almost 3 years ago • 3 mins
Every action has an equal and opposite reaction, and this one’s a doozy: investment bank Credit Suisse revealed a $4.7 billion loss following the collapse of Archegos Capital Management.
What does this mean?
If the name “Archegos” rings a bell, it’s because the investment firm hit the headlines last week after dumping its holdings to cover losses from a few ill-advised bets. And since the company had been paying for them by borrowing heavily from the world’s banks, those same banks could now be facing $10 billion worth of losses – almost half of which has fallen on Credit Suisse’s shoulders.
That’s expected to push the firm to a $1 billion loss last quarter, and could help explain why it’s trying to preserve its cash by cutting its dividend and freezing share buybacks. And considering this is the second time in the last few months that the bank’s short-sighted lending has led to big losses, the firm announced it’s replacing the heads of its risk and investment banking departments too. Go figure.
Why should I care?
For markets: Watch for banks’ earnings later this month.
Credit Suisse won’t be the only bank with an Archegos-shaped stain on its balance sheet, but at least the sector’s had an otherwise strong quarter. Banks’ trading departments have benefited big from market volatility and record trading volumes, while their investment banking businesses have done brisk business from a record number of mergers and acquisitions. Exactly how brisk will become clearer when they report earnings later this month…
The bigger picture: Interest rates take with one hand, give with the other.
Investors might’ve been spooked by rising long-term bond yields last quarter, but banks were much more upbeat about them. See, short-term bond yields stayed relatively flat, and since banks borrow money at short-term rates and lend money at long-term rates, a wider gap between the two means banks were able to pocket more profit.
Keep reading for our next story...
European regulators agreed on Tuesday to let the French government give Air France-KLM almost $5 billion in aid – just what it needs to stay calm in a crisis.
What does this mean?
Air France-KLM almost seems bound to run out of money eventually: the airline’s been burning through almost $12 million every day, and international travel isn’t exactly taking off. But thanks to a second rescue package courtesy of the French government, it’s kept the wolf from the door for a while longer.
The bailout does come with some caveats, mind you – namely that Air France-KLM can’t go spending the cash on bonuses, dividends, or share buybacks until the money’s repaid. The French government has its own rules to stick to, agreeing with European legislators that it would cut its stake in the airline – as much as 30% – back to pre-pandemic levels by 2027.
Why should I care?
Zooming in: Low-cost airlines have better odds.
There’s another trade-off Air France-KLM will need to make: the airline has to sell 4% of its Paris-Orly airport time slots to airlines whose aircraft are based there, which doesn’t include many low-cost carriers. They might not be happy about that, but it’s not like they have much competition from the big carriers right now: not only do budget airlines have lower operating costs, they also specialize in leisure travel – a market that’s recovering faster than the business market.
Zooming out: US travel is on the up again.
Rising coronavirus infections might be ruining European travel, but new analysis found that US travel demand had risen to half 2019’s levels by mid-March – the highest since the pandemic began. It even suggested that US domestic air travel will have recovered fully by early next year, with business and international travel to follow in 2023. That’s a lot quicker than expected, and suggests stimulus checks and vaccine rollouts might already be paying off.
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