Silicon Valley Bank shutttered, moved to FDIC receivership

[Winehole23]

Adam Tooze hitting similar themes

"Standard procedure"

If we consider 2008 and 2020 standard.

Is it standard for the system of payment to get stressed like this now?

the rich have been eating our lunch for the past 40-50 years, by political choice. that trend has accelerated during the last 15 years. the sentiment makes perfect sense to me.

yeah then thats probably where we're not seeing eye to eye. you just want to watch them burn even if it doesnt benefit others... as would be the case if deposits were just lost because there was a bank run. i have no interest in that. systemic change would involve taxation/legislation, thats what im after

no, I'd like them to play by the same rules everyone else plays by, instead of being supercitizens who buy the pols to write the rules and change them midstream when they the bed. that creates systemic problems that get socialized when financial ins utions break down due to greed and mismanagement. just because there's no immediate cost to taxpayers doesn't mean there's no moral hazard and it certainly doesn't mean society doesn't eventually pay for the fraud, greed and incompetence.

it took the Great Depression for Glass-Stegall to happen the first time, it might take something similar for it to happen again, sadly.

The deal-making over Credit Suisse is, in short, a classic case of sovereignty exercised through declaring an exception. This is the logic of Carl Schmitt that Cameron and I touch on in the podcast this week, which you can listen to here.



As I argued in Crashed, this can appear as a dramatic assertion of power, but it arises under conditions which, in fact, change its meaning. Who exercises sovereignty at the moment of a bank bailout like this? Is it the authorities who choose to suspend the rules, or some other force, “the markets”, that force the hands of regulators? Who is “the markets”? And can that force of market pressure really be described as sovereign? Is that not to impute too much subjectivity to it, too much by way of “decision-making”? The harassed bond traders who are canceling their tennis games this weekend, no doubt feel that they are the hunted rather than the hunters. That too may be a matter of journalistic emplotment. Apparently some banks, including Deutsche Bank, are hoping to act the role of the sharks, snapping up attractive portions of the Credit Suisse carcass. And, gruesome and suspenseful as it is, can one really say that this scene is exceptional? Is it not an (irregularly) recurring feature of financial capitalism - SNAFU?

https://adamtooze.substack.com/p/cha...-crises-states

[Winehole23]

As Katie Martin reports in the FT what dominated the scene was the sheer violence of the market reaction:

On Monday this week (March 13), the most important market in the world went, to use the technical term, completely bananas. Government bonds have a habit of rallying when the going gets tough, which it indisputably did when Silicon Valley Bank imploded. So a jump in US Treasury debt prices off the back of this makes sense. The turmoil prompted nervous investors to look for a safer hidey hole. … But there are bond rallies and there are bond rallies. This time, the market reaction in Treasuries was nothing short of apocalyptic. Two-year Treasury notes, the most sensitive instrument in the debt market to the outlook for interest rates, rocketed higher in price. Yields dropped by an eye-popping 0.56 percentage points, having already dropped by 0.31 percentage points the previous Friday. To put Monday’s move in context, it represents a bigger shock than in March 2020 — not a vintage period for global markets. It was bigger than on any day in the financial crisis in 2008 (ditto). You have to go back to Black Monday of 1987 to find anything more severe.

This points both to the scale of the shock and to the uncertainty that rules in the US Treasury markets. Price movements were as extreme as they were in part because the market was thin, with big gaps between bid and ask prices.










As JP Morgan remarks in a research note:

… liquidity conditions (in the Treasury market) remain relatively impaired, indicating that any fundamental or technically-driven flow is likely to exaggerate moves in yields. Indeed, Treasury market depth remains depressed, at levels last seen in the middle of March 2020, during the worst of the COVID-19 crisis (Exhibit 6). Importantly, this decline in liquidity is broad-based in nature, though it is notable that front-end depth has fallen to new lows (Exhibit 7). While this indicates liquidity is impaired, we do not see Treasury market functioning as being compromised to the extent we observed this time three years ago. Indeed, as we’ve highlighted multiple times in recent months, this illiquidity has been rooted in uncertainty over the path for monetary policy.

