Raphael Stevens

In a distant and forgotten era, around eight months ago, tremors were rippling through the global banking system. Three mid-sized American lenders collapsed in a week. In Europe the venerable Credit Suisse almost went under, before being bought by its rival, UBS. The scramble to merge them threw a cloud over an entire class of bank debt, $1trn of which has been issued over the past decade.AT1 bonds were supposed to make banks safer after the financial crisis of 2007-09. In good times, they work like normal bonds. But if the issuing bank’s capital falls far enough, some (dubbed contingent convertible notes, or “CoCos”) convert to equity. Some others are written off. AT1s are usually described as being senior to shares and junior to bonds in a liquidation. But when Credit Suisse fell apart, AT1 bondholders were wiped out before shareholders.The CoCo crowd howled, even as regulators insisted they were following the bonds’ contracts.  It looked as if the entire asset class might be done for, with investors everywhere poring over fine print to see how they would be treated in a similar scenario. AT1 yields rocketed.Yet today the market for AT1s is not just alive, but thriving. By November 20th the month was already the third-strongest for issuance over the past two years, according to Dealogic, a data provider. Mitsubishi UFJ sold $750m in dollar-denominated AT1s in October. This month both Barclays and Société Générale have issued their own. Even UBS recently sold $3.5bn in AT1s—under the same Swiss regulatory regime that annihilated those of Credit Suisse.An unkind columnist might wonder if all this is because investors have the recall capacity of goldfish. Amnesia is certainly tempting when such tasty returns are on offer. Euro-denominated AT1 bonds currently offer yields of around 9.6%, up from a nadir of 2.8% in late 2021. Feeling the warm glow, many seem keen to put their hands to the hot stove again.The more charitable view is that investors have decided the Swiss blow-up was idiosyncratic. Regulators elsewhere in the world rushed to insist that their banks’ AT1s would never be subordinated to shares. And the market seems to be functioning well despite its springtime panic. The vast majority of AT1s facing call dates—when banks can, but do not have to, redeem and repay the bond—have been repaid. That indicates good financial health, and an ability to issue more bonds. According to GAM Investments, an asset manager, 92% of AT1 bonds with a call date in 2023 have been redeemed, barely down from the long-run rate of 94%.The phoenix-like recovery of the AT1 market also says something about the state of financial markets more broadly. On both corporate bonds and stocks, the compensation on offer for exposure to losses is miserable. For American shares, the equity-risk premium—a measure of the excess expected return for buying risky stocks instead of “safe” government bonds—has slumped to its lowest level in decades. That does not mean that stocks will fail to beat bonds in the long run. But it does mean that the earnings that analysts currently expect offer paltry yields in return for risk.Something similar is true in the credit market. Corporate debt currently offers measly returns in exchange for the risk of default. In both the investment-grade and junk-rated markets, spreads—the extra yield investors receive above those of Treasury bonds—are below the average level over the past ten years. As recently as the beginning of 2022, American junk bonds offered marginally higher yields than dollar-denominated AT1 bonds. But today, at 10.1%, the yield on a dollar AT1 is 1.6 percentage points above the yield on the equivalent junk debt.Banks have sold $51.3bn-worth of AT1 bonds so far in 2023. If they issue another $3bn before the year is out, that will beat the total issuance figure for 2022, despite the seizure the market suffered in March. If the rewards for taking risk in other asset classes were less stingy, it is difficult to imagine that demand for AT1 bonds would have recovered so rapidly. It might not have recovered at all.The next year will be a pivotal one for the market. Around $30bn of AT1 bonds face their first call dates in 2024. But if surprisingly low corporate-bond spreads and an eye-wateringly expensive stockmarket persist, the instruments are likely to remain in demand among investors searching for returns. A sober assessment of how AT1 bonds would fare in another bank collapse may have to wait until the alternatives look a little less dispiriting. ■Read more from Buttonwood, our columnist on financial markets: Ray Dalio is a monster, suggests a new book. Is it fair? (Nov 16th)Forget the S&P 500. Pay attention to the S&P 493 (Nov 8th)What a third world war would mean for investors (Oct 30th)Also: How the Buttonwood column got its name More

