Second Financial Rescue in 15 Years
Hello bailout fans, we have the Second Rescue of the Banking System in 15 Years.
That is a free link to a WSJ article.
The Treasury and Federal Reserve stepped in late Sunday to contain the financial damage from Friday’s closure of Silicon Valley Bank, guaranteeing even uninsured deposits and offering loans to other banks so they don’t have to take losses on their fixed-income assets.
This is a de facto bailout of the banking system, even as regulators and Biden officials have been telling us that the economy is great and there was nothing to worry about. The unpleasant truth—which Washington will never admit—is that SVB’s failure is the bill coming due for years of monetary and regulatory mistakes.
Wall Street and Silicon Valley were in full panic over the weekend demanding that the Treasury and Fed intervene to save the day. It’s revealing to see who can keep a cool head in a crisis—and it wasn’t billionaire hedge-fund operator Bill Ackman or venture investor David Sacks, both frantic panic spreaders.
In a world of near-zero interest rates, SVB put the money in long duration fixed-income assets in search of a higher return. Regulators after the 2008 crisis had deemed these Treasury bonds and mortgage-backed securities nearly risk-free for the purpose of measuring bank capital.
The San Francisco Fed regulates SVB and somehow missed this rising vulnerability. The Fed and Treasury will try to blame the bankers, but they are as much if not more culpable. The idea of elevating San Francisco Fed president Mary Daly to the Board of Governors seems preposterous after SVB.
The feds said they will guarantee even uninsured deposits at SVB as well as at Signature Bank in New York. Typically in a bank failure those depositors would get their money back with a 15% to 20% haircut. This would no doubt be a hardship for many customers, but the $250,000 limit was known.
But there is political risk from a bailout too. If the Administration acts to guarantee deposits without Congressional approval, it will face legitimate legal questions.
Frantic Panic Spreaders
It won’t matter but I am pleased the Journal blasted Bill Ackman and venture investor David Sacks, as “frantic panic spreaders“.
There’s more in the article about how Rohit Chopra, an Elizabeth Warren acolyte on the FDIC board, is hostile to bank mergers on ideological grounds, perhaps preventing a merger.
The Journal speculates how Biden might illegally act to guarantee all deposits or pressure House Speaker Kevin McCarthy.
No More Financial Crises In Our Lifetimes
Here’s a flashback hoot of the day. On June 27, 2017 then Fed Chair Janet Yellen said she expects “No New Financial Crisis in Our Lifetimes”
“Would I say there will never, ever be another financial crisis?” Yellen said at a question-and-answer event in London.
“You know probably that would be going too far but I do think we’re much safer and I hope that it will not be in our lifetimes and I don’t believe it will be,” she said.
Once again, the Fed kept interest rates too low, too long, encouraged speculation, then bailed out the banks.
Spare me the sap about this was a depositor bailout not a bank bailout.
When you value assets at par so that banks don’t have losses, what the hell is it.
Conclusion
You can’t run the most reckless monetary and fiscal experiment in history without the bill eventually coming due. The first invoice arrived as inflation. The second has come as a financial panic, with economic damage that may not end with Silicon Valley Bank.
That’s from the Journal. I couldn’t have said it better.
This post originated at MishTalk.Com.
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Mish
1. Absolute power.
2. Build me an Antonov An-225 Mirya, but with windows and nice chairs. In the meantime, I’ll slum it in an An-124. But they’d better get working.
On March 12 (2009), Congressman Paul Kanjorski (D-PA), Chairman of the House Financial Services Subcommittee, held a lengthy hearing to examine Financial Accounting Standard (FAS) 157 Mark-to-Market. In his prepared statement, Kanjorski emphasized that, “We can, however, no longer deny the reality of the pro-cyclical nature of mark-to-market accounting. It has produced numerous unintended consequences, and it has exacerbated the ongoing economic crisis. If the regulators [SEC] and standards setters [FASB] do not act now to improve the standards, then the Congress will have no other option than to act itself.”
Proof? Of course not. Cultists never provide proof.
duration fixed-income assets in search of a higher return. Regulators
after the 2008 crisis had deemed these Treasury bonds and
mortgage-backed securities nearly risk-free for the purpose of measuring
bank capital.”
absolutely required to save your civilization. So I think when you have
troubles like that you shouldn’t be bitching about a little bailout. You should
have been thinking it should have been bigger. You should thank God the
government saved the big banks and their investors. Now, if you talk about
bailouts for everybody else, there comes a place where if you just start
bailing out all the individuals instead of telling them to adapt, the culture
dies. Suck it in and cope.”
Monitor, September 30, 2010