Projects
![]()
No projects found
Investors
New
DAO Treasuries
DATs
Lend / Borrow APRs
Chains
Categories
Spaces
Banking Contagion? First Republic Collapse | Turmoil Incoming?
Recorded: May 4, 2023 Duration: 3:20:54Space Recording
Short Summary
The discussion highlights significant concerns about the banking sector, particularly focusing on the rapid bank runs and high levels of uninsured deposits that have led to declines in confidence. The role of social media in exacerbating bank runs is noted, alongside trends in asset ownership with shadow banks now holding a significant portion of global assets. The conversation also touches on the pursuit of yield as a driving factor in depositor behavior and the complex interplay between currency and commodity markets, with gold reflecting broader economic trends.
Full Transcription
Guys, can you hear me?
I can hear you.
Hey Peruvian, how are you, man?
I'm doing well, how are you Mario?
Good man, good. You've got your...
Are you docks? Like, is your identity known?
Can I call you by your name or no?
No, I prefer to stay at N on Roneau.
And by the way, there's a little echo on your end.
Oh shit.
Is the echo still there?
Um, yeah, it is. You might want to use a headset.
This is weird.
Alright man, I'll just meet myself, set up the stage.
Donish, I'll give you the mic, because I've got echo, so I'll give you the mic.
That's all good.
Should we wait a few minutes, Mario, before we get started?
Yeah, but I wanted to ask you, like, can you just give me an overview of what's happened?
Over the last couple of days, it seems I've been insane.
I've got Echo, so I won't speak much, but can you just give me an overview?
What the hell's been going on?
Actually, your Echo's gone for some of it.
Okay, so what's been happening?
Maybe it's when Peruvian is unmuted, so maybe that's when it happens.
I'm just guessing.
I don't know.
I didn't check, but...
What the hell's been going on, man?
Especially with the news today about the bank that apparently was looking to sell us,
to was listing itself for a sale.
Financial Times turns out to be to have potentially messed it up.
Is it true?
Is it not?
I don't think Financial Times messed it up.
I don't think it was supposed to be public.
And so, so ultimately,
You know, and I'll probably repeat this Mario a few times, which is this is not about one bank.
This is like, that's been the narrative to date and that's the wrong narrative.
The right, actually I am hearing a little bit of.
No, go ahead.
Yeah.
So, you know, it's, it's, it's, this is the problem.
People.
People.
Always, when there's a new disease, I'm sorry, I'm a doctor.
But, you know, whenever there's something new, people assume it's only affecting one person.
But in reality, it's affecting the weakest people first.
And that's what's actually going on.
So just as a reminder, we had SVB collapse.
Then we had signature collapse.
They were the worst...
Worst...
quote unquote run banks, but that's actually not what was going on.
There was concentration of deposits in those banks.
They had a lot of people that were uninsured in those banks.
Again, you know, FDIC only insures up to 250K.
And so they had a bunch of companies,
bunch of organizations that were uninsured.
And so when all of this went down, people, if you are uninsured,
you're going to make sure you move your money to some place that's safer.
That is a natural response.
That started the contagion.
And then...
We have since then had a multitude of things happening.
There's been a reduction in confidence in the local and regional banking system.
The BTFP program by the Fed.
We'll talk a little bit about that today.
So essentially the Fed has set up the incentives so that if you're a big bank,
you have no incentive to acquire a smaller bank right now.
You just wait for it to fail.
And essentially the Fed, the FDIC, will sweeten the pot for you.
That's what happened with JPMorgan and FRB.
So ultimately, the Fed made a mistake in the way that they've set this up.
You remember Mario when SVB was going down and we had Bill Ackman on?
And Bill was like, that we need to guarantee all the deposits for every person at every bank.
Had they done that, none of this would have happened.
They didn't essentially lock down everything.
They should have locked everything down then.
So now the contagion is spreading and people are worried about this because of a variety
of other issues we'll talk about.
Number one being that.
these small local regional banks actually are overweight on commercial real estate commercial real estate is falling off a cliff right now and so all of these things reduction in deposits movement of deposits from these small and regional banks into national banks and into treasuries and to ICS sweeps and
essentially a flight to quality is causing all of these issues and we're going to kind of go over
all of them. I don't think it's one thing. And I think that's really important to recognize.
Yeah. And something else to point out is, you know, the reason why FRC and SVB were the first
to fall is because of their depositor demographic, right? Like these are the banks with the highest
amount of high net worth clients in the United States. SVB was a paragon of the
or a bellwether of the VC and PE community.
And FRC just had a huge amount of high net worth and family office banks.
I mean, just literally coined the family office bank.
And so part of the reason why these banks fell first and why they had deposit flight much
faster than would normally be seen.
I mean, SVB had 85% of withdrawals within 24 hours after March 9th,
after they had a failed capital race.
And so that's the fastest bank run in history.
And the reason why that's able to happen so fast, obviously social media added to that,
but it's because the average size of the deposit was 10 times larger than the average retail deposit at another commercial bank.
And so when you have enough of these large VCs pull their money and call their port codes to pull their money,
you just see a massively rapid bank run that's faster than anything that we've seen before.
So that's the reason why these just as a reminder, guys, I want to be clear, this is still going to happen to other banks.
It's just, it affects, you know, just like a virus kills people with diabetes and with other comorbidities early in the, you know, it hurts the most vulnerable first.
This issue is affecting the most vulnerable banks first.
It does not mean that other people will not be affected.
This is the problem.
Yeah.
So two things. First, I want to go to Peruvian, ask you a question.
So the morning show is mainly finance focus, so the audience is very savvy when it comes to finance.
This is a nightly show, so it's a broader audience that might not know a lot of the basics.
And what you're saying is that because of the 250K FDIC insurance,
The banks that have deposits that are on average higher than that limit, so the ones that have startups like we saw with Silicon Valley Bank and banks like First Republic that have wealthy individuals.
I think you called it the family office bank.
Depositors will be more worried because their money is not insured and there's more likelihood they'll take their money out of the bank leading to a bank run and that's what makes them more susceptible.
Is that what you meant, Peruvian?
Yeah.
Yeah, exactly. I mean, 96% of SVB's deposits were over the 250K threshold.
And so the reason, and I agree, like this problem is not isolated to SVB and FRC, you know, despite what Robert Wolf might have led you to believe in yesterday's space.
But overall, the reason why these banks fell first is because the banking system as a whole is sick.
There's $1.7 trillion of unrealized losses across the entire sector.
And there's 190 banks at similar capitalization ratios of...
as SVB, but the reason why FRC and SVB are first on the chopping block is because of their unique depositor makeup.
They had the highest amount of high net worth people as their clients.
And so when those people run, and they have more incentive to run because they're all over the FDSE threshold.
That means the bank goes under very quickly. But this isn't over.
What makes you both so confident this isn't over?
Jesus, you guys have a lot of information.
Shit, I'm convinced.
Yeah, because it isn't.
I mean, the problem that we had is that the bank run caused by SVB was a deposit run.
That seems, although deposits are still declining a bit, they're not,
they're not declining that much.
Now it seems to be moving to where it was deposit confidence.
It's now moved to shareholder confidence.
And the problem with not backing up regional banks,
and I'm not suggesting, by the way, that we should have stepped in and
and massively insured all their deposits, as Bill Ackman suggested, but
something like that, is that you've now got this shareholder confidence issue, which is the minute
the bank seems to be in problems, everybody runs on the shares, and that causes the actual
administration of the bank to become an issue. And so the contagion, if you want to use that word,
has moved from depositor confidence to shareholder confidence, and that's only going to favour
the top banks. And it
it essentially becomes a cheapening assets acquisition for the big banks,
which are essentially just federal reserve fronts at this point.
Jamie Diamond's getting called by the federal authorities and saying,
Jamie, you're buying this business.
What do the terms need to be?
And he goes, oh, well, I don't think, Rob, Rob, I'm still not convinced.
I don't understand why you expect other banks to fall.
Like, I asked Danish, I asked Peruvian, Danish's off for a few, a couple of minutes.
But I'm sure when he comes back, I don't think I'll be convinced because...
It's a confidence game.
Is it anything beyond confidence?
Is it just purely people freaking out, taking their money out of the banks?
Is that the only reason that was...
No, no. It's not taking their money out of the banks.
So this is a confidence in business administration.
So if you had a technology company that suddenly...
adopted AI or something stupid and people didn't know how to value that company or they didn't
trust the management's decision making you'd see a lot of people withdraw their confidence in terms
of shareholding in those banks as that was what we're seeing now we're actually seeing the
bank's owners saying they're not confident basically what happened is when SVB collapsed and others
and they looked teeteringly um and the
and the Federal Reserve sort of jumped in and said,
we're going to protect these banks and we're going to move the deposits over
and protect people as best we can.
What happened is that it actually gave people who own those banks.
I was one of them.
I was a bank stock owner.
A sort of,
hold on a minute, let me just check to see how my bank is doing, kind of question in their head.
And so from an owner's perspective, they went to their banks and said, hold on a minute,
you know, how are you administrating this? This was a risk profile that you should have seen coming.
How has this been managed poorly? Or has this been managed poorly?
And actually, when that lid was exposed for a bit, quite a lot of these owners of regional banks
saw that they were sitting on a lot of commercial real estate unrealised losses.
They're sitting on, you know, not particularly, they're healthy banks in terms of deposits,
but they're not healthy banks in terms of administration profits.
And so now you're seeing confidence from a shareholder perspective, not from a depositor perspective,
starting to wane.
And that, unfortunately, it happens very slowly and then very, very fast.
And that's what you're seeing with these banks slowly but surely.
That makes sense.
And it's more than that.
There's there's 1.7 trillion dollars blown through these balance sheets of all these banks.
There's there's 1.7 trillion of unrealized losses.
And the issue is if a bank starts to get a run, right?
Like they only have a fraction of cash on hand.
SVB had 13.
I think $3 billion of cash equivalents and actual cash of about $2 billion.
So all that needs to happen is a few large players need to start.
causing fear in the market and then people start to run on the bank and then the bank is now
in a very rough position because they have huge amounts of unrealized losses on their bond
portfolio and if they try to raise capital through selling equity that is another way to
depress their stock price and to cause investor investors to lose confidence and so their hands are
tied they either try to sell these securities that they have which will realize the losses
and will cause them to even blow up bigger hole in their own.
balance sheet or they sell equity which depresses their own share price so there's no way out
except to wait for fiasc and they're already down 70 or percent on the year and they're thinking
well hold on a minute i might take another 50 percent haircut on that so i'm going to sell now and that's
why you're seeing all these stocks falling overnight in yeah but i want to push back a little bit guys
so this is not just about bank runs this is not just about shareholder value to be completely
honest i am not very concerned about stock prices
That is not what the concern here is.
The concern here is that their actual balance sheets,
Roberto, I'm sorry, people have said this already,
but their actual balance sheets are in trouble.
And their actual balance sheets that are in trouble
are driven by many different things.
But again...
We have two other big factors outside of what the Fed has done and outside of this concern around banks.
And it is very much driven by the fact that their actual assets that they have backed are bad.
One of the biggest ones that is dropping like a rock, even Robert Wolf this morning admitted on stage with thousands of people in the room that commercial real estate is in deep trouble.
Where do you think commercial real estate is backed?
It is backed by local and regional banks.
You can't go out and get a commercial real estate loan easily at JPMorgan.
You've got to go to your local credit union, your local bank.
And so these banks are overweight, one of the worst asset classes out there.
I'm just going to say, I don't know what you're pushing back on there because we're violently agreeing.
Yeah, I think there's nothing to push back.
I know that, but I'm pushing back.
I'm hoping for someone to come in.
Specifically, the shareholder value.
I want to be very clear because I was listening.
Shareholder value, stock prices don't matter at all.
We addressed all three of those areas.
I completely agree.
It's a combination of all things.
I think they can all be taken evenly.
But what we're seeing in terms of deliberately overnight,
those share prices going down is shareholder confidence is falling in those banks
because of all of the things he've issued and their own positions,
which is obvious.
Yeah, I just want to be honest because the reason why I'm pushing back so much is because that's been used as a surrogate of whether things are okay.
And I don't think that that even matters.
I think there's actually an issue.
And it does not because it's an indicator that these banks are poorly run or have poor balance sheets.
So I think it's a great indicator.
When it matters in terms of macro, it doesn't.
For those banks, I mean, it sure does matter in terms of.
I mean, Joe, let me ask you a question, Joe.
Caleb and Kat Baaker just jump in afterwards.
But can you just, and I'll shut up after that.
But I just want someone to dumb it down for me.
So essentially what we see, the issue that we're seeing now is banks are reviewing their
balance sheets and they're sitting on a lot of assets that should be marked down heavily.
And as that happens, it's going to lose confidence in the system.
No, they shouldn't be marked down.
It's really important this.
They could be marked down.
At the moment, they're valued at less than the bank lent against them.
But they haven't matured yet.
And so if they're forced to mark to market, i.e. they're forced to, you know, they're forced to maturity.
They're forced to value them today.
They would realize huge losses.
That doesn't necessarily mean they're going to realize those losses, although it's highly likely they will.
How would that change?
So what's what's the, how could that change?
How can they not realize those losses?
Let's say like a private equity fund like we see with Blackstone has a property in Los
Angeles and they default on that or Brookfield or whoever.
They default on that because they can't make the payments anymore because the interest rates have gone too high.
Those loans are not done by local banks.
No, no, I'm just giving an example, Grant, of how you might market products that everybody might understand.
I understand, but, you know, a $140 million office complex is not,
the Wells Fargo property in San Francisco, it's 160 million,
that is not a local bank giving that loan.
No, I do understand that.
I was just giving a concept of how you mark to market an asset if it's depreciated.
But by all means, give a, give one.
And the fact that after SVB failed,
the federal government came in and said no bank needs to mark down their assets,
so why would they?
Well, that's exactly my point.
But yes, yeah.
Now, the real issue is deposits chasing 5% returns because you can't stop consumers that become aware.
I mean, it's not the $8,000 account.
It's going to be the guy that's got $120,000 in account says, fuck.
I'm earning nothing right now from, you know, the Arkansas Regional Bank.
They're only paying a half.
We've had high interest rates before. Sorry. Grant, just want to make sure that we're clear about this. That is not the only problem that's existing right now. We've had high interest rates before. When's the last time we had high interest rates? You have bank accounts in this country. Excuse me, you have accounts in this country. They've never seen more than a three or four percent return. Now they can get five. Most people in America have never seen a five percent return.
It was 25 years ago.
So you're going to have money.
You're going to have money.
You're going to have money when there's awareness.
For the last 10 or 12 years, we've been basically hypnotized into no return for your checkings and savings.
And so now if money can move to five, and it will at some point, it will move to five.
It's not going to all move to J.P.
Morgan because they're not going to take the account.
But they're going to figure out, people will figure out, do I go to Capital One that's paying four and a half?
Do I go to Apple that's paying four point one five?
Do I go to Treasury bills?
You know, what do I learn about where I get 5%?
When that money comes out of those banks,
That's how, you know, that's 100%.
Money will always chase yield.
No doubt about it.
That is where the big problem is.
We're not worried.
And just to be clear, I'm not worried about people moving their money from their local bank to JPMorgan.
I feel like that's a BS narrative.
I agree with you 100% grant.
My bigger thing is that some of these local regional banks are actually in trouble.
This is not just about bank.
So you do care about the movie because it's...
I'm sorry.
If you say that they're in genuine trouble, I'm trying to work out what your position
If you're saying they're in genuine trouble, then you should be worried about to pull it out.
So, Rob, I'll explain my position again.
I said it right right up front, but I can say it again.
My bigger issue is not around them moving their money from their local bank to JPMorgan.
It's them moving their money from their checking account, which is deposits that they can use,
these local banks can use.
to, you know, ICS sweeps and other yield, you know, and treasuries and other yield providing things that don't actually allow the bank to be able to use those deposits to actually generate.
income. That is the actual concern right now. So we're not seeing people reduce their deposit
loads from, you know, from one bank to the other. They're just moving their money like Grant said
within the bank, but to a point where the bank can't get access to it. And that actually causes
a lot of issues for banks. And on top of that, the banks also have given out too many loans, too
Again, we can talk about a shadow banking sector.
We can talk about PE and hedge funds.
And we can talk about how low the regulation is.
But that other part is really critical.
Right now about, I can't remember.
I think it was three months ago.
IMF came on and said, hey, 50% of assets in the world are owned by the shadow banking sector.
They are incredibly, uh,
you know, they are very vulnerable to rising interest rates.
And that is actually what I'm concerned about.
We're seeing commercial real estate drop off a cliff,
and it's going to affect the banking sector quite a lot.
And, Danes, can you explain for the audience?
And I want Joe to jump in afterwards,
what the shadow banking system is again.
It's not the morning audience.
I mean, it's interesting.
Grant's up here.
Grant obviously knows a ton about this,
but I'm happy to give my basic...
opinion of it, when you think about all the people that own assets using leverage, so hedge funds,
P.E. funds, V.C. funds, pension funds, all of these different parts are actually completely
unregulated approaches to money management. And that is called the shadow banking sector in a,
you know, in a broader sense. And they actually represent 50% of all assets
in the world are not owned by banks.
They're owned by shadow banks.
And that is an incredibly dangerous place that we're in.
As a heads up, Mario,
shadow banks did not own even 30% of worldwide assets pre-pandemic.
So pandemic, when money became free,
they used the free money to buy a bunch of real assets.
Now money is no longer free,
and they have to renegotiate their interest rates.
And again, money will chase yield.
and so money will go away from this.
That's bringing the real estate sector into,
and you know, Amy's here.
Amy, you know, you can kind of speak a little bit more
to the institutional ownership of real estate,
but I'd love to get your thoughts on.
And Grant would love to hear your thoughts after.
Dr. Dane, I need to understand this shadow bank thing.
Shadow banks don't have checking accounts,
savings accounts.
They don't do loans to small farmers
and business owners that need furniture,
equipment, computers, or tractors.
No, some of them do. Like money market funds are technically shadow banks because some of them, you know, they're not regularly like a bank, but you have deposit account that you can draw a check on. So like a retail person can put money into a money market fund. Give me the name of a money market shadow bank.
I mean, I would have to look up a specific one, but SPACs is an example that comes to mind.
Yeah, you can write.
Yeah, you can write.
So, the fair example of a shadow bank.
So again, the idea here, and again, Grant, I will DM you the article from Fortune that kind of walk through this in pretty significant detail.
But beyond that, shadow banks represent pension funds that are over leveraged.
We saw this happen in the UK, as you know.
So give me the name of a pension fund.
How did the Orange County?
Orange County Pension Fund is $20 billion.
So I'm actually referring to pension funds that are using leverage to buy properties to buy assets, whether those are equities and others.
They're literally using leverage.
And in the UK, remember when the right, Rob, hold on, hold on, hold on.
I want to give you a real example of this where it merely broke.
Grant, let me finish.
So, Rob, do you remember before Sunak, before the current prime minister, there was another prime minister.
And that prime minister raised interest rates and it caused one of the UK pension funds to go down.
Do you remember this at all?
Yeah, so basically what happened is they had a budget.
And in that budget, they spooops the market into...
a load of borrowing that they weren't expecting, which naturally caused a fear of interest rate hikes.
And because of that, outflows and some pension funds were causing huge problems,
and the Bank of England had to intervene for a four-week period to sort of provide stimulus for those.
But mainly because of the pension funds barely failed out of the threat of increased interest rates.
Yeah, yeah.
That they weren't able to get the leverage that they needed to be able to pay their bills.
Yeah, they were literally, I think one of them called the Bank of England and said,
if we don't have liquidity by four o'clock tomorrow afternoon,
8% of pensioners don't get paid next month.
It was pretty gnarly.
And Grant, you know, a lot of these pension funds are not regulated at the same level as a bank is.
They don't get stress tested, right? And so Grant, if they're using leverage to be able to pay their pensions while they have, this is literally what's happening, right?
You have long duration assets that are maturing over a long time, and then you need short duration access to pensions.
And so...
So again, this is a good example of where something like this can go really, really wrong if they've made the wrong investments.
Do you know what the Orange County pension funds investments are?
I don't.
I don't think the average person does.
I'm just using that as an example.
So when the redemptions, like at Black Rock or Blackstone or any of these big groups that you see that they're saying, hey, we're gating our redemptions, most of the redemptions.
hit because of the pension fund making a phone call to prudential or met life saying,
hey, guys, we want our billion dollars back.
Those are the first people to get their redemption.
Exactly.
Redemptions are gated.
So what you're saying is, let's say the Orange County put a billion dollars in a bunch of apartments.
