Tuesday, May 16, 2023

BLAMING OTHERS TO CYA

SVB's former CEO says Fed, social media contributed to bank’s collapse

The fastest pace of rate hikes by the Federal Reserve in decades combined with negative social media sentiment contributed to the failure of SVB Financial Group’s Silicon Valley Bank, said Greg Becker, former chief executive officer of the company.

“The messaging from the Federal Reserve was that interest rates would remain low and that the inflation that was starting to bubble up would only be ‘transitory,’” Becker said in written testimony prepared for a US Senate Banking Committee hearing Tuesday focused on Silicon Valley Bank and Signature Bank, both of which were seized by regulators in March. “Indeed, between the start of 2020 and the end of 2021, banks collectively purchased nearly $2.3 trillion of investment securities in this low-yield environment created by the Federal Reserve.”

Silicon Valley Bank catered to the technology-startup ecosystem, and its heavy focus on the sector combined with a portfolio of long-dated bonds that lost value as interest rates climbed made it particularly susceptible to the bank run that prompted regulators to seize the lender. Its failure touched off a number of other bank runs, leading to the seizure of Signature Bank days later and the eventual collapse of First Republic Bank as well.

Becker said comparisons by the media between SVB and Silvergate Capital Corp., which announced plans to wind down just days before his bank’s seizure, contributed to SVB’s failure.

“Silvergate’s failure and the link to SVB caused rumors and misconceptions to spread quickly online, leading to the start of what would become an unprecedented bank run,” Becker said in his testimony. “The next day, the bank run picked up steam. By the end of the day on March 9, $42 billion in deposits were withdrawn from SVB in 10 hours, or roughly $1 million every second.”


Becker also acknowledged lapses on the part of SVB raised by auditors and regulators that executives were working to rectify. He pointed to the expansion of the bank’s Treasury management team to enhance risk management as it closed on $100 billion in assets, a level it surpassed in February 2021. 

The bank also sought to hire a chief risk officer with experience running a so-called large financial institution after consultation with the Federal Reserve Board. SVB also looked to improve liquidity in 2022, he said, while noting that regulators said at that time that the bank had sufficient capital and liquidity.

“I never imagined that these unprecedented events could happen to SVB and strongly believe that the leadership team and I made the best decisions we could with the facts, forecasts and outside expert advice available to us at the time,” Becker said. “The takeover of SVB has been personally and professionally devastating, and I am truly sorry for how this has impacted SVB’s employees, clients and shareholders.”

SIGNATURE BANK

It’s the first time Becker is speaking publicly since March 10, when Silicon Valley Bank was placed into receivership. Executives who ran failed banks have been under intense public scrutiny as turmoil continues to roil the financial sector. Scott Shay, co-founder and former chairman of New York-based Signature Bank, also is set to testify Tuesday, as is Eric Howell, the company’s former president.

Both Shay and Howell said in their written testimony that they believed Signature’s liquidity position would have allowed it to remain open, but that they understood regulators viewed the situation differently.

“Although I disagreed with this decision, I recognize the important role that bank regulators play in our financial system,” Shay said. “My first priority in helping to build Signature Bank was providing excellent service to our customers. I was therefore pleased that the government guaranteed the full amount of our customers’ deposits.”


U.S. banks face regulatory scrutiny over interest-rate risks

U.S. regulators are ratcheting up oversight efforts across the banking system as they lack the ability to quickly overhaul rules to blunt turmoil that’s already collapsed four mid-sized lenders.  

The U.S. Federal Reserve and the Federal Deposit Insurance Corp. have been peppering lenders over the past several weeks with questions related to interest-rate risks and commercial real estate exposure, according to people familiar with the matter. Failures by Silicon Valley Bank and Signature Bank to deal with surging borrowing costs were partly blamed for their demise.  

The stepped up oversight dovetails with a political standoff between the White House and Republican lawmakers over raising the U.S.’s debt ceiling, and concern that failing to reach a deal would cause widespread calamity. There’s also a creeping realization that the government’s extraordinary move to spend billions of dollars to make uninsured depositors whole, and deploy other measures to shore up teetering lenders, haven’t eased the jitters.