Mission accomplished? Rich countries have at last met a promise to provide $100bn a year of climate finance to poorer ones, according to estimates for 2022 from the OECD, a club of mostly rich countries. That is two years late: the amount was originally pledged in 2009, when it was supposed to arrive by 2020. It is also not a sure thing. The OECD‘s figures are preliminary and may be revised.Still, the estimates may ease tensions between rich countries and poor ones ahead of COP28, this year’s UN climate summit in Dubai, which begins on November 30th. The missed pledge had become a symbol of rich-world hypocrisy: urging poor countries to forgo fossil fuels without providing the finance to help them achieve that, or to help them adapt to the warmer planet brought about by its own coal-and-oil-fuelled development. An indication, however tentative, that rich countries have at last met the goal is better than none.Developing countries will take a “trust but verify” approach, reckons Joe Thwaites of National Resources Defence Council, an environmental pressure group. The estimates are based on OECD projections published at the Glasgow climate summit in 2021. Since then, the spending data from multilateral development banks (MDBs) and governments have been at the top end of those forecasts. And so the OECD judges it likely that the $100bn pledge has been met. “I doubt they would say that without feeling really confident,” says Mr Thwaites.image: The EconomistEven so, any self-congratulation by rich countries will be poorly received. As well as being late, much of the money has come in the form of loans from MDBs that poor countries must pay back, and that will take priority in any debt restructuring. Poor countries will argue at this year’s COP that borrowing to fund climate investments will make their debt burdens less sustainable, as they already struggle with high food and energy prices and a strong dollar. At the Africa Climate Summit, where African nations hashed out a common position ahead of COP, they called for a “comprehensive and systemic response to the incipient debt crisis”, beyond the existing system of dealing with national defaults.Nor do the rich countries appear to have done well at “unlocking” private finance, which they have often promised to do. Estimates of the amount of external finance that countries in the global south will need to adapt to climate change tend to be in the trillions of dollars. Stretched finance ministries in the global north suggest that they will use scarce aid money to “crowd in” private finance rather than provide everything themselves. The OECD, however, found that the amount of private-sector funding mobilised by such wheezes amounted to just $14bn in 2021.Rich countries will hope to avoid fraught arguments over money in Dubai. A deal over climate pledges agreed by America and China last week has raised hopes of a breakthrough. A similar bargain between the world’s two largest polluters preceded the Paris climate agreement in 2015. Last year’s COP was dominated by negotiations over “loss and damage”, or funding to compensate poor countries for the impact of climate change rather than help them mitigate or adapt to it. The conference thus failed to produce any commitment to a more ambitious reduction of the pace of global warming. Ahead of this year’s COP, the EU has said it will make a “substantial” contribution to a loss and damage fund, while John Kerry, America’s climate negotiator, has said the country will pledge “millions”. That, along with rich countries having finally met their $100bn pledge, could take the heat out of arguments.Yet now rich countries must agree on a new pledge by 2025, since the framework they are currently following expires then. Technical discussions have so far been “rudderless”, says Michai Robertson of the Alliance of Small Island States, a group of countries that are vulnerable to climate change. There is no consensus on what should count as climate finance, the period for which the new target should run or who should contribute. Established in 1992, the group of donor nations excludes big emitters such as China and fossil-fuel producers such as Saudi Arabia and the UAE. Rich countries sometimes venture that these countries, too, should cough up.Disagreement also persists over the use to which any new money should be put. In 2021 rich countries pledged to double the amount of finance they provide for adapting to climate change, as opposed to for reducing emissions. Such adaptation is a priority for the poorest countries that emit little but are highly exposed to the risks of a warmer planet. Meanwhile rich countries, accountable to climate-conscious voters at home, are often more focused on getting middle-income countries to stop using coal. The headline announcement at last year’s conference was a deal for $20bn between a small group of rich countries and Indonesia to do exactly that. Making good on overdue promises is a start. But there is no end in sight for the rows over the bill for a hotter planet. ■For more expert analysis of the biggest stories in economics, finance and markets, sign up to Money Talks, our weekly subscriber-only newsletter. More

Binance has seen outflows amounting to more than $1 billion in the past 24 hours, not including bitcoin, according to data from blockchain analysis firm Nansen.
Founder and CEO Changpeng Zhao and others were charged with violating the Bank Secrecy Act by failing to implement an effective anti-money-laundering program and for willfully violating U.S. economic sanctions.
Binance agreed to forfeit $2.5 billion to the government and pay a fine of $1.8 billion — a combined $4.3 billion — in “one of the largest penalties we have ever obtained,” according to U.S. Attorney General Merrick Garland.

