Guest Post by Karl Denninger
Bear Stearns is not the banking system — it is contained.
Subprime is contained.
“We’re gonna OWN subprime lending — Mozilo”
Uh huh.
Who remembers me over on the Countrywide Yahoo finance forums back in 2007 before it all blew — when I was shorting into price ramps on that stock because from where I sat they were a zero. They were a zero. It was a nice trade.
Who remembers me calling out WaMu in early 2007 when they were paying dividends with money they didn’t have, and regulators did nothing? That article is still here, if you look for it. They were also a zero.
But First Republic is isolated, just like SVB. Uh huh. Sure it is.
How’s PacWest doing?
Oh, not so good. Let’s see…oh, looks sort of like an impending zero.
But wait — First Republic was it, right?
Sure it was.
There’s no real problem here, right? The TNX was down a full percent yesterday because….. the Fed will save it all, right?
No they won’t.
Not because they don’t want to.
They can’t this time.
Oh, you think not eh? How’s your homeowner’s insurance premium? Your car insurance? Your food bill? You know, all that stuff you have to buy? Yeah, you’re reading this and you’re probably middle class or better. You’re doing mostly ok. You’re on the right side of the bell curve, right?
Half the people are on the left, and they’re not ok. For them that 20% increase means they are taking payday loans to buy food, effectively and sometimes literally.
That ends the game folks.
If The Fed tries it we get government and social collapse.
The ramp in asset prices can’t just stop: It has to come back out. All of it. And yes, that will mean lots of firms — and people — blow up.
This is not fixable with any sort of deposit guarantee. That’s not the problem. The problem is that the banks loaned out a lot of money at 2% and thus can’t pay 4% or so or they will go broke. But other, equally safe or more-so investments do pay that 4-5%; for example, a government money-market fund that has daily liquidity equal to that of a bank and only holds US Treasuries.
Having made those loans at uneconomic rates in the first place there isn’t anything they can do about it now. As was the case in 2006-2007 and which I pointed out in Leverage losses are made when bad loans are originated; they are often not recognized at that time but the loss has been incurred. What’s left to argue over is who is going to eat it, and unlike the 2008 blow-up trying to force the general public to eat it will not work because they are already under the inflationary pressure from the BS run during the pandemic that led to the problem and trying to force the rest of it on the public will cause enough of them to starve that a revolt is quite likely.
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Someone explain it to me like I’m a child; how is this possible after The Dodd-Frank Wall Street Reform and Consumer Protection Act and the Emergency Economic Stabilization Act (EESA) the Troubled Asset Relief Program (TARP) and the creation of the CFPB and FSOC to monitor financial institutions and protect consumers we’re right back where we started in 2008?
Was that not enough?
How many more organizations and programs is it going to take?
Your question alone makes you more than qualified to answer that question. But you knew that already. 🙂
That was a real “Howl.”lol
Wait – you mean those were supposed to fix these things?
This time it’s different.
mommy didn’t explain that words are just as inanimate as guns & that it’s imagination that makes them intoxicants. endogenous opiate toy mfg’ers ‘r’ us.
nothing is unmitigated. costs attached. incl heavy ones for keeping sloppy, or cooking the, books … which does incl ‘letting’ the books cook & slopify you.
words, generally. & esp out of the mouths of the all grown up babes that “are here to help you.”
The sheep will run out of confidence before the FED runs out of fiat.
HSF, This has very little to do with loan credit quality (at this point; a big recession could change that).
2007-2008 was the result of shitty loans, with no meaningful underwriting standards. The current problem is banks holding long-term fixed “assets” – whether fixed rate mortgages or long-term Treasuries or mortgage-backed securities or other long-term bonds (corporate, etc.).
When rates rise (lately at the fastest pace in 50 years), the intrinsic value of those fixed rate “assets” plummets. No one will pay 100 cents on the dollar for a 30 Year Treasury bond yielding 1.26 (as in July 2020) when that same instrument is yielding 3.72% now. So the old bonds’ current value is far less than they were 3 years ago. Same concept across other instruments (10 Year Treasury Notes, mortgage backed-securities, 30 Year Fixed mortgages held in portfolio, etc.). The loans can be “performing” perfectly well, and banks still lose a ton of money. A homeowner can have put down 50-60% when they bought the house and be paying the payments on time, but if they got a 3% 30 Year Fixed mortgage, the value of that mortgage plummets when rates rise to the mid 6’s.
With fractional reserve banking, banks can invest up to 10 times their deposits. When people withdrawn their deposits in a big way, that’s when the banks are fucked. They have to sell off, say, a portfolio mortgage (which is like a bond asset to them) for, say, a 20% haircut from the face value.
This kind of “interest rate risk” doesn’t really exist on short-term assets (like short term T-bills). The banks could have avoided most of the risk they took by only holding things like T-bills. And to the extent they’d kept any loans in their portfolio, they should not have been fixed rate loans. They could have limited themselves to “5/1 ARM” residential mortgages or 5 year balloon multi-family or commercial loans, but they got greedy, trying to eke out a slightly higher yield on longer term instruments. Perfect example of “picking up nickels in front of a steamroller”.
This is really Banking 101, and everyone involved (from bank presidents to the Fed) should have seen this coming. I didn’t see it – but it’s not my job to know what banks’ assets are at any point in time.
1). This is not 2008.
2). Big banks are more regulated than regional or small banks.
3). There are always more banks than bankers
4). Jerome Powell is following Bagehot. Save the banks worth saving.
5). Private enterprise will always outsmart regulators.
6). Read some fucken books about banking lazy bastard.
why can’t uncle fed just buy back the govt paper that the banks are holding 4 face value?
The problem is not the lack of laws, it is the lack of ethics and morals which is now systemic in the entire country. This banking collapse is the result of pure greed. The banks knew that they should have been keeping a substantial portion of their deposits in short term paper, but their greed drove them to chase higher rates and profits.
Our culture has deteriorated to the degree we lie to ourselves about everything. Then when reality asserts itself, everything turns into a crisis. We are a country doomed to collapse because our ethics and morality are out of sync with reality. As a culture, almost everything we believe is a lie.
Where will asset prices land?
In broad terms, the future is either violent revolt or totalitarian oppression. Or both.
Go long on totalitarian oppression.
https://www.forbes.com/advisor/investing/dodd-frank-act/
The snow ball has started to roll down the mountain.
The niggers in Shitcago are upset that the spicks are overwhelming Their gravy train of free shit oh well dumbfucks who da racist now. The illegals are pouring in .
When SHTF, where do you think all these economic teat suckers will go and what will they do during an economic depression?
They’ll have nowhere else to go and will steal anything that isn’t nailed down. Get rural, get food, get ammo.
Let….. It….. Burn.
Then learn not to follow the sheep to slaughter. I know, wishful thinking.