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How to Liquidate a Failing Bank: DealBook Briefing

Lehman Brothers employees gather in the firm's headquarters in New York on Sept. 15, 2008.Credit...David Goldman for The New York Times

Good Thursday. Here’s what we’re watching:

• How to kill off a bank quietly.

• Snap just lost nearly $2 billion in market value.

• The new tax law is having implications beyond America’s borders.

• The Supreme Court helps define what a whistle-blower must do.

• Newell Brands named three new directors as it fights with Starboard Value.

• Broadcom and Qualcomm are getting feistier in their deal fight.

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The Trump administration has mostly taken a softer stance toward Wall Street, but on Wednesday, it suggested a regulatory change designed to make life harder for the big banks.

The change, proposed by the Treasury Department, is arcane, but in a financial crisis, it could be hugely consequential.

What is it? The tweak aims to increase the likelihood that a failing bank would be forced into bankruptcy, rather than into a resolution process overseen by the government. The difference might seem insignificant, especially since the current regulatory procedures for winding down a bank, introduced by the Dodd-Frank Act of 2010, are stringent and mimic bankruptcy. But the Treasury Department believes that an actual bankruptcy would be preferable. It would make the process of restructuring a failed bank more evenhanded and predictable, according to the Treasury. In turn, investors in the big Wall Street firms, and anyone doing business with them, would become more aware of the losses they could suffer if those firms crashed.

But didn’t the financial crisis of 2008 illustrate the grave dangers of allowing a large bank to go into bankruptcy? The disorderly collapse of Lehman Brothers into bankruptcy set off a panic across the global financial system, according to most analyses of the period. And that is why the Dodd-Frank Act set up a way for regulators to seize a large bank and restructure it in a controlled manner, known as the orderly liquidation authority. As with bankruptcy, it envisions making creditors the new owners of a restructured firm. But it added a feature to limit panic. Under Dodd-Frank, regulators can lend to the failed bank. Such a backstop could prevent a further run on the bank. Its customers and creditors would see that the seized bank had sufficient funds to pay them. The government lending mimics the loans that banks make to bankrupt companies.

How much of this does the Treasury want to do away with? Not much at all. It recommends using the Dodd-Frank resolution framework “as an emergency tool for use in extraordinary circumstances.” But that’s how the backers of Dodd-Frank saw the process, too. Crucially, the Treasury also wants to keep the emergency government loan. But the Treasury’s proposal does introduce an important and innovative change. It calls for a special type of bankruptcy regime for large financial firms, called Chapter 14. This new regime envisions having a set of specialist judges, working with regulators in the United States and around the world, who could plan for and oversee the bankruptcies of large banks.

Would Chapter 14 work in a crisis? Much depends on whether the customers and creditors of the failing bank yank their money, intensifying the run and spreading fear through the system. The Treasury argues that changes since the crisis mean banks have more cash on hand, and banks can now hold off for a short time on paying claims on financial instruments called derivatives (recall, such claims were particularly debilitating for Lehman.) Also, banks must now have detailed plans to put themselves into bankruptcy, though the Treasury last year suggested changes that might make that planning less stringent. Notably, the Treasury hopes to make Chapter 14 effective by deploying a method for restructuring a failed bank that regulators already expect to use under the orderly liquidation authority.

This approach rests on turning pre-existing debt owed by a bank’s holding company into new equity at the subsidiaries where the bank does all its business. The theory: If a reassuringly large amount of new equity were created at the subsidiaries, the banks’ creditors and trading partners would feel protected and not withdraw. Indeed, the Treasury says this would eliminate the incentive for counterparties to run.

Eliminate is a strong word. In the heat of a crisis, when the scale of a bank’s losses is not known, making it hard to know how much new equity is needed, creditors and trading partners may just head for the exits, crippling the bank. Even so, Aaron Klein, a fellow at the Brookings Institution, said it made a lot of sense to enshrine this formal wind-down procedure in bankruptcy. “Why wouldn’t you want to make bankruptcy better?” he said.

And there’s a big reason it might work. Under post-crisis rules, banks must earmark billions of dollars of debt that would be used for creating new equity in a resolution. Put another way, Dodd-Frank has made it possible for the Trump administration to pursue a favored policy goal.

— Peter Eavis

Shares of the social media company tumbled 7.4 percent Thursday after Kylie Jenner tweeted that she no longer opens Snapchat.

