“Suppressing” bank balance-sheet data in a banking crisis to prevent the biggies from yanking their billions out of a weakened bank.
By Wolf Richter for WOLF STREET.
US banks are now finding themselves in a situation where homeowners don’t have to make mortgage payments for few months, and renters don’t have to pay rent for a while, which leaves many landlords unable to make their mortgage payments – not to speak of the many Airbnb hosts that have no guests and won’t be able to make their mortgage payments. Commercial real estate is in turmoil because the tenants have closed shop and cannot or won’t make rent payments, and these landlords are going to have long discussions with their bankers about skipping mortgage payments. And subprime auto loans and subprime credit card loans, which were already blowing up before the crisis, are now an unspeakable mess, as tens of millions of people have suddenly lost their jobs.
Amid this toxic environment for the banks, here come the New York Fed and the FDIC and tout the “Value of Opacity in a Banking Crisis,” explaining, supported by empirical data from the Great Depression, that it’s better to stop disclosing balance sheet information about individual banks.
So here we go, as to why it’s important for “authorities” to lie about banks during a crisis. It’s not directed at households, as we’ll see in a moment – but at corporations, hedge funds, PE firms, state and local government entities, and other institutional bank customers whose bank balances by far exceed deposit insurance limits and that would yank their mega-deposits out of that bank at the first sign of trouble.
The authors of the article, a joint production by the FDIC and the New York Fed, cite Great Depression data before the arrival of FDIC deposit insurance to show how lying about balance sheets of individual banks is beneficial in ending runs on weak banks. They’re talking about accounts that were uninsured at the time, and that’s the key for today, as we’ll see in a moment.
Currently, US banks have to provide summary statistics about their balance sheets (“call reports”), which is made publicly available in a data base by the Federal Financial Institutions Examination Council (FFIEC), a U.S. government interagency entity of banking regulators.
“During normal times, regulators have long recognized that disclosure is an important tool that helps the market to discipline banks,” the article says. But now are not “normal times”:
In a crisis, however, theory predicts that undesirable outcomes can occur if the publication of balance sheet information induces runs on solvent banks. As a result, it may be desirable for regulators to suspend the publication of bank-specific information during a crisis so as to make banks more opaque to depositors.
Such a policy action prevents depositors from being able to distinguish between banks with stronger and weaker balance sheets, reducing the chance that depositors will run on a weak, but still solvent bank (an inefficient type of bank run).
The researchers relied on data on deposits at New York banks during the Great Depression before the arrival of the FDIC in January 1934. This was the period when deposits were not insured. New York had two differently regulated sets of banks: state-chartered banks and nationally charted banks, each with their own regulators.
To convince “panic-stricken” households in New York that their deposits would remain liquid and safe, the New York state bank regulator suppressed bank-specific information by not collecting and mandating the publication of call report data in 1933 and 1934 for those institutions under its oversight (banks with a state charter). This policy decision effectively ended the public’s ability to observe the balance sheets of state‑charter banks for two years.
In contrast, the Office of the Comptroller of the Currency (OCC) collected and mandated the publication of balance-sheet statistics for banks under its oversight (banks with a national charter).
Suppressing balance sheet data reduced the outflow of deposits at those banks, compared to banks that disclosed balance sheet data, with state-charter banks faring “better in June 1933 because of the New York state bank regulator’s policy of information suppression.”
But in 1934, after the FDIC deposit insurance became effective, deposit flows reversed, with deposits flowing back into banks, and those deposit inflows converged, with both state-chartered banks (that suppressed balance sheet information) and nationally charted banks (that disclosed balance sheet information) gaining deposits at a similar rate:
Having deposit insurance makes household depositors much less sensitive to bank-level information; once they are insured, depositors no longer have an incentive to monitor banks and so they pay less attention to the publication of balance-sheet statistics.
As a result, the introduction of deposit insurance makes irrelevant the gains from making the balance sheets of state-charter banks more opaque, placing national‑charter and state-charter back on an equal footing.
But wait… That’s not where this story goes.
It U-turns right at this spot in a conclusion, titled “Why Does This Result Matter Today?”
Even with the FDIC’s deposit insurance program, public disclosure of the portfolio of assets held by banks matters because banks issue significant amounts of debt that is not insured (for example, a significant fraction of bank deposits today are not insured by the FDIC).
These uninsured deposits are in accounts that exceed by a wide margin the FDIC deposit insurance limit of $250,000. They’re held mostly by businesses, institutions, state and local government entities, hedge funds, PE firms, and the like. They may have hundreds of millions or even billions of dollars in their transaction accounts.
Few households have daily liquidity needs that exceed FDIC deposit insurance limits, and savers can spread their bank deposits to different banks and stay within the FDIC limits with each deposit account.
Also, these “call reports” are not easy to dig up and read – though they’re available online. This is something that normal households have neither the time nor the expertise to deal with. So this suppression of information is not directed at savers and households.
But it is directed at businesses, state and local government entities, hedge funds, PE firms, and other institutional bank customers that need big balances in their accounts to fund their operations on a daily basis, engage in transactions, and the like, and that have the staff and expertise to study the call reports and use them as actionable data. And they’d yank their mega-deposits out of that bank at the first sign of trouble appearing in the call reports.
The New York Fed concludes:
Consequently, our results are relevant today and demonstrate there is value in having regulators suppress bank-specific information in a crisis as a way to stem runs on those banks by depositors and other types of investors.
These “other types of investors” are bond holders who would sell their bank bonds at the first sign of trouble in the call reports, thereby driving up the yield of the bonds and making funding for the bank more expensive and difficult; and these “other types of investors” include counterparties that might refuse to do business with the bank at the first sign of trouble.
It is interesting that the “value” of suppressing information about bank balance sheets are being touted now as banks are suddenly finding themselves stuck in a financial crisis so vast that the Fed decided to unleash the biggest amount of money printing in history in an attempt to bail out all aspects of Wal Street.
And it is even more interesting that this is so clearly directed at business and institutional bank customers and counterparties that apparently need to be kept in the dark about the health of their banks, lest they yank out their large deposits.