[Winehole23]

It would be worth exploring how and why this radicalism on law, money and finance flourishes in the US, alongside the brutal resilience of bailout capitalism. It is tempting to suggest that the spectacular Minskyian-logic of America’s boom-bust-bailout political economy, which Yakov Feygin identified so precisely, incites against itself a radical imagination. Given the emergency steps being taken, it can hardly be denied that things could obviously be fundamentally different. The “system” such as it is, clearly relies for its continuation on ad hoc interventions. And yet, the moment of radical sovereignty proves disappointing. The in bent power and wealth exhibit not just resilience, but extremely powerful dynamism, far more than the lame duck contenders in Europe. The Schmittian moment of sovereignty is false. It never arrives for the radical reformists either. So the dialectic continues, without resolution.

[boutons_deux]

150+ banks Carriy same risk as SVB, meaning if only half of their depositors withdrew their funds, the banks would fold

Don't we all just love deregulation of BigFinance?

The financial deregulation was of course bribed, including a bunch of Dems

There is no power stronger than the power of the dollar

[Winehole23]

Preferential treatment of SIBs hitting regional banks already?

The moral hazard free "not a bailout" continues apace.

“Federal Home Loan Bank System issued $304 billion in debt last week, according to a person familiar with the matter, who asked not to be identified discussing non-public data. That’s almost double the $165 billion that liquidity-hungry lenders tapped from the Federal Reserve.

The FHLBs are a Depression-era backstop originally created to boost mortgage lending. The system, now a key source of cash for regional banks, is known as the “lender of next-to-last resort” — a play on the nickname for the Federal Reserve’s discount window.”

https://www.bloomberg.com/news/artic...ster-liquidity

[Winehole23]

The “system” such as it is, clearly relies for its continuation on ad hoc interventions

.

[Winehole23]

Then starting the bank run. Then expecting the government to bail out them out after screwing their clients twice.

[Winehole23]

Sunk the bank by withdrawing deposits, but not before shorting it.

[Winehole23]

(It'd be a weird option to rule out, considering the edgy libertarian players.)

[Winehole23]

A recent study by Grimm et al. (2023: 34) “provides the first evidence that the stance of monetary policy has implications for the stability of the financial system. A loose stance over an extended period of time leads to increased financial fragility several years down the line“. However, the paper says relatively little about the theoretical transmission mechanisms from low policy rates to financial instability: “Why, though, do money and credit expand in the first place? By analyzing this question, we contribute to the strand of the literature that focuses on potential causes of credit booms. To the best of our knowledge, this strand is relatively thin.”

An interesting new explanation of the link between the central bank’s policy and credit growth is provided in recent paper by Kashyap and Stein (2023). The authors argue: “(…) it now appears clear that both conventional and unconventional monetary policy actions gain much of their traction over the real economy by influencing a range of risk premiums in financial markets, where the risk premium on an asset is the expected return that an investor can expect to earn above and beyond the safe rate on a government bond of comparable maturity” (p.55). However, this transmission channel focuses mainly on non-banks and on money market funds. As far as banks are concerned, it neglects the effects of the central bank policy rate on the liability side of bank balance sheets which can compensate the negative effects of lower interest rates on the accounting income of banks.

In a recent paper (Bofinger et al. 2023), we provide an alternative and more direct theoretical explanation for the effect of central bank policy rates on credit growth. Our model differs from standard models in that it is not based on the ‘financial intermediation theory of banking’, but on the ‘credit creation theory of banking’ (Werner 2014). 1 The main differences between the two approaches can be illustrated by comparing the standard loanable funds model with a model of the market for bank loans.

In the loanable funds model, ‘funds’ are an all-purpose commodity that can be used interchangeably as a consumption good, as an investment good, and as ‘capital’ or ‘saving(s)’ that banks intermediate from savers to investors. 2 Households supply the good on the ‘capital market’, where there is demand from investors who use it to increase the capital stock. Thus, deposits drive loans. In this setup, the role of banks is limited to the intermediation funds, as they cannot produce or consume the all-purpose commodity. The same applies to the central bank, which therefore has no role to play in this model.

