The Economy

That is looking at it in a backward-ass way, though. What exactly have banks' choices been?

The alternative is NOT having a banking system and for there to have been no lending. The Fed was pushing money into the banking system to SPUR lending.

The operative question is WHY were their net interest margins (how banks make money) on such SAFE ways to put money to work so low? It wasn't a free market that was robbing savers (such as banks and insurance companies) of the risk-free yield that a FREE MARKET provides.

I like James, but I can't believe that the Monday Morning Quarterbacks are now going to come out now and miss the forest for the trees. To frame this as that bank having taken enormous risks is absurd. It was taking deposits. ... and largely parking them in U.S. Treasury Bonds and mortgage-backed securities (the safest debt you can possibly buy!) to try to earn something (which is WHY they are in business). Their alternative was to close their doors and say, "a bank can't exist in this environment."

You had a central bank that was essentially robbing them of the yield those bonds SHOULD HAVE BEEN PAYING. If you are going to say what they were doing was wrong. ... what should they have been doing? Should it have been buying junk debt (and it is not allowed to), on the rational that at least the ACTUAL enormous risks involved with THAT would have paid more than the 40 basis points they were playing for? The rest of the world was driving dogecoin prices to insanity and sending the valuations of functionally bankrupt companies up to insane places on a cheap-money speculative frenzy. Should banks have been doing that with deposits? Come on.

EVERY bank in America is sitting on a portfolio right that has big losses on a marked to market basis. It's not THEIR stupidity that created that situation.

 

Signature Bank too, which the NY authorities stepped in on 15 minutes after the futures started trading yesterday.

They are praying that what you linked t osomehow establishes confidence. Because the politicians are desperate to avoid the word "bailout," so they are tapping an emergency $25 billion fund. ... to try to contain what could be an $18 trillion problem if people start withdrawing deposists en masse.

We also have our first acronym for this crisis. They are calling what they set up the Bank Term Funding Program (BTFD). That $25 billion comes from fees they assess on financial institutions every quarter. ... so any use of the money is not a taxpayer bailout. It also requires them to admit that we are facing systemic failure. But nothing yet about how THEY caused it.

The idea is that you can get a one-year loan from that $25 billion fund to avoid having to sell bonds that are under water (thanks to the Fed in the first place!) if you need to raise capital (let's say, from a run on your bank), and they will value your loan at the par value of the bonds you put up. Which begs the question, why can't everyone else take their underwater treasury portfolios and get a sweetheart deal like that for free?

No failure is allowed .... so the arsonists are riding in on the fire truck to save the day.

 

Two things to think about:

1) Our Federal government implicitly is guaranteeing all deposits, because the wink wink in this is that they will do whatever it takes beyond that piddly fund. SVB wasn't designated a Systemically Important Financial Institution. ... yet it put the entire global financial system at risk. After 2008 and now this, there may not be a codified government guarantee of all deposits, but everyone knows that the minute there is any stress, they are going to step in with government guarantees. For anyone who thinks that is a GOOD thing. ... a) it is moral hazard in a nutshell. When you are making monetary decisions that carry risk, but you don't carry the burden of those risks. ... you are NOT going to make prudent decisions. If anything goes wrong, someone else is going to pay the cost. Which is why b) as has been the path of this country, the next steps will be calls for regulation, which really always means socializing the banking system. We are slowly destroying our country from within.

2) After Jay Powell's performance art last week in front of Congress, where he sounded more relatively "hawkish," the Fed Funds futures started to price in a 50 basis point rate hike probability for their meeting next week. The baseline was 25 basis points. This morning? 50 basis points is off the table, and NO HIKE (which had 0 percent odds less than a week ago) is being priced in. This despite that we get a CPI print tomorrow that is still going to show inflation up something like 6 percent year over year (and the CPI UNDERESTIMATES the problem). So all of a sudden, the bullshit about the central bank steering us to "stable prices" is meaningless, because as inflation rages. ... they are likely to do more of what causes inflation. Goldman Sachs put out a research note earlier saying they expect a pause. The bond market is already pricing those changes in. Yields on the two year bond, in paticular (because it is closer to what the Fed actually controls with its interest rate policy) are down quite a bit this morning. That paradoxically helps banks that may need to sell underwater bonds in their portfolios to raise capital. ... but it loosens financial conditions, which is what has caused the inflation that the Fed was raising rates in the first place to try to fight. They are backed against a wall, just as I was trying to tell people when they began the rate hiking cycle. It was a matter of when something was going to break, and what thing to break that would create a systemic problem was going to be. They were bullshitting people with "soft landing" talk, when the question should have been, "What are they going to try to choose, runaway inflation or economic devastation?" And I put those as a binary choice, but even with their choices, they don't have an iron-fist ability to create cause and effect, and as they break things (because of the excesses they created in the first place), their ability to undo the damage (in ways that will ultimately just create a bigger credit crisis at some point) suffers. They can completely lose control at some point.

 

BTW. ... what Biden just said "no losses will be taken by taxpayers" is really semantic bullshit.

Banks can now swap their treasuries and mortgage-backed securities to the Fed for cash at par. But that magically doesn't make the bonds worth more than they actually are. It shifts the losses on those bonds to the Fed, and by extension to the U.S. Treasury. ... and that makes it ALL OF OUR loss. The banks are going to take the cash they get from the the Fed in exchange for their Treasuries and deposit it with the Fed to earn higher interest than what the Fed is collecting on the collateral! Who is eating that difference? It's sophistry to pretend that those losses don't actually exist, and that we didn't just shift it to make it a PUBLIC problem.