It looks like you're new here. If you want to get involved, click one of these buttons!
Park Hotels & Resorts, the owner of two of San Francisco’s biggest hotels — Hilton San Francisco Union Square and Parc 55 — has stopped mortgage payments and plans to give up the two properties, in another sign of disinvestment in hard-hit downtown.
Park Hotels & Resorts said Monday that it stopped making payments on a $725 million loan due in November and expects the “ultimate removal of these hotels” from its portfolio. The company said it would “work in good faith with the loan’s servicers to determine the most effective path forward.”
The 1,921-room Hilton is the city’s largest hotel and the 1,024-room Parc 55 is the fourth-largest, and together they account for around 9% of the city’s hotel stock. The hotels could potentially be taken over by lenders or sold to a new group as part of the foreclosure process.
“After much thought and consideration, we believe it is in the best interest for Park’s stockholders to materially reduce our current exposure to the San Francisco market. Now more than ever, we believe San Francisco’s path to recovery remains clouded and elongated by major challenges — both old and new,” said Thomas Baltimore Jr., CEO of Park Hotels, in a statement.
Those challenges include a record high office vacancy of around 30%, concerns over street conditions, a lower rate of return to office compared to other cities and “a weaker than expected citywide convention calendar through 2027 that will negatively impact business and leisure demand,” he said.
Park Hotels said San Francisco's convention-driven demand is expected to be 40% lower between 2023 and 2027 compared to the pre-pandemic average.
San Francisco Travel, the city’s convention bureau, expects Moscone Center conventions to account for over 670,000 hotel room nights this year, higher than 2018’s 660,868 room nights but far below 2019’s record-high 967,956. And weaker convention attendance is projected for each following year through 2030.
Tourism spending more than doubled in 2022 to $7.4 billion compared to the previous year. A full recovery isn’t expected until 2024 or 2025.
The company expects to save over $200 million in capital expenditures over the next five years after giving up the hotels, and to issue a special dividend to shareholders of $150 million to $175 million. The company's exposure will shift away from San Francisco towards the higher-growth Hawaii market.
Parc 55 is a block from Westfield San Francisco Centre, the mall where Nordstrom is departing, and the block where Banko Brown, an alleged shoplifter, was killed in a shooting outside a Walgreens in April. Nearby blocks are also full of empty storefronts, as tourist and local foot traffic hasn’t fully recovered.
Other hotels have faced financial distress. Atop Nob Hill, the historic Huntington Hotel was sold earlier this year after a mortgage default.
State Farm General Insurance Company, State Farm’s provider of homeowners insurance in California, will cease accepting new applications including all business and personal lines property and casualty insurance, effective May 27, 2023. This decision does not impact personal auto insurance. State Farm General Insurance Company made this decision due to historic increases in construction costs outpacing inflation, rapidly growing catastrophe exposure, and a challenging reinsurance market.
We take seriously our responsibility to manage risk. We recognize the Governor’s administration, legislators, and the California Department of Insurance (CDI) for their wildfire loss mitigation efforts. We pledge to work constructively with the CDI and policymakers to help build market capacity in California. However, it’s necessary to take these actions now to improve the company’s financial strength. We will continue to evaluate our approach based on changing market conditions. State Farm® independent contractor agents licensed and authorized in California will continue to serve existing customers for these products and new customers for products not impacted by this decision.
https://www.perkinscoie.com/images/content/1/1/v2/115211/IL-0712-Williamson.pdfThe market timing and late trading issues of the mid 2000’s were caused, in certain cases, by the lack of transparency regarding beneficial mutual fund owners invested through omnibus accounts. Rule 22c-2 under the 1940 Act, which the SEC adopted in response to those scandals, requires a fund to enter into written agreements with financial intermediaries, including those maintaining omnibus account positions with the fund, in which the intermediary agrees to provide the fund with certain shareholder information upon request and to implement any fund-imposed trading restrictions on investors identified by the fund as having violated the fund’s frequent trading policy
Guggenheim Funds frequent trading policyAlthough these policies are designed to deter frequent trading, none of these measures alone, nor all of them taken together, eliminate the possibility that frequent trading will occur in these funds, particularly with respect to trades placed by shareholders who invest in these funds through omnibus accounts maintained by brokers, retirement plan accounts, and other financial intermediaries. The Funds’ access to information about individual shareholder transactions made through such omnibus arrangements is often unavailable or severely limited. As a result, the Funds cannot ensure that their policies will be enforced with regard to those fund shares held through such omnibus arrangements (which may represent a majority of fund shares), so frequent trading could adversely affect these funds and their long-term shareholders as discussed above.
