At Milken conference, Wells Fargo's Scharf says regulators acted correctly on banks

Wells Fargo's Scharf says regulators acted correctly on banks

May 2, 2023 5:15 PM

The Milken Institute Global Conference entered its second day in Beverly Hills, California, bringing together an eclectic mix of attendees, from dealmakers to celebrities. Tuesday's roster of speakers includes Wells Fargo Chief Executive Officer Charlie Scharf and Anne Walsh, chief investment officer for fixed income at Guggenheim Partners Investment Management.

—With assistance from Richard Annerquaye Abbey, Taryana Odayar, Dawn Lim, Erin Fuchs, Dayana Mustak, Michael B. Marois, Olivia Raimonde, Sydney Maki, Allan Lopez, John Sage, Natalie Harrison, Paige Smith and Daniel Taub.

Scharf says regulators acted correctly on banks

Wells Fargo Chief Executive Officer Charlie Scharf said US banks such as his shouldn't be required to "unconditionally" cover the failures of other financial institutions.

Regulators functioned as they were supposed to as three banks — Silicon Valley Bank, Signature Bank and, most recently, First Republic Bank — failed over the past two months, Scharf said Tuesday during a panel discussion at the conference. The Federal Deposit Insurance Corp. stepped in when required, he said.

Scharf's remarks come a day after JPMorgan Chase agreed to acquire First Republic in a government-led deal for the failed lender, putting to rest one of the biggest troubled banks remaining after turmoil engulfed the industry in March. Wells Fargo was one 11 banks that had tried to keep First Republic afloat by pledging $30 billion of fresh deposits on March 16, with Scharf's company kicking in $5 billion.

The majority of banks that Wells Fargo is monitoring at the moment are "strong," Scharf said.

Jefferies’s Roop says SVB reminded him of Bear Stearns

Fallout from the regional-banking crisis has continued to sully public markets and sentiment for transactions.

Silicon Valley Bank and First Republic Bank's demise is ultimately just "another checkmark in the uncertainty box," Candice Choh, partner at global law firm Gibson, Dunn and Crutcher, said in a panel at the conference about about mergers and acquisitions.

Jefferies' head of Americas M&A, Chris Roop, said "the Sunday of SVB felt very similar" to when Bear Stearns collapsed during the financial crisis. Roop spent his early career working in Bear Stearns' investment-banking group, his LinkedIn profile shows.

While deal activity has slowed from a record two years ago, panelist said the appetite is still there. Activity could emerge in the form of restructurings, they said.

Mark McMaster, global head of mergers and acquisitions at Lazard, said even companies with high multiples can still do deals that work. Market valuations are down but so are those of the potential targets, he said, so transactions can get done without leveraging up balance sheets.

Guggenheim’s Walsh sees rising credit risks

The default rate across speculative-grade credits could rise to 5%, Walsh at Guggenheim said.

"It is going to be pretty painful as downgrades increase," Walsh said at a panel discussion at the conference.

A significant amount of private debt will need to be refinanced over the next two years, Michael Patterson, a governing partner at HPS Investment Partners, said during the panel discussion.

Higher interest rates — which make loans more expensive — stand to increase financing and liquidity needs, especially in sectors such as technology, Patterson said.

KKR’s Pietrzak sees volatility through year-end

Daniel Pietrzak, partner and co-head of private credit funds at KKR, said the debt-ceiling impasse will cause short-term volatility.

"The debt ceiling will be the conversation short-term," Pietrzak said in a Bloomberg TV interview at the conference. "I suspect it will get solved, but it will create volatility the market doesn't like."

Pietrzak said volatility will continue through the end of the year, but it's a time when private credit managers can shine.

Speaking about regional-bank turmoil, it "will play out for several quarters if not several years," Pietrzak said. "I think the market needs to get comfortable on what returns they can generate going forward."

Vistria’s Anadu sees regional-bank risks

Margaret Anadu, senior partner at Vistria Capital, said regional banks are a major concern for the real estate market because they are so interconnected.

People think about capital coming into commercial real estate from the big banks, but more than 80% of the lending in the US is from banks with $250 billion in assets or less, Anadu said in a Bloomberg TV interview at the conference. "It's causing a lot of concern, and it should."

There's opportunity in focusing on low- and moderate-income Americans who plan to remain in their homes and not move from places like New York to Florida on a whim, she said.

Hunter Point's Goodman cites ‘Asymmetric’ bank risk

Hunter Point Capital co-founder and Executive Chairman Bennett Goodman said the regional banking crisis is probably not yet over as the banking system faces "asymmetric risk."

JPMorgan Chase, Bank of America and other major US banks have become "systemically too important to our economy and they cannot ever fail," Goodman, a co-founder of Blackstone's credit arm, said in a Bloomberg TV interview at the conference. Meanwhile, "the same cannot be said of some of the regional banks."

"We need to figure out how to level that playing field," Goodman said as regional banking stocks slid.