In addition to Ukraine, Burma, Syria, Ethiopia, Somalia, and various other areas in West Africa, there’s another conflict that appears to be heating up according to this piece in The National Interest by Brandon Patterson and Dino Bozonelos. This one has the added complication of being between two NATO members—Turkey and Greece:

Turkish president Recep Tayyip Erdoğan has threatened an invasion of its neighbor and NATO partner Greece. The disputes between the two countries are numerous but lately have settled on the “militarization” of Greek Islands near the Turkish Aegean coast. Turkey claims that the military buildups in the islands are in reaction to Greek violations of the 1923 Treaty of Lausanne. Article 13 of the 100-year-old treaty states that “No naval base and no fortification will be established in the said islands.” However, the same Article 13 also states that “Turkish aircraft will forbid their military aircraft to fly over the said islands” and that “The Greek military forces in the said island will be limited to the normal contingent called up for military services.”

Greece’s counterclaim is that Turkey has repeatedly violated its historical treaty obligations through continuous military flyovers and a consistent naval presence in the region. Greece has said that this threatens not only the territorial sovereignty of the islands but also the economic sovereignty of Greece’s continental shelf. While this source of friction brought the neighbors close to war in the 1970s, the two countries largely agreed to try to develop a framework for drilling rights and natural resource extraction in the eastern Aegean.

Perhaps the better way of looking at this matter than as a new conflict is as a conflict that has been going on for the last millennium with periodic détentes. Turkey has been a NATO member in name only since the Kemalists lost power. Indeed, I think that the NATO member was a regime rather than a country. Since there’s no formal way of expelling a member of NATO, we have the specter of an armed conflict between NATO members. That would certainly place additional strain on the alliance.

At Evergreen Gavekal Michael Johnston provides some insights into the operations of Silicon Valley Bank worth reflecting on:

Taking a step back, SVB carved out a distinct and riskier niche that catered to early-stage technology and science/healthcare companies. Venture Capital (VC) firms and their portfolio companies often turned to SVB for venture debt due to its attractive debt packages that were much cheaper than those offered by nonbank lenders. SVB was also more willing to lend to higher-risk growth companies that many traditional banking institutions would only lend to at a premium or avoided altogether.

While SVB’s lending business is attempting to stage a comeback under FDIC-controlled Silicon Valley Bridge Bank, it’s unclear whether the bank with find a buyer for its loan book. It’s also likely that traditional bank lenders will take a more conservative approach that limits venture debt exposure while the dust settles.

This uncertainty opens the door for nonbank lenders and PE firms to fill a huge void in the venture debt market. Given that capital is the lifeblood for growth companies, and many of these companies are facing a triple whammy that includes (1) depressed valuations, (2) a more challenging fundraising environment, and (3) tech’s most popular banking partner on life support, founders may be more willing to accept higher borrowing costs offered by private credit lenders. This is bullish for nonbank lenders and PE firms that were previously boxed out of venture debt opportunities by Silicon Valley Bank.

Additionally, companies will naturally gravitate to private lending companies given the heightened solvency concerns with banks and bank liabilities. Unlike banks, private credit vehicles do not have a deposit base that can just leave. This should create less competition and increase returns for private credit – whether that’s through higher cash flow, more points up front, or larger equity kickers/warrants.

I for one think that commercial banks should be prohibited from engaging in investment banking, especially as long as the federal government is underwriting all deposits in them.

There’s new evidence that the raccoon dog might be the source from which the COVID-19 virus originated. Benjamin Mueller reports at Yahoo News:

An international team of virus experts said Thursday that they had found genetic data from a market in Wuhan, China, linking the coronavirus with raccoon dogs for sale there, adding evidence to the case that the worst pandemic in a century could have been ignited by an infected animal that was being dealt through the illegal wildlife trade.

The genetic data was drawn from swabs taken from in and around the Huanan Seafood Wholesale Market starting in January 2020, shortly after Chinese authorities had shut down the market because of suspicions that it was linked to the outbreak of a new virus. By then, the animals had been cleared out, but researchers swabbed walls, floors, metal cages and carts often used for transporting animal cages.

In samples that came back positive for the coronavirus, the international research team found genetic material belonging to animals, including large amounts that were a match for the raccoon dog, three scientists involved in the analysis said.

The jumbling together of genetic material from the virus and the animal does not prove that a raccoon dog itself was infected. And even if a raccoon dog had been infected, it would not be clear that the animal had spread the virus to people. Another animal could have passed the virus to people, or someone infected with the virus could have spread the virus to a raccoon dog.

But the analysis did establish that raccoon dogs — fluffy animals that are related to foxes and are known to be able to transmit the coronavirus — deposited genetic signatures in the same place where genetic material from the virus was left, the three scientists said. That evidence, they said, was consistent with a scenario in which the virus had spilled into humans from a wild animal.

A report with the full details of the international research team’s findings has not yet been published. Their analysis was first reported by The Atlantic.

