Tom Ozimek on credit tightening at small banks

Small banks lost $120 billion in deposits in the week that ended on March 15, a record drop.  Allianz chief economic adviser and noted economist Mohamed El-Erian wrote in a recent op-ed in Bloomberg that if deposit outflow from regional banks continues, this spells trouble. 

“This could become a big issue for local communities, regions, and sectors that fear that their access to loans will be curtailed because their traditional banking partners will have to shrink their balance sheets after losing deposits,” he wrote. 

El-Erian believes that the bank turmoil will slowly infect the real economy by squeezing access to credit.

~ Tom Ozimek, "Bank Turmoil Could Spread to Real Economy, Squeezing Credit Supply, Experts Warn," The Epoch Times, March 30, 2023

Michael Hiltzik blames SVB failure on "skittish depositors" and "paper losses" in bond portfolios

SVB's fundamental problem was that it had a huge number of skittish depositors, most of whose money was uninsured by the FDIC and could be withdrawn on demand, and had invested those deposits in treasuries and bonds that were generally safe, but wouldn't mature in less than 10 years.  After a series of interest rate hikes, the bonds were showing immense losses on paper.  When the depositors pulled their money — to the tune of $42 billion on March 9 — the bank couldn't liquidate its bond portfolio in a way that wouldn't convert its paper losses to real losses, so it ran out of money to pay the depositors.

~ Michael Hiltzik, "How Trump's frenzy of deregulation killed Silicon Valley Bank," Los Angeles Times, March 30, 2023

Steve Schwarzman: "the banking system is not in any type of conventional crisis"

The banking system is not in any type of conventional crisis.  We have just an interim issue with interest rates being up and we have a deposit issue caused by technology.  And these are both solvable problems for the vast number of banks. 

[...]

This crisis was caused by people on iPhones and other devices, hearing on social media that some bank might be in trouble.  They responded with huge withdrawals in a very short period of time, collapsing the bank.

[...]

[While rising interest rates have decreased the value of bonds held by banks, most of them] are government securities so if you wait long enough, they will be repaid.  [Loans are] in good shape [and lenders have much bigger capital buffers than 15 years ago]. 

[...]

We’ve seen some shift from overnight deposits into time deposits, but we’ve not seen a general deposit outflow of the banks.  For now the banking sector looks rather resilient.

~ Steve Schwarzman, "Blackstone's Schwarzman Says US Banking System is 'Solvable'," WealthManagement.com, March 30, 2023

Jim Bianco on confidence and the financial system

The whole financial system operates on confidence.  And if confidence is broken, it is very difficult to get it back.

~ Jim Bianco, interview with Bankless, 51:40 mark, March 28, 2023

Jim Bianco on depositors seeking yield and pulling money from banks

I think the biggest mistake everybody in the traditional world makes is, "Here's a new technology.  Oh, well I can use this - in the case of mobile banking - I can close some branches.  I can reduce my overhead.  I can increase my margin.  What a great thing this mobile banking is!"  But often what new technology does is it changes business plans, it changes business models, it changes behavior.  It does more than just allow you to skimp a couple of margin points off of your costs.  And so they didn't realize that they were opening up a whole new business model by going to mobile banking.  They didn't see it because we were stuck with zero interest rates for many years, but as soon as rates started rising and the public started realizing, "For five minutes of my time on my phone, I can make thousands of dollars by moving to a money market fund or buying a Treasury bill."  And they started doing this.  

And now these bankers are going to have to grapple with what you think you understand about your deposit base no longer applies.  They are not more likely to get divorced than switch the bank.  That has really changed.  And it really changed in the last 90 days...  I don't think we're going to see the outflows stop from the banks.  People are going to continue to say, "I don't want 2 basis points from Chase.  I would rather move to a money market fund and get 4 1/2%.  And we're going to continue to see that until those rates converge on each other.  