“The biggest problem is confidence, and I am not sure how you build that back,” says Sandeep Dahiya, a professor at Georgetown University and financial market researcher. “Deposit volatility is higher than we thought because we never saw what fast interest-rate increases can do in a world where information on banks is so much easier to act upon by the depositors.”

Representatives for the Fed and FDIC declined to comment.


CONGRESSIONAL OVERSIGHT

Whether regulators did enough to shore up the system, or sufficiently prevented stresses ahead of time, will take center stage at four congressional hearings scheduled for this week.

The Fed’s vice chair for supervision, Michael Barr, said in remarks prepared for a Tuesday appearance before the House Financial Services Committee that he plans to “improve the speed, force, and agility of supervision.” 

He’s previously said that the Fed is exploring ways to speed up remedial action by banks, including by potentially limiting dividends and buybacks if supervisors found their capital to be deficient.

Still, inside the halls of regulatory power in Washington, there’s an acceptance that agencies will need months, if not years, to toughen standards through new rules. A bitterly divided Congress also makes any swift action seem a long shot at best, training Washington regulators’ sights further on oversight fixes for the near term.

In addition to digging into interest-rate risks, the FDIC has bolstered scrutiny of the extent to which lenders’ depositors are uninsured, said one of the people, who asked not to be identified discussing the contours of the effort that haven’t been made public. The agency has asked its supervisors to focus on the issue, said the person. 

FED SUPERVISORS

Meanwhile, Fed supervisors are also stepping up scrutiny of firms that have a combination of high unrealized securities losses in combination with another issue, like a high level of uninsured depositors, said another one of the people. Supervisors are also looking closely at the potential for future losses in banks’ commercial real estate portfolios, given shifting patterns of office work.

Deposit outflows and sharp declines in stock prices can also be considered risk factors. Regulators have seen some firms successfully mitigating the situation, the person added. 

The issues are not seen as system-wide problems, but are being probed on a bank-by-bank basis. 

The more intense supervisory reviews also may impact banks’ earnings in the medium term. For lenders with troubled CRE exposures, there will be an emphasis on raising loan-loss provisions, and for banks with runnable deposits and losses on their securities portfolios there will be an emphasis on maintaining plentiful cash, said the person.


SELF CRITICISM

Wall Street remains transfixed on which small banks could buckle next and gaming out high-drama government auctions for their corpses. A closely watched index for shares in mid-sized lenders has plunged almost 40 per cent since before the government took over Silicon Valley Bank, known as SVB, two months ago. 

The dynamic is a deeply uncomfortable one for regulators. It’s even prompted unusually blunt self-criticism by the Fed and FDIC. 

Uninsured depositors — often businesses with significantly more money parked at a lender than the US$250,000 limit — were rampant at SVB and Signature Bank. Concerns that the bank’s failures could mean that businesses wouldn’t make payroll prompted the government to step in and insure all deposits, draining an estimated $15.8 billion for the U.S.’s bedrock insurance fund. 

EXPANDING INSURANCE

Efforts are already underway to replenish the fund, known as the DIF, but the  episode has fueled calls for a broader move to extend insurance coverage to at least some deposit accounts that businesses rely on to operate. Earlier this month, the FDIC said that it wanted Congress to approve expanding insurance coverage for corporate payment accounts.

Although raising the cap has some support among both Republicans and Democrats, there’s no sign that any changes will be fast-tracked. 

Sherrod Brown, a Democrat from Ohio who leads the Senate Banking Committee, recently told Bloomberg that there’s no consensus yet among lawmakers on the need for the change. 

INTEREST-RATE RISK

The Banking Committee will hold an oversight hearing on Thursday with witnesses including FDIC Chairman Martin Gruenberg and Barr, the Fed’s top banking regulator. 

Nellie Liang, the U.S. Treasury Department’s top domestic policy official, last week signaled that officials were studying their options for policy changes, regardless of whether lawmakers stepped in.

“Going forward, bank and regulators will review how liquidity risk and interest rate risk management and regulation may need to adjust given the effects of changes in technology and social media on deposits — their sensitivity to interest rates and their stability in stress,” she said during a May 11 speech at an industry event in Chicago.