Runs on the bank don’t take place today by people waiting in line at the branch to take out their $500 in savings. They happen when corporations, financial entities, and counterparties lose confidence in the bank and yank their millions and billions out.
Here’s what the Fed is doing to bail them all out and keep the Everything Bubble from imploding further. Read... $1.5 Trillion Helicopter Money for Wall Street in 3 Weeks of Fed Bailouts
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There may actually may some merit to this argument in this government-induced financial emergency.
The real problem may be lack of confidence that “opacity” will be (or has been) removed, as well as ensuring this technique doesn’t get used for more pedestrian reasons.
I agree that the “opacity” is probably justified. A first for me… agreeing with Javert Chip, if I correctly understand what he has written. The FED doesn’t have to be “good boy scouts”. They need to avoid a melt-down.
Even if that meltdown is extremely justified and well-deserved?
Jonas Grimm
EVERY financially astute person would agree there are bad actors that deserve to be “melted down”. However, there would not be a precise consensus as to who they were (Uber, Lyft, GrubHub might be on a lot of lists).
The problem is financial “meltdowns” are like tsunamis: they take out deserving and undeserving players. It’s impossible to focus the effect on the bad guys.
The question is those parties affected by these ‘OPAQUE” will just sit or start poking around the balance sheets of the institutions where they have a large exposure!
These are Joe and Jane of the Main street but barracudas and the sharks of wall st, NOT easily subjected to the snow job of the Fed, as they expect! Aren’t these same guys who got caught up during GFC?
I think proclaiming OPACITY is tantamount to declaring we are in big S**T!
Absolutely agree 100%. Opacity is just a polite word for “lying to your investors/depositors.” Period. This is a BIG red flag.
Well, we know all the large money center, criminal banks are insolvent. We got to watch Citi, currently a $4.00* stock, plunge from $60.00 to $1.00 in 2009. Will we get to see it plunge from $4.00 to 40 cents, another 90%+ loss, while they lie all the way down??
(*adjusted for face-saving 10-1 reverse split to hide the carnage)
Because every central bank that has every existed has avoided that situation… lol
People getting high off Jerome’s fumes…
How about if we make a rule that the banks can’t “poke around” the little peoples’ banking background when they go in for a loan???????
And, as one commenter above said…..”…we have to be in “deep S” for this to be happening!!
“Ah, What a tangled web we do weave”!
Doesn’t saying there are some rotten (or less than prime) apples in the barrel and we won’t tell you which ones, cast aspersions on the whole barrel?
And to repeat: from a Canadian perspective the US with about 5000 FDIC banks, is grossly over banked. There must be an army of inspectors.
But I assume things have tightened up since the Clinton’s old buddy McDougal bought a bank with a million or so down, less than a today’s McDonalds.
It soon acquired a major new real estate customer.
A long time ago, every small town had its own bank and these banks were just another local business. Everybody knew each other, and it was not difficult for the local bankers to determine who was solvent and trustworthy and who was not. If a farmer’s kid showed up with a hot sportscar in the high school parking lot, the banker’s kid would tell him about it and he’d know that the farmer was spending more money than he must, and he would make a mental note to review the loans to that farmer. This actually happened in my small town – the farmer’s name was painted over on his barn ten years later, after he either sold the farm or lost it to repossession.
Today we’ve abstracted all of these interpersonal relationships away into a sort of smeared cyber-reality where algos are used as a substitute for human judgment. I suspect that turning every bank into a megabank by mergers simply makes the entire banking ecosystem more fragile. Ireland and the potato famine are a good metaphor for what an economy with a few megabanks will look like when TSHTF, as it just has.
Canada has very few, very large, very conservative banks. (not as tight as they used to be but who is)
No one lost a dime in a Canadian bank during the Depression when almost ten thousand US banks went under taking lots of deposits with them.
I was reading a piece in the New Yorker about money and the banker/author mentioned BTW that a bank with under 140 million in assets only needed 3 % reserves. Each number is utterly fantastical from a Canadian perspective.
I’m all for small business but not in banks.
Way past time to bring back the Post Office Banks (where I opened my first account) and bring back public banks.
Yeah, this has nothing to do with distrust of PE,, investment Banks, Banks, and the co-mingling of all…
“On May 10, 2012, Jamie Dimon testified before the House Financial Services Committee regarding its London Whale scandal, where traders in its London office had gambled in credit derivatives with funds from its federally-insured bank and lost $6.2 billion. During that hearing, Dimon said this about off-balance sheet activities at his bank:
“Remember, we have higher capital standards, higher liquidity standards, far more rules. Most banks are stronger. There’s far more — boards are more engaged, there’s management committees that are engaged. There’s no off-balance sheet vehicles. There’s no more subprime mortgages.”
The truth is that off-balance sheet derivatives, despite blowing up the U.S. financial system, the U.S. economy, and the U.S. housing and job markets in 2008 in the greatest economic catastrophe since the Great Depression, have never been reformed by Congress or federal regulators. They are, in fact, more dangerous today than they were in 2008 because some of the counterparties to Wall Street’s derivatives are more fragile today than they were in 2008.”
sorry–forgot the attribution: Wall Street On Parade, “JPMorgan Chase Has $2.9 Trillion Exposure in Off-Balance Sheet Items Vs $2.3 Trillion on Its Balance Sheet”
Amen. Dodd Franks actually protected the banksters from lawsuits to make corporate officers and owners of undercapitalized banks personally liable by piercing of their corporate veils. Instead, depositors are now at risk but supposedly only for sums over FDIC guarantee.
The Glass Steagall Act in its original forms should just have been re-enacted. The “Dud” Franks act also made lawsuits against officers or owners to recover illegal distributions or fraudulent transfers (while banks are often legally insolvent due to over-valuing of their assets and understating of their liabilities) less likely and harder to prove.
Also, our system is perverse, because the few, well run banks will become liable for the corrupt banks’ debts when the most utterly corrupt, major banks fail due to their derivatives gambling. Those major banks are not truly stronger, because their capital might have increased a bit but their gambling debts for liabilities are now in the hundreds of trillions– total for all major banks. Now, those derivatives bets blew up.