There is another thread on MFO, entitled "Financial Health Ratings of Banks", in which the rating details are discussed. Below is the Overview statement on the Schwab Bank:@dt. What safety rating are you using? Thanks for your posts.
This is called “reciprocal deposits” and it’s having a moment. Stephen Gandel reports at the Financial Times:• 1) I am a regional bank and I’ve got a customer with a $450,000 deposit.
• 2) You are a different regional bank and you’ve got a customer with a $450,000 deposit.
• 3) I am worried that my customer will take out $200,000 of her money and move it elsewhere to get FDIC insurance.
• 4) You are worried that your customer will take out $200,000 of his money and move it elsewhere to get FDIC insurance.
• 5) We trade those $200,000 deposits: I put $200,000 of my customer’s money in your bank, and you put $200,000 of your customer’s money in my bank.
• 6) Now both our customers have $450,000 of insured deposits, and neither of us has lost any net deposits: I lost $200,000 from my customer but got $200,000 back from your customer, and vice versa.
Is this good? The argument for it is, look, the government is pricing this insurance irrationally, so rational bankers should load up on it:Beverly Hills, California-based PacWest’s website says clients can “rest assured” because the bank can offer up to $175mn in insurance coverage per depositor, or 700 times the FDIC cap. … The bank said in its most recent financial filing that it was enrolling more of its customers in “reciprocal deposit networks”, over which hundreds, or in some cases thousands, of banks spread customers’ funds in order to stretch insurance limits.
The biggest of these networks is run by IntraFi, a little-known Virginia-based technology group. ...
Banks can divert large accounts into the networks, where they are parcelled up into $250,000 chunks and sent off to other FDIC-insured banks. The networks match up the parcels so that any bank sending a customer’s deposits into the system immediately receives a similarly sized parcel from another bank.
Crucially, the networks allow banks to increase their level of insured deposits while giving large customers seamless access to their money. Banks pay the network operators a small management fee.
Reciprocal deposits still make up just 2 per cent of the $10.4tn in deposits insured by the FDIC. But they made up a notable 15 per cent of the growth in insured deposits in the first quarter. The share of deposits covered by the federal Deposit Insurance Fund was highest in at least a decade at 56 per cent.
The argument against it is, look, the government is pricing this insurance irrationally and that leads to misallocations of capital:“Banks are using reciprocal deposits aggressively, as they should,” says Christopher McGratty, an analyst who follows regional banks for Keefe, Bruyette & Woods. He said that in the wake of SVB’s collapse, investors wanted banks to reduce their use of uninsured deposits. “It’s a bit of window dressing, but it’s legit,” he said.
The argument against raising the cap on FDIC deposit insurance from $250,000 to infinity is that it creates moral hazard: If you have $20 million to deposit in the bank, we might want you to pay some attention to the creditworthiness of your bank, so that there are some limits on the growth of truly terrible banks. If deposit insurance is synthetically infinite, that has the same problem.Others have been more sceptical. “To the extent that these deposit exchange programs help weak banks attract deposits, it creates instability,” said Sheila Bair, who headed the FDIC during the global financial crisis. She has called out the deposit exchanges for “gaming the system,” in the past. “It increases moral hazard. There are many good banks that use these exchanges but the exchanges also allow weak banks to attract large uninsured depositors who wouldn’t otherwise bank with them.”
And:Investment bank clients are peppering Wall Street with questions about what happens if the US Treasury in coming weeks runs out of cash and does the unthinkable — failing to make payments due on Treasury securities, the bedrock of the global financial system. …
One school of thought is that the impact might not be so damaging. After all, since the 2011 debt-limit crisis, market participants have worked out a process for dealing with the Treasury announcing that it couldn’t make an interest or principal payment.
But JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon warned earlier this month that even going to the brink is dangerous, with unpredictable consequences.
“The closer you get to it, you will have panic,” he said in a May 11 interview with Bloomberg Television. “The other thing about markets is that, always remember, panic is the one thing that scares people — they take irrational decisions.”
And even a key group that helped to compile the emergency procedures, the Federal Reserve Bank of New York-sponsored Treasury Market Practices Group, has issued its own caution.
“While the practices contemplated in this document might, at the margin, reduce some of the negative consequences of an untimely payment on Treasury debt for Treasury market functioning, the TMPG believes the consequences of delaying payments would nonetheless be severe,” it said in its December 2021 gameplan.
Yesterday FT Alphaville published much of that JPMorgan rates strategy Q&A, which I would say is broadly sanguine about market plumbing. The first point is that, if the US government does default, that will probably cause the prices of Treasury bonds to go up, since a government debt default is a crisis and crises cause a flight to safety and the safest assets are, still, Treasuries:“We are likely to see localized dislocations in the event of missed payment,” if that were to happen, JPMorgan rates strategists, co-led by Jay Barry, wrote Friday in a Q&A for clients on a technical default.
RBC Capital Markets strategists, also writing Friday, said they “doubt” a downgrade would trigger any forced reallocation by fund managers away from Treasuries.
At the same time, RBC’s Blake Gwinn and Izaac Brook cautioned that the “back-office issues” of delaying payments “could very easily bleed into the front-office, causing disruptions to liquidity and market functioning.”
The TMPG noted that firms holding Treasuries in custody for other financial institutions tend to advance payments scheduled for those securities, and would need to sort how to proceed if those payments weren’t received from the Treasury on time.
Firms that offer pricing on Treasuries could run into challenges, “such as setting the price of a Treasury subject to a delayed payment to $0,” the group said.
Some market participants “might not be able to implement” the contingency plans, “and others could do so only with substantial manual intervention in their trading and settlement processes, which itself would pose significant operational risk,” the TMPG said.
From first principles, if a US debt default does not reduce the value of Treasuries, then Treasuries should remain pretty useful for plumbing and collateral purposes. Of course very little about financial plumbing is derived directly from first principles, and if your computer has a switch that is like “IF bond is defaulted THEN don’t accept it as collateral,” then there are problems. But people have had years of debt-ceiling warnings to adjust their switches and one hopes they have things kind of right:This is certainly not our modal view, but in the unlikely event of a technical default, we think Treasury yields would decline and the curve would steepen. This seems unusual in the context of a default, but Treasuries have rallied into the latter stages of other serious debt ceiling debates in 2011 and 2013.
And so on. Money market funds, for instance, hold about $1 trillion of short-term Treasuries; “ultimately,” say JPMorgan, “we believe these funds would not be forced to liquidate Treasury securities in a technical default.”Treasury can, in principle, delay coupon or principal payment dates. If Treasury announces its intention to postpone a payment date in advance (the day before the payment is due), the security will remain in Fedwire, and would therefore still be transferable. …
If Treasury fails to notify investors of its intent to delay a principal payment due the following day by approximately 10:00 PM, the security in question will drop out of Fedwire, and such defaulted security will not be transferable. If (only) a coupon payment is missed, however, the underlying security is still in the system and remains transferable. ...
The status of Treasury collateral depends on the timing of Treasury’s notification of any delays in payments. If done in the timeframe discussed earlier, the security remains in Fedwire and is still transferable. As a result, it could in principal be used as collateral for repo and derivatives transactions, although possibly with higher haircuts.
If notification deadlines are not met, particularly for principal payments, that particular security is dropped out of the system and is no longer transferable, and as a result, cannot be used as collateral. It is possible that an OTC market may develop for securities that drop out of the system, but the likelihood of such an outcome is unclear at the present time.
Since Treasury securities do not have cross-default provisions, other Treasury securities that have not had a delayed/missed payment will remain transferable on Fedwire and can therefore continue to be used as collateral. ...
