‘The US banking system is sound and resilient,” Jerome Powell proudly stated, just days after the federal government took over First Republic Bank, marking the second-largest bank failure in US history. In our Fed chair’s world, First Republic is just one other one-off, like Signature and Silicon Valley banks before it.
Sorry, one-offs (as Powell’s attempting to frame First Republic) rarely are available threes, or fours in case you count the ill-fated Credit Suisse’s forced merger with UBS by the Swiss.
Not long after Powell’s assurances, regional-bank stocks began to crash. Fox Business’s Eleanor Terrett and Charlie Brady reported that just prior to now week, the sector is down 10%. For the yr, regional-bank stocks are down 34.6% — in comparison with an 8.1% rise within the S&P 500.
The most recent problem child appears to be LA-based PacWest Bancorp, with $40 billion in assets. It’s smaller than the $200-plus-billion at First Republic, but not insignificant, and its stock collapsed not long after Powell’s remarks. Shares recovered a bit Friday but not enough. They’re still down 82% from their 52-week high and its management continues to hunt a white-knight savior.
The predominant offender is, in fact, higher rates of interest. Also an absence of leadership. The Fed is the nation’s front-line bank regulator. But Wall Street appears to have less faith in Powell’s ability to stem the most recent systemic threat to the US economy — a smoldering crisis threatening scores of midsized banks — than it had in his ability to foresee “transitory” inflation.
Ditto for Treasury Secretary Janet Yellen, one other player within the bank regulatory apparatus. For weeks now, she’s also been telling the markets things are high quality with our banks. Logic suggested quite the alternative, particularly on the regional-bank level where management collectively appears to have drunk from the identical cup of Kool-Aid.
Janet Yellen and Jerome Powell have been condemned over their handling of inflation and bank collapses.Getty Images
The regionals took probabilities in order that they could compete with the large banks. They were convinced the great times would never end when Powell & Co. printed money and Yellen spent like mad even after the economy opened from COVID. They made loans on terms that didn’t have in mind that the economy would someday slow because it’s doing now. They loaded up on capital bought at the peak of the market.
The Fed’s money printing got here at a steep price, in fact — that insidious tax on the working class often called inflation. Over the past yr, Powell has jacked up rates eight times to slow the fast-burning economy.
Inflation could also be falling even when it stays sticky, which implies more rate increases are likely despite talk of a “pause.” Meaning speculative assets will probably be “normalizing,” a Wall Street term for continued compression of costs in stuff like crypto, meme stocks, tech, and now dangerous assets on regional-bank balance sheets.
Banking is a confidence game. Recall Jimmy Stewart’s character George Bailey in “It’s a Wonderful Life” attempting to persuade depositors from yanking their money from the Bailey Constructing and Loan. “You’re considering of this place all mistaken as if I had the a reimbursement in a secure. The cash just isn’t here . . . your money is in Joe’s house . . . and 100 others.”
George Bailey prevented his “wonderful old Constructing and Loan” from collapsing, but just barely. He dipped into his own pocket, using his honeymoon savings as a short-term loan to pay some depositors. He was also in a position to persuade enough people to trust in his ability to maintain the bank afloat.
Yes, times were tough (it was the Great Depression). But depositors’ money, he argued, were in people’s houses — solid assets that may repay over time. Their savings were secured so long as they didn’t panic.
Jamie Dimon’s JPMorgan bailed out First Republic Bank. AP
Depositors on the run
We are able to use just a few George Baileys now. As word of risk-taking spreads, regional depositors are running for the exits. They’re draining the banks of their capital and sending them into insolvency because they don’t know what they’re backing up, akin to increasingly depressed business real estate. Their execs hide behind a phalanx of Pollyannaish flacks who can’t be trusted with the reality. First Republic dodged necessary questions during its last analysts call that guaranteed its demise.
Powell and Yellen offer bromides, too, and a patchwork of short-term fixes. A shotgun marriage arranged by the Feds allowed JPMorgan to purchase First Republic in receivership with oodles of presidency guarantees. It did nothing to stem worries in regards to the system, as this past week’s events demonstrated.
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My banking sources tell me they expect policymakers to provide you with one other half-baked solution to stop depositors from moving their money out of the regionals: Extend deposit insurance well above the present $250,000 limit, possibly making it limitless, either explicitly or by declaring all regional banks “systemically necessary” in order that they get the identical “too big to fail” designation as places like JPMorgan.
Sounds good, but rates of interest offered on bank deposits suck. Prolonged deposit insurance won’t stop the drain because you possibly can earn around 4% to five% in a super-safe money market fund offered by money managers like Vanguard.
One other solution: Just let the regional banks fail and be taken over by the larger, presumably higher capitalized megabanks. But huge chunks of the nation’s lending apparatus just can’t get replaced by the large guys — JPM, Citi, BofA, and Wells Fargo. More bank lending is mandatory to forestall a full-scale recession.
And what number of bad banks like First Republic can Jamie Dimon and JPM’s balance sheet digest? JPM now controls nearly 17% of the nation’s deposits. Speak about too big to fail!
Sorry, there are not any quick fixes for the pickle we’re in except possibly attempting to avoid the sins of the past.
We’d like Jerome Powell to show into George Bailey and begin telling the country some hard truths. The Fed printed money when it wasn’t mandatory. The hyperlow rates of interest of the past three years lasted for much longer than the existential threat of those COVID lockdowns to the economy. And now the bill is coming due.