With the loanable funds model still the dominant paradigm in monetary macroeconomics, it is not surprising that Mian and Sufi (2018: 50), for example, are puzzled by the dynamics of private credit growth:

“Much of the work on the credit-driven household demand channel takes the expansion of credit supply as a given. But what kind of shock leads to credit supply expansion? We should admit that we have now entered a more speculative part of this essay”.

Indeed, with household saving as the sole source of funds, the strong credit growth preceding financial crises is difficult to explain. This reflects the fundamental flaw in the model, namely that the monetary sphere is identical to the real sphere. In fact, only two decisions can be made: (1) the saving decision, which is identical with the consumption decision; and (2) the investment decision. How can one expect to explain the mechanics of the financial system with consumption and investment?

This is different in our model of bank lending: the monetary sphere is not constrained by the real sphere, since ‘funds’ are liquid bank deposits. They are created by the banking system ex nihilo, i.e. completely independently of private saving(s). The mechanics of this approach have been explained in detail by the Bank of England (McLeay et al. 2014) and the Deutsche Bundesbank (2017). The logic is quite simple: by lending to a customer, the bank credits his/her deposit account. Thus, the very act of lending creates deposits (i.e. money).

In this model, the central bank can directly influence the supply of credit by banks. This is because of the secondary effects of bank credit creation. In most cases, borrowers use their new deposits to make payments to another bank. For the bank that made the loan, this means a reduction in its reserves at the central bank. Assuming that it had an optimal level of reserves before the loan, the bank needs to replenish its deposits with the central bank. This can be done by borrowing from other banks on the money market or directly from the central bank. In the case of an interbank loan the interest rate on this borrowing is close to the central bank’s policy rate. In the case of central bank refinancing it is equal to the policy rate.

https://cepr.org/voxeu/columns/how-m...redit-creation

[Winehole23]

DP17896 Loose monetary policy and financial instability

• Maximilian Grimm Òscar Jordà Moritz Schularick Alan M. Taylor 9 Feb 2023

Do periods of persistently loose monetary policy increase financial fragility and the likelihood of a financial crisis? This is a central question for policymakers, yet the literature does not provide systematic empirical evidence about this link at the aggregate level. In this paper we fill this gap by analyzing long-run historical data. We find that when the stance of monetary policy is accommodative over an extended period, the likelihood of financial turmoil down the road increases considerably. We investigate the causal pathways that lead to this result and argue that credit creation and asset price overheating are important intermediating channels.

https://cepr.org/publications/dp17896

[Winehole23]

08 was followed by dodd Frank. Wasn’t business as usual. Not to mention the government got repaid on the bank bailouts with interest. Iirc made more than 10 billion profit off the chase bailout alone

Obama's spinning bailouts as profitable to the government was misleading, tbh.

The direct cost of bailouts arising from the 2008 U.S. financial crisis wasaround $500 billion

https://gcfp.mit.edu/wp-content/uplo...esentation.pdf

[Winehole23]

Official efforts to dispel concern provide an anchor for it. Deutsche Bank credit default swaps are ing.

[Winehole23]

Moral risk-free "not bailouts" seem to have amplified fragility.

The global economy may now be trapped in an easy money-forever cycle. A weak economy or financial crisis forces policymakers to implement fiscal measures and more monetary expansion. If the economy responds and the financial sector stabilises, then there are attempts to withdrawal the stimulus. Higher interest rates slow the economy and trigger financial crises, setting off a new round of the cycle.

If the economy does not respond or external shocks occur, then there is pressure for additional stimuli, as policymakers seek to maintain control. All the while, debt levels continue to increase, making the position ever more intractable.

https://www.nakedcapitalism.com/2023...-suspects.html

[Winehole23]

"TINA"

Faced with the stark choice between curbing inflation and saving the banks, venerable commentators appeal to central banks to do both: to continue hiking interest rates while continuing with the post-2008 socialism-for-bankers policy, which, other things being equal, is the only way to stop the banks from falling like dominoes. Only this strategy – tightening the monetary noose around society’s neck while lavishing bailouts on the banking system – can simultaneously serve the interests of creditors and banks. It is also a surefire way to condemn most people to unnecessary suffering (from avoidably high prices and preventable unemployment) while sowing the seeds of the next banking conflagration.