Those deals are not performing.
And now they're like, hey, we can't pay our pension money.
what I get not profits but our pension benefits our pension benefits every month because that portfolio is not performing i get it
And so, so Amy, you know, just educate us and Caleb will go to you after.
But Amy, can you educate people on institutional ownership of residential and commercial?
I think, you know, you've provided some data in the past.
I'd love, and I don't know, Amy, are you there?
Just want to make sure you're there.
Yeah, I'm here.
So it would be helpful to get a sense of how much institutional ownership we actually do have of the real estate sector.
Yeah.
Well, it's hard to get hard to get hard numbers, but it has increased a lot in the last three years.
And, again, a lot of this stuff is shadow.
We don't know what a lot of these loan structures look like.
But I do...
I do want to talk to, you know, there was a lot of talk yesterday with the failure of First Republic Bank in particular.
A lot of the language around it is, and this was the same thing with Silicon Valley Bank.
These regional banks, you know, they didn't use appropriate risk management.
The terminology is sort of around their risk management strategies and, you know, why, you know, these banks are sort of isolated incidences and this is not going to be this contagion thing.
But...
You know, my question back to that is, and I know, doctor, you're kind of on the same page with me in terms of, you know, how bad this underlying commercial thing could really be.
My question back to that is what bank had appropriate...
a risk for profile for the Fed to hike, you know, 500 basis points in what, nine months?
Agreed.
I mean, that's unprecedented.
Like, no bank, a year and a half ago, if a bank had even started to put protocols in to hedge against that, people would have looked at them like they were nuts.
Because that's like asking people to anticipate something that is, I mean, basically what the Fed has done in the last year is like a black swan event for these banks.
And these banks have been operating...
commercial real estate loans for 15 plus years under this expectation that interest rates are going
to stay low and within a certain bracket. And nobody expected the Fed to do what the Fed did in such a
short period of time. So the idea that it's just a couple banks had these bad risk management
profiles is a little bit ludicrous to me because I can't, I mean, name me a bank that would have
had the foresight to think that the Fed was going to do what they did as quickly as they did.
I can't think of any.
I mean, it's ridiculous to think that one even could.
Well, and to put a final point on that, Amy,
I think when Jamie Diamond a month ago comes out and says that he was shocked by the speed of the Fed,
when Mr. Fed himself is saying that, I think that edifies that point completely.
Yeah.
Just a tough time.
Joe, Joe, I know we were going to hear from you earlier, Joe.
Go ahead.
Yeah.
And, you know, I think there's a world where all of these things are true.
I think you guys are kind of arguing a little bit or debating a little bit on, you know, someone that got shot and is stabbed, you know, which thing killed the guy.
It's like, well, both aren't good.
And, you know, are people moving money to too big to fail banks?
Yes.
Are people moving money to money market accounts?
Yes.
All of the above.
And I think, you know, when you talk a little bit about, you know, how poorly are these banks run today.
I mean, when you look back at 2008, you know, we had these crazy synthetic assets.
You know, we had CDOs.
And, you know, for people that are kind of listening out there, it was like, you know, you're betting on the outcome of what someone else's bet is.
And that gets leveraged up.
And there's all this kind of fake money that's out there.
It's just a little bit of a different world today.
Like Amy was saying, where you know, you've got someone like Silicon Valley Bank who, you know, we do all this money printing from the Fed.
A lot of that money ends up going to startups or venture capital.
You've got Silicon Valley Bank going from, you know, a top 80 bank to a top 20 bank in a very short period of time.
You know, the money managers at that bank are like, oh my gosh, what do we do with all this money?
Like, what are we going to do with it?
They're like, well, we'll just maybe put it into the safest thing possible.
It's like, well, you know, same type of thing.
They put it into mortgage-back securities.
And...
The next thing is, hey, what if we put this in the commercial real estate?
It's like, I want to invest in the Hilton Hotel.
Like, is that a bad investment?
So I'd say maybe we were just ill-equipped.
and at some of these regional banks and some of the smaller banks for the situation that they
ended up being in and so it's kind of like a lot of things are true when you look at rates you know
there was a 20-fold increase in rates we were at 25 basis points to now 5 percent that's a 20-fold
increase in just a year when you look back at the 1970s i mean we were talking 5 percent to 20 percent
in a three to four year period.
I mean, this is like a massive, like, earthquake just bam,
hitting this entire sector and they can't hedge out of it fast enough.
They can't, you know, they can't make money now with the rates where they are,
95% of people are locked in under 5% that market's frozen.
You know, also like the speed of information.
I mean, we wrote an article at Lunar Crush talking about the second coming of social media
and predicting bank runs with Silicon Valley Bank.
I mean,
I mean, we saw, no one on social media talked about Silicon Valley Bank for three weeks.
There was like four posts about it.
It was an 80,000 percent increase the day they came out and said that they were going to issue equity.
And that sets off just an absolute wildfire of slightly more tech savvy people that can wire their money from a smaller bank to a too big to fail bank.
And so I guess with all of these things.
being true, we find ourselves in a very interesting situation right now to say who's next. And now that
the ground is shaken beneath some of these banks, you're seeing the money come out, people are savvy.
People are on the dinner table talking about this. Like, hey, do you move your money out? Did you move your
money out? And so anyone is, you know, and like you guys were talking about earlier, now knowing
that the Fed's going to backstop everything, there's these law share agreements. I mean, why wouldn't
you just sit around and wait?
until these things are on their last legs,
and then you're going to get a yes, okay, from the government will back you forever.
So it's like all of the above.
And I think that's kind of the scary part for a lot of people is saying,
we don't know what's next, but it's probably not good.
So just to be very clear also, the Fed made a really big mistake in the approach that they took to backstopping.
The approach that they took was they put a discount window in place, which means that people can go in.
That's the best possible thing that they could have done.
What do you mean that was a mistake?
That was the mistake.
What they should have done is said that all bank deposits for a short period of time will be
shored up. You will not lose your...
The Fed doesn't do that. Hold on. Caleb, Caleb, let me finish my sentence.
You don't understand the regulatory environment. You're talking about the completely incorrect
institutions. Caleb, I appreciate it. I'm asking you to... I'm not, I don't want to meet you.
So my point is... Go ahead and meet me then.
All right. So the point that I'm making is that they should have said that all deposits were shored up instead of saying you have this other program because ultimately it incentivized JPMorgan to wait until the failure of First Republic to acquire them for pennies on the dollar. That was the point I was making. They did the wrong. The Fed doesn't do that. That's the FDIC and that's the Treasury. Sure. I meant the FDIC.
Well, then there you go. I was that I was correcting you on that point.
Go on, okay.
Thank you so I'm wondering for the conversation.
All right.
So I'm going to move forward.
So the point that I'm making is looking ahead, what do we need to do to actually improve
the situation?
Yeah, there's a lot of things.
You know, I think, you know, one thing to look at, we talked about, I actually liked
a lot of Amy's points.
You know, speaking about how to hedge, it is possible for these banks to hedge.
I think I spoke about that in the space of yesterday with Robert, but it does, you know,
involve like, you know, Fed Fund futures, you know, U.S. Treasury derivatives.
interest rate derivative is, and for it is possible, but it would have looked strange for bank
like SBB to do that, I guess, you know, a year and a half ago, but they could have. Maybe
if they had a risk management officer, they could have, you know, evaluated that. Part of the
issue now for banks trying to do that is going to be related to fixed income volatility.
So right now, for example, the move index, which is, so there's two different kinds of volatility.
VIX measures equity volatility as very popular known, but I think fixed income volatility is a little
less well known. There's
There's a lot of measures of this, but the Bank of America Move Index might be, you know, one of the more popular ones.
It is now above the peak of where fixed income volatility was in March 2020, you know, and the coronavirus pandemic was just sort of kicking off.
It is significantly below 2008 peak, though. So that's just something to keep in mind.
We're about, you know, kind of half or a little more than half those levels.
You know, but one thing to keep in mind is these.
crises. You know, I actually like, Donish, your talk about your sort of medical analogy,
the idea of Vairi, kind of spreading throughout the body because if we think about the
financial crisis, 07,08, you know, started with New Century Financial and things like that in early
07. And it wasn't until 08 when we started to get things like Bear Stearns. And then months even
after that, you know, we had, you know, Bear Stearns and Lehman Brothers. And they were, they were
months apart from each other. So I do think this is a slow moving issue.
And I think it's a real one.
I put up something before about, you know, tier one capital ratios adjusted for unrealized losses.
Could be things like commercial real estate.
Could be a variety of other things.
But I would say generally it's not looking great.
And I don't think the prognosis for the future is going to be great either.
Yeah, you know, one of the big questions.
Yeah, you know, one of the big questions is, is there something specific about regional banks that makes them more vulnerable than the larger banks?
Obviously, systemically important banks go through stress tests.
But, you know, even a systemically important bank, Amy was 100% on point, which is that even a systemically important bank would not be able to, you know, to withstand a true bank run.
Right? And to withstand, I mean, Amy, my question is a systemically important banks able to withstand a significant increase in interest rate. I mean, they clearly are. So the question really is, is there something specific about commercial and about regional banks that make them more sustainable? I mean, make them more susceptible.
I think there's a lot more commercial real estate in regional banks.
But, you know, regional banks are smaller.
They don't have as many income streams.
They don't have as many options as larger banks.
And I also think, you know, to a certain extent, I hate to say, you know, larger banks are too big to fail.
But, I mean, to some extent we've already seen, you know, in 2008, there is sort of that mentality.
You know, we can't have...
all of our banking system collapsing, including like the biggest players.
But when it comes to these commercial real estate loans, I mean, typically with commercial
real estate, I don't remember the percentage.
I want to say like 45% or something.
It is with regional banks.
That may be an inaccurate set, but it's something around there.
But typically with Siri, you tend to see people going to these regional banks.
And there's a couple problems with it right now.
There's the problem, you know, we don't know exactly what the structure of these loans are that have been given out in past years.
Like this is all private banking.
We don't know what these loans look like.
We don't, we know there's a lot of floating rate debt.
Right.
We know that big players in the industry with billions of dollars on the line, Barry Sterlick, Sam Zell, they have been nonstop on CNBC warning us saying, hey, look, you know, Sierra, this is a problem.
And to some people just looks like, oh, they're talking their book.
You know, they're begging for the Fed to stop.
But there's a reason that they're picking for the Fed to stop hiking.
I mean, I think there's real fear there because they know.
They've been in this industry and they know what the structure of these loans are
and they know what these banks have been doing with commercial real estate for all these years.
So that's one problem is just what are the loans that are out there now?
What do they look like?
How bad?
How much have they lost value with the rate hikes is one aspect.
Aspect number two is the market is...
frozen right now, essentially, in a lot of ways.
Banks are tightening that credit.
So even if you are a private equity firm and you're in decent standing,
you're going to buy a piece of commercial real estate today,
say you go to look at a property that's got a suitable debt.
Well, it's somewhere like in Texas, where I am, for example,
the property tax appraisal just came in 20, 30% higher.
So you go to the bank, you need to get a supplemental bridge loan.
Bank's going to deny you cover it.
I mean, because the values are off the charts and
you're not even going to be able to get a bank to be willing to work with you.
So that's tightening and freezing up the market even further.
So there's like this dual problem facing commercial real estate right now.
There's the market's frozen.
Banks aren't wanting to extend credit to get deals to even go through.
And that's combined with all of these backlog of loans that who knows what they look like,
but based on the behavior of a lot of billionaires in the industry, they're not pretty.
Yeah, you know, I wanted to give Patrick a chance to weigh in also.
Patrick would love your analysis from just, I know you believe that charts are the only thing that matters.
Just kidding.
But I know that, you know, you believe that the charts are telling us something and we should be listening.
Can you give us a sense of, and can you post the charts in the, in the nest or down in the bottom right?
and kind of explain your thought process on what do you think the market's telling us about the local regional banking sector and just in general banking, the banking sector overall.
Yes, thanks. So it's not that everything else doesn't matter. It's that everything else, whoever's acting on that everything else. And I'm listening to you guys talk and everybody has a theory and all that. You've heard me say this before, but everybody has a thesis. Everybody's going to place their bets eventually, right? And that's what chart analysis is, is the aggregate of everybody, all that money sloshing around.
essentially who's right at the end is if the price is moving in their direction, then those people are right.
And that's what the study of prices of the charts is just listen to what the aggregate of market participants are telling you and track that, right?
Because that's how we make money.
You enter a trend, you think it's going in that direction, and then you exit higher up, right?
So let's get back.
Look, I put J.P. Morgan in the, look, what's going to happen now?
Yeah.
It's in the tweet, in the tweet where for the space, I put a few tweets and charts in there.
Yes, go ahead.
What's going to happen now, and this is the recipe, it's acceleration and destruction of purchasing power.
So essentially that is a combination of either the U.S. dollar weakening or divide adjusted for inflation.
So when we have these periods of acceleration and destruction of purchasing power,
Even if nominally, they do all these bailouts, whatever you need to keep nominally afloat, all these banks,
all that will destroy your purchasing power.
And gold is a perfect, not perfect, but it's a very good reciprocal of your purchasing power.
So you have to start, again, measuring, I know I might be like a broken record.
But JP Morgan, look at that chart pricing gold, guys.
It's been oscillating and it cycles, right?
You want to ride these cycles.
So when JP Morgan are banks or breaking down versus gold, that means gold is perfect.
pricing in the acceleration and destruction of purchasing power.
So why hold any bank if it's breaking down versus gold, right?
And you see those dates, it's insane.
We're in an equilibrium right now where we were in 2020.
2007, 2002,
1976,
1973, those dates, if ever you're a historian of charts,
you know those were breakdown, rollover in US equities, right?
Every time 2002, the dot-com level, 2007, after the rally,
and the US equities peaked and rollover,
2020, we're back there again, guys.
This is epic stuff unfolding before your eyes,
and if you don't look at the charts,
maybe you guys, you kind of feel it,
there's something wrong, something happening, but...
If you think we're at the bottom of anything, nominally, maybe, okay, if they manage to print so much money, that nominally stuff gets afloat.
But when you price it in gold...
It looks terrible, man.
So if this equilibrium line breaks down on that JP Morgan chart,
price and gold, we're heading into a meltup in gold.
We're heading and we're heading in practically no gains in these banks
and the U.S. equities.
They might go sideways, but it's not the place to be for the next four,
five, six, seven, eight years.
You've got to stay clear of that stuff and let the dust settle.
So for me, that's the biggest chart,
is watch for that J.P. Morgan chart and the price in gold.
Okay, but why isn't gold doing better?
I mean, Bitcoin's up 80% year to date and gold is, I mean, it's doing well, but why isn't it like rallying past all-time highs?
Yeah, well, okay, so gold, you have to understand.
Gold is not, it's not gold that changes its price.
It's, it measures the destruction of your purchasing power.
So gold's a rock.
It stays a rock.
So if you're purchasing power, if a U.S. dollar goes down, gold replicates that to the upside.
Right.
Bitcoin, it tracks, you could, if you guys, you don't know me, you know I've done a lot of charts on this.
Bitcoin was born in the inception of SPX breaking out versus gold in 2011-12, SPX breaking out versus produce price index.
Bitcoin is a speculative tech stock.
It's like meta, it's like all these other tech stocks.
It's not built.
track those capital flows when we're in the acceleration of destruction of person power.
It's something else.
And Bitcoin probably I did a chart, Bitcoin might range from 10,000 to 70,000 for the next
eight, 10 years.
So those fast gains from inception, blocking it up from $100, $1,000, up to $60,000,
$70,000.
If that chart breaks on JP Morgan and even SPX already broke down versus PPI, those days are over.
So until something changes...
those, you know, because why are we talking about Bitcoin actually?
It's because, oh, it did great gains.
People made a lot of money.
But think about it.
This is the perfect contrarian entry.
You have to go in something that's been going sideways, not performing.
That's the stuff that the crowd's not aware of.
Bitcoin peaked in 2021, like,
it was obscene the amount of attention it got right.
And now it broke down.
It's still below 35,000.
So even if it rallies for a trader, have fun playing those rallies in between 10, 15,
all the way to 60, maybe 70,000 nominally.
But when you start pressing that stuff in gold,
that stuff's going to start going sideways.
So this is a real eye-opener to start focusing on assets,
those commodities, silver, whatever you like in the commodities.
This is a reminder.
Patrick is of the belief.
And he believes it because the charts confirm at some level.
Again, I know Scott Melker and you had a whole conversation around this, Patrick.
But, you know, that Bitcoin is acting like a security, not as a commodity.
And I think that's a really important aspect of this.
I wanted to also, I know you have to leave, so I wanted to get your thoughts on the Black Rock,
because we spoke about Black Rock for a short amount.
You put something in there, and I then posted it up in the Nest.
And so for everybody listening, up top, you can actually scroll through the tweets
and you'll see the tweet that Patrick put in about Black Rock and how it's pricing against gold.
Can you explain that chart for us?
Yes. So BlackRock essentially, like I wasn't too aware of it. And that BlackRock chart actually looks exactly like the Bitcoin chart nominally. BlackRock it owns, I don't know, like a whole bunch of SPX and NASDAQ stocks, like the big stuff.
And pricing gold, the momentum has broken down.
So in the bottom pane, it's actually the distance from the three-year moving average.
So even while the price was kept going up and up and up versus gold,
and it did its top, I think, in maybe 2022 versus price in gold.
The momentum actually is breaking down.
It's now below important moving averages.
Look, that looks a little bit like the JPMorgan chart.
So you don't want to be in something where the momentum has flatline and breaking down.
You want to be in something that the momentum has flatlined and breaking out.
So you got to listen to this stuff.
We're back at 2007.
That's the last time I had the trendline of this magnitude.
Now we have a 12 year trendline breakdown.
Man, if you don't listen to that, even if nominally this could go sideways and stagnate,
assets, there's going to be outperforming asset classes going forward,
and it's definitely not going to be BlackRock.
Yeah, Patrick, I'd love to ask a question and tee up a discussion.
Hey, by the way, Eugene, before you ask that question, just want to let everybody know that I run the rooms a little bit differently.
So if you have a question, you can go to the bottom right corner and hit that little bubble.
Okay.
and putting your questions in there.
And our team on the back end is reviewing all the questions.
And if they find a question that they think might add to the value of the conversation,
we'll either bring you up or we'll put the question up in the nest and then we'll talk about it.
So you can hear the answer from the experts up here.
Eugene, go ahead and ask your question of Patrick.
Sorry about that.
Sure thing. I think that's a great reminder for everyone in the audience. Yeah, Patrick, I always enjoy learning and hearing from you about the technical analysis on the charts because even though I was raised more on the finance side on a fundamental analysis type way, but of course I have a lot of friends who are technical traders, working macro hedge funds, momentum traders. So it's always great to hear different people's perspectives. But
I want to tie in the fundamental analysis with what your technical analysis shows and hopefully
tee up a discussion related to inflation versus deflation.
Right.
So on the fundamental side, you know, people like Ray Dalio and Bologi talks about this a lot on
Twitter.
you know, talk a lot about, you know, how the world is going to change, right? And a lot of the
near term to midterm effects are related to inflation and potential money printing. I'm not
necessarily saying those people are arguing for that, but, you know, I think Bellagie is obviously
arguing for that, but I think Ray is a little more nuanced in some of his analysis. But basically,
you know, your technical analysis of gold is interesting over long periods of time. And I think
what's interesting about these analyses is when you do it over decades and decades, ideally
hundreds of years, right? And so what you pointed out is since we, the U.S. got off
red and woods the gold standard in the 70s we've gone from 35 dollars a troy ounce for gold to
over 2000 so basically the dollar has depreciated about 98 percent or so versus gold i think that's
what you're pointing out but what these charts are implying when you're saying destruction
of purchasing power related either to inflation or the dollar i see those as part and parcel the same
thing um so let's just say let's call it inflation or the the the sort of the lack of power
power of the dollar relative to other assets in terms of purchasing power.
So that's a great employee.
So I think your charts, if I'm correct and correct me if I'm wrong, are arguing that we're going to enter a high, highly inflationary period.
But then on the flip side, and we've had it on these discussions, you know, bank, you know, bank collapses are deflationary, right?
AI, which is new, at least in his current iteration, is deflationary in a lot of ways.
So, and I always love this inflation, deflation and debate.
I've actually had this and really smart people on both sides here.
But Patrick, am I to confirm that your charts are implying an inflationary period to come?
I believe that's the conclusion.
And if so, how does that tie in with some fundamentals, you know, bank rents and things like that happening?
Yeah.