The tweet comes as Snap faces growing criticism from users over the redesign of its app. So far nearly 1.5 million people have retweeted a petition asking Snap to revert to the old version, CNBC reported.

Earlier this week analysts at Citi became the latest to downgrade the stock over the negative reaction.

Mark May of Citi wrote:

“While the recent redesign of its flagship app could produce positive long-term benefits, the significant jump in negative app reviews since the redesign was pushed out a few weeks could result in a decline in users and user engagement, which could negatively impact financial results.”

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HSBC, Deutsche Bank and UBS Group collectively paid just under $47 million to settle civil charges of market manipulation with the Commodity Futures Trading Commission, but gained a waiver from a rule in the Dodd-Frank Act.Credit...Mike Segar/Reuters

European banks with significant operations in New York and other parts of the United States have seen multi-billion dollar hits on their results in the fourth quarter as a result.

Changes in corporate tax rates have forced European lenders – and their American counterparts – to recognize so-called deferred tax assets at the end of last year.

But, the pain is expected to be short term as most banks, including Barclays and UBS, anticipate the tax rate for their United States operations will be lower future.

As earnings season edges toward a close, here is the impact on some of Europe’s largest lenders:

• Barclays reported an annual loss of 1.9 billion pounds, or about $2.7 billion after it took a series of charges, including £900 million related to tax changes in the United States. “Given the group’s substantial U.S. operations, this is expected to result in a reduction of the group’s effective tax rate in 2018 and future periods to mid-20 percent,” the bank said on Thursday.

• Credit Suisse reported a loss of 2.13 billion Swiss francs, or about $2.3 billion, in the fourth quarter, driven primarily by 2.23 billion francs in income tax expenses related to the reassessment of its deferred tax assets.

• Deutsche Bank reported a full-year loss of 497 million euros, or about $612 million. John Cryan, the Deutsche Bank chief executive, said: “Only a charge related to US tax reform at the end of the year meant that we had to post a full-year after-tax loss.”

• HSBC reported a pretax profit of $17.2 billion for 2017, but took a charge of $1.3 billion to reflect a reevaluation of its deferred tax balances.

• Société Générale said its profit was dragged down in the quarter after it was hit by restructuring charges related to its French retail banking network and the impact of tax reforms in France and in the United States.

• UBS fell to a loss in the fourth quarter as a result of a writedown of 2.87 billion francs on deferred tax assets.

Keep an eye out for Standard Chartered when it reports its annual results next week.

The bank, which is based in Britain, but makes most of its money in Asia, has been recently touting its ability to serve the North American market.

— Chad Bray

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Credit...Justin Lane/European Pressphoto Agency

According to the Supreme Court, in an opinion written by Ruth Bader Ginsburg, it requires telling the Securities and Exchange Commission, not just your bosses. More from Andrew Ackerman of the WSJ:

The case stems from a lawsuit filed by a would-be whistle-blower, Paul Somers, who says he was fired from Digital Realty Trust in 2014 after complaining internally about accounting irregularities, among other matters. Mr. Somers argued he was protected by Dodd-Frank even though he didn’t report the alleged problems to the S.E.C.

Peter Henning’s take

The Supreme Court, in an opinion by Justice Ruth Bader Ginsburg, rejected that reading of the statute. It applied a simple analysis: “Courts are not at liberty to dispense with the condition — tell the S.E.C. — Congress imposed.” By not reporting his suspicions to the S.E.C., he lost the protection afforded whistle-blowers.

The maker of Sharpie markers and Elmer’s glue said today that it was adding three new directors amid its fight with Starboard. They are:

James Craigie, the chairman and former C.E.O. of Church & Dwight, the maker of Arm & Hammer

Debra Crew, the former C.E.O. of Reynolds American, the tobacco company

Judith Sprieser, a former C.E.O. of Transora, a services provider for packaged goods companies (who will be nominated at the company’s upcoming annual meeting)

What Newell said of the move:

These actions are part of Newell Brands’ ongoing refreshment process on behalf of shareholders designed to build a board with the best mix of skills, expertise and experience to support the Newell Brands’ leadership team in accelerating shareholder value creation.

What it didn’t say: That this was a response to Starboard, which has criticized Newell’s management team — and is seeking to replace the company’s entire board.

— Michael de la Merced

Ray Dalio, the founder of Bridgewater Associates, the world’s biggest hedge fund, thinks so.

