FDIC Wants Banks Bigger than $5 Billion to Pay for SVB and Signature Failures​​​

Giant banks and regional lenders with more than $5 billion in assets will help pay for the March failures of Silicon Valley Bank and Signature Bank, according to a new proposal from the Federal Deposit Insurance Corp., sparing small community institutions from footing part of the bill, YahooFinance.com reported. The FDIC now estimates that it will cost $15.8 billion for it to protect all depositors at those two institutions who were above the FDIC's $250,000-per-account insurance level — a step that it has taken to prevent a wider panic in the financial system. The FDIC typically replenishes its Deposit Insurance Fund with quarterly fees paid by all FDIC-insured banks. This time it is levying a special assessment to recover losses associated with the uninsured depositors, and thus has more flexibility to decide which banks should contribute the most. The proposal it announced Thursday asks the largest banks – those with total assets of over $50 billion — to pay more than 95% of the special assessment. A total of 113 banks would pay something. The overwhelming majority – some 96%, or roughly 4,500 banks — wouldn't pay anything. Read more.

The Senate Banking Committee will hold a hearing on Tuesday at 10 a.m. ET titled, "Examining the Failures of Silicon Valley Bank and Signature Bank." The witnesses will be Gregory W. Becker, former CEO of Silicon Valley Bank; Scott A. Shay, former chairman and co-founder of Signature Bank; and Eric R. Howell, former president of Signature Bank. Click here for more information.

In related news, employees leaving the Federal Deposit Insurance Corp. (FDIC) for higher-paying positions in the private sector has become a common problem for the bank regulator, which is scrambling to contain the most volatile episode of turmoil in the banking sector since the 2008 financial crisis, according to a New York Times report. With a tight labor market and hot inflation, the regulator has been struggling to keep staff from being lured away by more lucrative jobs, leaving its ranks depleted as it faces the threat of a banking crisis. After years of relative calm, FDIC officials have been working at a frenzied pace this year. The March failures of Signature Bank, which was overseen by the FDIC, and Silicon Valley Bank, which was regulated by the Federal Reserve, threatened to set off runs at regional banks across the country. The collapse of First Republic Bank late last month and the sinking stock prices of similarly situated financial institutions have renewed the focus on the nation’s financial regulators and spurred calls for more aggressive oversight and for a bigger backstop on bank deposits. Right now, the FDIC insures bank deposits up to just $250,000. Biden administration officials and federal regulators have described the recent bank failures as largely the result of poor management. But the FDIC acknowledged a shortcoming of its own: a lack of staffing. In a report released in late April reviewing the failure of Signature Bank, the FDIC pointed to its own “persistent” staffing shortages as a problem that has hampered its ability to supervise lenders. It said that it had difficulty attracting examiners and other regulatory staff to New York, where the cost of living is high and the quality of city life has deteriorated since the coronavirus pandemic. On average, 40 percent of the positions that scrutinize large financial institutions in the New York City area have been vacant or filled by temporary staff since 2020. Read more.
 

Corporate Bond Issuance Picks Up After Slow April​​​

Several of the world's largest companies raised billions of dollars in new debt this week and last, in a mini-resurgence of a primary corporate bond market that had been held back by the U.S. regional banking crisis and recession concerns, Reuters reported. On Monday, 11 companies led by iPhone-maker Apple, wireless carrier T-Mobile and drug-maker Merck issued $22.55 billion in bonds. The sales followed a similar 11-deal flurry of debt sales on May 1 led by Facebook parent Meta Platforms and Comcast. So far in May, these and other high-grade companies have raised a total of $57.5 billion, on pace to beat last month's $65.7 billion, which was the slowest April in a decade, according to Informa Global Markets data. The average investment-grade bond spread on Tuesday was 149 basis points over Treasuries after reaching a high of 164 basis points on March 15, according to ICE BAML data. ​​​Read more.
 

Funding Woes at the Education Dept. Threaten Federal Student Aid Agenda​​​

After Congress refused to give more money to the federal student aid office last year, higher-education experts warned of potential disruptions to efforts by the Biden administration and lawmakers aiming to help student loan borrowers and others paying for college. Now experts say those worries are coming to pass, the Washington Post reported. The student aid office is delaying or curtailing plans to help millions of Americans ease back into the routine of paying their student loans after a three-year suspension brought on by the pandemic. The funding crisis is forcing the Office of Federal Student Aid (FSA) to make sacrifices, including cuts to customer service hours and outreach, that experts worry could place already vulnerable borrowers at higher risk of falling behind on their payments. The Education Department had sought to increase FSA’s $2 billion budget by a third for the current fiscal year, but in the end, the funding was kept flat. And with House Republicans seeking to roll back education spending to 2022 levels, the fight for additional dollars in the next budget promises to again be fierce. “Restarting repayment requires significant resources to avoid unnecessary harm to borrowers, such as cuts to servicing,” said an agency spokesperson. “We continue to urge Congress to fully fund President Biden’s FY24 budget request, which would provide critical resources to FSA.” FSA is a small office with a big job. With a little more than 1,400 employees, it not only provides more than $150 billion a year in federal grants, loans and work-study funds to college students, it also manages the $1.6 trillion federal student loan portfolio. The office’s responsibilities and expenses have ballooned in recent years amid congressional mandates to overhaul the financial aid system and improve the servicing of student loans. Adding to that is a series of moves from the Biden administration to lift millions of people out of default, bring borrowers in repayment for decades closer to debt relief, temporarily expand loan forgiveness for public servants, and stand up a process for canceling up to $20,000 of student debt per borrower that is now before the Supreme Court. ​​​Read more.
 