Binance cofounder and CEO Changpeng Zhao speaks during the 2022 Web Summit in Lisbon, Portugal, on Nov. 1, 2022.
Ben Mcshane | Sportsfile | Getty Images

Outflows from Binance have amounted to more than $1 billion in the past 24 hours, not including bitcoin, according to data from blockchain analysis firm Nansen, after founder and CEO Changpeng Zhao stepped down and pleaded guilty Tuesday in a deal with the Department of Justice.
Meanwhile, liquidity has dropped 25% over the same time frame as market makers pull back their positions, according to data provider Kaiko. 

The outflows are significant and close to what happened previously when the exchange and its founder were charged with 13 securities violations by the SEC.
The exchange’s native token, BNB, is down more than 8% in the last 24 hours. Binance holds around $2.8 billion worth of BNB tokens, according to Nansen. And in March, after Binance phased out zero-fee trading of crypto asset pairs including bitcoin, a key incentive for customers, the exchange began to see its share of all spot trading drop.
Binance remains the world’s largest crypto exchange globally, processing billions of dollars in trading volume every year.
Binance agreed to pay $4.3 billion in fines to the U.S. government. The plea deals end a yearslong investigation into the crypto exchange.
Assets of more than $65 billion remain on the platform, according to Nansen, meaning that Binance is likely capitalized enough to withstand a sudden rush of investors away from the platform. And while withdrawals are on the up, there has not yet been a “mass exodus” of funds from the exchange.

“After the momentary shock of the agreement with the announcement, there is no significant impact on most assets,” said Grzegorz Drozdz, a market analyst at investment firm Conotoxia Ltd.
“The cryptocurrency that seems to have suffered the most, losing more than 9%, is the BNB token from Binance. Of the top 100 cryptocurrencies, as many as 98 have seen a noticeable rebound over the past 24 hours. Bitcoin, meanwhile, fell 4% before rebounding and remaining with a loss of 1.3%,” he said.
Drozdz added that it may be a net positive for the industry now that the dispute with regulators is behind Binance and that the company has pledged to increase security measures.
“This, combined with the likely imminent approval of an ETF based on bitcoin quotes, could positively impact the crypto market in the long term,” said Drozdz.

Can Binance survive at this stage?

That’s the multibillion-dollar question the cryptocurrency giant faces after Zhao agreed to a plea deal and stepped down from the company.
Started by the Chinese-born entrepreneur in 2017, Binance went from being a relatively obscure name to being a major force in crypto in a matter of weeks.
Experts CNBC spoke with said that Binance is likely to make it through the ordeal despite a turbulent situation. They cited the company’s decision to comply with the DOJ process and implement a three-year strategy to get its operations into compliance, and the amount of assets held within the company’s reserves.
“The sum of $4 billion is clearly very large and will create real pain for Binance’s balance sheet,” Yesha Yadav, Milton R. Underwood professor of law and associate dean at Vanderbilt University, told CNBC via email.
“However, this fine does not appear aimed at dealing a fatal blow to the exchange. Based on Binance’s dominant position within the crypto-ecosystem over a number of years, CZ’s personal wealth … and continuing trading volumes despite declines in overall crypto trading volume as well as in Binance’s market share relative to other venues, I doubt that Binance will face risks to its solvency in paying this fine.” 

$4.3 billion plea deal

Zhao and others were charged with violating the Bank Secrecy Act by failing to implement an effective anti-money-laundering program and for willfully violating U.S. economic sanctions “in a deliberate and calculated effort to profit from the U.S. market without implementing controls required by U.S. law,” according to the Justice Department.
Binance has agreed to forfeit $2.5 billion to the government and to pay a fine of $1.8 billion, for a total of $4.3 billion.
U.S. Attorney General Merrick Garland said in a press conference Tuesday that it’s “one of the largest penalties we have ever obtained.”
“Using new technology to break the law does not make you a disruptor. It makes you a criminal,” Garland said. “Binance prioritized its profits over the safety of the American people.”
Zhao said Tuesday in a post on X, formerly Twitter, that he had “made mistakes” and “must take responsibility.”
Richard Teng, a former Abu Dhabi financial services regulator, was named as Zhao’s replacement. Teng was most recently the global head of regional markets at Binance.
He was also previously director of corporate finance at the Monetary Authority of Singapore.
The action against Binance and its founder was a joint effort by the Department of Justice, the Commodity Futures Trading Commission and the Treasury Department.
The Securities and Exchange Commission was notably absent.
Treasury Secretary Janet Yellen said in a release Tuesday that the exchange allowed illicit actors to make more than 100,000 transactions that supported activities such as terrorism and illegal narcotics and that it allowed more than 1.5 million virtual currency trades that violated U.S. sanctions.
It also allowed transactions associated with terrorist groups such as Hamas’ Al-Qassam Brigades, Palestinian Islamic Jihad, al-Qaida and ISIS, Yellen said in the release, noting Binance “never filed a single suspicious activity report.”
Zhao has been released on a $175 million personal recognizance bond secured by $15 million in cash and has a sentencing hearing scheduled for Feb. 23.