I just put in the chart in the Twitter space, just a simple chart, it's chart of gold and versus gold going bottom, left, top right, and U.S. dollar divided by the producer price index.
So that's, for me, that's how I define purchasing power.
It's the U.S. dollar strength versus, let's say, the euro primarily because that's like 60% of the index, divided by producer price index.
And you'll see it's like almost a perfect image.
And so this, you got to remember, in the 2000s, when gold had its bull run, there wasn't
that much inflation, but the US dollar had peaked and was going down.
So it's a combination of both a racial purchasing power could go down with deflation, but
if the US dollar plummets, then the US dollar divided by inflation will go down and gold
will mimic that.
Or you could have like the 70s where you have a lot of inflation and let's say the U.S. dollar is going down.
So that ratio is still going to go down.
So that's why you've got to be careful with ratios.
You could have inflation for 10, 12 percent.
So you'd have to look at the actual inflation charts to see where you think inflation is going to be.
But it's also a combination.
And like this milkshake theory, we had Brent Johnson on my channel recently.
The U.S. dollar can actually spike up.
And if we have more inflation to offset the US dollars trans versus the euro, gold will also mimic that.
So that's why those are the moving dynamics where you got to be careful.
Those two moving parts make and gold replicates that end.
So yes.
Before you go, I've got some questions now.
Now you've spread a whole news.
I bet you everybody's asking like a million questions.
And by the way, if you have questions for Patrick,
please tag him in the comments on the bottom right.
And I'm sure when he's got time, he'll get back to you guys.
But Patrick, before you go.
There's been a narrative brewing, Mish who joins our morning shows quite often,
morning at 8am Eastern, by the way, for anybody that likes finance.
That's our daily shows.
You know, when Mish has been bought in on this stackflation narrative,
what you're telling us is that that is not the base case scenario the market is expecting.
Am I interpreting what you're saying correctly?
Okay, so when SPX breakdowns
for the producer price index,
historically we're more susceptible have
a multitude of recessions and bigger recessions.
So that's definitely in the odds there.
I did a few charts on that, guys.
Look, we've had one or two recessions from, let's say,
in 1980 all the way to 2000,
it was maybe one or two.
But every time SPX breaks down versus PPI or SPX breaks down versus gold,
we have these recessions.
So we will have the strong recession.
So I don't know,
that's probably half of the equation of stackation.
Half of.
equation, right? There's the recession, but inflation. We will. Yes. We're not worried about
a recession occurring at the same time as an inflation, inflationary period, according to the charts.
We have to look at the oil chart because if you overlay the crude oil chart and the US year to
year inflation rate, it's practically the same. I could put the sugar chart also. It tracks the,
I think we did this a little while back. It
It tracks that.
And right now, oil is bouncing on a beautiful breakout line.
If that thing moves up, that's the next wave of inflation, the market sensing it coming in.
So the CPI might actually be tumbling again.
And people are waiting for headline news, the fundamentals, oh, CPI is going down.
But if you see oil breaking out, it doesn't need much now to break out because it's a slanted trendline.
So if that breaks out and sugar continues its run, we're heading into maybe double digital
Oh, wow. Okay. So to make sure, because again, this is not our morning finance spaces. And so if you're finding me explaining things quite a lot, is just to make sure that everybody here who doesn't always come to our morning finance spaces, which I'm going to keep shilling at least four or five times, you know, we...
An hour.
Yeah. And so, you know, in that, we usually are able to do much more deep ties, but we've got to keep people appraised.
What Patrick is saying...
is that we are hitting a level from which it can bounce.
And what he's talking about is oil versus gold or oil versus other, you know,
sort of things that help us understand and normalize the data.
And so essentially the idea is that there is a world in which we go into a recession
and inflation reaches double digits, which is traditionally called,
stagflation. And so I just wanted to make sure that I approached that. Patrick, thank you so much for joining us.
I wanted to move on to Cat Bear. I hope that's actually, I hope your name doesn't, isn't said a different way, but Cat Bear. Thank you for joining us.
Wanted to make sure to give you the opportunity to weigh in. Are you worried about a stagflationary period?
So yeah, I've been positioned for sagflation for quite some time. That's definitely a narrative I agree with.
Okay.
I've had my hand up for quite some time, so I'm not sure if I can pop back or if I should let someone else go.
But in the beginning, Mario had asked a question saying he's not convinced that the, you know, he thinks the baking stuff is done.
And he asked everyone for their opinion.
And then we sort of switched to cold and back on that.
Go ahead.
Okay.
Okay.
I know, and earlier also I wanted to, I can't remember if it was Peruvian or if it was you, but one of you also mentioned that you think the FDIC is the solution to this. And I would like to explain, you know, why I totally kind of disagree with that idea.
So to begin with, we have a problem that for Mario's question, it's certainly not over.
The reason why is obviously we've had, like grants said earlier, we've had low rates for so long that most everybody's loan books are going to have a lot of these assets that aren't yielding the same level of interest that they could currently get on, you know, if they issued a loan right now, the difference is.
is that they can't because they have to, you know, keep their capital ratios and all of that in their all type of funding.
So the deposit outflows aren't actually a problem.
Like the deposit outlaws have been declining.
By the way, it was just to me or is Katz's a heart for everybody to hear.
I just want to make sure.
Just breaking up.
Just a touch.
Yeah.
Okay.
Can you hear me?
I think so, but I'll let you know if we can't hear you just to keep the quality space up.
Okay, sorry, sorry.
So I think that the major concern for this is that, you know, before, so you've seen the banks that have blown up where their, you know, risk management was really trash.
So the main problem you see with all of them, though, is that we had, and I actually have the FDIC PDF, which shows that,
you know, the change in the deposit flow. So we had this great influx of deposits because you got to think we had EIDL loans. We had PPP loans. You know, we were flushed with cash because of COVID. So what a lot of these banks did is they lent based on that base of cash. And that cash is now disappearing as we know this because, you know, either people spent it and we're tightening on top of that. So lending standards are a lot tighter.
and that money is being spent, it's gone.
It's not coming back.
I believe that this is the bank's fault more than anybody, all of these banks.
Not necessarily for lending for a long period of time, but if, you know, at a lower rate,
because obviously those were the rates.
But what it is is that when they have these giant influxes of deposits that are completely out of the norm,
and you can look at the FDIC, you can look at all this, they knew this wasn't normal.
So to fully go in, you know, when we look at, you know, what we saw with Silicon Valley, you know, they, they had this mismatched, you know, their assets and they went in with bonds and mortgage back securities. And then when they had their deposit outflows go out, then they had to market to market. We saw what happened with that. But when we look at First Republic, we're going to go out.
First Republic was in a much different situation
that I see a lot of these other regional banks are in as well.
So First Republic kind of is just...
specifically different because it had really overweighted.
Like it grew its loan portfolio just in 2022 by,
I want to say like 24% in residential real estate.
And the residential real estate sector of it,
I guess they specialized in jumbo loans because they have a kind of a wealthy clientele.
So the thing is,
is that they can't bundle off those loans and sell it off to Fannie and Freddie,
as most people would with residential loans because they're much larger.
So essentially it was stuck in like banking purgatory until JP Morgan was able to come in and take that.
So it's really unfortunate because that's pretty much the only bank that really the deposit outflows were the nail in the coffin.
If they had kept the deposit outflows, the quality of their paper and their delinquencies didn't look bad, obviously with time.
Who would have expected the interest rate to go up this fast?
Well, I mean, to be quite honest, First Republic did over loan in 2022 based on, you know, on average, most of these banks increased their portfolios on the lending portion where they were going to have these jumbo loans and stuff by like 5% tops, whereas First Republic took their stuff by like 25%.
So their risk management was completely off.
I understand what you're saying, that, you know, how were they supposed to know that that happened?
But let's be serious.
When most of these banks, especially the larger ones, are going to give out these loans, they're going to bundle them off and sell them.
J.P. Morgan is really good at doing that.
So if we look at that, they don't have to carry it on their paper that long.
So the problem with First Republic is if they marked those, I actually have this right now,
I had their financial stuff looking at them last week.
I have them on my desk right now.
So, you know, whereas where we saw the duration mismatch on Silicon Valley Bank,
but theirs were in the bond.
So when they marked it to market, they took that loss, blew their cap ratios and had that run.
But when you look at FRC, FRC's main loan portfolio was yielding 2.89%.
Okay. I mean, the mortgage rates today are 6.79, you know, it's almost a 4% mismatch. Okay. Here's the problem. That's what everyone's books are going to look like. Right. So, I agree with the difference is the differences. And that's why I'm saying it's not just specific to these banks. The differences is that you have to go with each bank.
and look at pretty much did they allocate too much money to one specific sector over leverage and mess up their risk management?
I've been looking at most regional banks are over leveraged to specific sectors depending on their region.
That's right. So that's what we've been seeing. And the commercial, so some commercial, uh,
real estate is maybe not maybe isn't as risky as others right so if you have one of the banks
that specialize primarily in offices near bigger cities uh that might be one you would want to look at
heavily if you have one that is invested in a lot of um non-income generating commercial land development
that is one you want to look at as well uh the only good thing about commercial in um
In comparison to, let's say, FRC, even though FRC, like I said, had very, very solid books.
But at the same time, these loans were a year old.
So they haven't really had time to go delinquent.
You know, normally the longer they're holding it, then they can go delinquent.
But with a lot of these commercial loans, they do have floating rates.
So that's kind of the offset, right?
Yeah, that's the main issue.
That is what you just said.
So I want to make sure, Jay, I'll get to you this.
So for people, again, remember everybody, and I, Kat,
that really great to have you up on stage.
We're going to have you back always.
But I was going to say, as much as you're willing to,
but I was going to say that, you know,
the point that she just made at the end
is actually the point I want to get to now.
And that's what I know that Mario Peruvian Bull
and I actually wanted to really focus on today,
because it's not just about the banking sector.
It's about how they have been operating.
And with the commercial real estate sector,
this concept of floating rates.
And so, Jay, I know you were about to go into it,
but I want to make sure that the average person listening,
again, we have a general audience right now.
So you can get fixed income rate, fixed rates on your loans, and you can get a floating rate.
And a floating rate changes as the interest rate changes.
And that is causing a ton of trouble right now.
So Jay, are you concerned about these floating rate mortgages that they have on commercial real estate?
And how concerned are you about commercial real estate right now?
Well, you can quantify it.
It's very difficult to, you know, to forecast, you know, the speed of how this is going to play out.
But commercial real estate is a $20 trillion sector in the United States.
There's about $1.5 trillion of commercial real estate debt that is maturing over the next
two years.
Of that, about two-thirds is office related and retail related.
And there's some legacy loans all the way back from prior to 2008, right, that have
just been amend and pretend and extend.
Some of these loans are held within, you know, CNBS. Some of these loans are held at regional banks. Some of the loans are held at private credit originators that are backed by stickier capital like sovereign wealth funds. So, it's not like the
the prior financial crisis where, you know, the banks held the majority of the paper
and were forced to liquidate because the banks were over levered.
This is a different situation where, you know, I am worried about it, but I think it'll
be a death of a thousand cuts.
And, you know, I gave an example of the two Brookfield properties that defaulted in L.A.
Where Brookfield walked away, the DTLA properties, the LIBOR that you're talking about,
LIBOR and so for right now are 5%.
A year ago, there was zero.
So the loans for those two properties at a 60 LTV loan to value ratio were LIB plus 190, right?
Which means that they're effectively borrowing at 2%.
And, you know, as of when Brookfield defaulted, you know, LIBOR was already almost 5%.
So the...
issue was that they're now being now paying 7%. So they went from 400,000 of interest per month to over a million and a quarter interest per month. And the buildings were only earning 2 million a month in rental income because they were 70% utilized. When the utilization fell closer to 60%, they weren't able to pay maintenance taxes and interest. So what they said was, hey,
our equity is probably worth zero here anyway.
We're going to walk away.
And I think that's going to happen.
That's happened with Blackstone portfolio companies.
In the U.S. and Europe, it's happened with real estate owned by PIMCO.
It's actually even happened to a New York building owned by Starwood.
So the biggest real estate owners in the U.S.
are focused on diversification and diversifying in energy infrastructure and other assets
because they're losing money.
And it's not just office and it's not just...
retail it's multifamily everyone thought multifamily was space was safe you know we've been active
in a capital structure called arbor where they recently defaulted on 3200 transitional
multifamily properties a huge complex complex in texas where there has been been overbuilding and when
you have a complex that's not stabilized and you have
a project where it was also based on floating rate debt and your debt costs more than doubles.
then you have a situation where you're going to have defaults that are going to affect banks.
Now, think about how banks operate.
They lend on a loan to cost or loan to value.
So if they're lending at 60% LTV or 70% loan to cost, then they may not see huge losses,
but they'll have to sell portfolios.
They don't want to own these buildings.
They don't want to manage them.
So they'll have market issues.
They'll have illiquity issues.
Deposits are likely going to...
flee at a certain at the banks where their stocks have fallen right everyone's been talking about it
so there's no way to predict that as well but to the point on on first republic earlier i you know
they're lending to my friends they're lending to wealthy new york new jersey coastal elite where
they're putting down big down payments i wasn't i wasn't really worried about the loan book i was
worried about the fact that the rates were so low
on the loans that just based on the yield that they would have to sell them on discount.
I wasn't worried about defaults going up on that portfolio.
And that's why JPMorgan was like, hey, we'll take this.
I mean, the FDIC ended up giving them a guarantee and we don't know the-
That's the point that I was making, Jay.
I wanted to focus on that last part.
And I want to go to Rahm with this question.
Rom, one point that I was making earlier, I had misspoken.
I said Fed.
I meant the FDIC.
The FDIC with the banking sector, the backstop, and I remember in the fever of SVB collapse,
you may remember as well, Rahm, we were having these conversations around what they could do.
And Bill Ackman came up on our spaces and I had a conversation with him.
And we were, I asked him a bunch of questions around, what does he think the FDIC should do?
And the FDIC, he said that the FDIC should say that all deposits are safe.
We're going to make sure that all deposits are safe, whether they're insured or not.
What the FDIC ended up doing instead was putting together this fund and then putting together a discount window, essentially incentivizing people to watch the banks collapse.
And when they collapse, they can buy it off.
Do you agree with that?
Do you agree that the FDIC may have set up the wrong incentives that people didn't happen?
happen over and over again?
It's more complicated than that.
And I'm a dyed in the wool banking and capital markets executive,
been at big banks like Bank of America, Maryland,
small banks like Cross River.
So here's the thing.
The FDIC lacks the statutory authority to say that all uninsured deposits
are now insured.
That can only be done with an act of Congress.
That's one.
However, the FDIC is functionally acting as if that is the policy
by invoking the systemic risk exception.
So not a single uninsured depositor has lost a penny.
And so they're functionally delivering on what Bill Ackman is saying,
but it's a bit of a confused message.
And this comes through in these very tortured congressional testimonies from Secretary Yellen,
because she also is trying to combat moral hazard
and leave open the possibility that the FDAC will not build them out.
So zooming out, there's some short-term things, some long-term things.
I think what we've got to start taking a view is to the longer term.
You know, ask yourself this.
Why is it that no private equity firm, Berkshire Hathaway, Amazon, Apple, Google,
who have Apple bought, they now $70 billion of stock buyback today.
That's more than the FDIC has lost through deductions on their fund.
Why has an external capital float into the banking system?
There's still a ton of liquidity and a ton of capital out there.
And fintech and banking is hot.
And the reason why is that it's illegal and it has to do with very old laws from 1956 called the Banking Holding Company Act.
Now, it's interesting.
Remember, like Wells Fargo started as an express mail delivery service in the mid-19th century.
That's what they have like the wheels right on the logo.
J.P. Morgan started as a water company.
But there's like these old dated laws that prohibit the so-called commingling of banking and commerce.
And it doesn't make any sense.
So, you know, some of you might recall when Walmart tried to become a bank or acquire a bank, invest in a bank in the 2000s, and it made a ton of sense.
They've got all sorts of capital.
They've got retail distribution.
And they can deliver financial inclusion to middle America, not the coasts, which is where the megabanks are, to people that need it most.
And the incumbents read the big banks push back.
So that antiquated policy, that antiquated law needs to change.
And if you did that, you would have not only fresh capital flowing in,
but you'd also have the digital banking transformation.
We have these frail, old, aged banks that are in desperate need of an influx of one competition,
two capital, and three digital banking.
Right.
So I want to make sure that I understand this from before we move on to Mark.
What you're saying is that there is an antiquated rule that prevents non-banks from acquiring banks.
Yes.
And that antiquated rule is preventing flow of capital and enabling more free market acquisition of these banks as they're struggling.
That's correct. That's correct. So like when think back to O.A. Some of you might be asking, well, gee, didn't Berkshire Hathaway save the banks in O.A? Not really because it's not permitted for non-bank, which would include Berkshire Hathaway to.
to have a control position in a bank.
A control position means they exceed 24.9% or they have indicia of control, such as board seats.
And that's why, you know, that was more of an optics perception component.
And the government had to step in and the taxpayer paid the hook.
We don't need that.
You know, we have these segmented capital markets.
Those fences need to come down.
You still need to have high levels of safety and soundness and supervision.
Right.
You still need to have the appropriate regulation in place because you've had management make egregious mistakes.
And here's another thing.
So, you know, Jay raised the point on the commercial real estate market.
There's $2 trillion in commercial real estate debt that has to be refinanced over the next four years, $450 billion coming due this year.
And the mortgage-backed securities market, the primary buyers of the banks.
Well, guess what?
The banking system is experiencing a 6% drawdown in their deposits.
So there's not enough deposits to refinance commercial real estate and mortgages.
What does that mean?
It means higher interest rates, higher interest rates for longer.
So, you know, I talked about enabling capital to enter the space.
The other lever is technology.
Imagine if you had First Republic's jumbo mortgages or this commercial real estate debt
or mortgage-backed securities on chain.
You would have transparency.
You would have standardization.
You would have liquidity.
you would enable another capital market to fund these loans.
And that improves the outcomes for ordinary Americans who are maybe trying to buy a house
and have to deal with 6.5% mortgage rate.
It would relieve the pressure on the banks as well.
Danish, I think something that you've been trying to kind of get at this whole time,
you know, when you look at the mortgage rates, you know, back when everything was really,
really low, you know, that, you know,
you know, there's not as much margin in between like a 5-1 arm, so adjustable rate mortgage,
which we're kind of using floating rate and adjustable rate kind of synergistically, but,
or interchangeably, sorry.
But when you look at the commercial real estate market, you know, if you're going to invest into a reet,
you know, you have a developer saying, yeah, go ahead, invest in this reet with us.
we're going to do a 3-1 or a 5-1 arm.
So even though rates were super close for a 30-year fixed rate and a 5-1 arm,
they're still trying to squeeze every last cent out of that.
And then they're going to go and say, hey, we're going to go build this Hilton hotel.
And then as prices go up, you know, we're going to go do like a 30-year cash-out refile.
You're going to get paid, you know,
you know, X amount of dollars after, like, four years, which is going to be a big lump sum,
and then you're going to get paid out every single year.
When we're raising rates at the speed in which we did, like we were talking about earlier,
20 times as fast as the 1970s, it puts a lot of these developers in a really tough situation.
And so now they're going to be left holding the bag, you know,
whether they're going to, you know, choose to let something float around for a little bit,
whether they're going to try to, you know,
squeeze down a couple of bips from some of the preferred lenders but then again you know where's the where's that actual capital going to come from and now you have their commercial real estate that's vacant and no one wants to be in it i mean hotels are one thing but if you were building an office building man are you a pickle absolutely mark yeah go ahead peruvian go ahead
Yeah, I want to bring up one of the questions that keeps getting asked in the replies.
And this is a good point.
So we've already touched on commercial banks and their exposure to commercial real estate
and the problems with their security portfolio of $1.7 trillion of unrealized losses.
But to what extent are credit unions exposed?
It looks like a lot of people are holding money there and they're worried about their stability of these financial institutions.
Not much at all.
And the reason why is...
one of the primary risk factors explaining these, the bank risks is the high percentage of uninsured commercial depositors.
So this is a very different bank run than we saw in 2008 when he had retail depositors surrounding Northern Rock.
So what's happening is these corporate treasurers, right?
So these are businesses.
They've got a CFO or treasurer is making a decision to move money.
And they've got a fiduciary obligation to do that if they perceive a risk.
Credit unions do not serve businesses.
Credit unions focuses on affinity groups and its retail money.
So here's the funny thing.
Give your credit union a hug.
Give your community bank a hug.
And what I mean by that is that they're safe because the deposits are sticky.