U.S. senator uses ChatGPT for opening remarks at a hearing on AI

U.S. Senator Richard Blumenthal opened a hearing on AI with a recording of his voice describing the risks of this emerging technology. 

“Too often we have seen what happens when technology outpaces regulation,” he said. “The unbridled exploitation of personal data, the proliferation of disinformation and the deepening of societal inequalities.”

But he didn’t write it and he didn’t record it.

Drawing chuckles from the hearing room on Tuesday, the Connecticut Democrat said the text was written by OpenAI’s ChatGPT and the audio was a voice application trained on his speeches on the Senate floor.

All eyes turned to Sam Altman, chief executive officer of OpenAI, who was sitting at the witness table, ready to provide testimony, alongside IBM’s Chief Privacy and Trust Officer Christina Montgomery.


Blumenthal said it was amazing that artificial intelligence could produce such a realistic audio clip, as he went on to actually read the rest of his opening statement. But he said the potential applications were potentially terrifying. 

“What if I’d asked it, and what if it had provided an endorsement of Ukraine surrendering or Vladimir Putin’s leadership?” Blumenthal said. “The prospect is scary.”

Blumenthal leads the Senate Judiciary Subcommittee on Privacy, Technology and the Law, which hosted Tuesday’s hearing on artificial intelligence technologies.

Altman and Montgomery during the hearing both called on senators to regulate AI, which is raising ethical, legal and national security concerns.


OpenAI, IBM urge U.S. senate to act on AI regulation

The creator of ChatGPT and the privacy chief of International Business Machines Corp. both called on U.S. senators during a hearing Tuesday to more heavily regulate artificial intelligence technologies that are raising ethical, legal and national security concerns.

Speaking to a Senate Judiciary subcommittee, OpenAI Chief Executive Officer Sam Altman praised the potential of the new technology, which he said could solve humanity’s biggest problems. But he also warned that artificial intelligence is powerful enough to change society in unpredictable ways, and “regulatory intervention by governments will be critical to mitigate the risks.”

“My worst fear is that we, the technology industry, cause significant harm to the world,” Altman said. “If this technology goes wrong, it can go quite wrong.”

IBM’s Chief Privacy and Trust Officer Christina Montgomery focused on a risk-based approach and called for “precision regulation” on how AI tools are used, rather than how they’re developed. 

The senators openly questioned whether Congress is up to the task. Political gridlock and heavy lobbying from big technology firms have complicated efforts in Washington to set basic guardrails for challenges including data security and child protections for social media. And as senators pointed out in their questions, the deliberative process of Congress often lags far behind the pace of technology advancements. 


Demonstrating AI’s power to deceive, Senator Richard Blumenthal, the Connecticut Democrat who chairs the panel, played an AI-written and produced recording that sounded exactly like him during his opening statement. While he urged AI innovators to work with regulators on new restrictions, he recognized that Congress hasn’t passed adequate protections for existing technology. 

“Congress has a choice now. We had the same choice when we faced social media,” Blumenthal said. “Congress failed to meet the moment on social media. Now we have the obligation to do it on AI before the threats and the risks become real.”

Several senators advocated for a new regulatory agency with jurisdiction over AI and other emerging technologies. Altman welcomed that suggestion as a way for the US to continue leading on the technology that springs from American companies.

But Gary Marcus, a New York University professor who testified alongside Altman and Montgomery, warned that a new agency created to police AI would risk being captured by the industry it’s supposed to regulate. 

Lawmakers questioned the potential for dangerous disinformation and the biases inherent in AI models trained on internet content. They raised the risks that AI-fabricated content poses for the democratic process, while also fretting that global adversaries like China could surpass US capabilities. 

AI ‘HALLUCINATIONS’

Blumenthal asked about “hallucinations” when AI technology gets information wrong. Tennessee Republican Marsha Blackburn asked about protections for singers and songwriters in her home state, drawing a pledge from Altman to work with artists on rights and compensation. 

