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Banks on the Brink: 2023 Mini-Crisis


Paxter

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Thought I would start a thread on all things related to the unfolding US regional banking crisis, which this week has spread across the Atlantic to raise questions around the viability of Credit Suisse.

As things stand today, I would still describe this as a "mini-crisis". Unlike 2008, we aren't (yet) in a position where there are material questions surrounding multiple systemic financial institutions. 

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13 minutes ago, Paxter said:

Thought I would start a thread on all things related to the unfolding US regional banking crisis, which this week has spread across the Atlantic to raise questions around the viability of Credit Suisse.

As things stand today, I would still describe this as a "mini-crisis". Unlike 2008, we aren't (yet) in a position where there are material questions surrounding multiple systemic financial institutions. 

Between deregulation (invite to criminal activity) and the spike in interest rates I suspect a whole lot of deals will start blowing up here shortly. 

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While I don't know that we'll have a Great recession, I think this makes it significantly more likely that we'll have a recession. Failures will make people more risk-averse, will cause more chaos, and will make investment/growth smaller. The good news is likely that will cause a slowdown in inflation in addition to what we've already experienced, but the bad news is more layoffs and job losses and a soft landing being off the table. 

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^^^ We are in a recession already. The last ones to ever report such measurements are govt. muckedy mucks.

At my own workplace (shipbuilding) im keenly aware of severe supply issues (parts, materials), worse ive seen in over 10 yrs and highly, highly out of the norm for our normal production rate.

We have contracts for years of work but the supply chain and raw material costs have made a joke out of planning, did i mention we need about 400 more qualified workers than we can find.

Things are not normal business wise and thousands of other companies, im sure, are suffering similar, deteriorating issues currently.

Also home utility rates seem to have about doubled from last year, it feels like im paying for a new vehicle (that is invisible) when im coughing up these extra payments for home gas and electric rates.

There will be no soft landing, its been painfully apparent for months from this midwestern hamlet.

 

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In laymans terms from the way im hearing and reading it reported SVB did not hedge against rising rates when it loaded up on mtg. backed securities.

Like it was some super secret that interest rates were generationally low and that they may actually reverse course.

That has to be the most blindsighted bet imaginable. A slow moving train and you laid down on the tracks.

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26 minutes ago, DireWolfSpirit said:

^^^ We are in a recession already. The last ones to ever report such measurements are govt. muckedy mucks.

At my own workplace (shipbuilding) im keenly aware of severe supply issues (parts, materials), worse ive seen in over 10 yrs and highly, highly out of the norm for our normal production rate.

We have contracts for years of work but the supply chain and raw material costs have made a joke out of planning, did i mention we need about 400 more qualified workers than we can find.

Things are not normal business wise and thousands of other companies, im sure, are suffering similar, deteriorating issues currently.

Also home utility rates seem to have about doubled from last year, it feels like im paying for a new vehicle (that is invisible) when im coughing up these extra payments for home gas and electric rates.

There will be no soft landing, its been painfully apparent for months from this midwestern hamlet.

 

Maybe that's true in other countries but it's not broadly true. It's not true by most basic measures of how to measure recession, it's not true by job numbers, it's not true by spending. I'm sorry that your industry is suffering - and it might be that shipbuilding is a good canary in the coal mine for this - but it is alarmist and reactionary to call what we're experiencing a recession. 

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Banks ride to the rescue...of another tottering bank. Bit different than the 2007-2008 fiasco. That these institutions deemed this necessary speaks to more than a minor hiccup.

I figure before the year is out, congress will grant banks a massive taxpayer funded gift, no payback necessary, with the full blessing of the republican House (and probably most of the democrats as well). And, of course, no serious regulation at all.

Wall Street rides to the rescue as 11 banks pledge $30 billion to First Republic Bank (msn.com)

 

Agroup of financial institutions has agreed to deposit $30 billion in First Republic Bank in what’s meant to be a sign of confidence in the banking system, the banks announced Thursday afternoon.

Bank of America, Wells Fargo, Citigroup and JPMorgan Chase will contribute about $5 billion apiece, while Goldman Sachs and Morgan Stanley will deposit around $2.5 billion, the banks said in a news release. Truist, PNC, U.S. Bancorp, State Street and Bank of New York Mellon will deposit about $1 billion each.

“This action by America’s largest banks reflects their confidence in First Republic and in banks of all sizes, and it demonstrates their overall commitment to helping banks serve their customers and communities,” the group said in a statement.

The deposits would be obligated to stay at First Republic for at least 120 days, sources told CNBC’s David Faber. Regional bank stocks initially fell on Thursday but reversed higher after reports from Faber and others about the development of the deposit plan.

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23 minutes ago, Chataya de Fleury said:

Try specialty finance. I just got a 33% pay cut and we lost half the value of the company last year due to bond pricing. 

