Ingram's May 2023

IN A NUTSHELL

by Ken Herman

Here We Go Again?

The fate of another big bank hangs in the balance as Fed assesses the need for yet another interest-rate hike. The coming days are expected to be crucial for the fate of First Republic Bank, as the White House, Federal Reserve Bank, and Treasury Department are evaluating plans to save the troubled regional lender under an “open bank” rescue. One scenario under consideration is to create a special purpose entity, whereby the big banks that earlier supported First Republic with $30 billion in deposits would purchase the underwater loans on its balance sheet (above where they would be marked to market). If this occurs, First Republic may be able to go out and raise new equity. The bank is striving to strengthen its balance sheet to avert a takeover by regulators and to allow for capital-rais- ing possibilities. It has been working on cutting costs, with plans to reduce its workforce by as much as 25 percent in the second quarter and condensing corporate office space. First Republic, which has been struggling with customers flee-

recent softer data on retail sales and manufacturing. As the Federal Open Market Com mittee meets in early May, it faces mul tiple conflicting forces—as does the world at large. The minutes from FOMC’s most recent previous meeting were released recently, revealing a significant min ority of Fed members who did not want to raise key interest rates at that point, mostly due to recent banking turmoil. These committee minutes also revealed that Fed staffers predicted a “mild recession” later this year. Overall, these minutes revealed that a minority of Fed members are dovish, so in light of the latest consumer and producer-price indices’ data, plus lower

ing the bank (known as the rich people’s bank; the average net worth of their cus- tomers was $3.5 million), reported net de- posit outflows of $72 billion during its first quarter, despite support from 11 of the biggest lenders in the U.S. Although other big banks posted record revenues, they issued a cautious note about recent stress in the financial sector and the negative impact it could have on future lending. It is still difficult to assess the extent of tightening from the bank tur moil, but one way of thinking about it is that approximately $350 billion left the balance sheets of small banks and landed in

Treasury yields, we can expect one last hike in interest rates—and then a wait-and-see post ure by the Fed. The Fed staff expects a recession in the second half of 2023. Wall Street is sympathetic to that forecast. But if it is going to hap- pen, employment and income growth

Confusion concerning the market’s direction and its volatility continues, with the financial media warning that first-quarter earnings forecasts may be decelerating.

money market mutual funds or on large banks’ balance sheets. Large banks characterize these new deposits as “hot money,” likely to leave as quickly as it arrived. They will lik ely wait before using these new deposits to make loans. Hence, $350 billion that previously was available to finance lending is now sitting in reserve balances and U.S. Treasuries. Confusion concerning the market’s direction and its vol atility continues, with the financial media warning that first quarter earnings forecasts may be decelerating from their original estimates at the start of the quarter. Opinions about how the first-quarter earnings season will play out are very mixed. There are those who believe the market’s resiliency is about to get a major wake-up call, where profits and guidance will sorely disappoint. But there are just as many who believe that companies will deliver top-and bottom-line results that surprise to the upside, despite some

must slow first. I suggest that we not expect much of a slowdown during the second quarter, given the momentum in income and job growth. The list of economic challenges is growing, but the top-line data still reflect a great deal of positive momentum. The Fed staff’s recession forecast is based on their economic model’s reaction to 475 basis points’ worth of rate hikes in the span of a little more than a year, which took them beyond a 50-50 assessment of recession risk late last year, compounded by addition al credit tightening in the aftermath of the March bank failures.

Ken Herman served as the Managing Director of Bank of America Global Capital Markets and was the Mayor of and served on the City Council in

Glendora, Calif. E | Editorial@

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