Missouri Senator Josh Hawley, the ranking Republican on the subcommittee, asked whether AI will serve to be as transformative as the printing press, disseminating knowledge more widely, or as destructive as the atomic bomb. 

“To a certain extent, it’s up to us here, and to us as the American people, to write the answer,” Hawley said. “What kind of technology will this be? How will we use it to better our lives?”

Much of the discussion focused on generative AI, which can produce images, audio and text that seem human-crafted. OpenAI has driven many of these developments by introducing products like ChatGPT, which can converse or produce human-like, but not always accurate, blocks of text, as well as DALL-E, which can produce fantastical or eerily realistic images from simple text prompts. 

But there are boundless other ways that machine learning is being deployed across the modern economy. Recommendation algorithms on social media rely on AI, as do programs that analyze large data sets or weather patterns. 


REQUIRING REGISTRATION

The Biden administration has put forth several non-binding guidelines for artificial intelligence. The National Institute of Standards and Technology in January released a voluntary risk management framework to manage the most high-stakes applications of AI. The White House earlier this year published an “AI Bill of Rights” to help consumers navigate the new technology. 

Federal Trade Commission Chair Lina Khan pledged to use existing law to guard against abuses enabled by AI technology. The Department of Homeland Security last month created a task force to study how AI can be be used to secure supply chains and combat drug trafficking. 

In Tuesday’s hearing, Altman focused his initial policy recommendations on required registration for AI models of a certain sophistication. He said companies should be required to get a license to operate and conduct a series of tests before releasing new AI models. 

Montgomery said policymakers should require AI products to be transparent about when users are interacting with a machine. She also touted IBM’s AI ethics board, which provides internal guardrails that Congress has yet to set.

“It’s often said that innovation moves too fast for government to keep up,” Montgomery said. “But while AI may be having its moment, the moment for government to play its proper role has not passed us by.”

Nutrien may slow potash ramp-up plans as earnings, sales down

The CEO of Canadian fertilizer giant Nutrien Ltd. said Thursday the company may consider slowing down its previously announced plan to ramp up potash production, as falling prices and lower sales volumes take a bite out of profits.

"Yes, we would consider slowing down. We're really, as we talked about earlier this year, watching the market," CEO Ken Seitz told analysts on a conference call to discuss the company's disappointing first-quarter financial results.

"If we see that the market's not there, then we'll pace our capital accordingly."

The Saskatoon-based company — the world's largest fertilizer producer — lowered its earnings guidance for the year to between $6.4 billion and $8.0 billion, down from a previously announced range of $8.4 billion to $10 billion.

The company's net earnings for the third quarter were US$576 million, down 58 per cent from US$1.4 billion a year earlier, and its sales for the quarter ended March 31 were US$6.1 billion, down 20 per cent from US$7.7 billion a year earlier.

It has been a volatile period for Nutrien, which achieved record earnings in 2021 and then saw fertilizer prices spike in March of 2022 as the Russia-Ukraine war shook up global agricultural markets and reduced supplies of fertilizer from Eastern Europe.

To meet increased global demand, Nutrien announced in June of last year a plan to ramp up potash production by 40 per cent compared with 2020 production levels — an increase of more than five million tonnes.

The company said it would achieve this by investing in expansions at its existing Saskatchewan mines, including the hiring of approximately 350 people.

But by the second half of 2022, Nutrien had suffered what it called a "historic'' decline in the pace of its potash shipments. In North America and Brazil in particular, farmers appeared to be postponing fertilizer purchases in the face of high prices.

As a result, in February of this year, the company announced it would slightly delay its expansion plans, targeting 2026 instead of 2025 to reach its potash production target of 18 million tonnes.

While Seitz said Thursday the company is open to slowing its plans further, he said he remains bullish on the longer-term outlook for fertilizer. He said Nutrien anticipates increased global potash demand in the second half of the year as a result of lower-than-expected inventories and improved affordability for farmers compared with 2022.

He added that historically, periods of lower-than-normal demand have been followed by years of strong demand growth — and he expects that to happen again.

"The reality is again that we are in a market that's growing," Seitz said.

"We believe that's going to carry on for the absolute foreseeable future — a two and a half to three per cent annual growth rate. New supply's going to be required to meet that growing demand."