~ Jim Bianco, interview with Bankless, 25:40 mark, March 28, 2023

Sam Goldfarb on how bank stock investors are buying the dip

A growing number of investors are betting on a rebound in the banking sector, wagering that regional lenders are in much better condition than many initially feared after the collapse of Silicon Valley Bank.

[...]

One of SVB’s problems was that it faced large unrealized losses on its portfolio of government-backed bonds thanks to last year’s jump in interest rates.  But no other major bank currently faces nearly the same amount of losses relative to its size, these investors point out.  In addition, such bonds are still essentially guaranteed to be paid in full when they mature, and banks can now borrow against them from the Fed at their face value—making them worlds apart from the toxic mortgage assets that sank lenders in the late 2000s.

~ Sam Goldfarb, "To Some Investors, Banks Look Like Bargains; Some see ‘once-in-a-decade’ buying opportunity after recent turmoil," The Wall Street Journal, March 28, 2023

Jim Grant on when gold shines

Gold, say we, is not so much an inflation hedge as an investment in monetary disorder.

~ Jim Grant, "Apathy in a panic," Grant's Interest Rate Observer, March 24, 2023

Jim Grant on BTFP: "the Fed is bailing out its previous bailout"

[W]ith the unveiling of the Bank Term Funding Program, the Fed is bailing out its previous bailout.  It's lending against the par value of bonds and mortgages that don't trade near par.  They don't trade near par because their too-high prices were eviscerated in 2022.  Their too-high prices were eviscerated because of the inflation that the central bankers helped to foment and, indeed, fan.  Thus, one intervention begets another.

~ Jim Grant, "Into the federal vortex," Grant's Interest Rate Observer, March 24, 2023

Steven Sosnick on investors piling into Apple and Microsoft

The one thing that does worry me is the concentration in everybody's favorite stocks, so to speak.  You've got now Apple and Microsoft combining to be 25% of the Nasdaq 100.  Stop and let that sink in: two stocks being 25% of a major index.  They're 13% of the S&P 500, give or take, combined.

~ Steven Sosnick, "A bank crisis brings back an old favorite back for traders," Yahoo Finance, 5:30 mark, March 28, 2023

Doug French on the housing bust and "stuck factor"

Existing home sales are undergoing a historic sharp contraction in sales.  And, what will keep the residential market sluggish is what [Ivy] Zelman calls the “Stuck Factor.” An incredible 92% of homeowners with mortgages have a 5% rate or lower.  Nearly half of those with a mortgage have a rate of 3.5% or lower.  As long as rates stay where they are, or higher, people aren’t moving anywhere except in the case of the three D’s-divorce, death, or default.

~ Doug French, "'Poison Ivy' Zelman's says 'Stuck Factor' has Housing Market Stuck," DouglasInVegas.com, October 19, 2022

John Adams on banking

Our whole system of banks is a violation of every honest principle of banks.  There is no honest bank but a bank of deposit. A bank that issues paper at interest is a pickpocket or a robber.  But the delusion will have its course...  An aristocracy is growing out of them that will be as fatal as the feudal barons if unchecked in time.

~ John Adams

Jean-Baptiste Say on the difference between private and public borrowers

There is a grand distinction between an individual borrower and borrowing government, that, in general, the former borrows capital for the purpose of beneficial employment, the latter for the purpose of barren consumption and expenditure.

~ Jean-Baptiste Say, A Treatise on Political Economy, Kindle location 9469

Murray Rothbard on trying to limit government

[T]he man who puts all the guns and all the decision-making power into the hands of the central government and then says, "Limit yourself"; it is he who is truly the impractical utopian.

~ Murray Rothbard

Bill Ackman on the need to guarantee uninsured deposits at Silicon Valley Bank

 I woke up Saturday morning after the events of the week pretty convinced that if the government didn't, at a minimum, guarantee deposits at Silicon Valley Bank, we'd have a massive run on pretty much every regional bank on Monday.  And my advice was "we need to guarantee all deposits, not just those."  Unfortunately, I think the run is continuing.  If you look at the deposit inflows at the big banks, if you talk to anyone at JPMorgan who works at opening accounts, they're working literally around the clock to take in all the capital that's flowing in.  That's not good for our banking system and our country and that's what I was afraid of over the weekend, which is why I was so public, if you will.