Did the Fed just suspend Dodd Franks unilaterally? Does this apply to the Big Banks, like Goldman Sachs and Morgan Stanley, etc? They just got hit with a huge loan default from Hong Kong coffee chain Luckin
Interesting.
Is the Fed overturning passed legislation?
They tax us by promoting inflation….
This is a logical extention.
Dodd Frank only exists to screw over small banks, it never held big banks back, as it was a bloated loophole ridden disaster. It’s purpose is to enlarge big banks after the last crisis “2008” so that the big banks would be even more, too big to fail. As this was guaranteed to happen. However, no bank is to big to fail “as long as you are a real economy, not financial”, and hopefully the big banks will be held underwater, until there’s no more bubbles, but, considering the politicians we have, we could be fu**ed.
Hear! Hear! You are so, very, very, very right. I refer the interested reader to my comment above about bankster control of government. See Simon Johnson’s “The Quiet Coup” in the Atlantic Magazine.
That is why Americans are destined to become poorer and poorer year by year: the banksters have long been and currently are creatively stealing the real, US national income little by little. They are very clever crooks and have paid off or intimidated or control the media, most politicians, most academic institutions, etc.
Please comment on this someone in the know:
Is it true that Dodd-Frank puts derivatives ahead of depositors for FDIC insurance?
Joe,
No. FDIC doesn’t provide insurance for derivatives. It only provides insurance for deposits.
However, regulators created a nasty issue. Many bank holding companies, such as Citigroup, have an investment bank that is not regulated by the FDIC and a separate deposit-taking bank that is regulated by the FDIC. What regulators did a few years ago, they allowed derivatives to be transferred from the investment bank (not regulated by the FDIC) to the deposit-taking bank (regulated by the FDIC). The FDIC objected but was overruled.
If the derivatives were in the separate non-FDIC insured investment bank, where they should be, that investment bank could be allowed to collapse without involvement of the FDIC since the FDIC doesn’t regulate investment banks.
But if the derivatives are housed in the deposit-taking part of the bank, they’re in the FDIC’s bailiwick. So if the bank fails, the FDIC will take over the deposit-taking bank, as it would normally do. It then transfers the deposits (liabilities) and some good assets to other banks, and often pays some cash. It also makes most secured creditors whole, depending on the capital structure and its rules.
Then the FDIC sells the remaining assets. If the derivative losses are large, the FDIC could be left holding those net losses on the derivatives. It will not bail out the counterparties. But it will eat the net losses. Those net losses will not be as gigantic as the nominal exposure might suggest, but they could be substantial.
Allowing derivatives to be moved into the deposit-taking part of bank was a crime, imho. I can’t remember who allowed that to happen, the Fed or Congress, but it was a nasty slimy thing to do.
Extend and pretend ain’t gonna work this time.
Karen,
It looks like it is working today.
Want to make any bets on tomorrow?
Looking at 2008-9, it took 5 or 6 months for the stock mkt to bottom out (time enough for 2 quarterly reporting cycles).
So far, we are about three weeks into Covid lockdown.
There is a lot of the story to be written.
Jdog,
Extend and pretend has been going on for a very long time. Where’s Unamused when you need him. He’ll explain it.
High Frequency Traders (HFT) have started to include parameters such as the trend in new Covid-19 cases in their algorhythms: with new cases on the decline across Europe the “buy” orders are out even for financial junk such as Norwegian Air Shuttle.
Also yesterday the Italian government announced a €400 billion rescue plan for the economy. Granted, it’s without financial cover but similar plans from Germany and Japan have caused the same overreactions in the past.
As the saying goes, let them have their little vacation from pain: the fire sales haven’t started because everything is still shut down and everybody is still in survival mode.
I agree. the parties they are trying fool by declaring OPACITY is required now is almost like announcement by a megaphone, something here is NOT just right! These are ALL big boys at Wall St. Are they going to get surprised later? It is too good to be true!
Just of matter of time unlike you and me, these BIG Players at the WALL St will eventually (before it becomes public) get that info (insider info!?)
Are they going to be ‘fooled’ by Fed, again after this OPACITY proclaimation?
Karen
Expanding my comment on opacity, my assumptions:
o In the end, the Fed will be the one cleaning up the mess
o While the economy is extremely volatile, price discovery is highly erratic; any rush to collections in that environment MAY do more harm than good (ie: damage solvent as well as marginal or lower quality credits)
o The bet is that deliberately slowing the process for a MAXIMUM of 60-90 days will reduce potential damage caused by overacting due to inaccurate data.
Reiterating my concern: prolonging opacity beyond 60-90 days, or that this extraordinary technique becomes more commonplace. General speaking, financial opacity is bad.
Debts that cannot be repaid wont be repaid.
Won’t us peons start to mistrust fiat money per se, as we “catch on” to these shenanigans, FDIC notwithstanding?
You overestimate the average rate of comprehension most Americans have when it comes to finance. Certainly no one I’ve ever come across in my day to day life has had much of a grasp on it…
These are BIG Players at wall st, with unlimited Power/wealth, expertise to probe and explore, NOT the average retail investors!
Do you think private equity/Hedge funds like BlackRock or KKR will just sit on the sidelines!?
Jonas Grimm: we agree!
However, that doesn’t mean we aren’t trying to understand.
For instance, how can we go about finding out whether our bank is going to fold some time soon?
That’s a good starter question we should be guided by.
Please respond. Thank you.
Well this peon hasn’t trusted fiat money since the late 70s when inflation was ravaging my meager bank account daily
Would suspicion not be enough for yanking out money?
How does one know one is not jumping from frying pan into fire (pull from bank A and put into bank B and bank B goes bust)?
That’s the point, isn’t it?
Define “money.” Do you mean entries in a spreadsheet. Just like grades can be manipulated by high school hackers, so can digital credits, but only by a few, and you ain’t in that club.
Is that why stocks are up? It’s safer then at the banks?
The last person sitting on the chair of musical chairs as their being pulled away is always the citizens paying and holding the bag…
And what about the mandatory “opting in” that all depositors with savings in excess of $200,000 are considered to be in if there is a run on a bank? Do you really think that deposit insurance will ride to your rescue? I would much rather keep my money under my mattress than risk a run on a bank for all the nonexistent interest I receive at present
If you haven’t any money you’re in big trouble and if you have money you’re in big trouble – this is going to end badly…..