We still don’t know. It could be a “chicken or the egg” situation in which humans spread the disease to raccoon dogs. Or vice versa. Or something else entirely. It does bolster the case for those who are promoting a zoonotic origin for the virus.

At Reuters Bart H. Meijer and Stephanie van den Berg report that the judges of the International Criminal Court have issued a warrant for the arrest of Russian President Vladimir Putin:

AMSTERDAM, March 17 (Reuters) – The International Criminal Court (ICC) issued an arrest warrant on Friday against Russian President Vladimir Putin, accusing him of being responsible for the war crime of illegal deportation of children from Ukraine.

Moscow has repeatedly denied accusations that its forces have committed atrocities during its one-year invasion of its neighbour and the Kremlin branded the court decision as “null and void” with respect to Russia.

Neither Russia not Ukraine are members of the ICC, but Kyiv granted it jurisdiction to prosecute crimes committed on its territory.

The tribunal, with 123 member states, has no police force of its own and relies on member countries to detain and transfer suspects to The Hague for trial.

While it is unlikely that Putin will end up in court any time soon, the warrant means that he could be arrested and sent to The Hague if travelling to any ICC member states.

When the actual text of the warrant becomes available I will post a link.

It will be interesting to see if this warrant has any effect especially in consideration of it coming on the eve of Chinese President Xi’s visit to Moscow.

I wanted to comment Jeffrey Snider’s observations at RealClearMarkets to your attention. It’s accurate as usual and somewhat less opaque than usual. Here’s the kernel:

The latest instance of this modern version of a bank run, the one which took down Silicon Valley Bank and Signature is largely of the same “substance.” Virtual cash was drained from both for various reasons, but it did not disappear into public hands. Rather, it migrated to others in the system as more book entries.

Therefore, the failures of SVB and Signature are uninteresting and pretty much irrelevant. The more important question is the same one about arbitrage; how there wasn’t any to help either of them. What must be inhibiting wholesale redistribution from those who have benefited from this migration, and was it specific to these two banks?

While we have no way of knowing for sure, it’s not as if we don’t have useful clues. Money market prices such as eurodollar futures give us a systemic sense of arbitrage potential, more so the risks dealers might be perceiving when considering them. And it is here where trading over the past week has been both illuminating and frightening.

Single-day moves in eurodollar futures contracts were historic. The price for the September 2023, for example, gained nearly 45 bps last Friday, March 10, in the wake of SVB’s seizure. That was almost the same as the March 2009 contract had been moved on September 15, 2008, the day Lehman Brothers’ insolvency was made public.

But then on Monday, March 13, a buying panic in these hedging instruments became so intense, the same September 2023 added an unthinkable 101 bps! In a single day, more than double Lehman. After a relatively small reverse on Tuesday, massive buying stuck again on Wednesday with the contract rising another 35 bps.

What do these moves tell us about perceptions of systemic risk? Bill Dudley, then the Federal Reserve System’s Open Market Manager, spilled the secret on August 7, 2007:

“MR. DUDLEY. That said, the Eurodollar market is a very deep market, and if one thought that the Fed was not going to do what the market priced in, there certainly would be the ability of people to take the other side of the bet…In the short run, that kind of thing certainly goes on. If I can’t sell the bad asset that I hold, then I will buy something that will perform well if the bad asset deteriorates.”

He goes on to say that whatever we want to call what’s happening is far from over. That’s what the markets are telling us.

I want to make one additional point. If the Biden Administration really, truly wants to underwrite the uninsured deposits of Silicon Valley Bank, there should be a special tax levy (call it a fee) placed on banks for doing so. Anything else is horrifically regressive. Allow me to explain.

If any governmental entity or the Federal Reserve, a public-private hybrid, underwrites SVB’s depositors by issuing credit (“printing money”), it will increase inflation. That will fall most heavily on the poorest people. We’ll be taxing the poor to pay the rich. Robin Hood in reverse.

And that doesn’t even get into the insanity of underwriting the uninsured deposits of foreign companies. I honestly have no idea why we’re doing that.

I wanted to call Vivek Ramaswamy’s Newsweek op-ed to your attention. After making some of the observations I’ve made here he continues:

Silicon Valley’s dirty little secret? Venture investors could easily infuse fresh equity capital to make up for any balance-sheet losses. Yes, that involves painful equity dilution for founders and VCs, which means the CEOs and other VCs don’t make as much money when the company becomes wildly successful. And yes, capitalism includes accountability for poor financial decisions. But that’s how these losses should be recuperated, not at the taxpayer’s expense.

Moreover, many of those founders and venture-backed companies even received private benefits—such as non-dilutive venture debt—from Silicon Valley Bank itself, as an implicit condition for depositing their money with SVB. Ordinary Americans would have never enjoyed the upside of those special arrangements.

But facts be damned: Their gambit worked.

Behold this pure display of cronyism. The tech companies that petitioned President Biden to protect their assets are now changing the rules after the fact to help a select few who are favored by political actors.