I’be stopped all subscription services, about to have to cut the concierge doctor service, moved my housekeeper to once every two weeks from weekly, and literally 100% stopped eating at restaurants. Etc. My AmEx is now in the freezer. No vacation to Capri this spring. 

It could be that we are in a rolling recession. It could also be that the recession has indeed begun, but as I am sure you know, recessions are declared by the NBER with the benefit of hindsight, sometimes even after the recession is over. 

You might think I’m not all that bright, but I am in finance and what you’re seeing but I don’t think you realize you’re seeing is the cracks in the system, with the current banking crises and mass tech layoffs.

I’ve anecdotally seen job offers in tech being yanked (neighbor whose house all of a sudden went off the market) and recruiters in my industry sending e-mails with “hot candidates!” rather than “hot jobs!” which is a pretty sure recession metric I’ve seen over the past 25 years of my career.

I think there is something going on that is systemic but it may be industry specific.  I'm not sure.  Not enough of a clear picture yet, to your point about hindsight.

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56 minutes ago, Chataya de Fleury said:

moved my housekeeper to once every two weeks from weekly, and literally 100% stopped eating at restaurants.

Look at the bright side, cooking can be a lot of fun and both cooking and cleaning can be meditative and cathartic. :P

33 minutes ago, Mlle. Zabzie said:

I think there is something going on that is systemic but it may be industry specific.  I'm not sure.  Not enough of a clear picture yet, to your point about hindsight.

I lean towards a larger problem that probably should have already occurred, but we've been propping up the economy for a while now and the fall may be worse for it. It's hard to pinpoint everything right now though because everything is on fire to some degree and things are only going to get worse as. I hate to be so pessimistic, but nothing I'm seeing suggests sunnier days are right around the corner.

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1 hour ago, ThinkerX said:

Banks ride to the rescue...of another tottering bank. Bit different than the 2007-2008 fiasco. That these institutions deemed this necessary speaks to more than a minor hiccup.

I figure before the year is out, congress will grant banks a massive taxpayer funded gift, no payback necessary, with the full blessing of the republican House (and probably most of the democrats as well). And, of course, no serious regulation at all.

Wall Street rides to the rescue as 11 banks pledge $30 billion to First Republic Bank (msn.com)

 

Agroup of financial institutions has agreed to deposit $30 billion in First Republic Bank in what’s meant to be a sign of confidence in the banking system, the banks announced Thursday afternoon.

Bank of America, Wells Fargo, Citigroup and JPMorgan Chase will contribute about $5 billion apiece, while Goldman Sachs and Morgan Stanley will deposit around $2.5 billion, the banks said in a news release. Truist, PNC, U.S. Bancorp, State Street and Bank of New York Mellon will deposit about $1 billion each.

“This action by America’s largest banks reflects their confidence in First Republic and in banks of all sizes, and it demonstrates their overall commitment to helping banks serve their customers and communities,” the group said in a statement.

The deposits would be obligated to stay at First Republic for at least 120 days, sources told CNBC’s David Faber. Regional bank stocks initially fell on Thursday but reversed higher after reports from Faber and others about the development of the deposit plan.

If I were born 4 years earlier I bet I could get elected by going to every state Trump won and just reading this article instead of giving "speeches". 

At the "debates", I'd just recite it from memory every time I was allowed to speak.

You don't wanna know what my "platform" would be. 

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Well, lessee here...

tech sector laying people off right and left.

lots of people with good paying jobs who cannot afford to pay rent, let alone a mortgage. (and up until a few months ago, I was seeing lots of clueless idiots on FB and elsewhere touting the benefits of buying houses, then using inflated rent to cover the mortgage)

still significant inflation.

severe lingering supply chain issues.

Fed raising interest rates.

Taken collectively, something systemic? Maybe not quite a repeat of 2007-2008, but with the potential to reach that scale? And when do the demands for bailouts start? (Not the penny Anny stuff so far, but a significant slice of the GDP)

 

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6 minutes ago, A True Kaniggit said:

Nyuk Nyuk. I’m just a regular guy working for a living at $15.36 an hour. 
 

No way these millionaire’s trying to become richer for whatever reason will ever affect me.

 

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46 minutes ago, ThinkerX said:

Taken collectively, something systemic? Maybe not quite a repeat of 2007-2008, but with the potential to reach that scale? And when do the demands for bailouts start? (Not the penny Anny stuff so far, but a significant slice of the GDP)

Even if we don’t see the failure of any systemic financial institutions (fingers crossed), the chances of a more severe recession have increased. Banks are going to be under pressure to focus on asset quality and won’t have access to cheap funds, which will constrain credit growth. The central banks are going to keep tightening interest rates. And businesses are likely to accelerate layoffs as consumption and investment fall. This unemployment will in turn trigger further falls in consumption and investment.