They're not over-indexed to a high level of uninsured commercial deposit.
And, I want to explain this point even broader.
So the thing that we keep kind of touching on that, Mark, I want to get to you as well is concentration of capital in accounts and the amount of money that is uninsured.
So what I mean by that is Silicon Valley Bank, again, like I was saying, sorry, I'm a doctor, so I have to use this as an analogy.
But it was the sickest, I mean, Cat Bear, you're right that it was a sick bank.
I agree. It had diabetes. It had hypertension. It had heart failure and all these other comorbidities.
And so when this, you know, this awful thing happened, which was rising rates at the most rapid pace ever, it was the most vulnerable and most ready to be affected.
After that, we saw, you know, we're seeing Pac West.
I'm not going to talk too much about them because then people will say that I'm causing a bank run.
I'm not trying to.
You know, all of these other banks, First Republic and others, signature, they also had other
comorbidities, maybe not as many as Silicon Valley Bank, but something like that.
And the concentration of capital, which is what Rahm was referring to, which is one bank
account, a business account that has a ton of money in it, most of it was.
which is uninsured is actually a huge risk factor for a bank.
Credit unions are not open to that.
Mark, I wanted to get to you.
Thank you so much for joining us and coming up.
I want to make sure that, you know, I know we've been talking about a lot of different topics.
We'll love for you to win.
Yeah, Dinesh, thank you so much for having me, Maria.
Thank you.
As always, I've only got a few minutes because I just came off a media spot
and I have to go to an event in 15 minutes.
Okay.
I think Mike Milken summed it up best when he was interviewed today at the famous Milken conference.
And I also get a kick out of your comorbidity references.
But there was a common contagion.
There was a common problem across all of these banks.
And we're going to put off to the side...
for the moment, the role of the Fed failure to regulate by its own admission with the report that came out on Friday morning.
Ironically, the same day that they decided that FRB was not to, was no longer a part of the banking system.
It's a whole other conversation.
But Milken really put it.
in the simplest and the best way that I've heard thus far, right?
It's a classic asset liability mismatch, right?
Buying, borrowing overnight and lending long.
Right? That the banks had enough credit, they had enough equity, they had the ability to absorb the losses that were coming down the road.
But as Milken said, rather than invest wisely, they doubled or even quadrupled their size by borrowing overnight and artificially low rates and buying intermediate securities.
It's really that simple.
It's really that simple.
You know, we could talk about reckless lending practices.
You know, we could talk about,
there's been a lot of talk of, you know,
these sweetheart loans given to the wealthy
by some of these regional banks at artificially low rates.
And, you know, I heard...
I think it was Ram and a prior speaker talking about that.
Did that happen?
Sure.
Should that be reined in?
And I don't mean from a regulatory perspective,
but should investors demand more of the banks that they're investing in
and their equity, securities to do that kind of thing?
Sure.
But...
I would throw out there that it happens all the time,
and those things are done, particularly in banks
that are catering to the wealthy, very often entrepreneurs,
business owners, business founders.
It's essentially looked at as a lost leader
to get their other business, right?
Either on the private wealth side,
or the commercial lending, or the pension account stuff
when you're talking about businesses of that size,
So we see it all the time.
And the other thing I want to just comment on,
I agree with Ram that the BHCA,
the Bank Holding Company Act,
is undoubtedly preventing the flow of more capital into the system.
In fact,
we heard from a number of investors talking about,
you know, as they were looking at being part of participating in, I won't call them bailouts because they're not formally bailouts, but liquidity facilities that were being provided by private parties in the banking system.
some of those parties saying we can't, right?
Particularly as it relates to some sovereign funds saying,
no, we can't provide more, we can't be a further part of it.
And a lot of analysts coming to, I think, the accurate conclusion
that those investors were limited to,
by the bank holding company act restrictions. I don't see, however, certainly within the current
administration, I think we would be looking at, you know, a regime change scenario around before
we saw any meaningful change to the BHCA, particularly in this regulatory environment.
Yeah, let me chime in there. So by the way, your point on sovereign is an excellent one. Remember the demise of
Credit Suisse. So the Saudi Arabian sovereign wealth fund couldn't go above 9.99%, which is another indicia of control. So that's got to change. By the way, I'm writing an op-ed on this. It'll hit in the next few days. I'd love to get a former bank regulator to co-own it. That'd be terrific. But one thing that just also point out here, and then I got a drop-off,
Look, all banks engage in duration mismatch.
That's what a bank is.
All banks, everyone everywhere, borrow short, lend long,
and they're engaged in liquidity transformation,
credit transformation, and duration transformation.
So what that means is that for the retail depositor,
commercial depositor, there's a perception of liquidity.
There's a perception of no risk because your deposits actually loaned to the bank,
but it's always marked at par.
But in the reality, they are engaged in the purchase of lending and investment in securities,
which are risky activities.
And they're taking your short-term zero-day demand deposit and they're making a longer-term loan.
And that loan is not callable immediately.
So all banks engage in that ALM mismatch.
And I like your core morbidity's observation as well.
So the gasoline on the fire, sorry, take a step back.
Here are the ground conditions.
So you have low rates.
You have banks buying mortgage-backed securities.
Why?
Because in the wake of 2008 crisis, the regulator said, I'm simplifying here, but we don't
want banks to take a lot of credit risk.
So we're going to let banks take interest rate risk.
Banks got to make money.
How do you make money?
Credit risk or interest rate risk?
So you shift over to interest rate risk.
And part of the Basel frameworks to say, hey, we'll let banks acquire high quality liquid assets.
And those are things like treasuries and mortgage-backed securities, which have AAA ratings.
And so then the regulators pat themselves in the back and so we're not going to have another banking crisis.
We crack the code.
The problem, and they thought about the scenario where rates rise.
They did consider that because what we're going through now is very similar to the S&L crisis.
The last time we saw rates spike so quickly was in 1981.
And a few years later, at the SNL crisis and the kind of the Resolution Trust Corp, the buying of these distress assets coming out of that.
But their answer to that was, okay, well, wait, look, we'll just help these banks hold to maturity.
We'll let them not have to crystallize a loss on their balance sheet.
And even the Silicon Valley Bank issue, this is a known issue in the banking kind of halls of these markets.
Even the Wall Street Journal covered it in November.
But markets can suddenly make things matter when they didn't matter before.
And right now with the bank failures you're seeing, those bank failures are not driven by commercial real estate, which is what some of this topic is about.
And I would expect to see some failures over the next few years as that starts to come, you know, to the four.
But one last thought, and I'll log off here, is that the way to think about a bank is a bank is...
got 10 turns of leverage.
A bank has more leverage than a hedge fund
because the bank has about 10% of their assets funded with equity capital
and the rest of it's funded via deposits.
So, you know, they're doing a carry trade.
They're borrowing short and they're lending long.
Carry trade is what like George Soros does, right?
And that's what we want banks to do, but in a responsible way.
So it's a really hard problem for regulators.
I think, you know, admitting new capital in the system, injecting technology,
putting these loans on chain, right?
Securitization almost killed the banks in 2008,
but tokenization now can save the banks
because it can create liquidity, it can create transparency.
What happened in 2008 is the banks didn't trust each other,
so they wouldn't fund each other overnight.
Right.
And so if you can't fund via a short-term borrowing market like commercial paper and your money good, you're solvent, but your assets aren't liquid, you can blow up.
If you put these assets on chain with transparency, you can enable the banks to trust each other to land access new ports of call for capital.
I just love how, Rahm, I have to say, I was tracking you completely until you went into tokenization, which I know is like your area of interest and expertise.
I want to go back really quickly.
You just gave a masterclass on one of the biggest core problems.
And I want to make sure that our...
general audience, again, this is not our regular finance spaces, which, by the way, are every
morning at 8 a.m. Eastern, I will continue to show our morning spaces with Mario.
And by the way, if people have questions, don't forget, we have 162 tweets already in the
bottom right corner. I need people to go down there. We have incredible people up on stage.
This is truly a masterclass. Even an idiot like me can follow, but I'll make sure that
because I'm not so smart, I can actually translate back to everybody else.
And Ram, please correct me if I'm wrong.
What Ram just said is really important.
What he said is that remember 2008 with subprime mortgages,
where really the big risk was that they were providing loans to people that really
they shouldn't have been giving loans to at high interest rates.
This time, what they're doing instead is they're actually providing loans to people that are really, really high quality loans, but they're doing it in crazy long duration, much worse than what they should do.
And each of those have their own risk.
There's still a risk.
The risk, I kid you now.
It's not that.
I think just to, I don't want to, for people to be.
Yeah, please correct me, Jay.
Loans have, you know, fixed durations.
If you look at 30-year mortgage, 15-year mortgage, that's predominantly how mortgages are structured in the United States.
Only 6% of mortgages today for residential properties are floating.
So it's not that they chose longer duration mortgages.
The actual problem is that...
with SIVB, which started this, was that they bought MBS, which while the underlying is a 30-year mortgage, the average duration is 10 years.
And they bought...
But still long.
It doesn't matter how long it is.
It really doesn't matter.
The issue is not how long the maturity is or what they're doing in terms of underline.
It was the fact that they bought these securities...
You know, with zero cost deposits, when they knew their deposits were falling because
SIVB was a Ponzi scheme.
They raised money from venture capitalists.
The only way they grow their deposits is with new capital raises.
And the portfolio companies burn all their capital in six to 18 months.
That's a completely separate issue than what happened with FRC, completely separate issue
that happened with anti-money laundering and why I think they closed down SBNY and SI.
And it's also a different issue than what's happening.
Yeah.
So hold on, hold on.
I just want to confirm this really quickly.
Jay, you're saying that the contagion is over.
No, I think you're misconstruing that completely.
What I'm doing, what I'm doing is I'm correcting a huge misstatement.
And the misstatement is that...
mortgage it that you're saying that banks are arbitrarily choosing the maturity of what they underwrite and that's not right
You know, these are these are fixed programs. Okay, man
so so rom I want to let me let me reconcile the thing that's why I was trying to explain it
So Ron you can explain the credit risk
Yeah, I think I think I think kind of talking past each other so the jumbo mortgages originally made by First Republic are high quality mortgages to high quality borrowers to your point
Exactly that's one second
So SVB also had, you know, good customers.
I have personally had issues of venture debt,
but you know, the delinquencies weren't low.
Those are good credit risk to take.
Both of them had negative equity if you mark to market.
If you were to crystallize the unrealized loss, they had negative equity.
They had negative equity for different reasons.
Part of it is the point that you're both raising, right?
So if you originate jumbo mortgage at 2.5% and then rates go to 5%.
Very simple math.
You're down about 50%.
By the way, here's where it's difficult because...
it's very hard to hedge mortgages.
And I know this is a kind of, I don't make this a primer, but you know, you've got negative convexity.
You know, if you're hedging a mortgage with an average duration of three years, when interest rates rise, then mortgage pre-payments, meaning people's, you know, ability to buy back that mortgage because they buy a new house slows down.
So it's extremely difficult.
It's a very, you know, think about it this way.
CEOs of banks need to think of themselves as chief investment officers.
As opposed to many of these community banks, it's family-run businesses, passed from one to the next.
There's a guy who was working the, as I started as a teller, worked his way up.
You know, these are 10x levered institutions and they're making bets.
And, you know, the banks that have blown up so far did take excessive risks with duration, interest rate.
And Jay, Jay's also correct that, you know, there were other issues around signature.
but anyway, this is a lot of fun.
But what banks are out there, they're not making these risks.
That's my bigger question.
Yeah, they all are.
They all are.
I think everyone, I think you're, the premise of this was that you were saying.
Going back to the original analogy, some people might have hypertension.
Other people have diabetes, but the underlying problems are still the same.
It's a core morbidity that increases issues with the problem.
No, you can't compare it.
You can't use a doctor analogy here, Dr. Danish.
I'm sorry.
I'm comparing apples to oranges here.
Yeah, so let's walk through with that.
I want to make sure, hold on.
I just want to make sure, Jay, that I give you the opportunity to kind of answer some questions
around the contagion and where we are right now.
So right now, what are you worried about with the banking contagion?
If you think that these were quote unquote, or not, I'm not going to quote you.
I'm going to paraphrase you and you correct me if I'm paraphrasing you wrong.
But if you think that these banks were very vulnerable because of poor practices, which I agree that at least SIBB and FRB signature banks is very different.
But, you know, those two banks may have had some issues in their practices.
Which were completely different, by the way.
Which were completely different, completely fair.
So do you think that there are other banks out there that are, and I don't need you to name the banks.
What I'm saying is, you know, if you're looking at the entire sector, are regional banks at risk because all of them are overweight on certain sectors that they shouldn't be?
I think that's just painting too broad a brush.
One, you have to understand how banks underwrite.
Two, you have to understand that, you know, there's different types of regional banks.
So, you know, they're money center banks.
There are super-regionals.
There are mid-sized banks.
And then they're small banks that focus on specific communities and only do specific types of lending.
Right.
Banks that, you know, the majority of the banks don't even own securities, right?
So they're not going to have the same issue as SBB.
Majority of banks, you know, fund themselves with deposits, you know, they own loans,
and their security balances are very, very low.
So the issue with SIB was it grew too fast.
It bought very high duration securities at the top of essentially when interest rates were the lowest.
And then subsequently, you know, didn't do anything about it.
The issue with First Republic was that they were lending to wealthy clients at very, very low rates.
And when rates rallied very, very steeply, you know, if because of the deposits that, because of the deposit run, if they had to sell the business because of merger accounting, any buyer of those assets would have had to mark them down, right, by 30 billion plus.
Those, those are completely different issues.
Yeah.
Now, with the other banks, if you look at Pac-West and WAL and some of the other banks,
you know, what you really need to do is look at the percentage of the uninsured deposits.
You need to look at their actual balance sheets, see what they own, and also look at the duration of their securities books,
and you need to identify, you know, within the bank, which...
And we started to do, you know, what are their potential losses?
What exposure do they have to commercial?
And within commercial, what exposure do they have to, you know,
class B and C, retail property?
And they don't tell it.
And the thing is they don't give you granular information.
Banks are black boxes.
They're not like a REIT or a BDC or a closed end fund that gives you all their positions.
So I just want to be, you know, the point that I'm trying to make and I'm trying to be very clear about it is that all of these situations,
right?
might have one or two symptoms that are you know that you could point to which is that the fed
you know jacked up rates very very quickly but the issues that i'm worried about are going to
play out over the next two years that are going to involve higher credit risk in the system and
a decline in lending activity that results in firms and businesses not able to refinance
commercial property is not able to refinance and that putting pressure on the banking system now
A lot of the issues that you're talking about, the symptoms that created this mess, right, are...
were created because of high rates and if a year from now two years from now rates are 100 200
300 basis points lower that issue those symptoms will fix themselves and we're going to be worrying
more about only i can use the doctor analogy jay just kidding sorry we're going to be worrying more about
the credit risks and the losses so i think that it's important to understand that this is a very
nuanced problem and that
The FDIC is also, you know, they're raising that, you know, a fee on all banks with assets over 10 billion to reshor the fund.
And the reason why they chose JPM Morgan to buy First Republic is, you know, they wanted to accept the highest offer and not have to expend, you know, they had already spent $30 billion out of the, out of the FDIC fund.
So their goal is to raise capital and have the banking system, right.
put more more funds in the insurance so that you don't you have a buffer now the majority of banks
don't have uninsured deposits at the same level as many of the banks that we've talked about so you
know that's number one and the number two of it is the majority of banks are also not lending to
super wealthy coastal elite at below market mortgage rates so
Yeah, so those are, I mean, obviously that's why those were the first two banks to fall. But, you know, like we've said before, like this is a systemic problem. There's contagion throughout the system because there's all these banks like we've, you know, been describing for the past hour and a half have been honeypotted into a trap created by the Fed. And, you know, whether they did that intentionally was or unintentionally is.
to be debated, but the Fed brought interest rates.
And run probably could agree with this.
The Fed didn't even view interest rate risk as the main risk here.
They viewed credit risk.
And, you know, they were trying to solve what happened in 2008.
So I don't think they're honey budded.
I don't want to use this type of terminology.
I would say the banks that are blowing up, you can filter, you can sort, you can put them on a table, you can identify them, right?
There's 4,000 plus banks in the U.S., unfortunately down from 15,000, like 20 years ago because of these consolidation trends towards too big to fail.
Right.
But it's a, I don't know, I'm not, I'm not of the contagion view.
There will be more banks that have issues and blow up.
Every single bank, by the way, that's blown up, I could tell you what they could have done differently in management and they wouldn't.
For example, if First Republic securitized their mortgages in 2001, if they call J.P. Morgan largest structure products, mortgage origination desk,
on the street, they took that off their balance sheet, they wouldn't have an issue.
But, Ron, that's kind of Monday morning quarterbacking, right?
Well, I'm saying, my main point is that management matters.
That's the main point.
So when I hear systemic, I hear of a factor that applies to the entire sector.
What you're seeing are the tides going out, you're seeing mismanaged banks that indexed to too many risk factors.
And yes, there are these backdrop conditions around low rates.
where banks were buying and that didn't help things.
But here's another, here's a contrary example.
Axos Bank, they took out insurance.
They have insurance up to $150 million.
They have private insurance.
Why do they do that?
Because they've got a bunch of commercial depositors.
That's a management decision.
They also made other kinds of decisions to avoid origination of certain risky credit
products.
So fundamentally, management's accountable.
But, you know,
There are these other ground issues at work, but this is not systemic.
This is not 2008.
And yes, you may very well see more banks fail.
And I also agree with Jay's point that the credit risk story will come back into play around commercial real estate that isn't in play now thus far.
But it will be.
It kind of has to.
It's just a function of the mass.
Okay, so I want to bring this back and get some of the input, some input from the other speakers.
The question I have for everyone is, what do they think the feds and the FDIT's responses to this crisis if it continues or worsens?
Especially, you know, the BTFP, they opened that facility in March and it's currently sending at $81 billion of use this week.
Does anyone think that that will increase?
Do you think that the Fed will create new programs to try to backstop the system?
Yeah.
What will the FDIC's response be?
And I'm going to kick this to Gareth first.
And then we're going to hear from O'Hare and then Mark.
So, Gareth, you have the floor.
All right.
Not here.
Gareth, are you there?
Go ahead.
Hold on.
O'Hare, bottom left.
You've got to hit the mute button.
You're muted, my friend.
All right.
Mark, I guess you won.
I was going to say, did I win the short throw?
Hey, guys, sorry, I lost you there.
Could you repeat the question?
I wanted to know what the panel thinks the Fed and the FDIC's response is to this crisis if it continues to worsen.
Yeah, no worries, Garrett.
We'll come back to you.
Mark would love to hear from you on this.
What do you think the Fed and FDIC can actually do now that we're here?
Well, listen, the first thing that we're going to hear from the Fed,
and this is one of the things I'm really upset about,
was that Chairman Powell decided to open his comments
been raising rates yesterday 25 basis points in the street with expecting by telling all of us that the
banking industry is strong and resilience and everything is okay right so when the government says
you know everything's fine we're here to help you is when you need to be concerned that something is
wrong i don't think we're going to see any significant changes from a regulatory perspective
you know with the current gridlock that we have between the senate and the house
I think the Fed will continue to rely rather than increase the deposit insurance, which
can only be done, I think another speaker spoke to by legislative act.
So they're going to continue to rely on these exemptions that enable them to essentially
invoke the crisis conditions to allow this set of things.
They're going to continue to ignore some of the rules that allow the big banks to continue
to get bigger.
You know, J.P. Morgan now has, by a study I saw...
just before joining the space is something like 16.5% of all American deposits.
There's a, it was supposed to be a fairly hard and fast 10% rule preventing that kind of thing.
And for good reason.
So I think we're going to see the Fed and the government continue to use the limited amount of tools in the toolbox to handle this.
I think they're going to continue to do a poor job of it.
And we're not going to see meaningful change until we see some regime change.
next election, frankly speaking.
And while I do agree, I think it was Jay that was saying that things will fix themselves in a couple of years as it relates to, you know, the pricing.
I think there's going to be a lot of losses in commercial real estate.
I talked today to one of our analysts that looks at data coming from the mortgage servicing firms,
which we sort of look at as being early indicators.
And the reality of it is on the commercial real estate side,
things are sort of still okay status quo.
We're not seeing any significant uptick in defaults or delays in payments.
And that's largely because of the duration of commercial leases.
So what you've got basically got is the corporate lesswords, whether it's for office space, commercial space, retail space, that they are continuing to pay to avoid the draconian types of expenses associated with busting or buying out of a lease early.