~ Bill Ackman, interview with Harry Stebbings, 20VC, 27:00 mark, March 20, 2023

Robert Aro on the fragility of the banking system

We’ve seen this before: A bank becomes insolvent, whether by ignorance or error.  The Fed saves the financial system by giving the same failed bank more money; this is socialism, it is not capitalism. 

Any system which works great until it collapses, then requires a government/central bank bailout is neither sensical nor sustainable.  Anyone holding a position in academia should not support this; but many do because it works so well for those on top.  So here we are.

~ Robert Aro, "More Supervision and Regulation to Prevent Bank Runs?," Mises.org, March 24, 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

Sheila Bair on risk of rising interest rates to the financial system

When interest rates rise, it creates instability.  My friend and dear mentor, Paul Volcker, was very critical of inflation targeting because the protracted period of accomodative monetary policy would inflate financial assets, inflate the value of stocks and bonds, and then when interest rates have to go up to fight inflation, the value of those assets go down...  There's this correction mechanism that can have instability ramifications on the financial system so I think and hope the regulators are on top it.  There's a lot more capital now in the banking system, but I'm still a little wary.  I think we need to learn more.

Sheila Bair, MSNBC interview, 5:40 mark, March 11, 2023

Sheila Bair on the SVB bank run

This bank seemed to have a reasonable plan to stabilize itself, but its depositors panicked and almost all of its deposits were uninsured.  Insured deposits generally do not run.  People have confidence in the FDIC.  They're not worried about their insured money, but uninsured deposits can run and most of this was from pretty sophisticated institutional investors: venture capitalists, startups, as you mentioned.  That's what I find so astonishing, that there was this herd mentality by sophisticated individuals to take this money out.  

You mentioned my books.  I also write children's books and I'm thinking maybe I should write one about banking for venture capitalists because their behavior suggests maybe they didn't understand the mechanics about banks where it's a classic Jimmie Stewart problem: you come in and take out all the money at once, you're going to force the bank to close even if it may otherwise be solvent.

~ Sheila Bair, MSNBC interview, 0:45 mark, March 11, 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

Richard Squire on fractional reserve banking and recent bank failures

Banking is inherently risky the way we do it in the developed world, where you have a bank that takes deposits that can leave at any time.  Depositors can demand their money and get it back at any time and then the bank turns around and invests the depositor money in long-term assets, in a 30-year mortgage or a 10-year Treasury bill or a loan to a business that might last a few years.  So this is inherently a rickety structure and when lots of depositors want to pull out their money at the same time, the bank becomes illiquid, it runs out of cash and often it fails.

So what we saw last week at SVB and to a certain extent at Signature [Bank] was a classic bank run.

~ Richard Squire, Fordham University School of Law, Yahoo Finance interview, 0:55 mark, March 17, 2023

Dick Bove on $30 billion bank rescue of First Republic Bank: "I think that the near-term banking crisis is definitely over"

I think that the near-term banking crisis is definitely over.  I think that if you go back in history, you know that time before the Federal Reserve was formed, that's what was done to preserve stability in the banking industry.  The banks would come together and basically share funds and bail out the problem company. 

The big event in 1907, which ultimately gave rise to the Federal Reserve, is when JP Morgan supposedly got all the bankers in his house, locked the doors, and said you can't leave until you solve this banking crisis.  And they solved it.  And then in more recent times, the mutual fund that went down [in 2008], the same thing happened.  Everybody got together, put money in, except for Bear Stearns, which refused to do so.  And so we're seeing it happen again.  And it works.  It's exactly the right thing to do.  The federal government should not have to bail out the banking industry.  The banks should have to bail out the banking industry and that's what they're doing.