Lest we forget, we have always known that banks were designed not to be safe, and that, together, they comprise a system cons utionally incapable of abiding by the rules of a well-functioning market. The problem is that, so far, we had no alternative: Banks were the only means of channeling money to the people (through tellers, branches, ATMs, and so forth). This turned society into a hostage of a network of private banks that monopolized payments, savings, and credit. Today, however, technology has furnished us with a splendid alternative.

Imagine that the central bank provided everyone with a free digital wallet – effectively a free bank account bearing interest equivalent to the central bank’s overnight rate. Given that the current banking system functions like an antisocial cartel, the central bank might as well use cloud-based technology to provide free digital transactions and savings storage to all, with its net revenues paying for essential public goods. Freed from the compulsion to keep their money in a private bank, and to pay through the nose in order to transact using its system, people will be free to choose if and when to use private financial ins utions offering risk intermediation between savers and borrowers. Even in such cases, their money will continue to reside in perfect safety on the central bank’s ledger.

The crypto brotherhood will accuse me of pushing for a Big Brother central bank that sees and controls every transaction we make. Setting aside their hypocrisy – this is the same crew that demanded an immediate central-bank bailout of their Silicon Valley bankers – it bears mentioning that the Treasury and other state authorities already have access to each transaction of ours. Privacy could be better safeguarded if transactions were to be concentrated on the central bank ledger under the supervision of something like a “Monetary Supervision Jury” comprising randomly selected citizens and experts drawn from a wide range of professions.

The banking system we take for granted is unfixable. That’s the bad news. But we no longer need to rely on any private, rent-seeking, socially destabilizing network of banks, at least not the way we have so far. The time has come to blow up an irredeemable banking system which delivers for property owners and shareholders at the expense of the majority.
Coal miners have found out the hard way that society does not owe them a permanent subsidy to damage the planet. It is time for bankers to learn a similar lesson.

https://www.project-syndicate.org/co...ufakis-2023-03

[Winehole23]

Walker Todd was assistant counsel of the New York Federal Reserve, assistant general counsel, and research officer at the Cleveland Fed, and has been actively involved in financial regulation for decades. When he looks at the U.S. banking sector, he sees several problems driving these recurrent crises, chief among them a profound transformation in capitalism known as the “financialization of everything” in which corporate executives chase short-term profits through risky activities. Businesses and their bankers securitize accounts receivable, thus separating ordinary consumer transactions from their primary funding sources. Then the bankers end up demanding bailouts when things go wrong and the consumers stop paying, all the while lobbying against regulation and oversight.

Ronnie Phillips’ “100% Reserve Plan,” also known as the “Chicago Plan,” persuaded me that it’s the next best thing to the gold standard because it requires the parts of banks linked to the payment system to maintain, at all times, assets at market value equal to the amount on deposit. The investments would be Treasury bills, Treasury notes, and Treasury bonds. They could hold those things and you could do away with deposit insurance because if the only assets are Full Faith and Credit government paper, then there’s no point in having it.

And what about the lending side of banking? Like investment banks before the ‘90s, they would have to raise their own funds in the wholesale funding market, knowing that their own notes, bonds, and stock issues raise operating funds. They would use the funds to make loans or they could buy investments or even government securities. The point is to take away the Fed’s argument that we have to rescue these poor babies because otherwise, they will crash the payment system. If they’re cut off from the payment system, what is the risk if they go down?

Drexel Burnham Lambert, a fairly large investment bank, was allowed to fail in 1990 with no consequences for the payment system. We know that some senior Fed officials wanted to make bailout loans to Drexel to save the world, to save the payment system. But senior staff worked hard to persuade the higher-ups that there was no risk to the payment system then, before the repeal of Glass-Steagall. Drexel could not have access to the payment system so there was no reason to intervene. When Drexel failed, it turned out that the accounts had been properly maintained and most people came out okay. The only people really hurt were the shareholders.

That’s the way things are supposed to work out. It’s a political matter that we refuse to go back to this model of handling failures of large banks that look like investment banks or mutual funds.

https://www.ineteconomics.org/perspe...when-they-play

[Winehole23]

Costs of doing business are passed on to customers

LP: What is the cost of banking crises to the ordinary person?