FDIC coverage is for $250,000 per person, per institution.
You can have $1 million in fully-FDIC-insured balances by holding a $250K deposit account at four separate banks. Most wealthy individuals hold multiple accounts at multiple institutions below the limit, or aggregate them with cash management firms who do the same.
Any excess savings needed to protect your illiquid assets should be shoved into TBills … the FED will always make sure those are made whole and they are not exposed to a tradeoff from inflation. I would not leave too much in the banks … while you will be made whole, there could be a long wait before you get your money … just when you need it to protect your assets.
True dat. Since banks pay very little interest anyway, we’ve been using Treasury Direct’s certificate of indebtedness (CofI) to hold our cash maturing buffer before either reinvestment most of it or tranfering it to the bank for paying our bills. Of course, most of the rest are in auto rollover auctions. Even at 0% 2 weeks ago, I feel my money is safer in the Treasury.
Call me insane but my margin of safety requirements are just higher. Luckily I’ve been in 100% cash even before the stock market fell. Now I’m having to answer calls from relatives asking how to protect their nest eggs.
I don’t expect banks to tell the truth anyway.
“These levels above represent a correction of the entire history of the SP500 from its inception when it was valued at 0 to the wave V high of 3393.53.” This is one time the bearish hyperbole may be right. Take note one reading allows for a new high at 3400. My thought is the Fed doubling down on GFC will self-immolate their tinder box of thin air money. http://www.321gold.com/editorials/captainewave/captainewave040620.html
Thank you You are absolutely right
Frederick,
No, he is not right. He is willfully clueless of how deposit insurance works, and apparently, so are you. See my explanation below, and do try to wrap you brain around the concept of “deposit insurance.”
Soupcon,
You do not understand deposit insurance, and apparently, you do not want to understand it.
Deposit insurance is an INSURANCE if you your money gets bailed in. It’s the insurance that pays you after your money gets bailed in.
You need to make an effort to wrap your brain around it.
Why stop at suppressing bad news? Why not take the small additional step of publishing fake good news? Can anybody even imagine any part of the Trump administration ever lying about anything?
i don’t think i have every lived under an administration that wasn’t lying to me. maybe carter, but i was too young to be paying close attention back then. this particular one isn’t exceptional in regards to prevarication.
pc-(Wolf may x-this out as it’s skirting the rules-i’ll understand) you would be right. Part of the problem is that truth from an administration is like holding a mirror up to an American public who is asking: “…who’s the fairest of them all???…”, when they should be closely scrutinizing what they see. Carter, probably the best example of the ‘DC outsider’ that so many claim to want, made the mistake of believing what the people said they wanted. His opponent won in a landslide by telling Americans to look away from that mirror, that those lines, scars, double-chins and blemishes were not only not real, but never were-and therefore never needed to be addressed. Again, in Walt Kelly’s sublime words: “…we have met the enemy, and he is us…”.
May we all find a better day.
I work with banks and its amazing how much has already been done in the last couple weeks to make bank balance sheets opaque. A few examples:
1. Regulators have told banks that any loans they modify to help borrowers by deferring the principal and interest payments b/c of COVID do NOT have to be treated as a “troubled debt restructure”. This is significant because if these loans were treated as TDRs, their loan loss reserve requirements would spike. Increasing the loan loss reserve is done via a provision expense, which would crush earnings. Avoid TDR treatment would also help boost their regulatory capital ratios as well because some of them would require higher risk-weights under the Basel III capital rules.
2. Publicly-traded banks do NOT have to comply with a new accounting standard called “CECL” which would have required them to increase their loan loss reserve for “expected” losses. This was the most controversal accounting change in the history of banking, and it was set to go live for the first time this quarter. No more. CARES act delayed it, and then the FDIC,OCC, and Fed put the nail in the coughin by saying the impact on regulatory capital would be delayed for two years. This is a major embarrasment for FASB and the SEC, who make and enforce these rules. More importantly, this would have forced banks to have a much larger provision expense. The old method allows them to only reserve for ‘probable’ as opposed to ‘expected’ losses, so they can claim all of the modifications they have done to help borrowers with COVID are not ‘probable’. Net net — most banks will have severely unfunded loan loss reserves.
3. Amazingly, banks are allowed to accrue interest income for loans they modify to help borrowers with COVID, even if they grant P&I relief for 90-180 days to those borrowers. In other words, banks can recognize the revenue from these loans even if the borrowers do not pay it. Some will likely never pay it. This will inflate bank earnings this quarter.
Folks, the games are just beginning. As someone who works closely with banks, i would not have any faith in the credibility of the first quarter numbers for most banks.
“nail in the coughin”
Freud just smiled.
Its not the cough that carries you off
Its the coffin they carry you off in
A poet who may not know it.
Excellent “inside-the-numbers-and-footnotes” revelations. Our (and other countries’) Central Banks, captured regulators, degraded accounting standards…one could go on. The exceptions are becoming so tangled, the regulations so complicated and the reasons so specious that every report such as yours, Wolf’s and others are jarring nails going into our society’s coffin.
The first quarter earnings/reporting will probably not reflect the damage done. However, expect that companies will either refuse or give a range of forward expectations. So, full reporting which reflects the absolute destruction of demand will not surface for the most part until Q2 earnings. Maybe that will give us another opportunity to buy more gold.
MuTang,
Excellent summary. Thank you.
“This was the most controversal accounting change in the history of banking, and it was set to go live for the first time this quarter. ”
A mere decade after the incident which inspired the rule…
…Yes, so, by all means, intentionally increasing opacity in political regulation is such a wonderful thing…
“When it becomes serious you have to lie”
Jean-Claude Juncker
And when it gets really, really bad you have to change the rules.
Terminate the Fed, with extreme prejudice
How / Who could terminate the fed? It was established as an amendment to the Constitution. I see the only real possibility is for it to get messed up worse. The last straw breaking the camels back comes to mind.
My imagination goes crazy with the possible outcomes.
They will pump but what will happen if that does not have any appreciable effect on the real economy. And that is a real possibility.
No the Fed was not created by an amendment to the Constitution.