Last week, Mr. Dalio said: “The risks of a recession in the next 18-24 months are rising.”

Now he says there is a 70 percent chance of one before the next presidential election in 2020, according to Reuters.

During an appearance Wednesday at the Harvard Kennedy School’s Institute of Politics, Mr. Dalio said:

“I think we are in a pre-bubble stage that could go into a bubble stage ... The probability of a recession prior to the next presidential election would be relatively high, maybe 70 percent.”

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Hock Tan, chief executive of Broadcom.Credit...Lucas Jackson/Reuters

Broadcom didn’t walk away after Qualcomm raised its takeover bid for NXP Semiconductor, but it did lower its own proposal by $3 a share, to $79. Why? Because the new NXP offer transferred $4.10 per Qualcomm share to NXP investors.

Qualcomm responded that the move “made an inadequate offer even worse,” and argued that the NXP deal couldn’t have gotten done at the original price of $110 a share.

Looks like we’re headed to a showdown at Qualcomm’s annual meeting on March 6.

The deals flyaround

• As online streaming booms and 5G gets closer, is now the time for Charlie Ergen to sell Dish Networks? (Gadfly)

• Hedge funds like Verition Partners are trying to save the shareholder appraisal process, meant to wring more money from mergers, from a series of adverse court rulings. (FT)

• Britain might block Melrose Industries’s hostile takeover of the aerospace supplier GKN on national security grounds. (FT)

• Two big U.S. hospital networks, Bon Secours Health System and Mercy Health, have agreed to merge, amid a surge in deal-making in the industry. (WSJ)

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Why has its growth slowed? A new study by the McKinsey Global Institute suggests that rising consumer demand, as well as what companies produce and which tech they use, drives productivity improvements.

More from Peter Eavis’s correspondence with Jaana Remes of McKinsey, one of the study’s authors:

Important new technologies can often take well over 10 years to have a big impact on productivity, she adds. The optimistic take, though, is that we can in the coming years expect to see big benefits as companies further automate, and introduce artificial intelligence.

In other macro news: Prepare for interest rates to rise, Jay Powell said. Preferably gradually, Randal Quarles added. The saving rate is at a 12-year low. And no one knows why the markets dropped suddenly yesterday.

• Mississippi granted a tax break worth up to $6 million to a hotel tied to the Trump family business. So could that violate the emoluments clause? (NYT)

• Sam Nunberg, a Trump campaign adviser, is scheduled to meet today with Robert Mueller. And t he special counsel has filed new charges — under seal — against Paul Manafort and Rick Gates.

• Congress’s next fight over Dreamers may come with a $1.3 trillion spending bill to avert a government shutdown on March 23. Meanwhile, Melania Trump’s parents have become lawful U.S. residents, perhaps through what the White House denounces as “chain migration.”

• Senators James Inhofe, Republican of Oklahoma, and Sheldon Whitehouse, Democrat of Rhode Island, called for a bipartisan infrastructure bill. (WSJ)

• Survivors of school shootings shared their stories with President Trump and pleaded for action. (NYT)

• Representative Trey Gowdy of the House Oversight Committee demanded documents relating to first-class travel by Scott Pruitt, the head of the E.P.A. (NYT)

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Credit...Kathy Willens/Associated Press

The bank’s employees are scattered across Midtown Manhattan. So it’s planning a new headquarters, which could be as tall as 75 stories, to house 15,000 workers. (Its current H.Q. — which, fun fact, is where the pistols from Alexander Hamilton and Aaron Burr’s duel reside — was designed for about 3,500.)

The context: The forthcoming JPMorgan skyscraper is the first major project under New York City’s Midtown East rezoning plan. The bank dropped plans for Manhattan’s Far West Side after failing to secure subsidies from the city.

Elsewhere in banking: Barclays lost $2.7 billion last year, hit by the U.S. tax overhaul, but promised to double its dividend. And José Manuel Barroso, chairman of Goldman Sachs International, has been criticized for lobbying the European Commission, which he led until 2014.

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Raj Nair, an executive vice president at Ford.Credit...Carlos Osorio/Associated Press

The carmaker didn’t specify what Raj Nair, the head of its North American operations, did to be fired, only that his ouster arose out of an anonymous tip. But the move adds to turmoil at the struggling company.

