Privatizing profits and socializing losses!
The night is young.
Just a reminder: “House prices rose 5.3 percent from January 2022 to January 2023.” And the Fed still has monetized $2.6 Trillion of MBS.
Deutsche Bank Bounces as Analysts Reassure on Financial Health sell-side analysts sought to reassure that the German lender’s financial health was sound.
Sell-side analysts? As a multi-decade observer of the markets, I can tell you: Sell-side analysts are worthless.
They’re sycophants and stenographers! They “Praise, as opposed to Appraise.”
One of the best on this topic is Bob Wittbrot.
Bank Failures. There’s a reason I often quote Bill Black.
US considering more federal support for banking industry: report
Sure, why not. If there’s one industry that doesn’t get enough federal support, it’s the banking industry.
Dallas Fed President James Bullard, FOMC Meeting Transcript, August 5, 2008 (a month before Lehman Brothers collapsed):
My sense is that the level of systemic risk associated with financial turmoil has fallen dramatically. For this reason, I think the FOMC should begin to de-emphasize systemic risk worries…
My sense is that, because the turmoil has been ongoing for some time, all of the major players have made adjustments as best they can to contain the fallout from the failure of another firm in the industry. They have done this not out of benevolence but out of their own instincts for self-preservation.
As one of my contacts at a large bank described it, the discovery process is clearly over. I say that the level of systemic risk has dropped dramatically and possibly to zero.
“The Cubans, the Kevin O’Learys, the Scaramuccis, the Ackmans - the whole Silicon Valley Crew - these guys all need their clock cleaned in a major way, because they were just bull market, cheap money players.”
“I’m a free-market guy, and it really troubles me that all these guys who’ve made money on zero interest rates, and think they’re so damn smart - the second things go against them, they beg for the government to bail them out.” - Marc Cohodes
“If you think silicon valley knows what it's doing financially,
you really have to rethink things.”
Adam Levitin (Georgetown Law professor and former Special Counsel to the Congressional committee which supervised the TARP)
“The response to the current crisis only confirms that regulators will not shut down troubled banks: the Fed's new Bank Term Funding Program is a zombie-bank life-support program.”
The new Fed facility allows banks to borrow against their Treasuries and agencies at par, not at market value. That's a way of extending support to banks that have failed at Banking 101 and mismanaged their interest rate risk. What that should tell everyone is that the game plan for dealing with this crisis is basically the same as in 2008: extend and pretend. Specifically, banks will be given all sort of support to enable them to avoid immediate loss recognition (as many would be in prompt corrective action territory if their securities portfolios were marked to market) and to claw their way back to solvency through retained earnings. In 2008, the extend and pretend was about bank's loan portfolios. Now we're just repeated the song in the key of securities.
The idea that regulators simply will not order abandon ship until the bow is below water is reinforced by the history of regulatory (inaction) on all sorts of other legal violations by banks, be it for AML or consumer protection. Exhibit A here is Wells Fargo, a repeat recidivist, still having a charter. If regulators will not take away the charter of a bank that engages in repeated and egregious violations of law, when will they ever do so?
Reminds me a bit of Jeff Gundlach’s take the other day:
“Look, they’re taking collateral of, say, Treasuries. They’re taking that collateral, at a par value, let’s say, of a billion dollars, but the mark to market is not at par anymore, because interest rates are up so much. So they’re going to lend out a billion dollars, but the collateral that they’re getting is only worth $800 million. They’ve created $200 million of liquidity…that’s the inflationary aspect. That’s why it’s QE. It’s basically, in real time, money printing.”
Levitin continues:
…What we've seen in 2008 and now in the Panic of 2023 is that regulators will disregard deposit insurance caps whenever they get twitchy about the possibility of contagion in the banking system. Does anyone really think that regulators will hold the line next time? After two such episodes, is it not reasonable for depositors to expect and rely on such treatment in the future?
Uncapping deposit insurance is basically a way of saying that banks will not be allowed to fail. Because if deposits are all guaranteed, banks should not face runs and liquidity problems and any solvency issues can be massaged through extend and pretend. That's a really troubling outcome. If we continue to have private ownership of banks (and no one is suggesting otherwise), then we're in a situation in which there's privatization of gains and socialization of losses: heads-I-win, tails-you-lose. [as I’ve written, this was one of the GOALS in the creation of the Fed - rh]
I can tell you how that movie ends: S&L Hell. Banks will be incentivized to engage in every riskier behavior. And given that regulators will be unwilling to toe the line, we're going to be right back in the S&L situation of the 1980s: zombie banks being allowed to invest in race horses, shopping mall developments, etc. because of higher yields to offset their past losses. To be sure, the FDIC will start charging more in premiums, but that won't fix the situation—they'll always be below market pricing (and will be a regressive cross-subsidy). At some point this system becomes untenable, and then there's going to be a MUCH worse crisis…
All this leaves me somewhat despairing. Insuring all deposits would be workable ... if regulators would actually rein in banks. (Desirability is another matter...) But the combination of cravenly prudential regulation and functionally uncapped deposit insurance is really toxic. Perhaps I should just go and buy some bank stock (especially now that it's discounted) because after a couple of years of retained earnings to get back to solvency, the real winners will be bank equity holders, who will get all the upside and bear none of the downside.
…the US does not seem to have the capability to resolve any really large bank, particularly one with capital market operations. And there is a pragmatic problem: those banks have large trading books. It’s not clear how they could be wound down (the last time I can recall anything like that happening was with LTCM ad they were big enough to be dangerous but not part of the central plumbing).
Consider the last really big bank resolution: Continental Illinois, then the fourth largest bank, in 1984. Continental Illinois was in receivership till 1991. I suspect that result has led the FDIC to be extremely resolution averse (despite Sheila Bair, to her credit, wanting to pull the plug on Citigroup during the crisis, but she was checked by Geithner and Bernanke, who withheld information about huge areas of Citi’s operations, making it impossible for her to make an informed decision).
Still doesn’t seem like there’s much fear, despite all the billionaires crying.
The “CRB Raw Industrials Spot Price Index.”
‘Includes copper scrap, lead scrap, steel scrap, tin, zinc, burlap, cotton, print cloth, wool tops, hides, rosin, rubber, and tallow.’ Items that aren’t really financialized.
I’ve noticed that since around 2020, the MSM has taken to judging the statements of politicians with qualifications like “Senator so-and-so falsely claimed that …”. I am eagerly awaiting such qualified judgment the next time Joe Biden or Janet Yellen claim that the SVB and Signature bailouts were not bailouts. The FDIC is eating $20 billion on SVB alone. That’ll be passed on to all other banks in higher deposit insurance premiums and will impact their shareholders, employees, customers, and ultimately the real economy. That $20 billion is a direct transfer to large depositors of SVB who should have taken a haircut but those depositors just happened to be politically favored. If SVB’s uninsured depositors were coal companies or E&P companies, they would never have been bailed out.
You’re a great consolation, Rudy, in this the Age of Greed. As muckraker Jessica Mitford said “"You may not be able to change the world, but at least you can embarrass the guilty."