The Federal Reserve Act was passed by the 63rd United States Congress and signed into law by President Woodrow Wilson on December 23, 1913. The law created the Federal Reserve System, the central banking system of the United States. Being created by law it can be removed by law.
Thanks, I’ve had that belief for decades… Good to fix fake news, especially when it is in my own head. Wonder where I came up with that?
The same year that Income Tax was permanently legalized. 1913. Think of the coincidence.
Economicminor:
“They will pump but what will happen if that does not have any appreciable effect on the real economy. And that is a real possibility.”
From the movie: “Margin Call”:
“The kid nailed it!”
The Fed has been “coloring outside the lines” since 2008.
Systemic saving buys them some latitude, but they never quit.
They pressed on, stimulated when none was necessary…QE’d when market on high and unemployment on record lows?
The Fed has been in constant violation of TWO of their THREE mandates…and no one says a word (Rand Paul an exception).
Promoting inflation flies in the face of “stable prices”
And they are supposed to promote “moderate” long term rates..to ensure a balance between borrower and lender…but the Fed allowed, promoted record lows in the long end, extreme, not moderate.
Flat yield curves and 4000 year lows in long lending….
Two of three Mandates violated…..crickets.
Stable prices is an inflation of around 2% . This allows prices that are to high to return to their true price without the need of a nominal price reduction. Most prices, especially for unique sellers, are to sticky to lower them nominal
When you’re young 2% inflation doesn’t sound like much. When you get older you realize that 2% means things double in price every 35 years. This is not stable money.
The moment the American war machine loses the Fed is the moment the machine stops. Would be interesting to watch.
Catherine Austin Fitts’ interview on Greg Hunter’s USAWatchdog blog this week said same.
Would you do business with any entity that told you they were acting to deceive you because they have decided it is for your own good? Odds are it is for their well being and they want you to be exposed to calamity, not them.
Very well stated!
So the government essentially?
Reported in the Washington Times:
The White house is mulling issuing war bonds. to raise money for fighting the Coronavirus. Will the treasury buy those, too?
How ridiculous can these financial machinations get?
If they pay 1%, I’d sooner keep my money and lose the war.
The Treasury will sell them…
The Fed will buy them.
DOW is up 2000 points. Crisis over, now to the moon!
hakuna matata
599 people died in New York today and the Dow was up 7.3%. I guess empathy is not quantifiable and therefore can’t be built into an algorithm. I don’t know about you, but I’m having a Stanley Kubrick moment. It is not as if someone moved the “goal posts” by which we measure how things are progressing in this unfolding calamity. There are no goal posts! No matter how outrageous and unthinkable any potential outcome of this medical and financial pandemic may appear to be, each is equally possible!
Mad Puppy,
On a average day, in an average year, about 7500 people die in the US.
And the everyday world takes little notice and always has.
I don’t know if the 599 number you quote is Covid only, NYC only – or how far above baseline it is (although I’m sure it is well above baseline – but in the largest, worst hit city in the US).
My larger point is that without the numerical context of what “normal” is, it is difficult for the average person/investor to really understand how severe a situation may be.
I am not saying that the NYC situation is not bad, I am saying the the MSM seems congenitally incapable of providing relevant, contextual data on almost any topic (think about the tiny, tiny amount of medical info beyond cases/deaths they are reporting – yet, there is already a ton of it from official government sources like Pubmed.)
There are no definitive medical answers yet…but there are hundreds of medical issues that could be covered, analyzed, and discussed.
But the MSM essentially refuses to provide this info at all – in favor of the 10,000th repetition of the same political hobby horse humping they *always* engage in.
As opposed to potentially useful knowledge.
Cast127,
You don’t normally need 85 refrigerated trailers in NYC to keep the bodies in because the morgues are full — this is the scenario now playing out in New York City. The 599 was NYC one day, Covid only. Time to quit trying to minimize the issue.
The only knowledge important now is knowing how to save yourself and your family from too many so-called experts. We’re making our vacation as pleasant as possible.
The coroner in my little suburban county just accepted delivery of a refrigerated trailer parked outside the morgue, complete with internal racks for bodies. He never did this before. Perhaps this time is different.
Wolf,
Nobody is trying to minimize the issue. I say as much in the post.
What I was trying to do was provide additional information – context.
I was also trying to point out that some media outlets (TV especially, but newspapers and blogs as well, seem to wallow in the worst and contextlessly sensational at the almost total expense of the practical and useful).
The US Government and related minions at Treasury and Fed are submitting us to the Lobster In A Pot treatment. Everything is just fine as they put us in comfortable bath/pot. No problems anywhere, it all feels good, doesn’t it?
Then they turn the burner up one little notch at a time…and soon, we are boiled and ready for eating.
What happens when the crew of lobsters decide they ain’t gettin’ in no pot and not believing it when the Governments say everything is just peachy?
Trust lost is trust never to be regained.
You forgot the part where some of us lobsters try to crawl out of the pot, but the others reach up and pull us back…
You could argue that trust has been dissolving slowly for over 50 years now…
Indeed. I first felt it as a baby-boomer teenager in Laos and Vietnam in the mid 1960’s. The stupidity and general idiocy of our policies were demoralizing. VP Spiro Agnew’s resignation on blatant corruption charges followed by Watergate when I got home.
I was, ever afterwards, a solid, card-carrying non-believer by then. And have been ever since. There are more sociopaths in political positions and running Wall Street banks than the entire population of all mental institutions in the world. Pace.
It really shouldn’t be surprising that the people who reach the top of the sh*t pile are the sh*ttiest people.
We have crap incentive systems and crap oversight.
No wonder we have crap outcomes.
Like in every town. The real criminals are across the street from the jail in the courthouse.
The devolving crisis in the 21st century turned on a few drops of semen on a blue dress.
Call me stupid, but if I was a company CFO, you just told me I should be buying T-bills!
Because my job depends upon it!
Except that payroll, accounts payable and other working-capital needs can’t be funded through swapping T-bills. Although perhaps they should be?
WS,
Actually, I’m not entirely sure that T Bill funds could not be used for daily/weekly corp liquidity – T bill mkt is the most liquid in the world and the banks trade the hell out of it among themselves.