The context: Ford already apologized to its workers after the NYT investigated longstanding abuses of women at two of its plants in Chicago. And its operations chief in China left earlier this year for pre-Ford “personal reasons.”

The misconduct flyaround

• The Dallas Mavericks franchise has hired outside counsel to investigate allegations of inappropriate conduct against its former team president.

• A national online survey found sexual harassment and assault to be much more common than previous studies had suggested. (NYT)

• The former NPR executive Michael Oreskes was warned repeatedly that he was acting inappropriately toward women, and kept doing it, according to an independent investigation. (NYT)

• Tom Schumacher, the Disney executive who took “Frozen” to Broadway, has been accused of workplace harassment. (WSJ)

• An anonymous chat app is helping lift the lid on sexual harassment in South Korea. (Reuters)

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Pavel Durov, the founder and C.E.O. of Telegram.Credit...Jim wilson/The New York Times

The secure messaging service is holding a second private presale before its highly anticipated (and record-breaking) initial coin offering. More from Adrianne Jeffries of The Verge:

The exact amount to be raised is still being determined, according to one source, but two other sources said Telegram is estimating it will be around the same size as the first round, which would bring the total raised to over $1.6 billion before the ICO even opens up to the general public.

More in digital money

• The S.E.C. charged the virtual currency exchange BitFunder and its founder with fraud. (CNBC)

• The Justice Department has made gains on a seized Bitcoin hoard, but has had trouble cashing out. (Fortune)

• Some new ways of selling shovels to Bitcoin miners. (WSJ)

• Lawmakers in Britain are examining sympathetic ways to regulate digital currencies. (Reuters)

• New software at big cryptocurrency exchanges could make Bitcoin transactions cheaper. (CNBC)

And Bitcoin’s at $10,676 today, according to CoinMarketCap.

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• The latest chatbots are impressive. But they might be even better if their inventors weren’t scared of them saying something vile in public. (NYT)

• Airbnb is trying to promote its Experiences business as it heads toward an I.P.O., with little success. (WSJ)

• Amazon’s Alexa could be the next great consumer computing platform, says Farhad Manjoo. (NYT)

• Roger McNamee, an early investor in Facebook, says it could be fixed by charging users for a better News Feed, arranged in cable-style bundles. (WaPo)

• Uber will keep investing in Southeast Asia, despite losing money to local rivals. (Reuters)

• A former Google engineer has sued the company for discrimination and wrongful termination, saying he fired for responding to racist and sexist encounters. (The Verge)

• Naspers of South Africa has become an under-the-radar e-commerce giant and global tech investor. (The Information)

• One of Twitter’s solutions for bot accounts: limiting automated tweets. (Axios)

• Facebook is using algorithms to flag expressions of suicidal thoughts. (CNBC)

• Apple wants to patent a way to count calories burned during yoga. (Axios)

Peter Tague, one of Citigroup’s co-heads of M. & A., is leaving. (WSJ)

Alison Gleeson and Wendy Bahr are the finalists to become Cisco’s global sales chief and No. 2 executive, unnamed sources say. (The Information)

• Glassdoor has hired Jim Cox from Lithium Technologies as its C.F.O. It also named Christian Sutherland-Wong as its first C.O.O. and Samantha Zupan as its vice president of global corporate communications. (Glassdoor)

• Coinbase is hiring a C.F.O. (Recode)

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Credit...Mandel Ngan/Agence France-Presse — Getty Images

“There is a credibility gap between what they say and the reality of what is to come.”

— The Deutsche Bank analyst John Inch on how G.E. executives — including Jeff Immelt — masked problems at the conglomerate with rosy projections and questionable accounting.

• Toys “R” Us plans to close another 200 stores and lay off many of its corporate staff after disappointing holiday sales, unnamed sources say. (WSJ)

• British officials have been holding talks with Unilever amid fears that the Anglo-Dutch consumer group could choose to have one unified headquarters in Rotterdam, not London. (FT)

• Hedge funds are buying planes and leasing them to airlines. (FT)

• A fund managed directly by Alan Howard, who made his name with impressive profits during the financial crisis in 2008, lost nearly 9 percent net of fees from May through December. (Reuters)

• Greece’s Parliament voted to investigate politicians over allegations of bribery by the Swiss drugmaker Novartis. (Reuters)

We’d love your feedback. Please email thoughts and suggestions to bizday@nytimes.com.

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