Under the US non-cleared margin requirements (NCMR) finalized by CFTC and prudential regulators, Treasury securities are considered eligible collateral even in the case of a missed payment. However, this is not the case under the UK and EU NCMR regimes. Thus, for any transactions facing counterparties in those regions, defaulted Treasury securities would be assigned zero collateral value, requiring the swap counterparty to substitute or post additional collateral. …
We believe the Federal Reserve will accept defaulted Treasuries as collateral at the discount window.
• 1) I assume that they are basically correct not to be too worried about the plumbing. We have been having debt-ceiling crises every few years for ages now, and surely everyone has war-gamed this out over and over again. Financial markets are not full of idiots, and it would be annoying if this extremely predictable and predicted event brings down the global financial system through some technicality.
• 2) That said, I assume that with, like, 85% confidence. There is a lot of stuff out there. Surely the biggest global banks and asset managers have gamed out how they will keep markets going in the event of a US default, but is there some smaller firm whose computers will say “Treasury price = $0” and cause chaos? Maybe!
• 3) If you work in some corner of financial plumbing that you think won’t work in the event of a default, please do let me know! Send me an email. Also, though, fix it? You still have a little bit of time, and you’ve had plenty of warning.
• 4) Wouldn’t it be so tiresome to work in financial plumbing at some big bank and have to go to all the meetings about this stuff? To have to build all the systems to deal with a US government default, just because the US government can never get its act together to get rid of the debt ceiling, and because debt-ceiling negotiations always have to go to the last second? Like imagine pulling the all-nighters at JPMorgan to prepare for this, scrambling to save the US government from the consequences of its own incompetence and malice, and meanwhile the Securities and Exchange Commission is fining because sometimes you text your colleagues about work. Just pay your debts, come on.
Not really! And yet Theory 2 has some truth to it, just not so much for regional banks:The recent spate of bank failures is upending a long-held theory among banking executives and regulators—that the value of a lender’s deposit business goes up when interest rates move higher.
The theory rests on an assumption: That banks don’t have to pay depositors much to keep their money around, even as rates rise. The deposits would be a stable source of low-cost funding while the bank earned more money lending at higher rates.
The more rates rose, the bigger the franchise value of those deposits would become—a natural hedge against the declining market values of a portfolio of fixed-rate loans and bonds.
But if rising rates or plunging asset values cause a bank’s depositors to flee en masse, the franchise value is zero—and, worse, it could beget other bank runs. That is what happened with Silicon Valley Bank. …
The Federal Reserve, which both regulates banks and sets interest-rate policy, in a November report pointed to large unrealized losses on banks’ bondholdings due to rising rates. Things weren’t so bad, the Fed said, because “the value of banks’ deposit franchise increases and provides a buffer against these unrealized losses.”
See, that’s a deposit franchise. Having a valuable deposit franchise means that you don’t have to chase every dollar of deposits, because they don’t go anywhere.JPMorgan Chase lifted its outlook for how much it expects to earn this year from its lending business following the recent purchase of First Republic, bucking a broader trend among US banks of shrinking profits owing to deposit withdrawals.
In a presentation for its investor day on Monday, JPMorgan lifted its 2023 target for net interest income (NII), excluding its trading division, to about $84bn from $81bn previously, because of its deal for First Republic. NII is the difference between what banks pay on deposits and what they earn from loans and other assets. …
Large lenders such as JPMorgan have benefited from the US Federal Reserve lifting interest rates last year, which enabled them to charge borrowers more for loans without passing on significantly higher rates to savers.
The bank said its deposits, which totalled $2.3tn at the end of March, were “down slightly” year on year. Chief financial officer Jeremy Barnum said the expectation was that system-wide deposits at US banks would continue to decline as the Fed tightened monetary policy and customers chased better yields on their cash.
“We will fight to keep primary banking relationships but we are not going to chase every dollar of deposit balances,” Barnum added.
JPMorgan is paying 1.21 per cent on average to depositors, lower than the 1.75 per cent average of its peers, according to data from industry tracker BankReg.
© 2015 Mutual Fund Observer. All rights reserved.
© 2015 Mutual Fund Observer. All rights reserved. Powered by Vanilla
