Power Corridor: The New 'New World Order'

Also: What a triple bank failure showed America and how global institutions are still trying to fight off the ghost of Jeffrey Epstein.

Welcome to our first issue of Power Corridor – the newsletter that tracks power balances from Wall Street to Washington and beyond.

In this new, twice-weekly publication, I hope to bring you along for what I suspect will be an eye-opening and startling  journey through the inner-workings of global economics, geopolitics and financial networks, emphasizing how these power balances impact both domestic and international affairs to shape the events of our lives.  

I have been writing about politics and finance for decades, and my career has taken me from New York to London, Europe, the Middle East, Africa and not a few offshore tax shelters, but I still feel like I am always learning and discovering new ways in which the world works, interviewing new people with incredible stories, and doing my best to share what I find with my readers. 

Thank you for coming along for the ride. We appreciate your subscribing. And if you aren’t signed up yet, but would like get this newsletter sent straight to your inbox, click here, it’s absolutely free. And by subscribing, you support our ability to deliver free, quality journalism to anyone who would like to read it.

We also want to make sure our readers are getting the most out of the work we do, so please drop us a line on any topic you may want to see covered. Or if you have a good story, feel free to send us a tip! You can reach us here, or on Twitter @PowerCorridor_ .

Now, let’s dig in.

Leah McGrath Goodman, Editor, Power Corridor

China, Russia, Ukraine, U.S. and the New ‘New World Order’

It may be new, but it remains to be seen whether it is much improved.

As long as humanity has been able to order itself, there have been “new world orders.” Prominent among them have been Woodrow Wilson’s League of Nations, Truman’s United Nations, Keynes’s Bretton Woods, the fall of the Berlin Wall – all of which could be categorized as either genuine efforts to organize or, well, historic disintegrations.

Lately, talk of a new “new world order” has cropped up again, after Pakistan’s foreign minister, Bilawal Bhutto Zardari, ruffled more than a few tailfeathers on social media when he made the off-the-cuff remark that there was quite “a lot of discussion about what the new world order will be” at the World Economic Forum in Davos, Switzerland, in January. Banks and financial firms have groused since Russia invaded Ukraine that the conflict has ratcheted up tensions between China and the U.S., challenged longstanding global alliances, fomented geopolitical fragmentation and prompted the emergence of competing blocs. In a nod to the closing of our relatively stable, four-decade period known as The Great Moderation, Harvard Business Review last month went so far as to declare, “The era of American hegemony is ending.”

If there is a new world order, it would seem important to talk about it – and not in an offhand way that might inflame the conspiracy-minded on Twitter, as Zardari inadvertently did. But what is a new world order? Borrowing from scholarship, a new world order generally ushers in a fresh paradigm of political and economic thinking alongside tectonic shifts in global power balances and international relations.

It is not a big leap to see how that might be happening now. The post-Cold War era of globalization, free market reform, dollarization and technological innovation is giving way to heightened competition among the major global powers, alongside surges in nationalism and the weaponization of energy, technology and financial networks. The result? For the first time since the fall of the Iron Curtain, America’s position as the world’s sole uncontested superpower is more fragile than ever. 

The new world order is expected to be far more volatile than those of decades past, according to BlackRock (a former employer of mine, full disclosure), with the trajectory of global markets and economies increasingly determined by geopolitics and their resulting alliances. While much of this has been triggered or exacerbated by the Russian invasion — objectively one of the most dangerous global conflicts since World War II — the implications will be far broader and more enduring.

In this new regime, nations will turn inward, seeking greater self-sufficiency in technology, food and energy, with coordination among dominant global powers expected to fall sharply. Such dislocations will impact national economies, keeping costs high and inflation turned up, even after the Federal Reserve concludes its rate hikes.

This is hardly the end of globalization – too many countries depend on one another for economic survival – but global leaders will be carefully reconsidering their relationships when it comes to energy, food, trade and their deeply interconnected financial ties, having learned how vulnerable they are from the invasion of Ukraine, widespread financial sanctions on Russia and the supply chain disruptions of the pandemic.

