Michael Lewitt on this week's expected Fed rate cut

The Fed is almost certain to commit another policy error this week by cutting interest rates by another 25 basis points with stock, housing & other financial asset prices at or near all-time highs.  Financial conditions are already loose so lowering rates will only further loosen them & feed the speculation pushing stock & other financial asset prices beyond reasonable valuations.  Gold & Bitcoin are also flashing warning signs that inflation is not contained (confirmed by recent data).  Nonetheless the Fed seems hellbent on its current easing path. 

As I’ve written all year, there is one compelling reason to cut rates - the cost of servicing the rising federal deficit.  If that is the reason the Fed is cutting, however, the plan is backfiring. Treasury yields have risen by roughly the same amount that the Fed has cut the Federal Funds rate since cutting began a few months ago.  As such, the market is telling the Fed it will demand higher compensation to fund the government under a lower rate regime.  This is entirely logical because lower rates enable higher spending & higher, not lower, deficits (as well as unproductive government spending & speculative private sector activity).  In short, the market thinks interest rate cuts are unnecessary.  The only market players seeking lower rates are private equity & private credit players who have little interest in what’s best for the economy.

~ Michael Lewitt, The Credit Strategist, December 16, 2024

Michael Lewis on knowledge

In the arenas of human ambition, in Hollywood or Silicon Valley, or Washington or Wall Street, there's a knowingness about people.  They don't want to seem like they don't know.  They think that if they don't know, they're going to seem stupid.  And that leads to greater stupidity.

~ Michael Lewis, "Michael Lewis on what he learned by studying the elites," Brief But Spectacular, November 4, 2024

Michael Lewitt on handling of SVB failure: "the government avoided a fire sale and created the time for these and other assets to recover"

While there is a great deal of handwringing about moral hazard with regard to the extension of unlimited deposit insurance at SIVB and Signature Bank (SBNY), that ship sailed a long time ago.  I think there are other lessons to be gleaned from how failing financial institutions were handled in 2008 that were applied (either knowingly or not) in this case that produced a better result.  And I think the FDIC did a reasonably good job managing a relatively orderly resolution of SIVB while minimizing any immediate systemic damage. 

The extension of unlimited deposit insurance will be debated for years but based on how the government handled the 2008 crisis, I believe it did the prudent thing here.  Had it extended a blanket guarantee on AIG’s obligations back then instead of selectively backstopping certain obligations, and also had it done the same with Lehman Brothers’ obligations rather than let the firm collapse, the losses in both cases would have been much lower and short-term and long-term damage to the financial system would have been much less.  Such a guarantee would have created the time required for these firms’ temporarily distressed assets to recover in value.  When financial institutions become distressed, the primary enemy is time.  Panic creates illiquidity which forces down prices to artificially low levels that almost invariably recover (sometimes rather quickly) once the situation stabilizes.  Today, even more than 15 years ago, time moves dangerously fast as a result of social media which accelerated the panic surrounding SIVB.  By guaranteeing the deposits at SIVB and SBNY, the government avoided a fire sale and created the time for these and other assets to recover (or begin to recover) their value, thereby avoiding unnecessary losses... 

In choosing between moral hazard and a bank run that could have caused unrepairable systemic damage, the government made the correct choice. It can address moral hazard later with measures designed to improve how banks manage their assets (including improved bank regulation), but the goal should be to live to fight another day. I would also add that the fact that depositors with more than $250,000 are almost exclusively “wealthy” as defined by the terms of our current political debates is a red herring.

~ Michael Lewitt, "Chasing Our Tails," The Credit Strategist, March 27, 2023

Michael Lewitt on commercial real estate loans coming due

Even more concerning is what will happen as commercial real estate loans mature and have to be refinanced at much higher rates.  Chris White at Loop Capital noted this morning that there are $147 billion of real estate loans coming due over the next 12-24 months with an average coupon of 4.3% while the current prime rate is 8%.  Rates may decline by the time these loans come due but will certainly remain at least 200-300 basis points higher than the original loans.  Many projects that penciled out in ZIRP are not economic anymore.  Many experts are forecasting loss rates of as high as 40% on commercial real estate based not merely on higher interest rates but lower utilization rates of urban (and even suburban) office buildings.  Commercial real estate was a major participant in the ZIRP/QE bubble and is now experiencing a painful and expensive adjustment as that bubble deflates.  A city like San Francisco, for example, is directly in the bullseye of higher rates, a tech bust, and the physical destruction of the urban environment.

~ Michael Lewitt, "Chasing Our Tails," The Credit Strategist, March 27, 2023

Michael Lewitt on the FDIC sale of Silicon Valley Bank's assets

First Citizens Bank stepped up and bought Silicon Valley Bank’s deposits and loans over the weekend, taking advantage of another bank’s mismanagement and the government’s need to support the banking system.  The deal involves the purchase of ~$72 million of assets at a $16.5 billion discount while another $90 billion of securities remain in receivership for sale by the FDIC.  What this means is that First Citizens is buying SVIB’s loans and leaving long-dated Treasuries and other investments behind for the FDIC to work out over time.  The FDIC also received equity appreciation rights in First Citizens’ holding company First Citizens Bancshares (FCNCA) with a potential value of $500 million to defray some of the potential losses on the transaction.  The 17 former branches of SIVB reopened this morning as First Citizens branches. FCNCA is rallying 40% on the news.  This should turn out to be a good move by FCNCA for which its management deserves credit.

~ Michael Lewitt, "Chasing Our Tails," The Credit Strategist, March 27, 2023