On sale.Credit…Brendan Mcdermid/Reuters
How Wall Street’s biggest banks sidestepped the crypto meltdown
As Bitcoin prices have plunged and cryptocurrency start-ups have failed, Wall Street’s biggest banks and their wealthiest clients have barely taken a hit. Some have even managed to turn a profit on the collapse. In the great cryptocurrency blood bath of 2022, writes The Times’s Emily Flitter, Wall Street is winning.
Unlike in the 2008 crisis, the fortunes of Wall Street and Main Street have diverged. Plunging digital asset prices have left some retail investors with large losses. Lured by the promise of quick returns and astronomical wealth, many individuals bought new digital currencies or stakes in funds that held these assets. That’s not the case for most banks, which generally don’t own crypto or run funds that invest in it. Nor have they lent much into the emerging market for new money. That’s not to say the big banks are without problems: Rising interest rates and falling stock prices have limited the number of companies that want to do deals, leaving bankers idle. But when it comes to crypto, few see a risk of contagion — the chance of losses from digital money markets undermining the banks.
Wall Street banks did want to get into crypto, but international regulators wouldn’t let them. Last year, the Basel Committee on Banking Supervision, which helps set capital requirements for big banks around the world, proposed giving Bitcoin and other cryptocurrencies the highest possible risk weighting. If banks wanted to put those assets on their balance sheets, they had to offset the risk with at least the equivalent value in cash.
U.S. regulators also warned banks off. That prevented Wall Street from participating in the bubble the ways it did in previous ones — by making loans so people could buy more houses or stocks, or by making it easier to buy and sell the rising asset.
But the suffering of some individuals who bought crypto is still raising questions for regulators. Jacob Willette, a 40-year-old delivery driver in Mesa, Ariz., stored his entire life savings in an account with the crypto lender Celsius that promised high returns. When crypto prices started to slide, Willette looked for reassurance from Celsius executives that his money was safe, but got none, as the company froze more than $8 billion in deposits. “I just don’t see how what they did is not illegal,” Willette said.
Black American investors have been hit especially hard because of higher exposure to digital assets, The Financial Times reports. A survey by Ariel Investments and Charles Schwab found that a quarter of Black investors owned crypto investments at the start of the year, compared with 15 percent of white investors.
HERE’S WHAT’S HAPPENING
Police detain a “person of interest” after a deadly shooting at a Fourth of July parade. Gunshots rained down from a rooftop onto the parade in Highland Park, Ill., killing six and injuring dozens. Celebrations were called off across the region amid fears of more violence.
Airlines cancel more than 1,400 U.S. flights during the holiday weekend. The airlines struggled to keep up with more than seven million weekend travelers in the U.S. Adding to the problems was a glitch in American Airlines’ scheduling system that allowed pilots to drop flights. Southwest, American Airlines and United canceled more than a fifth of their flights on Saturday.
Germany posts its first monthly trade deficit in 30 years. Exports have suffered as German companies raise prices to cope with a steep rise in energy costs, caused by Russia’s moves to restrict natural gas deliveries, and interrupted supply chains.It’s the latest sign that Europe’s largest economy is stressed.
The Biden administration is reportedly considering cutting premiums for federal housing loans. Industry officials are asking the Federal Housing Administration for cuts that would save borrowers $50 to $70 a month, according to The Wall Street Journal. The move comes as home prices are at record levels, and inflation is exacerbating homelessness.
Nuclear power gets a new push in the U.S. With challenges in meeting clean energy goals and new electricity demands, politicians in both parties are seeking to extend the lives of nuclear reactors and build new ones. But critics of the nuclear industry say waste disposal remains a challenge and fixes for aging facilities are expensive.
A twist in the Archegos saga
A former employee of Archegos, the investment firm that caused a brief market panic when it lost more than $10 billion in a matter of days last year, is suing the firm and its founder, Bill Hwang, plus five former top executives for $550 million. DealBook is the first to report the lawsuit, which was filed today in federal court in Manhattan.
The case against Archegos: Brendan Sullivan, a tech stock analyst who joined the firm in 2014 and resigned shortly after it blew up, said he lost $50 million, which was part of a $500 million deferred employee compensation plan that evaporated along with Archegos’s other assets when its highly leveraged options strategy failed. The suit seeks to force Hwang and others to cover the employees’ losses. Hwang was charged with fraud by federal prosecutors this year on suspicion of misleading lenders and market manipulation, and has pleaded not guilty to the government suit; last week, lawyers for Archegos filed motions to dismiss other suits against the firm from the Commodity Futures Trading Commission and the S.E.C.