Binance to continue

Binance will continue to operate but with new ground rules. The company is required to maintain and enhance its compliance program to ensure its business is in line with U.S. anti-money-laundering standards. The company is required to appoint an independent compliance monitor.
The case against Binance, which was unsealed Tuesday, shows that three criminal charges were brought against the exchange, including conducting an unlicensed money-transmitting business, violating the International Emergency Economic Powers Act, and conspiracy.
Some of its rivals may look to take advantage of the situation, particularly Coinbase, Kraken, and OKX.
Coinbase and Kraken are currently waging their own respective legal battles with the SEC. In June, the agency hit Coinbase with a lawsuit similar to the one it brought against Binance, alleging it operates as an unauthorized securities exchange, broker and clearing agency. And on Monday the SEC sued Kraken, alleging that the exchange commingled $33 billion in customer crypto assets with its own company assets, creating the potential for a significant risk of loss to its users.
Vanderbilt’s Yadav said Binance’s reserves were likely to come under scrutiny as investors assess where to go after the exit of the company’s CEO. Attempts by Binance to create strategic transparency since the FTX collapse have “floundered,” she added.
Binance published its proof of reserves, a system to show its number of assets and liabilities. But this proof is based on limited information that can be divulged from public blockchains, and is not on par with a full-scale audit.
“There is no doubt that Binance’s reserves will be coming under scrutiny in the months and years to come,” Yadav explained. “A big question that has hung over Binance is how it is run, the state of its internal governance and risk management.”
“This is a venue that has long been known for its opacity as well as an impenetrable capital and organizational structure whose complexity has caused regulators like the CFTC to investigate these organizational interconnections as possible avenues for Binance to engage in activities violating applicable regulations,” Yadav said. More