The banks do provide some additional cashflow services…but I don’t know if they really *have to* operate as TBill intermediaries for corps (after the corps deposit their money at the bank…what to you think the bank does with a big chunk of it…TBills).
There are a handful of Treasury Money Market mutual funds, sometimes hard to get into.
Read Zero interest Certificate of Indebtedness (CofI) at Treasury Direct. Takes about one day to transfer to a decent bank (i.e. BofA) and use to fund payments. Been doing this even before the coronavirus episode.
Dow up 1700 today on news that the end of the world isn’t coming after all.
Just Some Random Guy,
Yes, the stock market is forward-looking and reacts to the future. That’s why it reached a new high on Feb 19 even as all heck had already broken loose.
Wolf,
did you just imply the stock market’s crystal ball isn’t that good?
I find your lack of faith… disturbing.
Well said!
The concept of ‘Mkt forward-looking’ is the siren song broadcasted by by the Financial industry, when it suits them and the lemmings fall for it!?
The FDIC and NCUA are woefully underfunded to deal with the failure of just one medium sized bank or credit union, respectively. So the gubermint will have to print a lot of currency to fund those entities in a crisis.
Recently I conducted a review of the financials of two very large, military orientated, credit unions that are federally insured by NCUA. I was amazed to find that the total of unsecured loans (e.g. credit card loans) made by the largest credit union vastly exceeded ALL of its equity.
A good source for the financials of privately-held banks and credit unions is iBanknet dot com. They do a great job of organizing the financial data, including the amount of unsecured loans the bank has made and their amount of uninsured deposits, etc.
You might be shocked to see how reckless your small bank or credit union truly is, despite having an 11% equity cushion. I discovered one small credit union in Washington state that makes those more risky car loans only reserving 1/2% for loan losses. I couldn’t understand why their reserve was so low and then my question was answered a few months later when they announced a big merger with another credit union. They had to make their income stream look real pretty to their suitor.
Credit card loans of military personnel is in aggregated secured by their paycheck.Some may loose their ages but most will still be paid by Uncle Sam.
The FDIC is not woefully underfunded to deal with the failure of just one medium sized bank. It is in better shape than in 2008 when it handled the failure of IndyMac bank, a bank that had $32 billion in assets. Plus they handled hundreds of other bank failures over a several year period including Washington Mutual.
I still think the information gets out. One person can keep a secret….and that’s about it. Then the rumour mill starts. Rumour might be worse than transparency when it comes to banking confidence. I worked for some dodgy companies in the past and it was pretty obvious when they were on the skids.
Bank runs? My God, what’s next Bonnie and Clyde tooling up?
I’ve pulled a few months expenses out of the bank over the last few weeks. If it isn’t needed I’ll eventually deposit it back. Enough to get a curious look from a teller and probably have been reported to the feds, since anyone having a wad of actual cash is likely a no good criminal. Sigh.
Weary Patience:
They know.
Started with smaller amounts. Banks began running low, replaced withdrawals to “make an order” 1 week direct from the fed… now teller knows too.
Isnt it terrible feeling like you are a person of suspicion for physically holding your own fiat currency?
Even some stores have cash free commercials running through the speakers now. I rather pay cash and let you keep the change then have to swipe and then wipe my card today.
We have stores that offer 4% discount in a battle against CC companies who pushed the Cashless society only to raise fees on merchants.
I guess fed prefers we “invest” on double zero instead.
Some places around here are starting to refuse or limit cash/coins including the local dump and some of the close military bases. You get a dirty look or outright refusal when trying to use cash/coins, but they smile and approve when you pay with credit and debit cards.
Cesqy-no surprise, here. In the micro sense I return to when I was still in the work force at the moto shop. One of my constant chores was making sure ALL of my cashier personnel knew how, knew why, did always, and kept holy-counting change in closing a register transaction rather than relying on the reg to do it for them. This custom was in steep general decline, then (though the fact that our shop did brought many customers to us, revealed when we would quiz them on how we were doing), little wonder now (as I said, in the micro) that plastic is preferred from an investing less-in-your-employees-training point of view.
May we all find a better day.
Paulo:
Today’s world would leave 1930s Bonnie and Clyde totally befuddled!
But Lucy has Charlie Brown positioned perfectly!
I’m going to town tomorrow on a mask shrouded run for building materials. Will get some more cash at the same time. Thanks for reminding me.
Can’t say for a fact, but my guess is that cash is a likely conveyance of COVID-19, given how much it’s handled (fondled?).
thankfully the majority of my cash is covid-19 free. i lost faith in the banks years ago and made timely provisions…
I’ve always kept a few month’s worth of cash close by as a matter of course. But since mid-February, the amounts I pull out once or twice a week?….Run them through the hot water cycle of the washing machine and then use the hot level in the clothes dryer before filling up the envelopes again.
“What! Me Worry?”….Alfred E. Nuemann
@Charles N. –
You freely admit that you are guilty of money laundering?
[/joke]
Re, “Dirty cash”, Avoid coins, or pour boiling water on them.
Microwave cash until it’s steamy, about 15-20 seconds on fast heat.
I’m no microbiologist, but how can the virus survive that?
Maybe people’s fear of dirty cash could be exploited?
“I will take your dirty Twenties off you in exchange for a check…”
Today’s Bonnie and Clyde steal from the people and give to the banks. Think Yellen and Bernanke.
It’s all over the news that Janet Yellen suggested the Fed be allowed to buy stocks directly. Anyone want to take bets on how long until this comes to pass? (And I’d love to hear a good explanation of how the Fed directly buying equities would support their mandate).
Of course, the Fed doesn’t need to buy stocks when the market is soaring today for no reason. The official reason given is that there is evidence the lockdowns are working (deaths are leveling off). But if the lockdowns work to control the spread, then what comes next. I’ll give you a hint: we are going to need lockdowns for a long time ie the 12-18+ months it will likely take to make a vaccine. This is good news now?
