Good day and welcome to WSJ Pro Bankruptcy's Daily Briefing. It's Monday, May 22. In today's newsletter, the former leaders of failed crypto hedge fund Three Arrows Capital are having a tough time mounting a comeback. The recent series of bank failures has the industry questioning if a long-held assumption isn't holding up. And markets are pummeling the stocks of office landlords after some recent loan defaults.

Crypto fund's comeback stalls. Su Zhu and Kyle Davies, who ran the collapsed crypto hedge fund Three Arrows Capital, are among the founders of Open Exchange, which wants to let its customers trade bankruptcy claims on failed crypto companies, including Celsius, FTX and even Three Arrows itself.

But the fledgling venture, which went live in April, has been hit with numerous problems since it launched. Open Exchange, also known as OPNX, has been reprimanded by a financial regulator, threatened with legal action by institutions it said were its investors and was rejected by some market makers. At the root of some of these problems are the damaged reputations of Zhu and Davies, which haven’t recovered from the collapse of Three Arrows last year.

• Earlier: Crypto Customers Sell Claims at a Loss to Avoid Bankruptcy Wait

Bank runs trash long-held assumption on deposits. The recent spate of bank failures is upending the long-held theory that the value of a lender’s deposit business goes up when interest rates move higher.

If bank deposits are cheap and sticky, as many bankers and regulators assume, they would act as a stable source of low-cost funding even when interest rates go up. Deposit could then be lent out at those higher rates, giving banks a built-in hedge against rate increases, which can hurt the market values for banks’ portfolios of fixed-rate loans and bonds.

But if rising rates or plunging asset values cause a bank’s depositors to flee en masse, the franchise value could go to zero. The collapse of Silicon Valley Bank, followed by Signature Bank and First Republic Bank, proved that.

Shares of office owners plunge as short sellers pile in. Share prices for some of the largest office landlords have plummeted to near historic lows, reflecting a sluggish return to office rate and a rise in the number of investors betting that these stocks will keep falling.

Many office-focused real estate investment trusts are under selling pressure from soaring vacancies and declining rents. Leasing activity for office REITs was down 20% on average in the first quarter compared with a year ago, according to real estate analytics firm Green Street.

High interest rates are hurting office owners, which have billions of dollars of floating rate and mortgages at low interest rates that will likely have to be refinanced at much higher rates in the coming years.

Commentary: Even landlords with the deepest pockets may not service debts. Recent high-profile defaults show that creditors still face risks even from star borrowers, according to our colleagues at Heard on the Street. Canadian money manager Brookfield and Pimco-owned Columbia Property Trust are among those that have defaulted on office loans this year, and part of $7.7 billion list of office loans that have been sent to special servicing, according to Trepp.

Officials have indicated that their decision on whether to raise rates again at their June 13-14 policy meeting could be a close call. A handful have said inflation and economic activity aren’t slowing enough to justify leaving rates unchanged. But others, including Powell, have hinted that they might skip a rate rise to assess the effects of their past increases and the banking-sector strains.

One of China’s poorest provinces faces imminent debt problem. Cracks have been showing in the finances of Guizhou, a southwestern province with jaw-dropping landscapes and some of the world’s highest bridges.

Last month, China Cinda Asset Management, a state-owned institution that specializes in bad loans and distressed debt, said it would step in and help Guizhou sort out its finances. That followed a public admission by the local government’s official think tank that Guizhou couldn’t manage its debt on its own, and needed assistance from the central government.

How Guizhou’s debt issues are resolved will have ramifications for investors and banks across China that own local-government debt. Economists and analysts have warned that debts have reached unsustainable levels in many parts of the country, and that central-government bailouts could be needed.

Law firms plan merger. London-based Allen & Overy and New York firm Shearman & Sterling said Sunday they plan to merge, representing one of the largest legal industry tie-ups in recent history. In terms of revenue, it would be the third-largest firm globally, the firms said.

Share your tips, suggestions and feedback with the WSJ Pro Bankruptcy team: Soma Biswas; Alexander Gladstone; Jodi Xu Klein; Akiko Matsuda; Jonathan Randles; Alexander Saeedy; Andrew Scurria; Becky Yerak. 

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