Banks on the Brink: 2023 Mini-Crisis

[Iskaral Pust]

“Usually” this amount of monetary tightening by central banks would be enough to cause a recession, although there is a lag to those effects.  We’ve seen the slowdown already in the most interest rate-sensitive sectors, e.g. housing/construction and speculative start-ups, but it hasn’t percolated yet into the rest of the economy.  The recent overheating of the economy wasn’t driven by a rapid expansion of credit (as in 2008 and “usually”), so it’s not quickly reversed by higher interest rates.  Corporate and household balance sheets look mostly very healthy, albeit deteriorating recently for lower income quintiles, because of COVID-era effects (like lower spending for a while, fiscal transfers and govt PPP loans, plus refinancing mortgages at very low yields even as house prices rose) and very low unemployment, which is partly demographic due to Boomers retiring.  So it’s not at all obvious how much monetary tightening is needed to cause a recession to slow inflation — and it’s very difficult to get the latter without the former now that inflation is embedded in wage growth and the services portion of core inflation.  We may already be on a lagged path to an imminent recession or we may have more Fed tightening ahead. It’s very uncertain.  This is why the markets keep overreacting to every little economic data print. 

[Paxter]

Looks like UBS is going to pick up some or all of its former rival.

[maarsen]

3 hours ago, Spockydog said:

Nobody knows if there is going to be a big, fuck off recession. Because nobody understands the economy. Literally nobody. Sure, a whole bunch of well paid economists will tell everyone they know what's going to happen, but the truth is nobody has a fucking clue. 

 

 

 

If you took all the economists in the world and laid them end to end they would still all point in different directions. 

[Wilbur]

On 3/17/2023 at 8:17 AM, Chataya de Fleury said:

Then there are a good number of PE firms which should be getting fined.

I know regulators look at those e-mails. This will be found.

I completely agree that the PE firms should be held accountable for their communications, which were definitely a contributing factor to the fall of SVB.

I don't have much faith in regulators actually charging some of the most affluent people on the planet, however.

[Madame deVenoge]

6 minutes ago, Wilbur said:

I completely agree that the PE firms should be held accountable for their communications, which were definitely a contributing factor to the fall of SVB.

I don't have much faith in regulators actually charging some of the most affluent people on the planet, however.

You must have missed the multimillion dollar fines that some firms have received for employees simply discussing internal client-related matters on their cellphones vs e-mail, corporate Zoom, Teams, etc.

I seem to remember that you’re a teacher - please forgive me if I’m wrong. Are you allowed to discuss matters with other teachers over text message or via phone - whether it’s just a text or a call to say, “hey, are you teaching Gilgamesh this year?” or “is young Eric having a problem in your class, too? Do you think we should discuss with his parents now, or wait for the conference in a month?”

WE CAN’T - absolutely CANNOT - do that. 

When it happened again, the next year, Goldman, Morgan Stanley, etc, then also extended those fines to the erring employees. Managing Directors had to pay millions, while lower level staff hundreds of thousands to thousands - depending on the egregiousness of the conduct and the employee’s seniority level.

Basically, working for such a firm does have a lot of rules, and, yeah, regulators actually do hold people accountable. 

And I will tell you that there is no set of entities held more accountable than entities subject to SEC oversight while under a Democratic administration. (And I am a Democrat, btw.)

[Wilbur]

On 3/17/2023 at 11:25 AM, DireWolfSpirit said:

I have heard these anectdotal type denials before every recession and downturn, before each and every cyclical downturn like clockwork.

We always realize it first in construction and manafacturing, we especially see it first in the midwest. The reporting is backdated, lagging information.

Im telling you business is not normal. Small everyday items that are needed from our suppliers are taking months longer to get to the production floor.

I place a lot of credence in this description, and I would amplify it in a couple of ways.

First, a lot of the just-in-time supply chains that existed up until Covid provided the MBA middle managers with some bonus awards as they were perfected and any and all possible inefficiencies were ironed out.  However, Covid demonstrated that a perfectly efficient JIT supply chain is wonderful right up until the time when outside forces disrupt that state of perfect efficiency.  Then you no longer have a supply chain, and your fab / work site / lab / manufacturing facility sits idle until you can re-establish a supply of those critical widgets.