Yellen suggested that several years ago. It was assumed the Fed was moving toward being more aligned with other central banks. Powell was a retro choice who turned out to have more continuity than was thought. This Fed is not independent, it is rogue. Perhaps that was in part a process, Bernanke walked back the employment benchmarks. They walked back rate normalization, balance sheet reduction, with no adherence to dollar or fiscal policy. The scattergun use of every tool in the arsenal, sends conflicting messages. Repo or Reverse Repo, but both at the same time? Congress is reluctant to act on the Fed when markets are under stress. Markets were up today in hopes for an OPEC agreement that energy prices will stop their slide and Fed’s zero interest policy will not create a glut that shuts down the US energy industry completely. Extend and pretend is not a good way to handle a pandemic.
The Fed is allowed to only purchase govt backed securities.
But who holds the Fed to anything..?
“Congress is reluctant to act on the Fed when markets are under stress”
or, when markets are good.
So, never.
I find it odd that the argument about renters not paying rent is framed as somehow a problem for the landlords more than it is for the people with no income to pay rent. Do large numbers of landlords have no savings? No investments they can draw on? Or have they just been spending like crazy at the expense of their mortgages on rented properties? If so, perhaps they deserve to lose those properties, given how unconcerned they were with actually treating it as anything other than a big fat asset they could leverage against.
Jonas Grimm,
Well, the article was about a banking crisis and what data about banks to suppress — not a household crisis. Two different topics to be treated in different articles.
Well thats easy to answer, look how long it took for our most vaunted mega corps to head to washington with hat in hand for a bailout! Everything in america is garbage from the top down. Everyone is broke. Hemmingway once said that bankruptcy happened very slowly and then all at once. We’ve been going bankrupt since 1970 and it happened very slowly. And now all at once. You could say the same of freedoms 9/11 very slowly, covid19 all at once.
“and renters don’t have to pay rent,”
As far as I know most states have only delayed mortgage payments not rent payments. Some have delayed evictions (yeahhh capitalism!)
New York state may be an exception.
I wonder if this is part of the recent melt-ups in stocks. Safer play to buy stocks than have non-FDIC funds sitting in some banks.
I doubt it. A company that needs to have $200 million in its checking account to fund its daily operations cannot put that money into the stock market because it wouldn’t be able to pay vendors or make payroll etc.
How does Buffett keep his $129 billion in cash?
Cash on the sidelines is a myth which is consistently refuted. Even with a cash buffer an investor may find themselves with paper which cannot be collateralized. This time perhaps anything with the word Treasury on it. The system freezes up.
because maintaining fraudulent asset values is more important than transparency which would allow people to protect themselves and their lives.
i love how this virus exposes true colors, by this logic why have public markets at all? lets just as a society never short or hedge anything ever again.
1) Today the sun was smiling on the Nasdaq.
2) The Nasdaq dropped from Feb 19 top 3206 pts and stopped
on top Feb 2018(L) @ 6630.67 support line.
3) Anomaly : today bar was twice as large than Fri bar, but volume was lower.
4) The Nasdaq was > Mar 13/ 16 gap, an upthrust on Mar 31.
5) The bounce from Mar low might be EW wave 4. If correct wave 5 is next..
6) There is an option that the market will move much higher, but the speed from Mar low is much slower than the speed of Feb/ Mar plunge.
7) So far the Nasdaq retraced 1281 pt, or +40%.
8) If wave 5 is next, it will go much lower.
40% snap-back on the nas? wow, so, how does the vix track with that, historically and now?
Michael, I’ve been waiting for this next leg down for the past week plus, it’s frustrating and depressing. I hope your right we are headed lower, I’m sitting on a ton of cash and want to participate in the next rally, if it every gets lower.. What are you thoughts?
The stock market can go down longer than you can hold cash. FOMO
Fellow Depressed,
I’ve only fired 1/6 of my dry powder out of the cannons so far. I have ammunition all the way down to S&P reaching 1000. Stay disciplined and patient. A wise man once said nothing goes to heck in a straight line.
I see Martin Armstrong’s target for a major reversal was surpassed today. His implication is that approx 17,000 Dow would be a good target.
Duh. Hello.
George Carlin anybody.
John Wick if you are slow.
Is all about dominoes and I am not talking about the pizza.
There is a real fear that having accurate information will kill enough banks to cause a banking crisis on top of the current one.
And the FED imaginary money scam needs a lot of banks to work like a well oiled machine, right?
Raxidian:
Aaaah, that explains the order for a new set of imaginary oil seals!
Paulo is right. Any business CFO who went through 2008 knows full well that his bank(s) could be at risk here. And there’s far more data available than just call reports.
Unless the Fed are now going to freeze trading in bank stocks, in order to obscure current share prices as well? Lehman and Bear didn’t go to zero in a straight line, so if you were watching, you had a chance to pull out.
Companies already have enormous issues to worry about, without adding in doubts about the solvency of their banking counterparties. Hiding insolvency might save a few banks, but it will raise the anxiety level of any competent CFOs and trigger pre-emptive defensive measures.
The only thing I see that will work here is something like a zero-interest deposit with TreasuryDirect. A place where corporations can keep their working capital intact and not have to worry about how stupid (or merely victimized) their bankers may have been vis-a-vis the virus.
Problem with treasurydirect is that you don’t want them to remove their money from the banks and treasuredirect would do that
The problem here is Wolfe is discovering too many straight lines!
funny how the watchword — which once was transparency — is now ‘opacity’…and, could ‘diversity’ be next dispensed with by ‘conservancy’…PJS
Eventually there will be bail-ins and no depositors bank assets will be safe. I firmly believe that. We only keep enough in our checking account to pay bills. Larger savings amounts are held in capital preservation accounts in Credit Unions (sill only FDIC Insured up to $250,000). This won’t matter when the financial system finally implodes. FDIC Insurance won’t be worth the toilet paper it’s transcribed on.
I’m looking more thoroughy into Crypto currency as the coming future. Not only for safety & security but also for privacy. It’s the next big thing as more & more lose confidence in governments & the fiat monetary system. Monero is one such crypto that I was just introduced to.
Stay safe, stay free, question & challenge everything you’re being fed from Leviathan.
Double D,
“I’m looking more thoroughy into Crypto currency as the coming future. Not only for safety & security but also for privacy.”