Some might argue this is “the recession we have to have” to tame inflation. Even if that were true, the downturn won’t be pleasant.

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Silicon Valley Bank got into difficulties because they had a classic asset-liability mismatch, which triggered an old-fashioned run on the bank.  Their deposit base grew rapidly as tech start-ups received lots of venture cap.  They bought Treasury bond assets to back those deposits but, in a greedy reach for yield, they bought a large proportion of long-dated Treasury bonds for more yield.  But then yields rose and inverted as the Fed finally fought inflation.  Bank customers can now get a much higher yield in a money market fund so they started to withdraw deposits.  To meet these withdrawals, SVB sold a bunch of long-dated bonds at a lower price (yields go up means price goes down), then disclosed this reduced value of assets (only because it was realized; otherwise the assets are held at book value), which got noticed and started rumors, which became a run on the bank.

There are other small, regional US banks with similar fragility since Trump rolled back banking regulations on smaller banks that don’t represent a systemic risk.  It’s not like Lehman Brothers with crazy leverage and risky credit; it’s just an asset-liability duration mismatch that destroys you if your overnight depositors actually withdraw their money, but not a problem at all if your depositors don’t all withdraw their money.  SVB were complacent and deeply incompetent in simple risk management.

This has nothing to do with Credit Suisse who have been a shit show for a long time and needed to raise more capital to offset losses, even after they already recently sold a chunk of their asset management business to Apollo.  But some of their largest investors have recently sold their stakes (Harris Associates) or refused to invest more capital (Saudi National Bank).  So Credit Suisse needs a lot of capital and no-one looks interested in providing it.  A different type of rumor kicked off and there are reports of at least some banks (e.g. BNP Paribas was mentioned in the FT) are concerned about trading with them, so the Swiss central bank is stepping in.  (BTW since Lehman it is illegal to fuel rumors irresponsibly about banks so people are circumspect about what they say and where)

So SVB and Credit Suisse are quite different but banks fundamentally need credibility to function.  That’s a design feature of fractional reserve lending.  And credibility just took a hit for the entire industry.

There is, however, also a real underlying problem for banks though, not just confidence of their customers: interest rates rose a lot and banks have not passed that through to their depositors.  But depositors have a choice and can move a lot of their money into money market funds or similar to earn a better yield, without locking it up in an unsecured CD (certificate of deposit) at the bank.  There have been enormous flows of money into money market funds this week.  Now that savers can actually earn meaningful rates of interest, banks will have to compete for deposits and not just take them for granted. 

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A few other miscellaneous points I’d make:

- The run on SVB was old-fashioned…and not-so-old-fashioned at the same time. The Twitter-fuelled speed of the deposit outflows was quite something to behold and caught the oversight bodies by surprise.

- The backstopping of unsecured deposits is being marketed by the Government as avoiding a bailout. That’s only true as a technicality. Ultimately, FDIC is funded by bank customers and therefore taxpayers. So the backstops do come at a public cost, albeit one perhaps worth paying in this instance.

- The liquidity provision to First Republic by its competitors is a bit of a financial circle jerk and feels weird to me. I’d much rather see a private sale, but I guess no one really wants FR at this point. 

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2 hours ago, Iskaral Pust said:

 (BTW since Lehman it is illegal to fuel rumors irresponsibly about banks so people are circumspect about what they say and where)

 

Was that a part of Dodd-Frank?????? HOW THE FUCK HAVE I NEVER HEARD OF THIS!?!?!?!?!?!?!?!?!?!?!!? :read:

And here I thought my biggest issue with Democrats was the willful ignorance to airborne murder as a matter of convenience.

1 hour ago, Paxter said:

 

- The backstopping of unsecured deposits is being marketed by the Government as avoiding a bailout. That’s only true as a technicality. Ultimately, FDIC is funded by bank customers and therefore taxpayers. So the backstops do come at a public cost, albeit one perhaps worth paying in this instance.

-

Why? 

 

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[quote] SVB were complacent and deeply incompetent in simple risk management. [/quote]

Problem is there appear to be other major industries essential to the economy to which this statement applies in full - like the railway companies who put profit above maintenance and basic safety, resulting in a spate of totally predictable and highly destructive derailments. Likewise, utility companies in Texas and California decided to put profit above weatherization and maintenance, which was a major contributor to power outages and devastating fires. Factor in deliberate stupidity like banning ESG investing and shaky financial institutions, and a major mess is fast approaching. 

 

[quote] (BTW since Lehman it is illegal to fuel rumors irresponsibly about banks so people are circumspect about what they say and where) [/quote]

And this remains a mindblower - that a handful of ordinary laymen discussing publicly available information could be charged with a crime for doing so on an open website. It speaks of deep paranoia and corruption - an effort to silence cautionary voices.

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