Yellen calls FSOC back to order; Boston Fed, MIT working on digital dollar

Editor's note: Morning Scan will not publish Friday, April 2. It will return on Monday.

Receiving Wide Coverage ...

Archegos fallout

Moody’s and Fitch “downgraded their outlooks for Nomura and Credit Suisse, citing concerns over risk management as the banks confront multibillion dollar losses from the Archegos Capital Management debacle. Nomura and Credit Suisse were among banks that allowed Archegos, a New York-based family office run by former hedge fund manager Bill Hwang, to amass billions of dollars of exposure to equities through swap contracts. The trades imploded last week, leaving the banks scrambling to sell shares.”

Internal probes

Separately, at least two of the banks “that collectively had more than $50 billion of exposure to Archegos Capital are conducting internal inquiries over whether Bill Hwang concealed his other positions from them. The banks are investigating whether Hwang deliberately misled them or withheld vital information about mirror positions he had built up at rival banks.”

“Nomura, Japan’s largest investment bank, said its losses could hit $2 billion, while sources close to Credit Suisse said the Swiss bank could lose up to $4 billion. Mitsubishi UFJ Financial Group has announced it will book a $270 million loss on the trades, while another three banks — Goldman Sachs, Morgan Stanley and UBS — have indicated their losses will be minimal.”

The New York Times said that as “banks tally up their losses and shareholders smart over the hit to their portfolios, the tactics that Archegos employed will draw the eye of regulators and renew calls for further regulation of swaps and similar financial products, called derivatives.” The firm’s “use of swaps helped conceal its exposure to huge blocks of shares but showed once again how lightly regulated derivatives can shake the financial system.”

Wall Street Journal

Risky business

Treasury Secretary Janet Yellen “led her first meeting Wednesday as the head of the Financial Stability Oversight Council, homing in on risks that emerged during the market turmoil of a year ago when the coronavirus pandemic hit the U.S. economy. Ms. Yellen focusing on a variety of issues, including money-market mutual funds’ and hedge funds’ activities and their roles in the market turbulence last year.”

“The meeting’s agenda included a public discussion on climate change, an issue Ms. Yellen said poses an ‘existential threat to the environment and a tremendous risk to our country’s financial stability.’ The council also deliberated behind closed-doors on money funds and hedge-fund activities, to allow for private discussion of sensitive market information.”

The meeting “sets the stage for a potential recalibration of the body in the Biden administration,” American Banker reports.

Rethinking the dollar

Researchers at the Federal Reserve Bank of Boston and Massachusetts Institute of Technology are expected to reveal this fall “the first glimpse of research that could eventually lead to a Fed digital dollar. The effort is also a rethink of what a dollar can be.”

“This first stage of the research lays the initial groundwork for a new type of money some have dubbed Fedcoin. As part of this initial effort, the early version of the computer code for a potential digital currency will be made available for public examination. After that, the project will continue to explore different systems, with software built from the ground up for the purpose, that could deliver a digital dollar. The aim is to see what options are available and then present them to policy makers.”

Elsewhere

Bullish on bitcoin

Goldman Sachs “plans to offer investments in bitcoin and other digital assets to its wealth management clients in the second quarter, the latest top-tier company to move into the cryptocurrency space,” Reuters reported. “The move by Goldman comes days after a report that rival Morgan Stanley had started offering clients investments to the emerging asset class.”

“CNBC reported that Goldman would ultimately offer investments in bitcoin and digital assets that would include the physical bitcoin, derivatives or traditional investment vehicles. Goldman [recently] restarted its cryptocurrency trading desk and was also exploring possibilities for a bitcoin exchange-traded fund.”

Quotable

“We are digging out of a deep hole now, but we should be mindful that the hole could easily have been even deeper. The fact that extreme policy interventions were still required to support market functioning should serve as a clear reminder: We have to do more to address vulnerabilities in the financial system.” — Treasury Secretary Janet Yellen, chairing her first meeting of the Financial Stability Oversight Council.