Fictional money, a shot at inordinate riches and a good chance of landing in jail at some point. That, in a nutshell, is the popular board game of Monopoly. But it describes just as accurately the experience of those who have founded some of the world’s biggest cryptocurrency exchanges.On November 21st Changpeng Zhao, boss of Binance, resigned after pleading guilty to criminal money-laundering charges. He becomes the third founder of a major crypto exchange to be convicted of crimes. In May 2022 Arthur Hayes, who set up BitMEX, was sentenced to six months under house arrest for violating anti-money-laundering laws. And on November 2nd this year Sam Bankman-Fried, the founder of FTX, was convicted on seven counts of fraud. He may face decades in prison.Mr Zhao will pay a $50m fine. He may also go to jail—probably for up to 18 months—after he is sentenced in Seattle in February. In the meantime he has been released on a $175m bond. Binance also pleaded guilty to violating money-laundering laws and the International Emergency Economic Powers Act, the legislation under which America imposes sanctions. As part of the plea agreement, Binance will be allowed to continue operating under the supervision of a government team. It will also pay a $4.3bn fine. In a press conference Janet Yellen, the treasury secretary, called the enforcement action “historic”. It is the largest such settlement the Treasury has ever been paid.The indictment, which was unsealed on November 21st, does not allege that Mr Zhao intentionally set up a platform by which criminals or individuals under sanctions could evade scrutiny. Instead, it says that he put his relentless pursuit of market share, growth and profits ahead of all else.There are all kinds of people with whom the law forbids financial institutions from doing business. This means they must carry out a reasonable amount of vetting of potential clients. Yet between 2017 and 2021 most of Binance’s users could sign up with just an email address. Letting everyone trade freely probably helped Binance create a deep, liquid market—the most useful sort for customers—and thus build market share. But allowing Americans to swap bitcoin with anonymous accounts linked to Iranian phone numbers will get you into trouble.There are countless examples in the indictment showing Binance either did not care about these kinds of problems, or thought that existing financial rules might not apply to the novel crypto business. But there are also instances of deliberate rulebreaking. Binance’s compliance team at times identified users who appeared to be using the platform for illicit activity, like moving funds from Hydra, a Russian dark-web marketplace. They were told, before banning such users, to check their “VIP” status, a designation for high-value accounts. VIPs were then told they could open a new account. “Let him know to be careful with his flow of funds,” a former Binance executive said about the dark-web user; “He can come back with a new account…but this current one has to go, it’s tainted.”Mr Zhao and other Binance executives discussed blocking accounts with IP addresses, or internet location markers, from Iran or North Korea. They seem to have done little more than talk. The indictment claims that 12,500 users with Iranian phone numbers were active on Binance in 2019. Some 7,000 customers provided identity documents from countries under sanctions. In the end Binance processed almost $1bn-worth of trades between American and Iranian accounts.“Binance became the world’s largest cryptocurrency exchange in part because of the crimes it committed,” said Merrick Garland, the attorney-general, at the press conference announcing the exchange’s plea agreement. Ms Yellen said Binance’s failures allowed money to flow to cybercriminals, child-abusers and terrorists—including Hamas, al-Qaeda and Islamic State.Eventually, the exchange did attempt to clean up its act. It put full “know-your-customer” procedures into place in 2021, and by May 2022 users could not trade unless they had uploaded identification documents first. As crypto regulation has been written around the world, Binance has applied for licences to operate a fully regulated and compliant exchange. Speaking to The Economist in October, Mr Zhao called Binance “the most licensed crypto firm in the world”. But it is clearly too little too late for Mr Zhao, who will probably be barred from future roles in financial institutions.In a long post on X (formerly Twitter) Mr Zhao said he had “made mistakes’‘ and “must take responsibility”. He announced that Richard Teng, a Singaporean career regulator, would replace him as Binance’s boss. Mr Zhao himself will now “take a break” having not had a “real (phone off) break for the last six and a half years”. But the length of that break may not be entirely up to him. ■ More

Goldman Sachs paid professional golfer Patrick Cantlay more than $1 million annually for the past four years in a sponsorship deal linked to the bank’s consumer-banking efforts.
A deal signed by Cantlay in 2020 included a minimum of $1.1 million annually, plus performance bonuses for PGA Tour and Major victories.
A Goldman spokesman declined to comment on the financial aspects of the sponsorship, as did a representative for Cantlay.

Patrick Cantlay of the United States plays his shot from the 18th tee during the final round of the Workday Charity Open on July 12, 2020 at Muirfield Village Golf Club in Dublin, Ohio.
Sam Greenwood | Getty Images

Goldman Sachs paid professional golfer Patrick Cantlay more than $1 million annually in a sponsorship deal linked to the bank’s consumer-banking efforts, CNBC has learned.
A three-year deal signed by Cantlay in 2020 included a minimum of $1.1 million annually, according to people with knowledge of the contract, with performance bonuses for PGA Tour and Major victories and hitting top rankings worth potentially far more.

Goldman opted not to renew Cantlay’s sponsorship this year in the latest example of the bank’s retrenchment from its retail banking push. After CEO David Solomon capitulated to demands to end the money-losing effort, the bank shut down a personal loan unit, shelved a planned checking account and sold off businesses.
Cantlay initially wore a cap emblazoned with the bank’s short-lived Marcus brand. That was replaced by the Goldman Sachs name after the bank’s president, John Waldron, said to be a fan of the sport, pushed for the change, said one of the people, who declined to be identified speaking about sponsorship deals.  
The first Cantlay deal was considered a relatively modest sum for a Top-10 ranked PGA golfer, mostly because his brand was still rising when he was signed, according to one of the people.
He got paid significantly more when Goldman renewed his sponsorship in a one year extension earlier in 2023, this person said. Cantlay has earned more than $42 million in official competitions since turning pro in 2012, according to the PGA Tour.
Goldman spokesman Tony Fratto declined to comment on the financial aspects of the sponsorship, as did Cantlay’s representative Molly Levinson.

“We constantly evaluate the firm’s partnerships, and at this time, our logo will no longer appear on his hat,” Fratto told The New York Times, which first reported that Goldman wasn’t renewing Cantlay.  
Cantlay still appears on Goldman’s website as a brand ambassador, along with LGPA golfer Nelly Korda and McLaren’s Formula 1 racing team. More