Weekly U.S. Jobless Claims Highest Since 2021, but Companies Are Avoiding Risk of Being Caught Short-Handed​​​

The number of Americans filing for unemployment benefits last week rose to its highest level in a year and a half, although jobs remain plentiful by historical standards even as companies cut costs as the economy slows, the Associated Press reported. Applications for jobless aid for the week ending May 6 rose by 22,000 to 264,000, the Labor Department said Thursday. That’s up from the previous week’s 242,000 and is the most since November 2021. The weekly number of applications is seen as roughly representative of the number of U.S. layoffs. Many employers appear to have put a premium on retaining workers after some of them were caught short-handed by the rapid post-COVID-19 economic recovery. As a result, most economists don’t envision waves of layoffs even if a recession were to strike later this year, as many expect. The four-week moving average of claims, which evens out some of the weekly volatility, rose by 6,000 to 245,250. Analysts have pointed to a sustained increase in the four-week averages as a sign that layoffs are accelerating, but are hedging their bets on whether any spike in layoffs is imminent. ​​​Read more.
 

Supreme Court Puts New Limits on Fraud Prosecutions​​​

The Supreme Court placed new limits on white-collar fraud prosecutions, handing down a pair of decisions that criticized legal theories frequently used by the Justice Department, the Wall Street Journal reported. In both rulings released today, the court threw out convictions emerging from former U.S. Attorney Preet Bharara’s crackdown on what he called a “show-me-the-money culture in Albany” during the tenure of former Democratic New York Gov. Andrew Cuomo. In the first case, Percoco v. United States, the court ruled in favor of former Cuomo top adviser Joseph Percoco, who challenged his 2018 conviction on fraud and bribery charges. In that unanimous decision, the court curtailed the Justice Department’s use of the “honest-services fraud statute,” limiting how it can be used against private citizens. In the second case, Ciminelli v. United States, the court overturned the criminal conviction of real estate developer Louis Ciminelli, who was accused of conspiring to rig bids on a $750 million manufacturing project, part of a Cuomo administration initiative to boost the economy of the city of Buffalo. That decision dealt with the scope of the federal wire-fraud statute, a key statute in the U.S. criminal code. The court declared invalid an approach frequently used by prosecutors in recent years, known as the “right to control” theory of fraud, which expanded the wire-fraud statute’s scope. (Subscription required.) ​​​Read more.
 

EV Makers Poised for a Shakeout — Just Like the Early Days of the Auto Industry​​​

Only months after electric vehicle maker Lucid went public in the summer of 2021, the company’s value shot up to nearly $91 billion. Fisker, another EV start-up, also saw its valuation spike — to roughly $8 billion — after its IPO in November 2020. Electric truck maker Rivian, meanwhile, hit $127 billion after going public in fall 2021, the Washington Post reported. But none of these companies has managed to sustain those swells, each watching their market values deflate 75 percent or more as of Wednesday. This week, each reported large losses and dwindling cash supplies. It should not be surprising that these companies are burning through cash and piling up losses, industry observers note. Though start-ups rarely turn a profit in their early days, such automakers contend with unique costs and manufacturing challenges not seen in other industries like, for example, software. Tesla reported its first full-year profit in 2020 — nearly two decades after it was founded. Some analysts say the recent round of earnings by EV companies suggests that the industry is primed for an overhaul, in which some companies will emerge as clear winners and others fade away — much like the earliest days of the automotive industry in the early 20th century. At that time, entrepreneurs rushed into car-making across the country, said Michelle Krebs, an executive analyst at Cox Automotive. “And ultimately, there was a shakeout of just a few players, and that just happened to be in Michigan,” she said, referring to Ford, General Motors and Chrysler. Electric vehicle makers are facing challenges, including increasingly limited opportunities for funding due to higher interest rates, as well as competition from legacy automakers, which can subsidize their EV business losses with revenue from gas-powered vehicle sales, analysts said. Ford, for example, said in March that its EV business would take a $3 billion loss, but the company would still turn an overall profit of as much as $11 billion. ​​​Read more.
 

More Law Firms Getting on Board with Artificial Intelligence​​​

Big law firms, known for their grueling hours and workloads, are experimenting with artificial intelligence tools that can handle the drudgery typically delegated to entry-level lawyers and simplify complex work that bogs down even top firm leaders, the Wall Street Journal reported. Law firms, as well as legal departments staffed inside companies, now have access to software that can perform writing and research tasks such as drafting documents and reading contracts. Some of the tools can quickly perform legal research that normally takes hours, sifting through thousands of pages of case law in just minutes. The new products use GPT-4, an advanced version of the commercially available ChatGPT developed by OpenAI. Known as large-language models, these tools can recognize patterns, make predictions and create content by processing enormous quantities of text, images and audio. Large-language models will likely be a game-changer for white-collar occupations because of their ability to engage in sophisticated writing and research, said John Villasenor, a professor and co-director of the University of California, Los Angeles’s Institute for Technology, Law and Policy. Previous waves of automation mostly affected blue-collar jobs in industries like manufacturing, or back-office roles that required many calculations, such as accounting or mortgage-processing. Rapid developments in AI could pose threats to the type of work performed in white-collar professions, like the practice of law. AI could also change the financial dynamics of the legal business, which bills high rates for the many hours spent on complex, time-consuming tasks. (Subscription required.) ​​​Read more.
 

ABI’s New Subchapter V Task Force Needs Data from YOU!​​​

ABI’s Subchapter V Task Force, a nine-member expert panel established during last month’s Annual Spring Meeting to study and evaluate subchapter V of chapter 11 of the Bankruptcy Code, needs your help! The Task Force is seeking input from professionals who have worked or are working with the subchapter to study its effectiveness since it was enacted three years ago. The Task Force also intends to solicit input on subchapter V from the public via hearings and its forthcoming website, culminating in a final report to be delivered in April 2024. Please take a few moments to complete the survey. ​​​

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