But they have absolutely no intention of renewing those leases as those leases become up for renewal in the next couple of years.
So we haven't even really seen yet based on the data that I looked at today, what the impact is going to be of work from home, what the impact is going to be of what the leases look like in terms of their terms and where it's really going to have the other shoe drop in commercial real estate, which could be.
even three years out based on this least duration.
And I've asked them to come back to me and tell me where those numbers are,
what's sort of the mean and the average duration so I can get a better picture of that on the commercial side.
With that, I got to drop off.
Thanks, Mark.
Appreciate you coming on.
Yeah.
Always a pleasure, guys.
Thank you to everybody.
Thanks.
Thanks, Mark.
Yeah.
And we have two more new speakers.
Just to address that very quickly.
Okay, go ahead.
The issue that I think will resolve itself with rates coming lower is that is the holding of treasuries and the holdings of MBS where those when interest rates
decline the value of those securities. I mean, duration cuts both ways, right? This value of the
securities increases. Commercial real estate is still a big risk. That's a completely separate issue.
But the issues that, you know, that's why I said don't paint a don't paint the same brush for all
these different banks. When it with respect to treasuries and good assets, right?
you know, if the Fed were to change its to, I'm not saying it will in 2024, 2025, you know, that
interest rate issue would be less of an issue. The commercial real estate, the credit risk
would be a bigger issue.
But we don't know what the FDIC is going to do.
But it's not the FDIC, you mean we don't know what the Fed is going to do.
We don't know what the Fed's going to do, sorry.
And we're making an assumption that they're going to cut rates at this point.
But I want to go to Amy and Emma.
But Amy, you've had your hand up for a little bit.
I know when Mark was discussing commercial real estate, that must have perked your ears even more.
I would love to get your thoughts, Amy.
Yeah, you know, I actually just want to respond to what Mark opened with when he said, you know, he was disappointed or he, you know, by Powell coming out with that statement saying, are you sort of waving off the bait contagion being a concern, you know, right before.
The PAC West thing came out like, what, two hours after that press conference?
And everybody's kind of like, you know, how can Powell say this?
Well, I mean, and this was mentioned yesterday.
The Fed had just unanimously voted to hike rates 25 bibs.
And they can't, Paul can't come out there and say,
hey, look, I think there's a real big problem in the banking sector right now.
And by the way, we just unanimously voted that we're going to hike rates again, another 25
bips.
Like, that is a really, really bad look for them.
And I actually posted to the thread the FMC notes from September 2008, which was after Lehman had collapsed.
And there were about 10 of Fed speakers in that meeting who were still expressing concern about inflation.
And back then, inflation was like 3%.
It was nothing like what it is now.
But the Fed was very singularly focused even back then on inflation.
And inflation is significantly worse now.
So we can't necessarily expect the Fed.
to be coming out and being the people who are going to be ringing the alarm bell on, you know,
what could be in commercial real estate, what could be contagion in the banking sector.
Like, if they're going to come out and do that, then they can't also come out and do that
and hike rates at the same time.
So right now, their singular focus is on inflation.
And they try to make that pretty clear during the speech yesterday.
So I think, you know, in terms of, you know, how do we expect the Fed to respond to this?
You know, I think...
If they come to a scenario where this is a worse situation in the banking sector than anybody is saying that it's going to be or anybody's expected that it's going to be, a rate cut is going to be sort of like, oh, surprise, we didn't realize this was so bad.
Now we have to cut.
They can't come out here now and say, right.
oh, you know, we kind of anticipated this.
They're going to pause for longer, Amy.
There's no way it cuts are coming.
I'm not convinced.
I feel, I mean, unless, you know, Emma, I want to get your thoughts on all of this.
Thank you, Amy.
Emma, I just want to get your thoughts on what you think is going to happen moving forward.
What will be the Fed's response?
And is the FDIC going to step in?
There's been talks about FDIC increasing the insurance requirements.
But we'd love to get your thoughts on it.
Yeah, so I have read the same thing about the FDIC causing all businesses to have to pay higher premiums, and thus, therefore, they would have slightly more ability to bail out people in a completely utter disaster like this, which they wouldn't have nearly enough money to do so anyway, and they've got printing presses.
So I don't know if they're actually going to do that.
I think the FDIC tends to be less...
left, I don't know if you want to call it,
or what you want to call it, but less, like, let's just bail everybody out.
Let's just make a quick, I think there been four or five comments about the FDIC.
Let's understand what the FDIC is.
The FDIC, and Emma, you know,
Emma is extremely brilliant.
FDIC is a private institution.
It's not funded by taxpayers.
You could say indirectly, banks might charge depositors,
but it's funded by banks,
and the power that the FDIC has is limited.
They can't just arbitrarily take money from the Fed.
They're not the Fed.
They have nothing to do with the Fed.
So I just wanted to be clear and understood that that is a case.
And I'd like to add to that.
Yeah, and something else I want to add to that is if you actually looked backward in time,
because, you know, when everything's going down at once with SVB, people can overlook things that if you don't go back, you notice only after the fact.
But when on that Sunday, the FDIC came out with, they needed to come out with Yellen and...
with the Fed to say,
we're going to go for a full on
basically without saying it directly
a bailout versus a bail in.
Because the FDIC had originally said,
I don't care about the
over 95% of the deposits,
by the way,
at FGB and there was,
I think,
174 billion of them.
So that was all not covered.
So I could see if I was in an insurer like the FDIC, I might not,
I might just say, oh, okay, well, that sucks for you guys.
But they needed the help of both Yellen and Powell to come and push this through.
But there's a huge significance to this because if we look back to the 2014 timeframe,
November 2014, the G20 put together these rules,
It was from all between 2008 and 2014, creating a distinction between a bail in and a bailout.
And I'm sure a lot of you are familiar and don't want to have to hear this again.
But just for those who aren't, you know, a bailout involves taxpayer money.
And you're saving depositors who perhaps could have easily just as easily put their, say, 500 grand total in Wells Fargo, Bank of America, J.P. Morgan.
Yeah.
I don't know.
I don't want to say one that blew up.
But you get the point.
They could have exercised some money market fund.
Like, if that's not only their working capital needs, the rest of that should be managed to some extent if you have any reasonable amount of money.
And so where was I going with that?
I was trying to have a pretty time.
I kind of lost my train and thought.
Where was I?
What was I saying before that?
Yeah.
So they had, first off, they had to get the monetary authority and the Fed involved to break the rules that had been in place.
And the Europeans had stuck to them.
So they had screwed over some depositors in Cyprus.
And then they would have these cocoa bonds, as I'm sure a lot of you, that's what I'm talking about.
A lot of you guys probably know what co-co bonds are.
They were bonds that could be issued by banks.
And they could get, they paid a high rate, but they would be wiped out in the event of default, even though they were a bond.
So the equity holders were able to get money.
And like, I think in the way the credits weeks happened, I think it was there a little long.
So I was just teeny amount.
But like the equity holders were able to recover some, whereas the cocos were completely wiped out.
And it was a huge amount of money.
Yes.
Okay, well, thank you, Emma. I want to pivot to some of the new people have come up.
We've been talking about, you know, the banks broadly are at risk, but obviously there's different risk profiles for each bank.
I think the panel's in agreement on that.
Markets with May, you're a new speaker. I wanted to hear your thoughts on.
I know you listened to about three or 400 earnings calls a quarter.
So do you have any insights on which banks you think are at more risk and what happens next?
I think there's a few things that are kind of relevant.
And I think the most relevant thing is how many banks...
Okay, so First Republic, obviously, the way in which it differs from the other banks that are trading like hell today, for lack of better way to describe it,
is that the sheer raw amount of deposits that they lost over such a short period of time.
Relative to that, you've got about $7 billion of deposits that came out of...
I just posted this Western Alliance.
You have...
around like quite a bit less than that just because the size of total.
I mean, so $7 billion versus 54 is what we're talking about with Western Alliance.
I think it's like something like I can't remember the exact number that came out of PACWIS.
The pack was only $28 billion.
The challenge that you had with with First Republic, obviously just to kind of set in case you guys didn't go through these numbers for folks that are in here.
The challenge that you had was about $174 down to $130 of which of those deposits was the other banks coming in.
Okay, so just the sheer raw number of deposits that came out makes First Republic look cosmetically horrendous.
Reason for the deposits coming out, though, still implies contagion for some of the other banks to the extent that we see issues...
of deposits leaving. And also now we've got another kind of concern because of the collapse
of First Republic, the manner in which it was done, and also the increase in fed hike. So three
things that I'm just going to kind of nail that are my major concerns. I don't know if anyone
else cares. But, you know, so, you know, number one,
our deposits going to leave these banks, right?
You've got quite a few.
They're quite a bit smaller, so they're easier for other banks to absorb.
Nonetheless, it doesn't look good.
you know, number two, if you're an equity holder, there's more than one way to collapse a bank.
The way that Credit Suisse was done was to, you know, give the equity shareholder a price at which you could clear the market.
The way that First Republic was done was for J.P. Morgan to take all of the assets that could potentially create some kind of future return.
And for the equity shareholder to get absolutely nothing, which is not an insignificant thing if you actually want these banks
from an equity basis to perform well.
I actually think that that probably is underappreciated for why you'd have a 30% decrease at Pac-West and, um,
Western Alliance, I don't know if it was 30% today at Pac-West, but it was 30% Western
lines. Anyways, you got me. And then the other component is the 25 basis point increase does,
of course, make the held to maturity losses, the paper losses worse. Now, what I found very
interesting in going through the numbers and I'll land my plane there is that the amount of deposits
that were uninsured, improved dramatically for all of the banks.
First Republic, kind of an anomaly, let's just put that to the left,
because you don't really get great numbers before and after, so to speak,
as relates to percentage of uninsured.
I mean, you can intuit approximately what it is,
but you don't have just a timestamp number with Westmore.
Yeah, I think, look, I think I think,
I think that's a really good point. The Holt's maturity transition between the banks has been stark over the past year.
At the beginning of 2022, only about a third of total bank securities were marked as H.TM, which means that they didn't have to mark them to market.
And they also didn't have to hedge interest rate risk. And by the end of the year, about 45% of total bank assets were marked HTM.
Yeah. So, yeah, I mean, this is, this is like, it's almost like another loophole that the banks found in order to stave away, like, hungry shorts to get them off their backs. But I want to move on to the other speaker.
A little nicer than that, because the health maturity is the duration component. So a year ago, you wouldn't have the issue, right? Yeah. Okay, good.
Yeah, I want to bring in some of the other speakers who are new.
Mickey, the floor is yours.
Yeah, thanks so much.
This is a really an excellent space.
I just want to say thanks, first of all, to all the participants.
I think just having this conversation here, the quality of is super high.
So I really appreciate the discussion.
And I just have a question about,
like sort of installation.
We've been having this conversation,
I've been listening to the speakers talk about,
look, that, you know,
COVID created a lot of tidal waves
and set a lot of time bombs in the markets
and institutions are figuring out
Some institutions have done a better job than others. I'm managing these tidal waves and these time bombs.
And we've sort of seen over time, you know, the Fed's reaction to COVID. And it looks like, you know,
regional banking, you know, has been less able to manage and navigate these waters. And now some of the
speakers are talking about, okay, let's look at sort of the different exposure to different institutions.
And my question is,
If we were to look through exposure on these different institutions, what would we like to see on the balance sheet that's more insulated from sort of the tidal waves of COVID?
What would you want to see as a healthy balance sheet for assets for these banks to be onboarding for us to look at an institution to say, yeah, this is probably as healthy as it gets given the market conditions and given the uncertainty?
I'd say one thing there.
You'd hope to see one that has a lot of depositors, not a few large ones.
So you'd like diversification in a lot of smaller accounts.
That's one part.
I'll let somebody else say, chime in with the rest.
Emma's absolutely right.
Uninsured deposits is what any, you want banks that have most of their depositors with deposits less than 250,000.
Right.
So it's not an issue then for the, for the FDIC or, you know, they're not going to have as much of an asset liability mismatch risk.
Right.
If you're, if you have less than 250,000 at a bank, you have no reason to pull it out, apart from finding a higher interest rate.
And I just, go ahead.
No, go ahead. I'm going to take the other side.
So it's okay.
No, no, no. I'm moving it on, but finish your thought.
Okay.
I mean, just realize that when you have clients that have greater than $250,000 in deposits
are what we call rich people, right?
So less than $250, there is like somewhere, like there's a special place that might be ideal.
The challenge is that you necessarily take on credit risk.
It's almost impossible.
You know, if you look at the losses...
If you look at past non-performing assets, you end up with loss rates that are like either zero or even negative in a lot of years because the recovery rate on the assets was so great for both First Republic Bank and also Western Alliance.
So just realized that there is no perfect...
There was no perfect, I mean, the only other thing you could do is get private insurance for any assets above a certain amount.
Some of them have talked about any number of things, some of which I think absolutely should not be done.
But, you know.
All right. I just...
If your first republic bank, it's your...
And if you're an investor in this and you're looking at which banks to invest in,
I meet with the management team's evaluating what's your hedging strategy?
What's your approach to, like, you know, assessing who you would lend to,
where are your deposits coming from?
All these kinds of questions.
So simply because these people aren't rich...
doesn't make their deposits any less valuable.
I mean, I guess I don't.
I think she's saying that the lower income individuals that also take mortgages with those banks, right,
have a, you know, might have lower FICO scores.
But, you know, I don't think this is a resi issue.
I think it's a commercial issue.
So I don't know if that's as relevant.
I agree, Emma, that I don't think it's as relevant.
Yeah, and the one thing is, like, if you look at the banks and their distribution of deposits,
J.P. Morgan has, I guess, the most poor people.
So it just- They also have significantly higher credit risk, right?
So we're talking about NPL's closer like well over the 33 basis points the average regional bank has
versus 0% for Western Alliance before this year.
Now they're at 0.05.
And actually I think 0.06 was the first quarter that you'd seen it come above zero for Hearst Republic.
All I'm saying is that it's going to be a slight change, but that it's not an insignificant change either.
My follow-up is then, doesn't that just lead us to the idea that basically J.P. Morgan is the big winner here.
And like, you know, should you just look at that and then go on vacation and go to the beach?
Well, J.P. Morgan's, you know, only 15% of the system.
We have to worry about the rest of the system, right?
And Jamie Diamond must be the highest paid government employee in the world.
But we can't, J.P. Morgan's not going to save everyone.
We have to understand that.
No, only 33%.
If you want to do a comparison on MPLs, you could actually look at SOFI, which comes in at about 769 FICO score as of this last quarter.
And it's a bit higher, but it's not crazy high.
It's just, what do you do is really the question.
Agreed.
Rob, you were trying to weigh in.
Go ahead.
Well, I'm actually, I don't know if it's helpful, but we were talking about solutions before in terms of what does the FDIC do, what does the Fed do, what's the government do.
One thing we're not talking about is that sales cures all in many ways and what the government, in terms of the executive branch, could be doing to incentivise
businesses to get back to commercial real estate that would fix quite a lot of those problems.
Oh, that's the Vecramaswamy solution, just keep pushing GDP, growth fixes all.
You know, I do think that there is something to that, but I think it's a lot harder than people think it is.
There's not much...
No, it's definitely difficult.
My biggest problem actually with the commercial real estate problem in...
Actually, in general, the deposit of problem in commercial and regional banks is
is that they aren't going to be lending to companies.
We're seeing that in a big way on the ground now,
companies that we've looked to invest into,
simply I'm looking at great business ideas,
but I can't see how they're going to get the liquidity
to execute their plans over the next five years.
And so it's very difficult to invest
or give any sort of cornerstone capital to that on a basic level.
And then as you look to growth businesses,
Whether not they're on the market or not,
specifically private growth businesses,
these are particularly capital-intensive ones,
are really struggling for...
free cash flow in order to invest into the future of their companies. And so that's not going to
see those businesses decline per se, but it's definitely not going to see those businesses grow.
And that kind of creates a general problem underlying all of this, which isn't being spoken about
by anyone. We come out and we talk about the banking system, but fundamentally the underlying
economy is supported by these regional banks and, you know,
isn't getting the support in my own businesses.
We're seeing that, which is fine for us.
We've got liquidity, but not fine for other people.
Oh, Herr, I know you're trying to chime in.
I'd love for you to kind of continue on this point.
Do you agree?
Well, yeah, I was going to hop in a while back when I think Rom was talking about a few things that I thought were interesting.
But I do generally agree with Rob.
You know, one thing I just want to go back to briefly is somebody brought up Michael Milken.
And, of course, this week is the Milken Institute conference down in Beverly Hills.
And somebody brought up Milken and some of the thoughts that he shared today on CNBC and throughout the week about...
what's happening in the banking sector.
And I find it a little bit rich.
And the reason I say that is because, you know, all we have to do,
and, you know, all of us are, you know,
deconstructing what happened here with the banks,
these spaces.
And I was on a space a few weeks ago with Mario here.
We talked about very much the same thing we're talking about now.
And it seemed to have kind of gone away for, you know, two, three weeks.
Everything was kind of static.
This quote and then talking about it.
What I want to bring up is the S&L crisis back in the mid to late 80s, early 90s.
And I'm driving right now, by the way, if I break up, forgive me.
But back in those days, part of that crisis was created by Michael Milken and his team at Drex-Learnum with the introduction of high-yield junk bonds.
and the appetite for those junk bonds on the part of small regional banks to try to juice returns.
And something like a third of banks, if my memory serves me correct here, failed during that crisis.
Something over a thousand banks failed during the S&L crisis.
Part of it was real estate based, you know, overpaying for real estate securities.
Part of it was high-yield junk bond related.
Okay.
But all you have to do is just go back and study what happened in the late 80s, early 90s.
And then kind of fast forward to today, it'll give you a really good idea of really what's happening and where we could go.
Now, you know, history never, you know, repeats, but it does rhyme.
So a lot of the things...
today that are going on are a little bit different, but a lot of it is the same.
So that's kind of one thing I wanted to bring up.
So I would encourage everybody here to kind of go back and read up on the SNL crisis
and kind of what happened, how it kind of got out of hand.
I mean, up until the SNL crisis, you guys got to remember the Fed,
raised interest rates, I believe, from something like low to mid, the overnight lending rate went from something like, I want to say 8% to 12% in the late 70s, early 80s. The overnight rate was 12%.
And so, you know, today we're at, what, five?
You know, one of the things I think that the spaces,
because these spaces could really do is rather than recreating what happened,
we kind of have an idea, right?
And it's still going on.
But what can we do to alleviate the problem going forward?
How do we stem the,
you know, the, the ongoing crisis here. What can we do? And I think one of the things we can do
and encourage our politicians, our regulators, to do is to stop raising interest rates. I mean,
I've talked about this at nauseam for over a year now. You know, we've effectively, and a lot of
people made this point, and I'll just, you know, elaborate on it. We went, you know, 12 and a half
years of zero interest rate policies by the Fed.
which created a monster, right?
The cap-am pricing model,
okay, was thrown out the window.
Today we're going back to the drawing board, right?
Today we are now recreating what we had pre-QE, right?
Which,
which was kind of the cap M, capital asset pricing model.
Risk free rates were effectively zero.
Any kind of transaction, any deal made sense.
Anything made sense.
Everything made sense.
You know, NFTs made sense.
Meme stocks made sense.
Crypto, spaks.
You know, paying, you know, three X.
Made sense of something.
Yes.
Everything made sense.
And so today, everything's been flopped on its head.
And the problem with it is it wasn't flopped on its head in, say,
you know, like a two or three year timeframe.
It literally has flopped on its head in the span of less than one year.
This problem didn't, you know, originate in March, by the way.
No, I agree with her. I want to keep the conversation going for a second. I just want to reply back to your point about this. So I agree with you that we should be talking about solutions. And I agree that the interest rates have gone up very quickly. I will say that we are still at risk for inflation not peaking and going into stagflation. There is still a non-zero risk of that.
Well, here's the thing.
The rate of inflation, here's, you're right.
So, uh, I was talking.
Denise, you're right.
I mean, inflation's still here.
Inflation's sticky.
Most of this inflation we're dealing with right now is labor related, right?
It's labor related.
And so that was bound to happen.
I've spoken about this topic a lot.
Inflation is not linear.
It's like a ratchet, right?
Three steps forward, two steps back.
You never go back.
to before it went up right you never go back to that to that beginning time inflation is all around us
it never goes away it's just how fast is it going up and so right now because of covid and because
of a lot of misplaced attitudes around energy and esg policies and i i'm Mario and i was on a space
with Mario i don't know for a few months ago we talked about this you know there are a lot of all of this
kind of coalesced around covid
And so, you know, logistic issues, factories being shut down.