Fund employees were told that the deferred pay plan was guaranteed, the suit says, and that it was invested in highly liquid stocks. Neither claim was true, according to the suit. What’s more, it says, employees were forced to contribute at least 25 percent of their annual bonus to the plan, and declare how much they would defer before they knew the details of the bonus. “The message was crystal clear,” the suit argues. “No contribution. No bonus.”
“Hwang and these executives lied to their employees like they lied to the banks,” Sullivan’s lawyer, Michael Bowe of Brown Rudnick, told DealBook. DealBook contacted a lawyer forHwang and a spokesman for Archegos, neither of whom immediately responded with a comment.
The fund tried to dissuade employees from quitting, and cast doubts over deferred compensation payments if they did, the suit says. Sullivan, who left anyway, has not received any money from the plan, though as recently as January of this year the company continued to promise former employees they would do so, according to a letter seen by DealBook that Archegos sent to former employees.
Archegos was run like a “cult,” the suit says. Job interviews “revolved around religion and an investigation into the candidate’s religious upbringing,” according to the suit. During performance reviews, it says, Hwang, who is a Christian, told employees to “devote more time to their faith.” At company retreats, employees received praise for publicly declaring gratitude for “God, Hwang and Archegos,” according to the suit.
“Liberals or even most moderates never listen to it, they don’t pay attention to it, they don’t see it, they don’t hear it. So you don’t know it exists, you don’t know how widespread and how powerful it really is.”
— Lewis A. Friedland, a professor who studies radio at the University of Wisconsin-Madison, on how heavily conservative radio is promoting claims of election fraud, fueling mistrust about the results of the coming midterms.
Corporate profit outlook remains recession-free
If a recession is on the way, someone forgot to tell stock market analysts. Wall Street analysts, a normally optimistic bunch, appear far more upbeat than investors as a whole.
Companies start reporting their second-quarter results next week. At least for now, analysts aren’t even expecting the start of an earnings recession, which is when corporate profits fall for at least two consecutive quarters, according to a recent report from FactSet Research. Analysts expect companies in the S&P 500 to report profits in the second quarter that are 4 percent higher on average than during the same period a year ago. For all of 2022, analysts believe average bottom lines at S&P 500 companies will rise just over 10 percent.
Analysts lowered their earnings expectations during the quarter, but only slightly. Economists, on the other hand, have been racing to lower their expectations in the past few months. Last week, JPMorgan Chase’s top economists more than halved their estimate for U.S. G.D.P. growth in the second quarter, to just 1 percent, down from 2.5 percent. Combine that with labor shortages and inflation both driving up costs, and you would expect analysts to be a lot more pessimistic. For now, most of them appear to believe that companies will be able to absorb higher costs by raising prices. At some point, though, those expectations for continued double-digit earnings growth, at least for the year, could set investors up for disappointment.
Amazon and Target have seen their expected earnings growth drop the most. In May, Target reported that many of the items on its shelves were not selling as quickly as expected. In general, retailers have seen the biggest drop in expectations of any sector. Profits for so-called consumer discretionary stocks are expected to fall by slightly more than 9 percent during the quarter. Consumers closing their wallets is not a good sign for the economy. But does it mean we are headed into a recession? At least for now, Wall Street analysts are still saying no.
THE SPEED READ
IBT Media is asking a New York court to cancel its spinoff of Newsweek magazine. (Newsweek)
The Middle East’s I.P.O. market is booming, and Wall Street wants in. (Bloomberg)
Banks, forced to swallow losses on risky loans, may pull back funding for leveraged buyouts. (WSJ)
The euro has fallen to a 20-year low against the U.S. dollar. (Bloomberg)
Biden may reportedly soon roll back tariffs on Chinese imports, including consumer goods. (WSJ)
The European Central Bank will adjust its corporate bond portfolio to reflect climate risk. (Bloomberg)
Best of the rest
A new law in California aims to counter the sleep deprivation epidemic. (Vox)
The C.E.O. of Kraken defended his crusade for “libertarian philosophical values” at the crypto exchange. (Protocol)
Crosby, Stills & Nash music is back on Spotify. The band had followed Neil Young’s lead in asking for it to be removed to protest against the Joe Rogan podcast. (Billboard)
A Chilean worker who was accidentally paid 300 times his normal salary took the money and ran. (Metro U.K.)
Previously unheard recordings offer a chilling insight into Adolf Eichmann, the Nazi official executed in Israel for his role in planning the Holocaust. (NYT)
We’d like your feedback! Please email thoughts and suggestions to [email protected].