Are things looking up? Has The System stabilised?

What of threats from another bank run? And from debtors like GE & the Issa brothers?

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The System has survived the shock of five bank failures. The economy apparently, is looking up. The BBC’s business editor, Simon Jack reports that

Confidence among finance chiefs at the UK's biggest companies has seen its sharpest rise since 2020. The Deloitte survey of chief financial officers showed sentiment rebounded as their concerns about energy prices and Brexit problems eased. (Emphasis added)

But the global system is still far from stable. Holdco Asset Management (HAM), the outfit that issued an early warning about unrealized losses at Silicon Valley Bank, has issued a new, worrying report about US Bankcorp - in which, it must be noted, HAM holds a short position.

The fifth largest bank in the country (by deposits) – U.S. Bancorp, an undeniably systemically important bank that carries a national deposit footprint spanning a majority of states – has been allowed by the Federal Reserve to hold shockingly low amounts of capital relative to assets

And the FT reported yesterday (17 April) that

So ….bank runs may not be over.

Closer to home, here in the UK, a story in the FT alerts readers to the threat posed by private equity and other corporate debtors to The System - but also to innocent bystanders.

It is a story of easy money, vast debts and usurious rates of interest. It is important, given signs that central bankers, apparently indifferent to the global debt overhang, are hell-bent on raising rates even higher at their next meetings. According to Forbes on 12th April - markets expect

the Federal Reserve to hike rates 0.25-percentage-points at their upcoming May 3 interest rate decision. There’s a 7 in 10 chance of a hike according to fixed income futures, with a 3 in 10 chance of holding rates steady.

Should higher rates set by big, foreign central bankers - institutions that appear to operate in the stratosphere - matter to innocent low-income bystanders in say, Leeds, UK? Those that anti-poverty campaigner, Jack Monroe argues are just about managing a cost-of-living crisis?

I would argue yes, they should worry. Here’s why: low-income shoppers at the British supermarket may soon be called upon to help their owners - two jet-setting billionaire brothers and a private equity firm - pay down their vast debts. These are now ballooning, burdened by high rates of interest.

Thanks to an investigation by Robert Smith and Kaye Wiggins at the Financial Times, we learn that two brothers, Mohsin and Zuber Issa, working with a PE firm, TDR Capital, paid just £200 million in 2021 for Asda - which at the time was valued at a whopping £6.8 billion. The brothers paid £100 million in cash, as did TDR Capital. Within a year of the Asda buyout, TDR had already made almost 20 times its investment on paper, the FT explains.

The massive purchase of the supermarket chain was made through a complex series of financial manoeuvres, which included

£3.7bn of junk-rated debt to help pay for the Issas and TDR to buy Asda.

In addition a company named EG Group made an unsecured loan of half a billion pounds to help finance the purchase.

The Issa brothers and TDR just happen to own EG Group.

The interest EG charged Asda’s customers, workers and shareholders on that loan of £500 million was a usurious 12 per cent. At the time, January, 2021, Bank rate was 0.1 per cent. Earlier the two brothers had arranged an interest free loan from EG to buy two private jets.

The story does not have a happy ending. According to the FT

…the unsecured loan [to Asda] has landed EG, which already had €8billion of debt, much of that due for refinancing in 2025, with new financial burdens.

One option now being considered is to sell heavily-indebted EG to Asda. In other words, the two brothers and TDR would be in effect sell a heavily indebted company they own - EG - to another company they own, Asda - i.e. to themselves, as the FT explains. The consequence is that Asda’s shoppers, workers and shareholders would take on EG’s €8bn debts, just as interest rates are set to rise higher.

This story is about a mere €8 billion of debt - a drop in the ocean of “record global debt of $235 trillion” according to the IMF. That debt amounts to nearly 250% of global income - defined as GDP.

If higher rates are causing “new financial burdens” for a company with just €8bn of debt - imagine what impact higher rates will have on that $235 trillion global debt overhang.

If central bankers are to follow through on expectations and tighten monetary policy by hiking rates, then The System will surely face more runs on banks, more shocks, defaults and failures.

In other words, paralysis.

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