In the past, geopolitical events typically had just a passing effect on the global markets, but those days are likely over, BlackRock notes. “Geopolitical fragmentation is likely to foster a permanent risk premium across asset classes,” the firm augurs, “rather than have only a fleeting effect on markets, as in the past.”

SVB: Just Don’t Say the ‘B’ Word

After three bank failures in rapid succession, will the Fed be able to get back to business as usual?

If you have whiplash from trying to follow the events arising from the failure of Santa Clara, Calif.-based Silicon Valley Bank (SVB), which at the end of last year held more than $200 billion in deposits, then you would not be alone.

While the U.S. Department of the Treasury and the Federal Reserve managed to cobble together a plan to save tens of thousands of SVB bank depositors – many of them influential Silicon Valley founders and CEOs – from certain ruin, the episode did not leave anyone looking too clever.

Although it is too soon for final thoughts, there’s plenty of blame to go around in this lightning-bolt of a debacle. Most of the market participants and investors I spoke with this week were still reeling from the market gyrations and opinions ranged wildly. However, there were a few points of general agreement, and I would like to focus on those, as the more comically divisive parts of this story will be (or have already been) well covered.

First and foremost, there is general agreement that if you put a deposit in a bank and come back later thinking it will be there, that is a reasonable expectation. To say that SVB’s depositors, including 37,000 small businesses across the country, should have been left to twist in the wind, as some have suggested, because of the bank’s implosion, is not sound or just. The depositors did not lose these funds themselves – they trusted their bank, SVB, to safekeep them. That’s what a bank is supposed to do.

There were some lamentable moments as several SVB depositors, many of them company founders, issued cries of distress over Twitter, only to be hissed down by individuals with unforgiven student loan debt, or a recent job loss, or a lack of health insurance. The heckling highlighted how deeply bitter American taxpayers remain over the bank bailouts of the 2008 global financial crisis – especially when no CEOs at any of the major banks went to prison. The takeaway: If you’re important enough, you get bailed out. If not, you can go twist. In this sense, the SVB mess is just as much a societal crisis as it is a financial one.

For many, another disturbing aspect of SVB’s demise – the largest since the global financial crisis – were multiple indicators that the bank’s top brass may have not only been aware of the problems with SVB’s balance sheet and risk management, but also took steps days before the bank’s meltdown to quietly cash in on its stock.

These executives included SVB’s chief executive Gregory Becker, according to company filings with the Securities and Exchange Commission. SVB’s executives shed millions of dollars of the bank’s stock before the investing public learned of the bank being in trouble. If any of these executives made these shares sales based on nonpublic material information, then that would be potentially punishable by financial penalties and/or prison. So far, Becker has made no public statement since the bank’s collapse. The U.S. Department of Justice and the Securities and Exchange Commission are now investigating SVB’s implosion under two separate probes. It is not yet clear whether there has been any wrongdoing, but the sequence of events in the bank’s breakdown will matter a great deal.

Another observation of many I spoke with: What happened to Silicon Valley’s bravado? Its unapologetic anarcho-capitalist streak? “They’re libertarians…until they need help,” one source quipped. “It’s down with big government, down with social programs, but as soon as the money runs out, it’s ‘please, please, please.’”

Even the words you use to talk about what happened are subject to heated debate. Above all, U.S. regulators feverishly telegraphed, they did not want anyone using the ‘B’ word.

Because America does not do bank bailouts anymore, right? “The reforms that have been put in place means that we’re not going to do that again,” Treasury Secretary Janet Yellen stated publicly over the weekend in addressing questions of a possible bailout. That was just hours before a de facto bailout was announced late Sunday, in which the Treasury and Fed agreed to rescue SVB depositors who lost access to the funds they held at SVB above the $250,000 limit covered by the Federal Deposit Insurance Corp., the U.S. agency tasked with protecting bank deposits.

Yes, it was a bailout. No, it was not a traditional bank bailout, because the bank had already failed. It was a bailout of the bank’s depositors only, but of course it raises all kinds of ghosts of the 2008 financial crisis, including the dreaded specter of moral hazard. (Moral hazard is a very poorly worded term that basically means when you are given incentive to take more risks because someone else will probably have to clean it up, like the U.S. government.)