You couldn't move goods and services.
I mean, all this stuff kind of happened all at once.
And, of course, at the same time, the Fed printed us, you know, trillions of dollars and
flooded the market with all kinds of money.
And so we're dealing with all these things.
Now, I got to say, inflation, the rate of inflation year over year has dropped dramatically.
The Fed yesterday should have paused and signaled that they're keeping an eye towards
inflation.
but they're more concerned about the piping.
But.
And the, you know, the problem right now is not inflation.
It's the piping around the financial system.
Okay.
By raising another 25 yesterday, just because they could, they're
they're they're basically just adding more fuel to this fire and i wouldn't be surprised if by
summertime they take rates back i would not at all surprise i would be in shock actually i think
i mean before we get into the before we get into rates there's just one point that in the savings
and loan crisis before we go into the next topic so i know that there are a lot of people trying to
learn from this a third of the banks didn't go
BK. I mean, we have 4,800 banks today. We had 15,000 then. Within the 15,000, there are like 32, 3, 3,300 S&Ls.
A third, a third of, yes, that's right. A third, Michael Moken was responsible, right? He at Drexel, he did create this product.
But it was a third of the savings and loans and basically 1,000 out of 15,000 banks. So that compares to 2008, where 100 banks went.
bK, but you have a thousand over 15,000, which is roughly 6.6%.
Yeah, but you've got to look at it this way too, Jets. It's all relative, right?
It's all, the economy was a lot smaller. The amount of money outstanding total was a lot
smaller. The banks, generally the banks were a lot smaller. I mean, look at the size of JPMorgan
today. It blows my fucking mind that the Fed allows this to continue. You know, we had too big
to fail in 2008 and 9.
And it's continuing. And I'll tell you what, I think at one, sometime this year, we're going to have congressional hearings again on this same topic about this too big to fail.
Oh, I agree.
This is just the problem that's been festering for the last few years.
So on your race point? Yeah, I'd like last time. Do nothing about it again.
Yeah, I think you're right. I think it will be an issue and it will have, I mean, it will be something discussed in Congress.
And I also think that.
you know, by increasing rates, the Fed is making the banking issue worse, right?
So that's a fact.
So I, well, that's, yeah, it's the cost of, right.
And I think we've talked about this, Jay, in the past, it's, you know, people, I mean,
in layman's terms, raising interest rates, what that means is the cost of doing business.
The cost of money is going up.
It's gone up tremendously in the last 12 months.
And so not only has the cost of money, the cost of doing business gone up,
but it's gone up in the face of the most levered economy we've ever had.
This is really the problem.
I mean, sure, but at the same time, the Fed has a very clear mandate.
You know, the mandate is very clear what the Fed should be focusing on.
They're focusing on maximum employment while maintaining price stability.
And that means that, you know, this...
what you're referring to is not actually technically part of their mandate.
They're supposed to be focused on employment.
It's not.
But if you're a police officer and you see someone dying on the street,
it may not be,
you know,
it may not,
you may not be an,
you know,
an EMT,
but you're,
you know,
you're not a paramedic,
but you're going to step in a house.
Exactly.
And with the Fed,
you know,
to O'Harris point,
if you saw,
you saw,
This number go from four banks to six banks with the two.
I'm not going to name them today.
And it went to 20, 25 banks.
You better believe that Powell would be taking action.
It's coming.
Well, that's because it will, hold on, but to be fair, Jay, the reason behind that decision-making would be because it would automatically affect inflation.
You know, it would still be on a huge lag.
But guys, it would still be on a huge lag.
We're already going to see deflation.
We are already working with lagging data, guys.
I just want to be very clear.
This is the biggest problem with the whole Fed system that we have is that they're working with lagging data to begin with.
Let me ask you a question.
Let me ask the panel of question here.
What's worse?
What is worse?
an individual in the United States of America paying $6 for a dozen eggs and a gallon of milk, okay,
and having to struggle with high gas prices and high rental costs and high utility costs and high everything else.
What's worse?
That or being at a fucking job, right?
I would say, I would say, I would submit to the panel that having higher inflation for a little bit longer,
and not creating a fucking disaster like what's happening right now before our very eyes.
Remember, this is all a function of how comfortable people are with the economy around them,
whether they're in the middle America or on the coasts.
I'm here in the Bay Area in San Francisco.
You know, it's a question of how comfortable are you, right?
If you lose that, you know, that confidence, right?
But to be fair, just to be fair, sorry,
just to be fair, unemployment is still at all time lows.
It is, it is.
To be fair, to be fair, maximum unemployment,
CPI is.
I think that was a fraud.
CPI, hold on, hold on.
Yeah, right.
Okay, I'll give it to you, but CPI is not a lead indicator,
PPI is, and it's already the negative for two months.
That's exactly, that's exactly my point, which is,
I'm with you know, recognize this.
The fed should be looking for a few of the wind show
like I am right now, not through the fucking rearview mayor.
Also, PPI is still pretty lagging in my opinion.
It's still lagging.
They're fighting last week's battles, last quarter's battles.
If you want to look at leading indicators,
commodity prices often are like sugar,
other things like that.
Look at the price of lumber.
Lumber. Look at the price of lumber for guys.
Rates has never impacted the price of sugar.
Mother Nature impacts the price of sugar from what I understand.
Yeah, but come on.
No, no, no, that's ridiculous comment.
Also impact the price of sugar.
But inflation rates do not impact.
Is a surrogate for what's happening in the commodities market.
Oh, no, no, no, no.
I agree with market.
That is not right at all.
I mean, agricultural commodities are completely different than...
yes if you look at base metal commodities in o'hare i know would agree with this market would
agree with the china the lack of the china reopening and a global slowdown look at copper look at iron
or lumber look at all the base metal commodities are all look at oil all rolling over you cannot
look at sugar and coffee and orange juice those are based on weather and in specific crop yields
and other issues
I can answer your question.
I'll be very clear about this, about whether inflation has peaked.
I think there is, there are two schools of thought right now around inflation
peaking already and whether we are going into that situation.
And just to be very clear, hold on, hold on.
What does it mean for inflation to peak?
In your mind, what does that mean?
What I mean by that is that inflation, so just so everybody knows, and this is kind of a funny commentary, because anybody that comes to our 8 a.m. Eastern finance spaces in the morning, they actually know that I actually believe inflation is peak.
But because there's so many people here that believe that I have to play the opposite end of this, it's so fascinating to do the other side.
But my bigger point is that...
Inflation peaking means that we will, we are now going into the other side of the cycle.
And that's actually like, you know, the concern right now that a lot of people have is that we're going to bounce off the loan.
We're going to come back up and that this has been a false flag.
And I just, I want to be.
At least somebody represents that point of view.
And then stays stubbornly high still, even though it's off its peak.
It doesn't really fix the problem, is it?
I mean, we're not.
Let me tell you guys this, too.
Let's throw this in there as well.
The vast majority of Americans today versus, let's say, the late 70s, early 80s, the vast majority of people in the 80s had pension funds, right?
They had pension funds, the fine benefit of plans.
Today, the vast majority of Americans in their 50s and on have 401K plans.
Okay.
So let me ask you this.
I'll throw this out there as well.
Let's assume they continue fighting this ridiculous inflation war.
Okay, and they raise again in the next meeting and the economy slows and the stock market tanks 50%
House prices come down 50%.
I mean, how is that helping the average American?
How is that having a 55 year old guy if they're fucking stock market tanks by 50% because Jay Powell's got a hard on to bring asset prices down?
How does that help anybody?
Yeah.
Oh, here, can I ask you a question, O'Hare, just to follow up, you said that one of the risk factors for continuing raising rates would be, you know, mass unemployment.
You said, basically, look, it's much better off that people pay more in that basket of goods than have to deal with being unemployed.
But my question for you is, if the Fed raise rates faster than any time in history and has continued to raise rates, why haven't we then seen...
changes in unemployment? Why is unemployment still at record highs? If that really is the tradeoff,
why haven't we seen that take place? You have to look at that structural difference between today.
See, here's the thing. The U.S. economy is different today. The employment landscape is different
today than it was 30 years ago. 30 years ago, we had a manufacturing economy. Today, we have a
service-oriented economy, right? A lot of these jobs people are talking about,
are jobs in service sectors,
you know,
whether it's at restaurants,
malls, coffee shops,
breweries,
movie theaters,
airports,
library,
I mean,
those things,
type of job. So it's just a different landscape. I think we it's really difficult to compare. And this is,
I think, the problem, the crux of all this is like we try to look back at historical, you know,
mandates, the Fed does. And they look at like the 70s, 80s, 90s, early 2000s, the last recession.
And they try to kind of extrapolate that data into today's, uh,
you know, a backdrop.
And I just don't think they can do that.
It's a different time.
You know, I think, look, inflation, inflation is coming down.
It's coming down year over year.
It's still higher than it was three years ago.
I'll grant you that.
But the reality is, again, do we want to play with fire here?
That's what the plan is doing, you know?
I would love to further support your argument really quick if I can jump in.
If you take food and energy, or sorry, if you take food and housing out,
you end up at your target inflation on CPI.2.
Housing inflation is the biggest component right now,
and that is harmed by raising rates,
not improved by raising rates,
because right now housing stock is so low.
Every single rental is, I mean,
rental inflation has been out of control,
particularly in urban areas, but elsewhere as well.
So raising rates, right this minute,
given what all the indicators,
he could have just as easily been like, well,
you know what let's just wait a half a beat because it looks like ppi this that and the other is working
but no let's just go ahead and take the banks out that's what it looked like to me anyway
M.G, you've had your hand up for a little bit.
And I also want to remind all the listeners, bottom right corner, there's that little bubble.
You can click that and tweet at us.
Any questions or comments you have, and the team will review them and bring them up to the speakers.
Thank you.
M.G., you got the floor.
Thank you.
Thank you for that.
I just wanted to push back on a few things and throw my hat in with O'Hare and Markets with May.
One, there was an issue that was something that was said a long time ago.
I don't think that the banks are really at, you know, I'm going to actually defend the banks and say that, you know, while there were some mistakes were made, in the grand scheme of bank mistakes, this was minor.
And I think the biggest corporate here, by far, is the Fed.
And so one of the things, you know, that was said was that, you know, people could have hedged this.
I would...
respectfully disagree.
There's just no way that this could have been hedged.
There's seven to eight trillion dollars
of marketable plus fixed loans on banks balance sheets.
Who is the other side of that transaction?
That's exactly.
I'm not sure if you were thinking,
I thought it could be hedged,
but since I actually did that for a living at one point,
there's no way it could be hedged.
There's no way it could be hedged.
There's no way it could be hedged.
And so that's one.
You can hedge a billion dollars easily,
then you are just a better woman than me.
I'll tell you that much.
No, some people can hedge it who are, Mark, hold on a second, hold on, you spoke.
So some people could hedge it and market, money market banks, money, money center banks can hedge it because they have active derivative banks.
So Donish's question was like, why are money center banks in such a much better position than regional banks?
It's because money center banks happen to have very well stock derivative desks.
They have access to all this stuff.
They operate in that space very, very, very, very fluidly.
So for that reason, they are much more inclined to be hedged and pay for those products.
There is a rationing of hedge products out there.
Yeah.
People can hedge.
That's a fair point.
So J.P. Morgan, 100% can hedge it.
The biggest fixed can come out there.
Okay.
Hold on. I got a jumping.
The main culprit is the Fed, guys.
The main culprit is the Fed.
They raised rates from 0.25 to 5.
The duration is so huge that that means an impairment of 10 to 20% on fixed income products.
There was a recent paper that was published by professors from USC Business School, Northwestern Columbia and Stanford.
they estimate that like, you know, there's $2.2 trillion of impairment on banks balance sheets,
which means that about 60 banks are essentially insolvent.
If you actually, like, you know, have runs, modest runs, you get to like about 105 banks.
They're essentially insolvent.
That happens because if you actually mark to market the bank's balance sheets, the assets,
they have to be impaired when you raise interest rates so fast, no matter what the credit conditions are.
This is something that the Fed actually caused.
Okay, because there's a whole bunch of businesses in our country.
Do you mind if I respond directly because I think that was the response to my comment?
So I'll hold up.
Just let me finish for one sense.
There's a whole bunch of businesses in this country that can't operate with higher interest rates.
That's it.
Yeah.
So, MG, I actually totally like spiritually agree with you.
Generally speaking, like, you know, like a lot of people say, hey, you know, do we blame the Fed?
Do we not blame the Fed?
I do think the Fed is, uh,
has a lot of things that they're not doing quite correctly.
But on the specific point of whether a regional bank can hedge interest rate risk.
Now, I am, again, before I say this, I want to caveat to say,
I think the whole Monday morning quarterbacking of, oh, you know, these banks could have failed,
et cetera, or could have hedged their risk. Well, you know, $42 billion in a fractional reserve banking
system out in one day, you know, who can handle that? I'm not even sure the big GSI is good.
So I want to say that I'm probably more in your camp. But on the one specific point,
and I would like somebody to push back if they have a different idea of this, but if you could,
with information, go back to the beginning of 2021, you know,
SVB could have hedged their interest rate risk, right?
You know, like, and I'll give an example as to why.
So HSBC USA at the end of 2022 actually had smaller assets than SBB.
So they had about $162 billion in assets, right?
And of that, they had interest rate derivative contracts of 163 billion, right, even though they were smaller.
And 30, like something like 30, 31 billion were on future forwards contracts, interest rate contracts alone.
So, for example, SBB, like rough numbers, SB could have bought.
something like 18 billion in Fed Funds features and then shorted across the yield curve on the two year, the five year, the 10 year, as well as some other T bonds.
And they could have actually created a portfolio.
And it would have taken less notional value than, for example, HSBC USA, which is a smaller bank than them.
So again, I'm not saying that they that.
But here's why that's wrong, Eugene.
Here's why that argument is incorrect.
The reason why that argument's incorrect is that you could point to each individual person,
and they could have done that because the market can handle that individual amount.
But in the aggregate, because that's what we're looking at here.
Obviously, there was going to be, if it wasn't SVB, it would have been another bank like them
that would not have been able to hedge because you have $8 trillion of
fixed income securities on the bank's balance sheets that need that that are that are
essentially that that are at risk if interest rates go up you so I'm going to take the other side of
that can I break down your argument just that I understand what you're saying what you're saying
is that individually bank there's enough liquidity to handle individual banks but what you're
saying if I want to hear you correctly your argument is that if all the banks try to do what do that
that you're saying that that would have,
hold on,
by example,
driven up volatility or options prices.
Do you guys hear me?
What I'm saying is that you can say,
okay,
look,
you know,
on the margin,
could one guy could like,
you know,
put an extra like few billion dollars
worth of hedges on?
Yes.
But in the aggregate,
all of them couldn't have.
And the fact is,
they didn't because there isn't that much hedging.
This,
yeah,
and this,
this brings back what I was saying
in the very beginning.
We can hear you, but let me just make one quick point.
This brings back what I was saying in the very beginning that the Fed honeypotted the entire baking system into this.
Interest rates were very low and then, yeah, and then they increased liquidity programs.
They plow $120 billion a month into treasuries and MBS.
And of course these banks are going to have an increase in deposits.
If you look at the retail bank deposits across the U.S., they rose all across the board.
And so what are the banks going to do?
They're constrained by capital.
constraints. They can't do anything else other than...
Even more than that, Peruvian, the deposits also increased because we injected an unprecedented
amount of fiscal stimulus into everybody's pocket. What were those people going to do?
Those people are going to deposit at first. That's another source of the increase of deposits.
Right.
One of the things we've talked about, M.G, over the last few months,
and you and I have been some, you know, we've discussed this,
is the idea of hedging.
Everybody, you know, since March, everybody says,
why aren't these banks edging?
Why haven't they been hedging?
First of all, the, I think there's two things here.
First of all, the Fed has been sending the wrong message to these banks for a long time, right?
I mean, J-Powl himself, right?
Just as recently as last summer,
was out saying that we don't you know sorry the summary before so right before the feds are raising
interest rates so a year and call it a year and five so you're talking about 2021 right which is
adequate time
Yeah, exactly. So, so was sending the wrong message, like, hey, the message was, we don't know we're going to kind of, you know, it's status quo. We don't know when we're going to raise rates, if we're going to raise rates, right? And so if you're sending that same message over and over and over to market participants, they're going to believe you, right? So that's number one. Number two, hedging is,
is a zero-sum game, to MG's point, you know, for every person that wants to hedge something
and exposure to risk, someone else has to take that exposure, right? It's a zero-sum game.
For every winner, there's a loser. You can't, and, you know, and then there's reinsurance.
So certainly if someone takes that risk, they can sell it to someone else and reinsure it.
This was, by the way, what was going on pre-2008.
Everybody believed that AIG and other insurance companies and other, you know, and other
market participants were hedged.
Everybody was hedged.
The reality is if everybody's hedged, who's holding the bag?
They were all holding the bag, right?
Because everybody was offloading risk to everybody else.
It was a big daisy chain.
And so to say that, you know, these banks should have just unloaded the risk and,
and hedge themselves, M.G's right.
Who's going to take the other side of that trade, you know?
I mean, there's a large enough market. I'll leave it at this because I think it'd be nice to move on.
I actually, again, I'm spiritually with O'Hara and M.G, like, you know, there's a lot of fed blaming and I've done it myself on these bases.
So I actually agree with a lot of your points. But I think the one singular point I'd say is if you'd say, hey, SBB or take pick your bank that's failing, just have no options, right, on an individual bank basis.
I think that's a little disingenuous. Now, I mean, SBB had greater problems like not having a chief risk officer for a while. And
And by the way, on these spaces, I've defended SVB more, you know, more than perhaps even others.
So, again, I want to stay on, I'm not saying I'm defending it fully, but I'm defending, like, the fact that it's really hard.
I agree with you in general.
I just pushed back on that one point.
I think individual banks could have done it.
Yeah, thank you guys. Gordon, thank you so much for joining us.
We'd love to hear from you.
Hey, guys, can you hear me?
Yeah, we can hear you.
Yeah, so I guess I just had a statement and then a question.
Just SVB.
A couple things that just kind of strike me.
One of the things that was that, can you guys hear me?
I'm sorry.
Yes, we can hear you.
O'Hare, you're cutting, you're jumping in a lot, can you?
Yeah, one of the things that were stated was that would you rather have, you know,
40-year high inflation or a lower stock market.
And anybody who studied the history of economics would say unequivocably,
you'd rather have a lower stock market.
I think that there's this viewpoint that like if stocks crash 50%,
the stock market is the economy.
And that's just incorrect.
The peak to trough, the S&P was down 40% in 1987 and over the 2000 to 2002 timeframe.
And there was no recession.
The stock market is not the economy.
And then with respect to banking and this being a crisis, this isn't systemic at all.
This is effectively a couple of very dumb slash-free banks.
In 2000, there was a recession, Gordon.
Wait a minute.
Hold on a second.
Gordon, there was a recession.
What are you talking about?
I'm talking about over the 2000 to 2002 timeframe.
So from 2000 to 2002, the SMP.
The S&P 500 was down 40%.
Over that full time frame, there was no recession.
It was down 48%.
I think it was down close to 50%.
Yeah.
And by the way, you all saw Gordon, you can't just look at it in a vacuum.
You have to look at it in the context.
Hold on, hold on here.
Let's Gordon finish.
I finish my thought and then you can respond, please.
So the idea that this is a banking crisis,
that comment in itself, in my view, is dead wrong.
And let me explain why.
You don't even have deposits exiting the system.
You have deposits shifting from bank to bank.
And effectively, what's happened is you have a bunch of dumb, greedy banks who effectively, you know, basically had massive duration mismatches.
They're in a position where their assets, i.e. the loans they made are not paying out enough to cover their deposits.
And so the Fed hinted, the Fed made it clear in late 2000 and early 2021 that they were going to start hiking rates.
And then they delayed it for like a year and a half.
And you saw the Bank of Mexico and the Bank of Brazil and a number of other central banks hike rates by like thousands of basis points.
So the idea that this couldn't have been hedged.
That's suggesting that banks don't know how to do risk management 101.
I firmly disagree with that.
And the last thing I'll say, and I think this is why a lot of people have become banking experts overnight.
The problem is that we've had a decade of quantitative easing, $30 trillion, which is in 10 years of balance sheet expansion, which is 3,000 years of balance sheet expansion in 10 years.
to have made everybody think they're stock market experts.
The reality is, if you look at over the history of the market,
only 10% of money managers outperform the market.
So there's a lot of people out there who think they're going to outperform,
including probably myself, who aren't.
It's extremely hard to outperform the market.