Nutrien's share price tumbled Thursday on the company's first-quarter results, trading down almost five per cent on the Toronto Stock Exchange as of mid-day.

The company's diluted net earnings per share for the quarter were US$1.14, down 54 per cent from US$2.49 a year earlier.

This is a corrected story. A previous version ran with a photo of a former CEO.

This report by The Canadian Press was first published May 10, 2023.

Schwartz to step down as Onex investors approve succession plan

ONEX CORPORATION (ONEX:CT)

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Gerry Schwartz will step down as chief executive officer of Onex Corp., the Canadian private equity firm he’s managed for nearly 40 years, after shareholders agreed to extend his voting control until 2026.

Investors backed the firm’s succession plan at the annual meeting Thursday by allowing Schwartz to hang on to the special rights attached to his multiple-voting shares for three more years. That paves the way for President Bobby Le Blanc to replace the founder as CEO. Schwartz will remain chairman.

“Onex is on a certain path to a one-share, one-vote structure,” Schwartz told shareholders. The share rose 1.1 per cent to $61 in Toronto.

Le Blanc, who was promoted to president in 2020, is taking control at a critical moment for the firm as it struggles with fundraising for its sixth flagship fund and lackluster returns. Buyout firms are contending with one of the most difficult investment climates since the 2008 global financial crisis, as higher interest rates make financing deals more expensive.

“It’s a true honor to have the opportunity to lead this team,” Le Blanc said.

 

McCain steps down as Maple Leaf Foods CEO, optimistic about 2023

MAPLE LEAF FOODS INC (MFI:CT)

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The head of Maple Leaf Foods Inc. said he's confident in the future of the company as he hands the reins of the protein producer to current president and chief operating officer Curtis Frank.

CEO Michael McCain will stay on as executive chair of the board of directors for the Mississauga-based firm, and said his family will remain as the company's largest shareholder through McCain Capital.

"When I started at Maple Leaf almost three decades ago, the world was a very different place and the challenges, while many, were perhaps not as profound as they are today," said McCain on a call with analysts Thursday. The company announced a year ago that McCain would be stepping down after taking the top job in 1998.

"Our vision to be the most sustainable protein company on Earth is inspiring and enduring. I could not be more thankful or prouder of the team that we have the resilience that they've shown over decades," he said. 

The remarks came as Maple Leaf reported a loss in its first quarter compared with a profit a year ago as it faced a difficult pork market, cost inflation and higher startup expenses. McCain said on the call that some of the post-pandemic difficulties the industry has faced are starting to abate. 

The company said Thursday it lost $57.7 million or 48 cents per share for the quarter ended March 31 compared with a profit of $13.7 million or 11 cents per share in the same quarter last year.

Sales in the quarter totalled $1.17 billion, up from $1.13 billion in the first three months of 2022.

The company said the increased revenue came as sales in its meat protein group rose to $1.14 billion compared with $1.09 billion in the same quarter last year. Plant protein sales fell to $37.4 million compared with $44.9 million a year earlier.

McCain said in a news release that the company's supply chain has made "exceptional progress back to full normalization," and the company has been raising prices to mitigate inflation. 

Maple Leaf is also taking advantage of renewed access to Chinese markets, he said.

McCain also said that the company hopes to achieve neutral adjusted earnings before interest, taxes, depreciation and amortization on its plant protein business this year.

"Our objective is for the plant protein business to be highly profitable," he said on the call with analysts. 

McCain said the company has seen demand in China for pork products go up, as European supply contracts. 

On an adjusted basis, Maple Leaf said it lost 12 cents per share compared with an adjusted profit of three cents per share in its first quarter last year.

Analysts on average had expected an adjusted loss of 10 cents per share and $1.16 billion in revenue, according to estimates compiled by financial markets data firm Refinitiv.

Analyst Irene Nattel at RBC Capital Markets said in a note that Maple Leaf's meat and plant protein businesses delivered marginally better results than forecast. 

Shares in the company were up almost 10 per cent Thursday at $27.43.

This report by The Canadian Press was first published May 11, 2023.