Second, a lot of those JIT S/Cs had their origins in China.  So Covid is still interrupting many of those sources and processes, and alternatives may or may not have gone out of business in the interim.

Third, many component and value-added suppliers are assessing the global market and seeking to re-price their products and services.  They aren't completely certain what the new price should be, but they ARE certain that they should be paid more for their work, particularly if they are not in China.  And while in the past they might have entered into a contract with a length of 24 months, perhaps now they only need to consider a 12-month supply contract, as this gives them the opportunity to revisit that pricing question against sooner.

Fourth, some suppliers have Plan X as a key component of their business model, with "Plan X" being the need to pay their employees less than a living wage.  Every time I run into one of these businesses, I am surprised once again, but it is far more common than I expect.  And I don't understand how employees agree to work for these wages, or how the owners expect to maintain the Plan X model, but it is everywhere.  When you have a supplier running on the Plan X model in your supply chain, and their employees suddenly wake up and walk out, those links in the chain fall out.

And just in time for American companies to resume making key components or combing them or reworking them or adding code, the banks go and enjoy a self-guided excursion into existential crisis such that no one will be able to lay their hands on the capital necessary to create a more resilient supply chain.  Not particularly useful.

[Wilbur]

12 minutes ago, Chataya de Fleury said:

I seem to remember that you’re a teacher - please forgive me if I’m wrong.

Retired semiconductor exec, although I started off my career in the Big 6.  My wife is the schoolteacher - good memory!

Edited March 18 by Wilbur
It wasn't eight anymore, down to six

[Madame deVenoge]

13 minutes ago, Wilbur said:

Retired semiconductor exec, although I started off my career in the Big 6.  My wife is the schoolteacher - good memory!

Omg, I remember when it was the Big 8, though by the time I was in grad school, it was the Big 5, and then Andersen spectacularly imploded. I interviewed with Andersen!!

Ah, the days before the VIE guidance and SOX. 

[DireWolfSpirit]

So......

a study has identified (so far) nearly 200 additional banks also in danger of not being liquid enough to cover major withdrawals without resorting to the same fatal losses that sank Silicon Valley Bank, namely these excess allocations to the long dated low yield treasuries that are "unrealized" balance sheet losses.

That is unrealized till the moment depositors come calling for thier cash and the losses trigger.
 
" Nearly 200 banks at risk for same fate as SVB: study"
 
https://nypost.com/2023/03/18/nearly-200-banks-could-fail-the-same-way-svb-did-study?utm_source=drive&utm_campaign=android_nyp
 

Edited March 18 by DireWolfSpirit

[Madame deVenoge]

7 minutes ago, DireWolfSpirit said:

So......

a study has identified (so far) nearly 200 additional banks also in danger of not being liquid enough to cover major withdrawals without resorting to the same fatal losses that sank Silicon Valley Bank, namely these excess allocations to the long dated low yield treasuries that are "unrealized" balance sheet losses.

That is unrealized till the moment depositors come calling for thier cash and the losses trigger.
 
" Nearly 200 banks at risk for same fate as SVB: study"
 
https://nypost.com/2023/03/18/nearly-200-banks-could-fail-the-same-way-svb-did-study?utm_source=drive&utm_campaign=android_nyp
 

This is now completely moot since the Fed is buying all of these at par.

And also, it’s not typical that depositors call for all their money all at once. Unrealized losses due to pricing on literally THE SAFEST ASSETS ON THIS PLANET mean nothing. Unless a run on the bank crystallizes those losses.

Edited March 18 by Chataya de Fleury

[DireWolfSpirit]

Never deny the inverted yield, "imminent storm" forecast.

It may take months, but the tsunami shall roar.

[DireWolfSpirit]

1 hour ago, Chataya de Fleury said:

This is now completely moot since the Fed is buying all of these at par.

The bank equity valuations are still going down and likely to decline further.

The majority of 401K and pension funds are holders of that bank equity through stocks and mutual funds as you know.

So no not completely moot, there are, and will be, ramifications even though the Fed has said they will guarantee uninsured deposits (SVB's) and make emergency capital (the backstop) available to banks.

Also has the Fed agreed to guarantee future uninsured deposits, or just SVB's uninsured depositors?

I wasnt certain they agreed to guarantee all future uninsured (those above that 250k threshold) at all the other institutions?

Ive heard comments that the Fed promise falls short of that sort of blanket protection?