So the point I'm trying to make is suggesting that the Fed should go back to what got us where we're at, i.e. artificially low interest rates and quantitative reasons. Keep in mind, in a normalized interest rate environment, based on the estimates from the government, the 10 years should be around 4%, not zero. So in a normalized rate environment, if your business can't survive, you probably shouldn't be in business.
And what low rates do is they create things like we've seen.
Like, you know, I cover a couple of solar companies that, well, let me not go there.
But the point is, it encourages massive moral hazard.
You know, these bankers knew what they were doing and they should pay the price.
So I just think that everybody positioning this as a crisis suggesting it's systemic.
It's just, that's just grossly incorrect. Thank you.
I would like to respond to that because I actually could care less if the market's down 50%,
but I do care if the banking system has to change rules in such a dramatic way that it becomes a real problem,
which is what I think we're staring at right now, Gordon.
So if there's someone, if there's someone else that has said what people care about on this stage is the stupid market, that is a misunderstanding.
Because you know what?
Anyone on this stage that can go along the market
can also short the market.
So we can make money either way.
That's not the point.
The point is you just had two mid-sized banks
that had zero credit losses go to zero.
And even worse, the unwind of First Republic
resulted in the equity holders
becoming completely zeroed out,
which implies that any regional bank
that is following the rules of CET capital reserves,
meaning they've got most steadily deposits,
some of which are insured,
some portion of which are not insured.
Basically, any equity holder...
should like sell their bank stock because those things should not have
Can I jump in?
Can I jump in here?
So the weekend that the SBV bank stuff happened, I haven't looked at balance sheet
slash, you know.
I look at them every quarter, every single one.
Hear me out.
400 companies a quarter includes all the financials.
No, but hear me out.
So what I did is over the weekend, I just took a look at their 10Ks and Qs.
I literally spent two hours.
And you know what I found?
Okay, cool.
This was a bank that was making,
hold on,
this is a bank that was below market.
Sorry,
if they were making below market rate loans.
Go ahead, Gordon.
This was a bank that was making below market rate loans
to companies that were losing money.
and they were providing sweetheart deals via mortgages
to the corporate insiders at these banks
they were making loans to.
That is a bad business practice stating it as politely as I can.
They not only should they have gone out of business,
but the equity holders should lose everything.
If I was able to see this in two hours,
If you're not looking at the financial statements of a bank to see what you own, then you deserve to lose your money.
Gordon, I want to let market respond to that.
Mark, please go ahead.
First of all, you can say what you want about Silicon Valley Bank.
They definitely were heavily leveraged towards the VC market, which is what did them in, the removal of deposits by both the VCs and their request to do so by the companies.
But you can't say that about First Republic.
I think Gordon was very wrong.
My issue was, what the heck with First Republic?
Fair and Square, they had a lot of uninsured deposits, but guess what?
So does a couple of quite a lot of other regional banks.
Now, what you're really saying is they should not have wealthy clients as their primary source of income,
which, by the way, used to be what was considered sticky deposit.
That's absolutely what I'm not, not what I'm saying.
What I'm saying is you should not make below market rate loans in an environment where the Fed has been telling you for two years they're raising rates.
and provide sweetheart deals
to the corporations.
If you do that,
rates go up,
you go out of business as a bank.
That's banking one-on-one.
You do realize that everything
becomes below market
when the Fed raises rates
over 400 basis points
in the course of a year, right?
You realize that.
There's thousands of banks
that adjusted their duration
to match lighting rates.
There's a couple of things
now they're going to trade.
You think that the price
of a home mortgage
hasn't increased in step
over the course of the whole last of last year
that just happened overnight.
Because that's what it would have had to look like.
They would have had to, in March of last year, I've been like, oh, oh, you know what?
I don't care if everybody else is doing mortgages at this rate.
I'm going to mine's 400 base points higher.
Is that what you're saying?
And they'd have to explain that to market and they would have been laughed out of the room.
Gordon, I'll let you respond.
I don't know.
What was the question?
Yeah, market, you know, can you repeat your question, please?
Well, everything becomes a below market loan when you increase interest rates by 400 basis points.
You would have had to have the foresight to believe that 400 basis points could happen in a year.
There's no precedent for that, number one.
Even a scenario analysis, 200 basis points on a scenario analysis, both up and down, would be a very aggressive risk scenario analysis.
Most are done at 100 basis.
points. We had over 400 in the last year. So everything becomes below market at that point.
When you look at the balance sheet from a snapshot on March, you're backwards looking so aggressively at that point given the rate increase.
And every 25 basis point the man does, all he does is tank every single bank farther through.
And trying to hedge it at this point in time, yeah, could they have hedged it like two years ago when rates were flat for, you know?
Maybe, you know, but then how exactly would you have thought about that?
You could use an arm, okay?
You could try to get people to take floating when rates are almost zero.
It's, I mean, I really agree with MG and I don't know that that's really appreciated what he's trying to say.
Especially if you're a business bank,
if you're a business bank, totally different.
Let Gordon respond, please.
Go ahead, Gordon.
I still don't know what the exact question was.
So Gordon, you made a lot of commentary
around specific banks making bad decisions.
And what market is saying is that no risk management team
and she's absolutely right in my opinion.
But again,
This has been my opinion.
And I do strongly disagree with your point that it was a banking decision.
This is not just about that.
No risk management team out there would have expected that this level of increases would have occurred in such a short duration.
Gordon, do you agree that that is a fair representation of what occurred?
Respectfully, I completely disagree.
Again, if you read the financial statements of these banks, you'll see that they continued to issue bonds when the Fed funds rate was 4%.
That's these guys continue to be reckless and issue shorter. In fact, with SBB and some of the others, including the others that you guys think are quote unquote good banks. I mean, they continue to issue below market rate loans. But that's not why they went under, Gordon. That's not why they went under. That has nothing to do with why they're doing that. All right, I'm G, let Gordon finish the sentence and please jump in. Go ahead, Gordon.
Finish your sentence, please.
Yeah.
So when you do that, you position yourself as a bank to fail.
This isn't rocket science.
This is banking 101.
I learned this in my sophomore class in college.
Fair.
MG, go ahead.
Yeah.
No, it has nothing to do with why SVB went under.
SVB went under because the depositors left.
Has nothing to do with what bonds they bought.
They're underwriting nothing.
First public really quick.
I mean, I think SVB obviously was very different.
Even First Republic, even First Republic, okay?
If they made loans, no one here seriously thinks that those loans are actually not going to be money good.
They paid, they had lower interest rates, so they took a hit on that that they didn't have to mark to market.
That's not what happened.
What happened was that all these reports came out saying, look,
you know, half these banks are insolvent.
And so depositors started fleeing.
And that can happen to anyone because, by the way.
Why don't you get the last word on this?
And then we're going to move on.
But Danish, the reason is that right now,
there's at least 60 to 100 banks that have the same criteria.
Oh, I agree.
That's why I completely disagree with people that think that this is an isolated issue and it's not a systemic issue.
It's funny because I've had to do the devil's advocate and I'm done doing it.
Thank you, Gordon, for allowing me to return back to my core base position.
J.C., go ahead.
But 60 out of 4,800, right, is a small subset.
Yeah, but again, contagion spreads.
It's just, this is, this is, I want to hear from JC, Jay, sorry.
No, this is a great conversation.
I appreciate all of you and I appreciate the invite.
So for me, I look at it from the perspective of an investor.
Like, all this is great and everything, but what are we going to do about it?
I have to invest money on a daily basis, right?
We're looking for opportunities, long, shorts, bonds, stocks, whatever.
What's moving?
How do we profit from the whole scenario?
So that's how I look at things, right?
So I guess that's what I'll bring to the table.
And how I look at it, I thought there was an interesting point made that these deposits aren't
disappearing.
They're just moving from one bank to another.
And I think that the market is really acting that way, right?
Whether that's the case forever or whether that's the case for just now, that's for us to figure out as an investors.
But until right now, market's held in really well, right?
Interest rates have been falling, you know, 10 years since fourth quarter.
When you look at, you know, tips, right, look at inflation protective treasuries relative to nominal yielding treasuries.
That ratio peaked early Q2 of last year.
Crude oil peaked early last year also, right?
So when you talk about some of these commodities and what they suggest for inflation, right,
that's real-time data.
That's not lagging.
That's like for real.
Like, what's the deal?
And then when you look at the bar market, what the bond market is pricing in, that's the real deal too.
It's not these lagging indicators.
So I think inflation has been coming out for a year, over a year at this point.
And at the same time, the new 52-week lows list in the stock market peaked in June of last year.
And since then, stocks have been up tremendously, right?
Look at European equities up 50% just in the last couple of quarters, right?
You have European banks holding up really well, all things considering.
You have the overall stock market.
You have the S&P 500 and the NASDAQ 100.
closed April, highest month to close in a year.
So what I see is where is this systemic risk?
Now, theoretically it should be right.
I have like people like, oh, JC, you weren't around in 2008.
Yes, I wasn't around 2008.
I traded that.
I'm fully aware of what happened.
I'm a historian just like the rest of them.
I know what happens.
The point is, with the yield curve inversion, I'm fully aware of what a yield curve inversion, hold on, I'm fully aware of what a yield curve inversion what historically has occurred.
I'm fully aware that regional banks, to me personally, have been a great leading indicator for many years, so for the record.
So it's very interesting.
What I think really stands out the most is why so much relative strength in equities and develop markets in general, number one.
And number two...
everybody seems to agree that interest rates are going lower, right, in this conversation.
So is the trade you buy bonds and you buy sort of bond equivalent sort of scenarios like large cap tech, right?
For example, like is that the trade?
And I'll just throw it out.
So just throwing out a few things.
Just curious your thoughts.
Before we answer that, I want to ask you and Gordon, I mean, I don't understand why you guys are saying that deposits, broadly speaking, haven't declined.
If you look at the Fed's own website, yeah, yeah, yeah, they've literally like look at Fred right now, deposits all commercial banks down one trillion dollars since March 30th.
And, you know, money market funds have been hoovering this up in the past two weeks, $100 billion, zero hedge just put out a tweet.
and I can put it in the nest,
but $100 billion float into money market funds.
And this is all because the Fed created this giant reverse repo window,
which is unprecedented,
and paid the award weight at 4.8%.
So now all these money market funds can just basically get free money
by parking their cash at the Fed.
And so there is an exodus from the traditional banks.
I don't know what you guys are getting that.
So two thirds of the money has been going into money markets and treasuries,
and one third has been going to bigger banks like J.P. Morgan...
I think my bigger point here, forget about the semantics of where the money is being held.
The point is, I think what, I don't know if that was his point or not was, but for me it was,
is what the price, is what the market is pricing in, essentially that this is not, in fact, systemic.
This is not in fact, 2008.
There isn't this massive leverage that we had.
Maybe there is.
I'm not saying there isn't, right?
I'm not, maybe there is.
My point is, why hasn't the market started to price that in yet?
Correct.
could maybe today started maybe tomorrow maybe next week i don't know
which which wait wait wait wait wait wait hold on hold on hold on hold on
which market are you talking about you're talking about equities are you talking about
spreads really haven't blown out in a lot of areas high yield like if it those real
that's right you know the weakness the weakness in the u.s dollar like you haven't seen that
strength that flight to safety in the u.s dollar like there's a lot of things that if like
the world is falling apart like you would see you know what i'm saying
you're exactly right.
The reason, I mean, this is the point I'm trying to make.
And I think this is a point then Gordon made that this is not anything like 2008 in that, you know, at that point in time, if you guys recall, banks were levered, the big investment banks were levered 30 times.
You didn't know what they held.
And there was so much counterparty risks that AIG had to be billed out because nobody could, you couldn't, you couldn't essentially get your money back on your hedge.
So it was, it was a wild time.
People didn't even know what was on.
on bank balance sheets.
Lehman was committing fraud with the repo 125s.
They were understating leverage.
Like,
you had no dock loans.
You had almost 20% of the mortgages were floating rate.
Like,
it's nothing like the situation we have today.
And that is what now the market should,
in my opinion,
get weaker as credit risk increases.
You know,
credit spread should wind and out.
Valuation multiples should be affected.
You're already seeing the KRE reprice.
But,
you know, this is not,
people are,
people like don't know the definition of systemic.
And, you know,
something can become systemic from here.
But, you know, we're talking about, you know,
one percent, less than one percent of the banking system.
If you actually lay out all the banks and you look at
uninsured deposits, the banks
underwriting these types of loans that are below market.
But, say, hey,
I, but what's the trade?
One second, one second.
One second. The underlying, the underlying economy is that,
the underlying polling from the economy in general is that people do not feel that things are going well, at which point that's going to spell into banking. I don't see how it isn't. So whilst it's not technically systemic now from a financial standpoint, emotionally, the general economy is not feeling it. And so when does that not creep at all of this news about
banking contagions or not banking into whatever and drone power's coming out making everything
more expensive and businesses can't get access to capital and people are starting to lose their
jobs and they're certainly feeling it from a credit standpoint they're in a huge amount of debt
personally and and they're in car loans god knows what else so none of the points you made are
they're all correct points they're all correct points but i think we're missing the point
If this were a systemic issue, we would be talking about it in Congress, and Powell would not have completely ignored this issue.
And would the VIX be making new 502 close?
I'm just wondering, like, how many more months does this go on before the general...
If the world has fallen apart, would the victory in Nucity 2 close?
The VIX hit 16, right?
Market was making local highs.
I'm not even saying that's a right thing.
I expect the market to go lower.
But...
You know, for people, the same thing I said in March, you know, and I stick by it, it's not the frigging end of the world.
And you can have 10 banks go out of business.
You know, you had a thousand, you know, O'Hare was talking about the SNL crisis out of 6.6% out of 15,000.
You had 100 go out of business in 2008.
And if you have 10 to 20 banks go out of business, right, you know, it's not the end of the world.
Thanks, Jay.
Mickey,
you wanted to give you a chance to weigh in.
Do you agree with what Jay just said?
And let's continue the conversation.
Yeah, I think it makes sense.
I would be, my sort of question is, you know, they're talking about systemic risks to these banking institutions.
And they said, really, that it's not about these banks making bad decisions like, you know, in a macro scale that basically deposits got scared and took their deposits out and put them in other banking institutions.
So my question is, maybe for Jay or for anyone else, is what could possibly be?
the Fed or anyone do anything I do about that. We live in an age where you could be on the bathroom
on your phone, you could be taking a shit and you could be moving, you know, millions of dollars
from banking institution to banking institution. So how can we lay that? If the charge is, I think it was
market, if the charge is basically this is all the Fed's fault.
But basically, it's depositors, a few depositors are getting scared and moving their money.
You know, how can the government...
Well, I don't think anyone is saying it's fully the Fed's fault.
Maybe I didn't hear anyone say that specifically.
It is management's fault, right?
They're clear issues with SIVB management.
They grew very quickly.
You know, anyone with common sense understands that their portfolio companies burn cash.
And, you know, they should have been more conservative with how they invested in securities.
That's number one.
So it's management's fault.
It is, you know, the Fed communicated this two years ago.
So if you weren't listening to the Fed, you know, you had your head under a rock.
So you could say some blame lies at the Fed because they raise very quickly, but
if you're a CEO and you're getting paid you know over a million dollars to run a bank with
over 200 billion in assets you have to be i mean i could use four letter words like you have to be
something absolutely absurd not to anticipate um and then number three um it's not just the the fed's
fault it's not just management's fault um it's also the fact that you know from a regular regulatory
perspective a lot of the banks that were not tier one banks you know
Their interest rate risk wasn't scrutinized as much.
From regulatory perspective, the focus was on credit risk and defaults.
It wasn't on interest rate risk.
So it's the regulators, the Fed, and management teams that created this issue that we're facing today.
So look, look, I want to push back, look, I want to push back on what everyone is saying.
You know, everyone's saying that this isn't 2008 and I agree, but it's, in my opinion, it's much worse because we're talking about banking contagion and whether there is or not is honestly...
In some regards, a moot point, because in the prior crisis, the reason why, part of the reason
why we were able to get out was because the treasury was able to load up on so much debt through
tarp and tamp and all these other programs to swallow up the toxic assets the system that created
that was able to escape and basically like find a loophole to get us out of that problem.
However, this time, it's the treasury itself that's,
like stuck in a debt crisis, right?
I mean, this is worse than any of the other banks because if a bank fails,
look, you're talking about?
I'm talking about what toxic debt?
2008.
Yeah, but what toxic debt does the treasury need to buy today?
Zero.
Yeah, but this goes on to this goes on to a broader discussion of the actual debt crisis
that the United States is facing.
You know, at $31 trillion, $4% interest rates mean that 40% of our tax receipts just go to pay
interest alone.
And we currently are sitting in a situation where there's $106,6 trillion of unfunded liabilities.
Baby boomers are retiring at the rate of 10,000 people a day.
And so we have this massive demographic wave.
And we're still sitting in the midst of a historically high deficit spending period, right?
Like I think deficit spending was 7% of GDP in 2021 and it was even higher in 2022.
And the Fed's just about to tighten us into a recession.
just as the Treasury needs more and more money to spend on because of inflation,
because of,
budgets being adjusted upwards for that.
So like,
You know, and all this is not even to mention the TGA is about to run out, right?
This is the elephant in the room.
The TGA declined by $100 billion in the past two days.
I mean, we're running up against a clock here.
And so what happens when the TGA is out and Yellen has to begin austerity measures?
I mean, at that point, this regional banking crisis is kind of moot.
Yeah, that's a completely different.
My question for you moved on to a completely different topic, though, right?
Yeah.
But make it make a good.
Yeah.
What are the indicators you're, I mean, we start to J.C.'s point and to Jay's point,
proving like, what are the indicators you're looking at that would indicate to you that this is something that's worse than 2008?
Like, you know, things blew up pretty quickly in 08.
And so what, you know, it seems to me that, like, I sort of agree.
I'm sort of wondering when the shoe is going to drop.
It doesn't seem to have dropped.
And I think what I'm hearing from Jay is basically saying that, you know, we're so in condition to an 08 like crisis that we're expecting, you know, these huge tidal waves of, you know, of indicators dropping.
We may not see that.
So what in your mind proving are you looking for that would let you, that would indicate to you that you're seeing something akin to, you know, a huge financial crisis?
Yeah.
The reason why I'm saying this is worse than 2008 is not because of the state of the regional banks or even the prime banks is the state of the treasury.
True interest expense is 111% of tax receipts.
So that's entitlement pay goes plus the interest expense paid daily or yearly on the debt.
You can't use that stat.
That's not.
I don't know.
I've never seen anyone use that stat.
Can you explain how you're calculating?
That's that's.
That's from Luke Groman in his macro briefing in October 2021.
He's trying to attract attention.
That's not, that's not someone,
something anyone really looks at.
But why is that,
why is that not reasonable?
So describe your statistic and how you get to it and why it's relevant.
Okay, so true interest expense. The two additives are entitlement pay goes and the actual interest paid on the debt. And entitlement pay goes is basically the amount of money the Treasury is spending each year on Social Security, Medicaid and Medicare. And that's a fixed expense, non-discretionary spending. That's not an interest expense. Yeah. That's not an interest expense. But it's not an interest expense.
It's essentially an interest expense because this is money that the Fed or that the Treasury has to pay out to the agencies in order to continue running.
You think that this is all going to be fixed forever?
I mean, do you think we're going to have entitlement reform?
I think eventually Congress will push that through.
Jay, but we have to live in the world we're in.
Yeah, I mean, that's really my point, right?
So all there's-
No, that's actually completely incorrect.
This-
The US economy and businesses have evolved.
But my point is, it could be correct or it cannot be correct.
And at one point it might have an impact or maybe not, right?
The question is what's actually happening?
Like what is really, really happening in front of us?
that collectively around the world, investors everywhere have decided that this is the price of this asset, right?
And in 2008, you had just massive, just massive unwinds that you saw for years at a time before we ultimately got a collapse in 2008.
While currently we've been seeing the exact opposite.
That's my point, right?
So what is it that the market's pricing in?
It's not, you know, definitely inflation falling off for sure.
The market's been pricing that in.
But the negative implications of all of that have yet to be priced in.
It could be start pricing.
And tomorrow, maybe next week, it could be systemic one day, but, you know, why so much strength?
So, J.C., to answer your question directly and also potentially either, I'm not 100% sure what the exact point the Peruvian's making, but also some of the things that you guys are saying about systemic versus what have you.
