Monday, March 20, 2023


This is the quality of bailout you would expect in the Third World:  Rate hikes to curtail inflation as everything collapses in real-time...

Biden went to great pains last week to assure everyone that these latest bank bailouts were for depositors not for investors. Shareholders in several banks (SVB, Signature, Silvergate) were wiped out last week. This past weekend, with the Credit Suisse/UBS forced merger it was bondholders who got totally wiped out while stock investors got ~.50 on the dollar. Which is very unusual and probably illegal. I am guessing that regulators didn't want the public to see a fourth bank stock going to ZERO given that retail investors usually trade company stocks not company bonds. 

On the topic of depositor protections, consider that by this point in 2008 Congress had already taken steps to insure ALL deposits at ALL banks. Which is how they stemmed the bank run in that era. Last week, Goldman Sachs had this to say about universal deposit insurance passing Congress:

"Increasing deposit insurance without accompanying regulatory changes looks politically difficult, but an agreement on regulatory changes would substantially slow approval"

Elizabeth Warren just introduced a bill to rollback the 2018 Dodd-Frank rollback. Essentially closing the barn door now that the horses are out. To reimpose Dodd-Frank on small banks would immediately expose regional banks to ~$600 billion of unrealized losses due to the restoration of mark to market rules. Meaning it would precipitate the final collapse of the banking sector. Which seems like a bad idea at this point in time. 

Whether that bill passes or not, we now learn that another 190 banks are already teetering on the edge of collapse due to a combination of insolvent assets and high levels of uninsured deposits. The two main factors that catalyzed the Silicon Valley collapse. 

"On the heels of Silicon Valley Bank’s collapse earlier this month, 186 more banks are at risk of failure even if only half of their depositors decide to withdraw their funds, a new study has found"

“The recent declines in bank asset values very significantly increased the fragility of the U.S. banking system to uninsured depositor runs”

A run on these banks could pose potential risk to even insured depositors — those with $250,000 or less in the bank — as the FDIC’s deposit insurance fund starts incurring losses"

The FDIC deposit insurance fund ("DIF") has ~$128 billion insuring ~$18 trillion in deposits. Yes, you read that right. Roughly half of those deposits are uninsured. So without a Congressional backstop, this all gets ugly really fast. And in the meantime while that's not happening, CFOs are moving unprecedented amounts of money out of banks into money markets and t-bills. There are $9 trillion of uninsured deposits.

Next, from a fiscal perspective, consider that in March 2020 Congress enacted the largest fiscal bailout package in U.S. history. Whereas this year, the GOP is plotting to push Biden over the fiscal cliff as early as June by vowing not raise the debt ceiling until he reigns in spending.

Which is what they did to Obama in mid-2011. Which dropped the S&P 500 a cool -20%.

On the monetary side of things, by this point in March 2020, the Fed was cutting rates by .5%. Last week the ECB raised rates by .5% and this week the Fed is expected to raise rates by .25%. Again, the opposite of accommodative policy. Many bulls have been encouraged by the fact that the Fed balance sheet is now increasing once again. This was due to the global liquidity facility that central banks put in place last week. Nevertheless, it's a fraction of what took place in March 2020:

In other words, everything taking place now is the opposite of a bailout. Which is clear indication of societal bailout fatigue and the growing conviction of letting losses fall where they may. Which sounds great. However, what NONE of these people understand is that they have now put the entire system at risk with this late stage experimentation in REAL capitalism. Long overdue, but arriving at a time when the financial system is ready to collapse.  

Why? Because as Warren Buffett always says, what the wise man does at the beginning, the fool does at the end.