“With SVB, everything came together to create a perfect storm,” says James Angel, associate professor of finance at Georgetown University. “But the bank was also reckless, it made some big mistakes with how it managed risk. If a well-respected bank can make such a rookie error, it makes you wonder, what are the other banks doing?”

Bookending the demise of SVB were the failures of pro-crypto banks Silvergate Capital (which came just beforehand) and Signature Bank (which came immediately after). All three banks experienced runs as depositors withdrew billions of dollars in an extremely jittery market amid rapidly tightening monetary policy. Like SVB, Signature Bank’s collapse was also seen as a systemic risk, so its depositors will be made whole with no losses borne by the taxpayer, according to the Treasury.  

But it’s not as simple as that. “Wherever there are bailouts, there’s going to be a moral hazard problem,” says Campbell Harvey, a professor of finance at Duke University. Harvey places much of the blame at the feet of the Fed, which he says should have been monitoring the stability of banks far more closely as it continues its aggressive hike rates. He believes the Fed, which is set to meet next week to possibly raise rates again in a bid to curb inflation, needs to take a breather. “I certainly hope they pause,” he says, “They need to stand down. Too many people are paying the price.” 

Epstein A Nothingburger No More

More than two years after his death, Jeffrey Epstein continues to haunt his wealthy and powerful friends.

Jeffrey Epstein started his Wall Street career at the now-defunct Bear Stearns, so it is fitting that these seemingly endless battles over his deplorable crimes may finally be put to rest by bold-faced names at the top banks.

This week, attorneys for Epstein’s victims made their most direct charge yet against Jes Staley, who worked closely with Epstein, his former client at JPMorgan. The victims are accusing Staley of “participating” in Epstein’s abuse of minors and alleging that JPMorgan helped to enable it.

JPMorgan has denied any claims it knew about Epstein’s illicit activities, but last week sued Staley, saying he had “concealed his personal activities with Epstein from the bank” and wants Staley to cover the costs of any fines if JPMorgan is found liable for facilitating banking services for Epstein, who died in prison in 2019 awaiting trial on sex-trafficking charges. 

JPMorgan also wants to claw back an estimated $80 million in earnings from Staley, representing eight years of compensation from the bank from 2006 to 2013, after which Staley left JPMorgan and the bank ended its relationship with Epstein, who at that point was already a criminally convicted sex offender. Epstein then took his business to Deutsche Bank.

Staley, who has denied involvement in Epstein’s sex trafficking, led JPMorgan’s asset management and banking businesses before later taking the helm of Barclays as CEO, but left that post in 2021, following an inquiry into his links with Epstein.

The attorney general of the U.S. Virgin Islands filed a lawsuit in federal court in Manhattan late last year accusing JPMorgan of providing banking services to Epstein after he had been convicted of sex charges in 2008. The Virgin Islands has also alleged that the bank knew about issues with Epstein’s account and failed in its duty to make proper regulatory filings for more than a decade on Epstein’s suspicious activities, which it said violated anti-money-laundering laws. “Human trafficking was the principal business of the accounts Epstein maintained at JPMorgan,” the lawsuit stated.

If JPMorgan had complied with federal regulations, the Virgin Islands AG said, its reports might have alerted the government to the alleged sex-trafficking ring of underage girls Epstein ran through the U.S. Virgin Islands, where he owned private islands and property. Staley serviced 55 Epstein accounts from 1998 to 2013, according to the Virgin Islands AG.

The U.S. Virgins Islands lawsuit in late December came just days after two anonymous women who claimed to be Epstein victims filed lawsuits against JPMorgan and Deutsche Bank, accusing both banks of enabling Epstein’s crimes and profiting off them. JPMorgan provided “special treatment” to Epstein’s sex-trafficking ventures, the two women asserted, adding that “without the financial institution’s participation, Epstein’s sex-trafficking scheme could not have existed.”

So far, Epstein has successfully tarnished two U.S. presidents (Clinton and Trump), three billionaire CEOs (Bill Gates, Les Wexner and Leon Black, in addition to Staley) and at least one enormously unsympathetic member of the British royal family (Prince Andrew). It remains to be seen what more he might do to some of the world’s top banks from beyond the grave, but as Epstein has proven time and again, it’s hard to fight a dead man.