Three points, okay? So give me three points on this, all right? First is that obviously there were six months between Bear and Lehman. So you can have absolutely a market rally and a pause between, let's call it major incidents. Okay? The second thing is I believe what did them in at that point truly, the actual part, but this has got lots of potential folks that will disagree. But one of the things that
that then allowed it to then contagion through to the marketplace
was what happened in the debt markets
as relates to your ability to get access to it.
And you still have at this point all of the banks,
not just the regional banks,
but also you've got consumer finance banks,
You know, you've got the primes, whatever it is that you guys are thinking about.
But all of them are mostly getting rid of their debt.
They are not necessarily issuing or re-uping and also spreads or widening.
So then it just has to do with how long does it take for corporates to have to roll through, you know, term out their debt further.
Most of them, because the interest rates were so low, termed out their debt,
over the last couple, like pre-March.
And then a bunch of them, obviously,
if you just look at the amount of issuance
in the middle of last year, I want to say,
you know, I think that's probably the highs
sometime in the second quarter, you know,
maybe bleeding into the third, depending on you.
Anyways, that I think is the next potential step.
to figure out if this is going to permeate further.
Hopefully that was articulate enough.
Sorry if I wasn't.
That's all good.
Thank you, Mark.
I wanted to give Kevin a chance to, Kevin, thank you for joining us.
You know, I know you've been listening to this conversation so far.
Do you agree with some of the points that have been made right now?
I agree with all of them, actually.
I think everybody has really good points in certain areas and,
One thing, I just wrote a couple of notes down, so I'm just going to go through them if you don't mind.
First and foremost, when we talk about the hedging aspect of the business and trying to hedge portfolios,
it could have been done.
So those that say that it could not have been done, I think they are incorrect.
And then I'm going to wane on Jay on this, because I know that he probably deals in a little bit more of the debt markets than I do,
but I deal mostly in options.
And when you have demand for a hedge product, say you have...
$100,000 and you need to hedge that by utilizing options.
When you go into that marketplace and try to hedge,
you can actually do that by looking at the delta of that hedge, right?
I'm not going to go into the specifics,
but the point is, as more demand goes out for those hedges,
the premium for those hedges also go up.
So the market itself would have tightened without the Fed or without the FDIC having to intervene.
And then that would have caused these banks to be able to pull back on the loan that they were extending.
So I'm also of the camp of I do kind of blame some of these banks.
because it could have been done.
It's just that the cost of capital would have increased to be able to hedge that,
and then that would have caused consumer demand to be able to shift.
I think that's a key point.
Another thing, too, somebody just made a point.
I think it was, I forgot his name, but...
The signs of a recession is the inversion of this yield curve.
The three-month, 10-year right now is that the largest it's ever been.
And usually we don't bottom until it actually normalizes.
So that's something to actually be very, very careful about.
And that might also signify that we might not be, the 3,600 level in the S&P 500,
could be something that we do test.
The money market aspect, I'm just going through my notes, the money market aspect,
everybody's talking about, oh, money markets, money markets, dude, this is the same thing that happened in 2008.
This is exactly what happened to Lehman Brothers and why they failed,
because they had a run on the money markets after those rates adjusted,
And they messed up and invested in some shitty-ass products.
So money markets are going to be great for now, but once rates start to normalize,
they're not going to be looking as attractive.
Money will be able to move out.
And then last and at least, there's notion of the dollar is weak right now.
The dollar is at the highest level since 1999.
You can look at that by looking at the dollar index.
So just kind of keep that in mind.
We've been talking about the dollars being weak once the dollar index is at 120.
The dollars is the standard against the G10.
It's been in a very long time on a one-year average base.
Like when you think about flight to quality, the dollar becomes a short when the Fed starts to cut.
But outside of that, we go into a recession, right?
The dollar has actually been stronger.
Exactly.
And it's been rallying versus the G-10.
Kevin, you made a lot of great points.
Yeah, thanks, Kevin. Appreciate you. Name, I wanted to give you a chance to jump in. I know we've gone through a lot of topics since you had your hand up, but go ahead.
All right, where do I start? So I like to look at numbers and I like to also...
pan out and look at like what Kevin talked about, what Jay's talked about.
So the yield curve inversion, we can start there.
So the twos and tens, that got as inverted negative 108 basis points ahead of Silicon Valley
Bank.
That's now negative 40 basis points.
So it's de-inverting every time that happens.
And the more of that keeps de-inverting recession is literally months away.
officially, okay? I already think we're in one, but, you know, that's that. And yes,
what Kevin said about the three-month tenure, that has never been as inverted as is now
negative 187 basis points. I think prior to that, maybe negative 50 basis points. So these,
I mean, Kevin and Jay can talk more about these, but these are signs that recession is imminent.
I want to say a couple more things commenting on Silicon Valley Bank, okay?
Since COVID, maybe a little before that, but definitely during COVID, this economy and the government has become basically coddling everyone that, oh, if things happen, we're just going to hand you money.
And everyone now expects a bailout and no one wants to like step up in.
you know, COVID was a little different, but, you know, carry that on to now these bank failures
and Silicon Valley Bank, well, they did make terrible management decisions there, okay? The Federal Reserve
was very clear in communicating that they were starting their tightening cycle and starting to raise
rates. So Silicon Valley Bank,
And I know market, you look at the balance sheets.
I've looked at Silicon Valley Bank's balance sheet as well.
And they did not manage their security portfolio correctly.
They had time.
And not to mention with their mark to market losses, they could have done equity raises at the high when I think it was trading at $700.
I forget how high it went.
but they did not.
And they could have offloaded some of those holdings.
But at the end of the day, when they did collapse, Silicon Valley Bank,
they had, I believe, like 75% of their securities was tied to mortgage-backed securities
and commercial mortgage-backed securities with an average yield of 1.6% and a duration of six years.
Okay, so forget about the talk of interest rate hedging.
They could have done other things to manage that.
And they had...
Did someone mute rename or die?
Yeah, I'm not sure what just happened.
That's fine.
So the Fed was very clear.
Jay touched on this.
They were clear in their communication that they were raising rates.
So the banks that didn't manage that or take advantage or adjust,
to and listen everyone knew this and jay said it um very politely but i mean i they're idiots okay
they they could have they had time to take care of this they didn't and there were several
ways they could have fixed us they could have offloaded some of those mortgage back securities
taken smaller losses they could have raised equity and secondaries well now here's the issue is um in
2008
when these brokers and banks were holding the actual toxic assets, the subprime mortgages,
when they were taking mark to market losses, they were actually able to go to the market and raise equity.
And that was happening quite often, but there was always a bit.
that's not happening in this situation.
So, and that sort of was like the demise of Silicon Valley Bank when they tried to do a $2 billion
offering of like convertible and equity and there was no bid.
And then they, they were put in receivership that weekend.
And that was that.
who else is trying to do capital raises right now?
And if anyone tries to do that,
that's the market's not going to treat that.
They're going to get spooked.
Yeah.
Exactly.
And the bank's going to be done.
So I don't know what the,
What's the solution then?
I mean,
like now what do we do?
I mean,
I mean,
I mean,
Like,
you know,
Rob's been messaging me like 35 times an hour saying,
everybody's talking about what,
you know,
everybody's a great historian.
Everybody likes,
well,
there are very,
there are very easy solutions.
number one you could actually go to now that congress would have to act on this you would have to
essentially guarantee and it's political so not so easy but go ahead um you would have to you'd have
to go to congress you wouldn't have to be a big number but if if you just changed it from 250 000
to 500 000 the number of banks that would actually fall into this category would fall from 60 to 100 to under 30
Okay, so you don't even need a really big number out there if you increase it from 250 to 350, from 350 to 4.
Just keeping up with inflation, right?
You could actually solve this and I don't see why no, you know, why.
this this isn't possible number okay so here I could talk about that Jay and here's a solution
for raising the deposit limit okay so in 2008 it was a hundred thousand dollars and they raised it to
250 just to put you know make people confident that you were going to be okay and the fact of the
matter is majority Americans do not have 250,000 dollars but let's just say if you adjust for
let's say nominal GDP okay
In 2008, it was 14.6 trillion. Today, it's about 26 trillion. So if you do the numbers and
adjust the deposit insurance for, say, 22 GDP, it would be roughly $450,000. So that would
make sense just to bump it up. But I still don't think that really solves, you know, the
underlying issues of deposit flight. I mean, the fact of the matter is, is like,
People aren't. Why do you think that? Because I have money at like over 20 banks, right? And there's there's one bank out of the 20 that I'm not super. Why do I think? Why do you think that a $450,000 deposit limit wouldn't solve the majority of the problem?
Well, because, and that was what I was going to finish with was because I don't think people are pulling money out of banks because they're afraid.
I think people are pulling money out because of why I did.
And I'm sure you have two, Jay, is because three-month treasury bills are trading at five and a quarter percent.
And money markets are five percent.
So why would I keep money in a bank that's not paying me any interest?
Well, actually, I half agree and half disagree.
So the number of...
So the deposit outflow is actually slowed down.
So they spiked in March and then they slowed down to less than $50 billion over a two-week period before First Republic.
So I think that there will be a natural flight because banks, someone said earlier, these greedy banks that are paying you zero on deposit.
Some can.
Like Chase doesn't have to pay you anything.
because there's a flight to safety.
But for some of the smaller banks,
they will have to increase rates
and it will hurt their nim net interest margin.
What I think will happen is
it would be a multi-factor process.
So if you increase the deposits,
insurance, I'm not saying you should,
but if you did from 250 to 500,
the number of banks that would have immediate issues,
the percentage of uninsured deposits,
would drop dramatically.
Those banks would then be able to issue equity
and preferred hybrids, you know, at, you know,
anywhere from, you know, 7 to 12% coupons.
Now, that would be a temporary bridge so that, you know, over the next two years,
I have a strong opinion that the Fed will likely cut rates if we enter.
I think we are already entering a recession, and I think we're going to be in a pretty
moderate one.
And, you know, as that happens, then they can refi out of that paper.
But banks can't really raise equity, which is a point you made that I agree with.
Smaller banks cannot.
Big banks can't.
but they don't need to.
I wanted to also address the comments that were directed towards me, if that's okay.
Yeah, go ahead, Mark.
Sorry, I didn't know that.
Oh, sorry.
I was waiting for a pause, but I can.
Go ahead.
You're good.
Mark, why don't you go ahead?
I was just going to say, you did a decent job of characterizing Silicon Valley Bank,
although I would mention that the deal that happened before they went out of business
was actually oversubscribed, not not subscribed.
They just didn't get it in time to make the deposits that.
Hold on, hold on, hold on, hold on.
But then the deposits flight was so severe after they did that call that that was the end of that.
Yes, Peter Thiel caused the situation.
Okay.
In general, Lentick, they went to the behind market.
That's the first point.
Hold on.
That's the first point.
And the second point is although everybody loves to look at Silicon Valley Bank, which 100% had a very different business model than everybody else.
if not the least of which was most of their earnings came from warrants for the years that the market was doing what it was doing previous to the 450 base point rate increase.
So that's Silicon Valley Bank, but that is not characterized first republic.
I don't think anyone disagrees with you.
I think we all agreed on that point.
Yeah, no, that's two separate situations.
Yeah.
And on the Silicon Valley issue.
You used Silicon Valley Bank in the context of...
I only brought up Silicon Valley Bank as it collapsed and people were so quick.
Oh, we need to bail out or protect all the pauses and this and that because we got used to everyone being rescued during COVID and everything.
And now it's sort of the same thing.
That's only the reason I'm...
My understanding.
My understanding is you...
So I have one other thing to address...
So my understanding was that you were bringing it up in mismanagement as the context.
But perhaps I still feel that the CEO Silicon Valley Bank mismanaged the bank.
I think-
No, I'm talking about First Republic.
Yeah.
I'm talking about First Republic.
So, Mark, why don't you go ahead with your point, please?
Oh, sorry.
The second point that I'd like to make is that above and beyond the equity raise,
this is a point I brought up earlier, but possibly it's just not very clear,
is that the way in which First Republic's, let's call it,
collapsed, okay, was handled with such that J.P. Morgan took all of the, any value that might
have remained in the bank and the equity shareholder got nothing. So I think just by virtue of that,
you've created a very weird scenario for any kind of equitization of capital rate, any kind
of concept of permanent capital, in other words. How could that have been avoided?
Credit Swiss.
Unwind it like Credit Suisse was unwined.
Give the market a price.
That would be a bailout and we're not doing this.
Exactly.
And so that's my-
Well,
definitely not.
You would have just married two banks.
If you give equity any value,
Well, Bear was also, wait, hold on, hold on.
So let's talk about what a bailout.
Like a bailout is a little bit different, okay?
But Bear was married in that way.
There's not been an incidence of the bank that size
where you didn't just marry it versus what was done.
This does a number of things.
not the least of which allows the markets to clear, like, easily.
Yeah, no, I agree with you.
Look, I agree with you.
I understand what a bailout is.
I'm just, and Credit Swiss is a different situation because it was in, you know,
Switzerland, right?
So, and they're not part of the EU in that way.
You can pick your favorite.
But Bear Stearns was a bailout.
And these are these, J.P. Morgan buying First Republic.
I mean, done as a marriage, right?
Yeah.
Done as a merit with no credit losses in this case.
What's that?
Done as a bail.
So we can call it a bailout,
but the fact is with no credit losses,
it becomes something a little different.
The first of the public wasn't a bailout.
Correct.
But the asset transfers.
Mark, can you please make your point a little bit more clearly so everybody can follow?
My point is you transferred the entirety of the assets of First Republic.
Exactly.
You mean, equity holder go to zero.
Any residual value that would have just been worked out?
Go to JP.
went to J.P. Morgan.
Exactly.
So how do you actually, in any way, shape, or form justify being the equity holder of a bank in that kind of scenario?
That's hilarious.
I made that commentary.
Hold on it.
I made that same commentary in the beginning, which is we've set up a system right now that is incentivizing this type of behavior.
That was actually my original point.
Sorry.
Sorry. Go ahead.
Say it again.
I might have missed that comment.
I apologize, Dr. Daniel.
Yeah, no, no, no.
I literally said that in the beginning.
I was like, you know, we've set up a system right now
where literally the best thing for J.P. Morgan to do is to watch it burn
and then to pick up the pieces.
That is actually what we did.
We did the worst possible thing that we could have.
But the equity market is, you know, like that's sort of chore.
I mean, the equity market, you don't have the, you don't have claim to your capital.
I mean, that's what it's about.
But Kevin, there is a system in which we are incentivizing bad behavior.
Wait, wait.
No, I don't.
It's accounting.
Do you guys understand how money's work and value in security, how merger, how merger accounting works?
The way first of was taken care of is the way it should have happened.
I don't know where the bad behavior is, but the bank should have been put in receivership and sold to the highest bidder.
100%.
When you do that, but when you do that, that's when you do that, that's when you hit the equity holders have no value.
Equity holders shouldn't have value.
That's the way it is.
That's right. Equity got zero, preferred got zero, bonds got zero.
Exactly. That's what receivers should be. Yeah. I mean, that's our system.
That's not bad behavior. That's the way it works.
Well, hold on now.
We talked about it. We talked about trying to find a solution. And I think one of the solutions that we can look at is instead of the Fed having the balance sheet run off, basically meaning the,
the treasuries are going to come to maturity, and that's when they get their cash.
If the treasury, or not the treasury, the Fed, I'm sorry.
If the Fed actually went out and started selling these securities actively in the market,
they could actually re-invert or they can actually normalize the curb on their own.
And then that would encourage those that are in money markets to go back to,
financial institutions like community banks things to that nature it sounds very aggressive but
it's actually something that that no one's actually been talking about it is something that could shock
the market but it also could move money fairly quickly and sure up bring one more thing up about the
federal reserve balance sheet that i mean we're talking about the um
mark to market losses or on the bank's balance sheet.
But the Federal Reserve, if you want to talk about bubbles, that's the biggest bubble in the room.
And they're sitting on a $1 trillion loss on their securities that they bought through quantitative easing.
So it's in their best interest for things sort of to crash on their own.
and not prematurely start cutting rates when the market,
for six months,
the market has been trying to predict a pivot,
and it's been wrong the whole time.
So they're not going to pick.
Tell me about a central bank that you know of.
That is actually positive right now.
I mean, at the end of, I know we're talking about debt and all that stuff and being responsible.
But you know, every central bank, every single major country is in debt.
I mean, no one has cared about the shit for 40 fucking years.
Why do we care about this show right now?
Hold on.
I don't know that we got to, Danny or I got to respond.
Well, I think I have responded to the issue with First Republic before you respond to that.
Because I don't think anyone here has been actually talking about merger accounting and how it works.
Nothing wrong that happened.
You might hurt some people.
You might have a relationship with First Republic.
But in reality, right, the issue is that we have...
Data, everyone gets data quickly.
People are pulling deposits out 10 times faster than they did in 2008.
And what ended up happening with First Republic is that in merger accounting, even if PNC bought them, or Zion bought them, or NYCB bought them, or KeyBB bought them, they all would have not been able to take the acquisition because when you mark to market, you fair value the loan book and you fair value the securities book.
you would have automatically had a $30 billion plus write down that would have impaired their own book and their own tier one capital ratio.
So the idea that someone maliciously had this bad behavior and this First Republic thing, listen, I feel bad because it was a good bank and they did have good customer service.
And, you know, if interest rates weren't where they were, First Republic would still be here today.
But, you know, trying to say that this is some sort of a conspiracy, I think, is just unconscionable.
Right.
But Jay, I definitely am not saying there's a conspiracy.
What I'm saying is that the reason all of this came to pass is a deposit outflow.
And so what Danny and I think are trying to say, maybe let Danny speak for himself, I apologize,
Danny if I'm putting words in your mouth, is that given the way this went down, if all it takes
is deposit outflow to create an instance where you mark the entirety of the book in an interest
rate environment that's been moving way more than normal.
mall in a world where you can move deposits quickly, it is very difficult to be an equity
holder and constantly believe that you're in a good spot, especially when all of the accrued
value of that loan book, of which you have 0.06 default non-performing, and usually you have an
average rate of 0% non-performing goes straight to J.P. Morgan. That's my point. To answer that,
Most banks do not have that issue where uninsured deposits are that meaningfully high, where you would have a fire sale risk.
So yes, I think it's sad that it is an issue for some banks, but it is not an issue for the majority of the banks out there.
Are you sure, Jay?
What is the number of your...
Because the banks I've looked out, I keep looking at...
Like, so, for example, the last three that I've reviewed definitely look almost identical.
I mean, it's three out of 4,800.
I mean, most banks are not publicly traded.
So the majority of the banks...
Okay, so then we can also look at most of the...
Most of the banks are not publicly traded.
Most of the banks do not have the level of uninsured deposits anywhere close to SIBB or FRC.
Okay.
Fair enough.
I'm talking about public banks.
So I only cover...
Or I review, I review close to 25 a quarter.
And so all of them would have this issue.
The average bank has 6% on insured deposits.
Just for everyone to understand, I don't care if you're looking at public filing.
Okay.
So that would be the non-public, right?
Okay, that makes sense to me then.
I actually think that what it really implies is that most of the banks should be not-pullied.
And most of the banks are fun, is what it implies.
Okay.
All right, guys.
Well, on that note, Mario, I wanted to hand it over to you to close up the room.
Go ahead.
If Mario is there.
I'm not there, and I was just having a bite to you and listening.
I see you on mute.
Can you hear me?
Can you hear me?
Mario, your audio is right.
Yeah, we can hear you.
We can hear you.
Everyone, tell him.
Tell Danish.
Everyone can hear me except Danish.
Yeah, guys, and there's a great space.
And not much to say because I wasn't here for the space.
Danish ran it.
But I'll see you again tomorrow.
Okay.
I'll be hosting the space tomorrow regarding the tensions in Russia, Ukraine, especially after the developments yesterday.
Danish will do the morning space, as always, just a finance focus space while I sleep.
Even if you see my face there, I'm sleeping, guys. I can't be there 24-7.
Anyone that has projects, any VCs or...
investors that have projects in the AI and Web3 space.
We work with them.
So my company that hosts these shows as well,
works with AI and Web3 companies for in return for equity.
So hit us up and we will start doing Shark Tank shows as well on a regular basis.
We do it already for AI.
We do it for Web3.
We're going to start doing it for tech startups as well.
So if you have projects that are interested, do hit us up.
Otherwise, you're going to do.
See you again tomorrow morning.
Really appreciate you all.
And thanks, Danish, you can't hear me.
And Peruvian for moderating the space.
So, Mario, Donish, just said thank you for us in the space
because we have technical difficulties in the space.
Thanks, everyone, for your comments, questions.
Thanks, Jay.
Thanks, everybody.
Bye, everyone.
That was fun.
