood insurance hearing at 10 a.m. … Senate Banking has a hearing on rural housing at 2:45 p.m.

Whatever happened to too big to manage? — Our Ben White: “With the last-minute purchase of First Republic Bank, JPMorgan Chase and CEO Jamie Dimon are once again at the center of an American economic debate. Some have hailed Dimon as a savior for taking on yet another imploding bank as he did during the 2008 financial crisis. Others like Sen. Elizabeth Warren are castigating the deal as emblematic of weak regulation and of an unfair concentration of power and wealth.

— More on First Republic from our Victoria Guida: “Are more banks going to fail? It’s very possible, but there are no obvious candidates teetering the way First Republic has been. And all three of those failed banks shared clear links: lots of runnable deposits and huge unrealized losses on their books.”

X-date — Our Adam Cancryn, Jennifer Haberkorn and Jonathan Lemire: “The debt ceiling crisis has arrived on President Joe Biden’s doorstep — and left his administration with far less time than anticipated to solve it. But don’t expect the White House to change tactics any time soon.”

— Citi CEO Jane Fraser said the bank is starting to field a wave of incoming calls from clients and investors about the possibility of default. “This time feels different,” she said during the conference. “It’s more worrying.”

‘Everything is on the line’ — Five weeks ago, the SEC sent its biggest warning shot yet to the $1 trillion cryptocurrency market: A so-called Wells notice to Coinbase alerting it to potentially looming charges. But Coinbase is not sitting around waiting to be sued. Instead, the largest U.S. crypto exchange has gone on the offensive in a preview of what’s likely to come in the digital asset market’s biggest showdown yet with Gary Gensler’s SEC. — Declan Harty

First in MM: House members press FEMA on flood insurance — Zach reports that a bipartisan group of 51 House members led by Oversight Chair James Comer and Majority Leader Steve Scalise are demanding that FEMA turn over extensive documentation on how the National Flood Insurance Program has set rates under a recent revamp that’s triggered rising costs for some homeowners. The overhaul, known as Risk Rating 2.0, is an attempt by FEMA to improve the accuracy of how flood risks are assessed for individual properties. The lawmakers said in a letter to FEMA that the process leading to the rate increases has been “less than transparent,” and they have concerns about homeowners dropping their flood policies.

Talking Points

Glenn Youngkin was “long-term bullish on China” as a private equity investor in 2019. As the Republican governor of Virginia in 2023? Not so much.

What changed?

“The Chinese Communist Party changed,” Youngkin told me on the sidelines at the Milken Institute Global conference on Monday. “The investigations of Micron, the search of a Bain office, the recent changes in their regulatory framework about how they treat foreign companies. I think it’s a wake-up call for non-Chinese businesses on what it means to be in the Chinese market. This is really different from the China of five years ago.”

“This is a different China and one that we better wake up as a country and recognize,” he added.

In the markets

More First Republic — The stock market barely moved on the news that First Republic had been seized and sold to JPMorgan Chase. And even though there are still some signs of trouble for regional bank shares, the results reflect that there’s “a lot of relief – maybe – that this one is behind them,” Seema Shah, the chief global strategist at Principal Asset Management, told your host from a poolside cabana at the Beverly Hilton.

The probability of Federal Reserve Chair Jerome Powell announcing a quarter-point rate hike shot up above 90 percent on the news, she noted. And Powell’s comments on Wednesday should offer a glimpse of whether the Fed is open to pausing rate hikes. The more likely event, in Shah’s opinion, is that Powell will leave the door open to raising rates again if prices start to climb again this summer.

“There is barely anyone out there who’s talking about inflation reigniting at some point which, to us, is an underpriced risk,” she said.

IPO — Even with the insane amount of market-moving policy news on Monday, Joe Mecane of Citadel Securities told your host that he’s keeping an eye on Johnson & Johnson’s bid to spin off its consumer health care business Kenvue later this week. If the pharmaceutical giant pulls off the $40 billion IPO, it could be a bellwether for the health of U.S. capital markets (which, incidentally, is a top concern for House Financial Services Chair Patrick McHenry).

“It also leads a little bit to some of the market structure conversations that we had,” added Mecane, who leads Citadel Securities’s execution services business. “A lot of the concerns over the proposals that have been out there [have to do with] whether they’ll have a disproportionate effect on small mid cap companies, which do tend to be more focused in terms of trying to make sure the capital markets are healthy.”

Regulatory Corner

Oversight incoming — Speaking of McHenry: More House Financial Services oversight hearings on the spate of bank failures will be on the calendar next month, he said.

First Republic “was a husk of its former self,” the North Carolina Republican told your host in an interview after appearing on stage at Milken. “The regulators made the right call, and pulled the plug on one organization to avoid contagion. My view was they should have a normal bid process and be open to all bidders, and it appears that that was the case.”

“My primary question is why they didn’t do this” with Silicon Valley Bank and Signature Bank in March, he said.

Deposit insurance — Also from Victoria: “The Federal Deposit Insurance Corp. on Monday urged Congress to consider a higher deposit insurance limit for bank accounts that businesses use for payroll, suggesting that doing so could increase the stability of the financial system.”

This would be a top story, most days — Bloomberg’s Josh Wingrove, Kate Davidson and Catarina Saraiva: “The White House is considering promoting Federal Reserve Governor Philip Jefferson to vice chair and naming a Latino candidate to an open board slot in a shift from prior plans.”

Jobs Report

Christine Joseph is now special adviser at the Office of Space Commerce at NOAA. She most recently was a legislative assistant for the House science committee’s space and aeronautics committee. — Daniel Lippman