Silicon Valley Bank rattles Wall Street

This is an audio transcript of the FT News Briefing podcast episode: ‘Silicon Valley Bank rattles Wall Street’

Marc Filippino
Good morning from the Financial Times. Today is Friday, March 10th, and this is your FT News Briefing.

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It was supposed to be a quiet day on Wall Street. Then big banks tumbled. The leaders of France and the UK are finally meeting. It’s the first time in years. And Mexico’s currency is hot, even though the economy is not. I’m Marc Filippino, and here’s the news you need to start your day.

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The four biggest banks in America lost more than $50bn in market value yesterday. Investors were spooked when a big California lender called Silicon Valley Bank or SVB revealed earlier this week that it wanted to raise $2bn in a share sale to shore up its finances. And it had taken a big hit after selling a portfolio of assets to raise cash. Here’s our US markets editor Jennifer Hughes on why the sell-off spread to other banks.

Jennifer Hughes
Yeah, it’s really the example that Silicon Valley Bank set because SVB has now said we needed to raise cash by selling our portfolio of assets. And by the way, we lost 1.8bn in doing it. So then we’ve had this read across to the other banks as people say, well, if SVB loses that much, I wonder how much JPMorgan might be losing, what it’s holding, and starting to ask questions around that.

Marc Filippino
But Jen, why do they see this as a problem that’s broader than SVB and not just trouble at that one bank?

Jennifer Hughes
Absolutely. The SVB Bank has got more problems than the big banks who are all really well-capitalised. But all of the big banks hold massive portfolios of assets, which would include a lot of bonds. And all bond prices have fallen in the last year as interest rates have risen. So it’s not a new fact, but SVB has kind of crystallised everyone or forced them to start thinking about this and that’s really what we think happened in this sell-off.

Marc Filippino
That’s the FT’s US markets editor, Jennifer Hughes.

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British prime minister Rishi Sunak and French president Emmanuel Macron are meeting in Paris today. It’s the first bilateral summit between the two countries in five years. They’re aiming to ease post-Brexit tensions, among other things. To find out more, I’m joined by the FT’s political editor, George Parker.

Hi, George.

George Parker
Hi there, Marc.

Marc Filippino
So I wanna ask you what each of the leaders is hoping to get out of this meeting. Let’s start with the UK. What’s Sunak’s top goal here?

George Parker
I think the main priority, the overarching strategic priority, is just basically to get the relationship back on a normal footing. Over the last five or six years since Brexit, relations have been the opposite of whatever an entente cordiale is. It’s been in deep freeze. The relationship has been terrible. As long as Boris Johnson was prime minister, there was absolute distrust, something close to loathing, I think probably be fair to say, from the Élysée Palace towards the British prime minister.

Rishi Sunak has changed the mood, without a doubt. He’s helped to improve that further by getting this agreement on the Northern Ireland protocol, part of the Brexit deal that Boris Johnson signed, of course. And so they see this summit ready as a chance to reset the relationship across a whole range of areas, whether it’s defence co-operation, energy co-operation or — indeed the topic of the moment in the UK — the question of migrants coming across the English Channel from France in small boats.

Marc Filippino
And Macron, what does he wanna get out of this?

George Parker
The relationship between the UK and France is bedevilled by the fact that both countries are rather too similar in some ways, that they’ve got this imperial past, slight delusions of grandeur on both sides, I suspect. But they have to live together, we’re neighbours. We share energy interconnectors. We are both members of the UN Security Council, of course. And so Macron sees that opportunity ready to improve business ties and to show that Europe actually can make a difference militarily, in particular on their own continent in the context of the Ukraine crisis. So you’ll hear a lot of stuff at the summit about co-operation on military equipment, joint exercises and a sort of co-ordination of efforts in terms of providing equipment and training to the Ukraine forces.

Marc Filippino
So you had talked about the chemistry between Macron and past UK leaders. How does this relationship with Sunak compare?