~ Dick Bove, Odeon Capital Group, "Here's why the banking crisis is over, says long-term sector analyst," Yahoo Finance, March 17, 2023

Sheila Bair on how bank stress tests did not include a recession and rising rate scenario

There's been a significant weakening of these stress tests to begin with, but I think most important is that they don't really stress the scenario that I am worried about and a lot of people are worried about, which is that we go into a recession, inflation remains persistent, interest rates keep going higher... that perfect confluence of events that is exactly what happened when Paul Volcker was chair of the Fed.  Actually he had to go through two recessions to get inflation under control, maintain interest rates at very high levels.  That may well be what the Fed needs to happen and that is the extreme stress scenario that they should be preparing for, but that is not the scenario the banks had to show that they should survive and be resilient.

~ Sheila Bair, former FDIC chair, interview with The Claman Countdown, July 6, 2022

Mohamed El-Erian on BTFP guaranteeing uinsured deposits

We're here [bank failures] basically because we had a prolonged period of overly-loose monetary policy.  When it came to adjusting monetary policy, the Fed did not act fast enough and then it had to hit on the breaks.  And you've heard me say over and over again, when you hit the breaks, you risk both economic and financial accidents.  And we've just lived through a financial accident.

It's important to stress that depositors should not worry.  Your deposits are fine.  And there is no need to move your deposits...  Honestly, there is no risk to your deposits anymore.

It is almost impossible now to go back on unlimited deposit guarantee.

~ Mohamed El-Erian, CNBC interview, 0:45 mark, March 13, 2023

Janet Yellen: "our banking system remains sound"

I can reassure the members of the Committee that our banking system remains sound, and that Americans can feel confident that their deposits will be there when they need them.  This week's actions demonstrate our resolute commitment to ensure that depositors' savings remain safe.

Importantly, no taxpayer money is being used or put at risk with this action.  Deposit protection is provided by the Deposit Insurance Fund, which is funded by fees on banks.

~ Treasury Secretary Janet Yellen, appearing before Senate Finance Committee, March 16, 2023

Joel Tillinghast on financial companies

Financial companies are the jackpot for scam artists who want to get their hands on other people's money.  Clients routinely trust banks and brokers with their assets.  For each $1 billion of equity, most banks hold deposits and borrowings in excess of $10 billion.  An electronic record of a loan or security corresponds to another electronic or paper document, not a physical property.  Even if accountants view the physical collateral supporting a loan, they also need to know the other liens and contractual wording.  Often these documents are confidential.  The combination of opaqueness and other people's money may explain why many of the largest fraud cases involve financnial firms.

~ Joel Tillinghast, Big Money Thinks Small, p. 130

Carl Icahn on decision making

In life and business, there are two cardinal sins.  The first is to act precipitously without thought and the second is to not act at all.

~ Carl Icahn

Michael Lebowitz on the Fed's new BTFP facility

Banks sell from the pies in the chart above [loans, Treasury securities, MBS, trading assets] to meet withdrawals.  However, from an economic perspective, as we will explain, it’s not necessarily what they sell but to whom they do not lend to going forward. 

Further, given the Fed’s new BTFP facility, banks are incented to hold on to Treasury and mortgage assets.  As such, other asset types will be sold or, at a minimum, not added to.  The other assets are loans which drive economic activity.

[...]

If banks significantly tighten standards, the Fed may be dealing with disinflationary pressures sooner than expected.  Banks, not the Fed, create money as they make loans.  If fewer loans are made, less money is created.  Subsequently, the nation’s money supply will decline further. 

Yes, we said, “further.” The year-over-year change in the money supply has declined for the first time since the Depression, as the reventure consulting graph shows. Each previous decline was met with an economic depression or financial crisis.

~ Michael Lebowitz, "Aftershock Life in the Wake of Silicon Valley Bank," Investing.com, March 15, 2023

Maxine Waters on recent bank failures: "this is all about regulation"

This is all about regulation and this is all about the fact that at some point in time there was great advocacy for making sure that the regional banks and the smaller banks didn't have to comply with some of the rules that perhaps would not have allowed them to get into this situation because there would've been stress testing and more oversight and more watching of what was going on.  And I certainly think all of that needs to be tightened up.