It’s wildly unfair. But it’s worse than that, too: By selectively changing the rules after the fact for SVB, the U.S. government is now incentivizing greater risk-taking by corporations in the future, teaching large depositors at smaller banks that they can simply throw money at risky banks without diversifying or conducting diligence, just like many tech startups did here.

My key point is that I think that the public good, bank management, shareholder scrutiny, and depositor scrutiny should all be aligned. Right now they aren’t. I also think that laws should be enforced without carveouts, exceptions, or special cases. Such things inevitably repeat inevitably become political footballs.

An interesting discussion continues in comments in my posts about Silicon Valley Bank, see here and here. In my ongoing research I’ve found some food for thought. This article by Peter Santilli in the Wall Street Journal reports the size of some deposits in the bank:

You don’t get a lot of those to the pound.

And here are some interesting observations by Laura He from CNNBusines:

Hong Kong
CNN—The collapse of Silicon Valley Bank (SVB), which courted Chinese start-ups, has caused widespread concern in China, where a string of founders and companies rushed to appease investors by saying their exposure was insignificant or nonexistent.

What are we talking about?

BeiGene, one of China’s largest cancer-focused drug companies, said Monday it had more than $175 million uninsured cash deposits at SVB, which represents approximately 3.9% of its cash, cash equivalents and short-term investments.

“The company does not expect the recent developments with SVB to significantly impact its operations,” it said.

Zai Lab, a pharmaceutical firm, announced that its cash deposits at SVB were “immaterial” at about $23 million.

The closure of SVB “will not have an impact” on the company’s ability to meet its operating expenses and capital expenditure requirements, including payroll, it said.

Other companies that publicly assured investors included Andon Health, Sirnaomics, Everest Medicines, Broncus Medical, Jacobio Pharmaceuticals, Brii Biosciences, CStone Pharmaceuticals, Genor Biopharma and CANbridge Pharmaceuticals.

Mobile ad tech firm Mobvista and wealth management firm Noah Holdings said their cash holdings at SVB were “minimal” or “immaterial.”

So here’s my question. Should the federal government underwrite the uninsured deposits of foreign companies, particularly when the companies themselves are declaring those deposits “immaterial” or unlikely to “significantly impact” their operations and why? I also wonder how many of these companies are state-owned or de facto state-owned.

Note that these are uninsured deposits which means that the deposits aren’t covered by the FDIC and the FDIC service charges haven’t applied to them.

Update

My reading of the statutes empowering the Federal Deposit Insurance Corporation suggest that the FDIC is specifically prohibited from covering deposits above the $250,000 limit in the absence of an act of Congress. Perhaps someone better informed than I can comment on this.

Tyler Nottberg’s Washington Post op-ed on the recent decision by the 4th Circuit Court of Appeals that ruled that “gruyere” was a generic term for a type of cheese pushed a number of buttons on things interesting to me. Among them are cheese, Americans making bad assumptions, Europeans making bad assumptions, and our system of common law. Here’s his main complaint:

The judges affirmed a district court ruling that the “gruyere” label cannot be trademarked. Americans have voted with our wallets in favor of generic cheese by purchasing more ersatz domestic “gruyere” than we buy of the authentic Swiss stuff.

Having experienced the region, the people and the product in its native setting, Brooks and I believe the 4th Circuit has used runny logic. This is a loss of something important — perhaps not as bad as Velveeta claiming to be cheese; more like a cover band claiming to be the Rolling Stones. Perhaps I feel so strongly because I lead a business that has been in my family for more than 125 years. A brand to me is more than a word or logo on shrink-wrap; it is the passion, sweat and culture of people who give their best to burnish it from generation to generation. Those who seek the real Gruyère will find it not by its label but by the love on that Swiss mountainside. It’s worth the trip.

Why is cheese interesting to me? First of all, I like cheese. My mom once observed that members of our family could probably live happily on a diet consisting only of bread, cheese, and apples. I think we come by it honestly. My Swiss ancestors were milk brokers and had been for, probably, most of the last millennium. What do milk brokers do with the milk they don’t sell? I suspect they use it to make cheese.

What bad assumption is Mr. Nottberg, an American, making? Like most Americans he is apparently unaware that there is no robust international system of civil law. European laws mean next to nothing in the United States. What bad assumptions are the Europeans making? They didn’t adopt their “protected designation of origin” regime until 1992. If they think that at that late date that Americans will change every name of every thing that uses a place name to conform to their new laws, they don’t know us very well.

What things have place names?

Cheddar cheese
Stilton
Swiss cheese
Gruyere
Camembert
Brie
Champagne
Port
Parmesan
Asiago
Hamburgers
Frankfurters

That’s just off the top of my head and that’s just a bare beginning. I could probably come up with hundreds more.

What relevance does all of that have to our system of common law? Under the common law you can’t copyright terms that are in common usage. That makes sense. Otherwise you’d have people trying to copyright everything forever. By and large European countries have a civil code system of law. A law could be enacted allowing a company to copyright “fire” or “wheel” and the courts would happily enforce it.