Edited March 18 by DireWolfSpirit

[Fez]

8 hours ago, Iskaral Pust said:

“Usually” this amount of monetary tightening by central banks would be enough to cause a recession, although there is a lag to those effects.  We’ve seen the slowdown already in the most interest rate-sensitive sectors, e.g. housing/construction and speculative start-ups, but it hasn’t percolated yet into the rest of the economy.  

Housing starts grew by 13.8% in February. Maybe it's a one-month fluke, but it's not what I'd expected to see if interest rates were closing off demand or if a recession was imminent. 

[Madame deVenoge]

1 hour ago, DireWolfSpirit said:

The bank equity valuations are still going down and likely to decline further.

The majority of 401K and pension funds are holders of that bank equity through stocks and mutual funds as you know.

So no not completely moot, there are, and will be, ramifications even though the Fed has said they will guarantee uninsured deposits (SVB's) and make emergency capital (the backstop) available to banks.

Also has the Fed agreed to guarantee future uninsured deposits, or just SVB's uninsured depositors?

I wasnt certain they agreed to guarantee all future uninsured (those above that 250k threshold) at all the other institutions?

Ive heard comments that the Fed promise falls short of that sort of blanket protection?

I the current crisis, it’s pretty much all. They haven’t said it, but since they also guaranteed Signature…yup, right now, any and all.

[DireWolfSpirit]

7 minutes ago, Chataya de Fleury said:

I the current crisis, it’s pretty much all. They haven’t said it, but since they also guaranteed Signature…yup, right now, any and all.

I could foresee lawsuits from other banks and stakeholders if they did not guarantee the others. But yeah, I dont think its been explicity stated yet, Im sure the hope is we dont have to go there.

[ants]

3 hours ago, DireWolfSpirit said:

So......

a study has identified (so far) nearly 200 additional banks also in danger of not being liquid enough to cover major withdrawals without resorting to the same fatal losses that sank Silicon Valley Bank, namely these excess allocations to the long dated low yield treasuries that are "unrealized" balance sheet losses.

That is unrealized till the moment depositors come calling for thier cash and the losses trigger.
 
" Nearly 200 banks at risk for same fate as SVB: study"
 
https://nypost.com/2023/03/18/nearly-200-banks-could-fail-the-same-way-svb-did-study?utm_source=drive&utm_campaign=android_nyp
 

Um, isn't that always the problem with banks? If there is a run, then even solvent banks will face a crisis, which has a snowballing effect. 

[Paxter]

21 minutes ago, ants said:

Um, isn't that always the problem with banks? If there is a run, then even solvent banks will face a crisis, which has a snowballing effect. 

Nailed it.

No modern-day bank can survive extreme deposit outflows. See: fractional reserve banking.

Edited March 19 by Paxter

[Jeor]

12 hours ago, Paxter said:

The good thing is that FR is nowhere near as systemic as Lehman.

The big worry this weekend is Credit Suisse and whether a peaceful resolution can be effected. All eyes on Europe and any ripple effects to other systemic banks there. 

Yes, First Republic is small fry. Credit Suisse is a bigger problem, though it does have a few options and it looks like UBS will take it with some encouragement from Swiss authorities, and probably break a few pieces off for other private equity to snap up.

My point with Bear Stearns and Lehmann being 6 months apart is...from what I can recall of the GFC, at the time people thought Bear had been sorted with the sale to JP Morgan, and while Bear was a shock, it wasn't nearly as big a deal as Lehmann. 

It's not usually the big ones that fall first, the cracks appear in smaller places and then eventually catch up to something big. Even if they're papered over for now, I think there's big trouble lurking somewhere and I'm not trusting any bounce that might come from equity markets in the next few months.

These financial crises might seem to happen much more quickly in the Twitter age, but in the fullness of time they still take months to play out and usually ensnare a lot of different companies - unfortunately I think we've only seen the early skirmishes.

[Spockydog]

Whatever happens, it will be a brave political leader who signs off on another trillion dollar bankers bailout.

Edited March 19 by Spockydog

[ThinkerX]

1 hour ago, Spockydog said:

Whatever happens, it will be a brave political leader who signs off on another trillion dollar bankers bailout.

Nah. Bipartisan vote done behind closed doors late at night with no press whatsoever.