~ Rep. Maxine Waters (Dem), Financial Services Committee, "SVB collapse leads to big payday for short sellers," Yahoo Finance, 0:15 mark, March 15, 2023

Steven Leuthold on being a contrarian

I am contrary but not for the sake of being contrary.  It’s good business.  When everybody hates something, we buy it.  When everybody loves something, we sell it.  There is a warm comfort in being part of the herd.  But I can live without it.

~ Steven Leuthold, 1937-2023

Stephanie Pomboy on SVB failure: "this is all totally predictable"

This is all totally predictable.  When you force the banks to hold nothing but Treasuries and agencies and you ratchet up interest rates at the fastest pace in history, and drive sharp losses in those same "risk-free" assets, you're going to create some dislocations.  And I think probably what happened is that the fact that nothing untoward had occurred over the last 12 months imbued their confidence that "hey, maybe everything's going to be just fine."

~ Stephanie Pomboy, interview on Fox Business, 5:25 mark, March 11, 2023

 

Kevin Duffy on the everything bust

As the tide goes out on the everything bubble, the first layer of uneconomic structures is being laid bare: cryptocurrencies, money-losing tech unicorns, expensive exercise equipment (Peloton), used car vending machines (Carvana) and even schemes to capture asteroids in a giant bag.  Meanwhile, Amazon warehouses, Tesla gigafactories, wokeness, ESG and the American empire are coming into view.  Still buried below the ocean floor: fiat currencies, central banking, fractional reserve banking and the myth of vigilant and protective regulation.

~ Kevin Duffy, "FTX Collapse," The Coffee Can Portfolio, p. 8, January 24, 2023

Joel Tillinghast on stock buybacks

Buybacks are most popular when companies are feeling flush, and those are often the moments when buybacks are least beneficial.  As the market was topping out in the third quarter of 2007, S&P 500 companies bought back $171 billion of stock.  A year and a half later, the S&P crashed to half its former value, and in the first quarter of 2009, only $31 billion of stock was repurchased.  This is disappointing not just because the timing of the buybacks was inopportune, but also because buybacks signal confidence in the company's value and outlook.  Cheer is most appreciated when despair is all around.  When I study some buybacks that turned out badly, I find that very few companies took the action because of a discount to intrinsic value.

~ Joel Tillinghast, Big Money Thinks Small, p. 117

Jim Cramer pumps SVB Financial (2023)

The ninth best performer year-to-date is SVB Financial.  This company's a merchant bank with a deposit base that Wall Street has been mistakenly concerned about...  I think the fears were not justified and it's a very compelling situation.  Hey, by the way, private equity and venture capital, they're not going away.  Being a banker to these immense pools of capital has always been a very good business.  Stock's still cheap.

~ Jim Cramer, CNBC's Mad Money, February 8, 2023

Malachy McCourt on resentment

Resentment is like taking poison and waiting for the other person to die.

~ Malachy McCourt, A Monk Swimming (1952)

Annie Duke on the value of quitting

Quitting doesn't slow you down, not when it's done well.  It actually speeds you up.  And that's the secret.  People think that "quitters never win and winners never quit," but that's not true.  Winners actually quit a lot and it's in fact how they win.  When you look at the best investors, they are so good at getting off the positions that aren't worthwhile so that they can then reinvest that capital into things that are worthwhile...  That's what's actually going to move the ball forward for you...  When you are a good quitter, you get to where you want to go faster.

~ Annie Duke, interview with Dan Ferris, Stansberry Investor Hour, 51:55 mark, February 27, 2023

Bill Miller on risk, real and perceived

The problem is that real risk and perceived risk are two different things.  And that's where people get into trouble, because they perceive risk to be high when prices are low, and they perceive risk to be low when prices are high.

~ Bill Miller