Peter Schiff on bank failures: "the entire house of cards was directed by the Fed and U.S. government"

I warned for years that the banks will start collapsing for the precise reason that they're collapsing now: the Fed kept interest rates at zero for so long.  That's what allowed the institutions to load up on overpriced, low-yielding Treasuries, mortgage-backed securities and other loans.  Plus U.S. government auditors from the Fed, FDIC, they encouraged the banks to buy these long-term Treasuries and mortgage-backed securities because they gave favorable accounting treatment.  The banks didn't have to mark them to market as long as they could pretend they would hold them to maturity.  So the entire house of cards was directed by the Fed and the U.S. government, and now it's collapsing and they're acting like they have nothing to do with it and they're tying to figure out how to put out a fire that they lit.  And of course the problem is they're not putting out the fire, they're throwing gasoline on it.

~ Peter Schiff, interview with Fox Business, 4:05 mark, May 4, 2023

Judy Shelton on how the Fed's stress tests missed the Silicon Valley Bank failure

A: I will say the call for more stress tests overlooks the fact that the stress tests that became a part of the post-2008 regime were really oriented toward what will the bank do to survive if the Fed drops rates to zero again.  And it's uncanny, given that the Fed has over a trillion [dollars] in unrealized losses on its own portfolio that wasn't alert to this sort of dilemna in the valuation of bank assets.

Q: Yeah, theoretically the Federal Reserve is broke.

~ Judy Shelton, senior fellow, Independent Institute, "How Did Silicon Valley Bank Miss Its Ticking Time Bomb?," Fox Business, 1:30 mark, March 27, 2023

 

Barry Sternlicht on how the Fed encouraged banks to take on interest rate risk

There are 400 PhDs at the Federal Reserve.  Four hundred.  This weekend, me and two of my colleagues went through six regional banks and if you had to mark them to market, they're all insolvent.  Now why are they insolvent?  Actually it was the rule book set up by the government.  The government said that if you own 10-year fixed agencies and mortgage-backs or if you own Treasuries, it's one-fifth the capital requirement than if you bought floating rate notes, senior secured floating rate notes.

So you wound up with a situation, the banks were following the rules.  They were following the rules and they did not have to mark those securities to market.  We run the nation's largest mortgage REIT.  We have 2 billion dollars in securities, and 90 percent rate-hedged.  It couldn't have happened to us.  But because the banks face no consequences with the held-to-maturity category, they decide to save some money and not put any hedges in place.  That's irresponsible, but it is the rule book that the OCC [Office of the Comptroller of the Currency] and the government, the Treasury and the Fed oversaw, and they didn't even stress test these banks if rates rose.

~ Barry Sternlicht, CNBC interview, 1:25 mark, March 23, 2023

2013 Dodd-Frank stress test: government bond losses assumed temporary and not marked-to-market

Losses on securities held in the available-for-sale (AFS) or held-to-maturity (HTM) portfolios are projected other-than-temporary impairment (OTTI) over the planning horizon.  OTTI projections incorporate other-than-temporary differences between amortized cost and fair market value due to credit impairment, but not differences reflecting changes in liquidity or market conditions. 

Some of the AFS/HTM securities, including U.S. Treasury and U.S. government agency obligations and U.S. government agency mortgage-backed securities (MBS), are assumed not to be at risk for the kind of credit impairment that results in OTTI charges.

~ Dodd-Frank Act Stress Test 2013, p. 43, March 2013