WT: The federal rescue costs are spread around so thinly that you don’t notice that $200 of your annual income is going, for example, to a $30 billion rescue package. And even if you didn’t, the government does not fund the rescue through tax but rather a special assessment on the banks. The banking system has to figure out how to swallow the $30 billion and spread it around among depositors and shareholders through fees and the like.

[Winehole23]

LP: What current assumptions about banking need to be rethought?


WT: I think the 1999 repeal of Glass Steagall (the Gramm-Leach-Bliley Act) was the major mistake for the long haul. It set in motion trends that culminate, ultimately, in each successive crisis being more difficult to resolve than the one that preceded it. That’s where we are today. It’s not on the scale of 2008, but if we keep mishandling the problem, we can get there.

[Winehole23]

Preferential, "not a bailout" loan terms to protect banks and banks only from rising interest rates is moral hazard free, because no money was appropriated in Congress, and the Federal Reserve takes (below market rate) interest.

Money will be made and any profits will presumably be deposited to the US Treasury, in all likelihood it will be a net plus to taxpayers!

The central bank’s aggressive rate hikes are a key factor behind the latest round of shocks to banks, whose investment securities collectively lost $600 billion worth of market value due to rising rates. Yet the assembled bankers and economists appeared unbothered about whether the Fed’s actions might make the crisis worse, and focused instead on the imperative of suppressing wages and worker bargaining power.


There's a good reason for that. After Fed Chairman Jerome Powell, a former private equity executive, declared war on workers in order to drive down wages and fight inflation last year, it looked briefly like the banks might become collateral damage. But the Fed moved quickly to shield the banks — and only the banks — from the impact of its actions before announcingWednesday that it would raise rates by another quarter-point.


That means that while ordinary consumer borrowers struggle, banks will have access to what one financial analyst recently called “the biggest bailout to the banking sector since the great financial crises.” A new Fed lending facility, launched the same day the central bank voted to bail out Silicon Valley Bank, has already injected more than $53 billion into financial ins utions at highly favorable terms.


The double-standard was on full display at the ABA summit, where former Fed Vice Chair and Brookings Ins ution senior fellow Donald Kohn bemoaned that wages are “still too high” and predicted that rate hikes will continue — while telling the bankers in the audience that the Fed’s latest actions should provide “foam on the runway” to banks, in order to “make the landing as safe as possible.”


The Fed will even avoid releasing the names of banks that use the facility until a year after its end, to protect their reputations and avoid tipping off the public to any signs of trouble with their balance sheets.


That means banks shouldn’t be too proud to ask the government for help, Peter Cook, the ABA’s chief communications officer, told the audience. “There’s still the stigma concern — that if you do this, it’s a sign of weakness,” he said of using the Fed’s emergency lending facility. “That’s not how folks should look at this.”

https://www.levernews.com/lever-week...st-rate-hikes/

[Winehole23]

"The system, such as it is, depends for its continuation on ad hoc interventions"

Odd those sophisticated whales didn't diversify their deposits, but in the end, there was no need to.

[Winehole23]

On the day Silicon Valley Bank collapsed, there were still $119 billion in total deposits at the bank, according to the FDIC. The total shortage to cover all deposits would have been $20 billion, and if the FDIC had stuck to its insurance limits, that loss would have represented the maximum haircut for all uninsured depositors. It wouldn’t have been the end of the world.

https://wolfstreet.com/2023/03/27/fd...nd-20-billion/

[Winehole23]

More "not a bailout" FDIC deal terms

First Citizens got a of a bargain: it paid zero dollars for SVB's assets, its deposits and its loans. Any losses it incurs from its commercial loans over the next five years will be paid by the FDIC, no questions asked.

https://pluralistic.net/2023/04/15/socialism-for-the-rich/#rugged-individualism-for-the-poor

[Winehole23]

the Cramer curse

[CosmicCowboy]

Looks like First Republic is the next bank to fail. Dropped 50% yesterday and another 14% overnight.

[pgardn]

Looks like First Republic is the next bank to fail. Dropped 50% yesterday and another 14% overnight.

Bad investment company...
Individualized Private Wealth Management... not good.

Maybe People just need to keep the fluid $ in local credit unions?