George Parker
Yeah, the relationship is much better. Emmanuel Macron, Rishi Sunak see a lot of themselves in each other. They both come from a financial services background. They’re both quite technocratic. They are about the same age. And when you see the two of them together, they’re (chuckle) sharply suited and you know, they see eye to eye and they both see it in each other someone that they can do business with. And that’s totally different to the kind of shambolic, chaotic approach that Boris Johnson took. So the fact that Rishi Sunak has worked very well behind the scenes with the EU to settle this longstanding dispute on Northern Ireland, I think, has stood him in good stead with Emmanuel Macron and allowed the two of them to put this relationship back on a much more even footing.

Marc Filippino
George Parker is the FT’s political editor. Thanks, George.

George Parker
Pleasure.

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Marc Filippino
Also meeting today to ease tensions is US president Joe Biden and European Commission president Ursula von der Leyen. You see, the EU is upset about something called the Inflation Reduction Act. The new American law provides massive amounts of funding for green energy investment, and it’s already luring European businesses across the Atlantic. Yesterday, the European Commission released a rival green subsidy plan. One official involved called it, quote, “quick and dirty money to match the Americans”.

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Mexico’s currency hit a five-year high this week. The peso is now the best-performing currency among major economies this year. That’s despite Mexico’s not-so-great economy. To talk about this, I’m joined by the FT’s markets editor, Katie Martin.

Hey, Katie.

Katie Martin
Hey, Marc. How you doing?

Marc Filippino
So, Katie, Mexico’s economy has barely grown in the past five years. It’s still struggling to recover from the pandemic. Why are investors so excited about the peso?

Katie Martin
So as you say, the Mexican peso is having a great old run. It’s up about 8.5 per cent so far this year. Compare that to South African rand, which is down about 7 per cent. And it’s . . . the peso is well ahead of the Brazilian real, for example. So it’s having a great old run. As you say, the economy is not necessarily proving that exciting, but it’s benefiting from a number of kind of really big factors that are running through global markets at the moment. One of them is just the interest rate is just so incredibly high. It’s at about 11 per cent. The central bank has raised rates 10 straight times, 10 times on the bounce for between half and three quarters of a percentage point a time. Generally, the rule of thumb is the higher the interest rate, the stronger the currency.

Marc Filippino
OK, so interest rates are a big factor. You mentioned there are other factors at play. What else is driving the peso higher?

Katie Martin
So you think about some of the really big themes of the moment in kind of global corporate strategy. And one of them is around nearshoring or friendshoring. So the idea is that companies don’t necessarily like to rely on supply chains that are super far away in China when we’ve seen what happens when a pandemic strikes. So it’s much more appealing to rely on supply chains that are nearby and in countries that you have relatively friendly relationships with. So that pulls a lot of manufacturing over to Mexico. The other thing is the US Inflation Reduction Act, which among other things involves throwing enormous amounts of money, like gigantic amounts of money, and it also has some benefits for Mexico. So it gets looped into this. And so that’s why you see, for example, BMW, the car maker’s going to spend €800mn on expanding electric vehicle production in Mexico. Tesla has said that it’s going to spend a lot of money in Mexico. This just brings a lot of money into the Mexican economy. And again, it’s really beneficial for the currency.

Marc Filippino
Katie Martin is the FT’s markets editor. Thanks, Katie.

Katie Martin
You’re welcome.

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Marc Filippino
Before we go, a judge in Brooklyn, New York, yesterday sentenced Roger Ng to 10 years in prison for his role in the 1MDB scandal. It’s one of the biggest financial scandals in history. Last year, a jury found the former Goldman Sachs banker guilty of conspiring to violate US bribery laws, launder money and skirt his bank’s internal accounting controls. US authorities allege $4.5bn were embezzled from 1MDB, which is a Malaysian state investment fund. The money was used for a global spending spree on luxury real estate and jewellery, among other things. Ng plans to appeal the judge’s decision.

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You can read more on all of these stories at FT.com. This has been your daily FT News Briefing. Make sure you check back next week for the latest business news.

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The FT News Briefing is produced by Sonja Hutson, Fiona Symon and me, Marc Filippino. Our editor is Jess Smith. We had help this week from David da Silva, Michael Lello, and Gavin Kallmann. Our executive producer is Topher Forhecz. Cheryl Brumley is the FT’s global head of audio, and our theme song is by Metaphor Music.