You’re worried about your FDIC insured bank deposits and you’re looking at cryptos as an alternative? Hahahahahaha… that was a good one. Bitcoin is down 63% against the hated fiat dollar. Ripple, once the number 2 or 3 has collapsed by 94% … those people already got “bailed in.”
you forgot to laugh at the “privacy” part too!
I’m not an expert on the numbers behind banking. The FDIC was made to back deposits, and last I checked it was not big enough to back all deposits.
If it is possible to get the FDIC account to be that big, it should be a legislative requirement. It’s just another capital requirement.
If you do that, and a couple of other things, bank runs, which this opacity is meant to prevent, should already be prevented.
I’m not sure if I have that right, but as usual, the remedy seems simpler than the powers that be would have us believe.
Then there’s the pension benefit guaranty corporation. It should have the same requirement.
This might limit the profitability of certain financial institutions, but maybe that’s the way it “should be”.
wkevinw,
“The FDIC was made to back deposits, and last I checked it was not big enough to back all deposits.”
So here is my copy and paste answer (please read it carefully):
People who say this don’t know: 1., how banks work; 2., how the FDIC works; and 3., how insurance works. Or they don’t want to know because it’s a lot more fun to go around fear-mongering. So let me explain…
When a bank is taken over by the FDIC, stockholders and their capital instantly get “bailed in” and wiped out. The FDIC gets all the assets and takes care of the liabilities in accordance with their place in the capital structure. The secured creditors are taken care of first from the proceeds of the asset sales. And there are always lots of assets left to cover at least some if not all of the insured deposits (unsecured liabilities).
Bank assets are things like mortgages, other loans, investments, reserves at the Fed, Treasury securities, and the like. The FDIC sells these assets to other banks, sometimes for cash, but often in exchange for these banks taking some or all of the deposits (liabilities).
So Bank X is taken over by the FDIC Friday evening, and over the weekend, the FDIC makes a deal with Bank Y where Bank Y buys for example $10 billion in assets and pays for it by taking on $10 billion in deposit liabilities. There is usually a premium that allows Bank Y to make a little money on the transaction.
In other words, the FDIC sells off Bank X’s assets and uses the proceeds to pay off the liabilities, including deposits to the extent possible.
Most of the time, the proceeds from the asset sales cover most of the liabilities, including most deposits. Some deposits that exceed the $250,000 limit, are not insured and depositors might take a haircut (often something like 10%). And the FDIC only has to fill a relatively small hole with deposit insurance.
Comparing the amount in the FDIC fund to the total amount of deposits (liabilities) is total BS and completely ignores the biggest factor: the assets at the banks. The US banking system has nearly $18 TRILLION in assets. This is what the bank-fear-mongers willfully ignore with their BS.
In addition, the FDIC is the US government, which is backed by the Federal Reserve’s printing press, which will never allow the US government to run out of money.
Even during the BIG BAD financial crisis, no FDIC-insured depositor ever lost a dime.
In terms of insurance:
If, if, if… If every car in the US got into a fatal accident at the same time, all insurers would be instantly bankrupt, and payouts would be nearly nothing. But the chances of all cars getting into a fatal accident all at the same time are nil. That’s how insurance works.
FDIC is insurance. The chance of all banks collapsing simultaneously is essentially nil.
I have been through 3 bank collapses including what was then the second largest one ever (MBank in Texas) and later Wachovia during the Financial Crisis, and I have never lost a dime. Actually, I didn’t even know the difference, except that the bank’s name on the deposit changed.
This fearmongering about the FDIC is not based in fact, but shows cluelessness, and has no place on this site.
Thanks for the response.
I plainly said I am not an expert on this.
Best.
Panic is the real issue. People are lemmings, and once spooked will all run right off the cliff. If they freak out over toilet paper, can you imagine the panic over a bank scare?
As an example of a bank run in my lifetime, I remember the run on Rhode Island credit unions and their collapse in the early 1990’s. People didn’t start to line up outside in the hopes of getting money out until they saw it on the front-page of the newspaper. By then, it was too late.
It gives a whole new meaning to “bank-rolling” something!
So AirBnB operators can’t make their mortgage payments and have to sell the house or get foreclosed. Gee, that’s too bad.
The banks the lend money to the AirBnB operators have to keep the mortgage default opaque to the big banks like JP Morgan, at least until they go under and then JP Morgan loses all their money. Gee, that’s too bad.
AirBnB ceases to exist. Gee, that’s really too bad.
AirBnB just got a $1B infusion from private equity. They are also ‘Too Big To Fail.’
AirBnB has a great advantage: it won’t go bankrupt. Their hosts will, especially those living a grey area of legality in countries like Italy and Spain that means no bailout.
Those rental properties won’t disappear overnight: they’ll go on the market, most likely at rock bottom prices, and quickly return on AirBnB under new management.
The world won’t end and it’s very likely we have overreacted a tiny bit, both with lockdowns and the bailouts, but we’ll pay the consequences of the former over the next six months and of the latter over the next couple of years. Handsomely so I may add.
There are no weak banks in this crisis.
100% TBTF
So invest with confidence- suckerz.
We will decide who survives afterwards if any of them fail from ineptitude.
Same with the Fortune 500.
Only commercial property will fall, along with residential.
Someday this war’s gonna end…
Weak banks failing is probably the best thing that can happen.
It will hurt, but things should get better eventually.
Great post Wolf.
I totally agree with your criticism.
I’ve never understood why the Fed goes to such extraordinary lengths for the sake of preventing money-center banks from experiencing or suffering from the feeling of “stigma” — which the Fed fears *might* occur if a large bank has to admit to being undercapitalized.
Think of the extraordinary lengths to which Bernanke went in 2008 — creating new policies, credit lines, lending programs, etc. — all for the avowed purpose of preventing particular banks from (possibly) feeling “stigma” in its relations with counterparties.
That regulators go to such great lengths is just fantastic to me, unbelievable.
When did preventing banks from feeling “stigmatized” become part of the Fed’s mandate?
Once the lower and mid income citizens gets a taste of their $1,200 checks from the IRS, there is no going back. This will be the new normal because voters will demand it.
Yep,,,,MMT on steroids.
Is that $1200 per month or $1200 per week? Just asking so I can reorganize my budget.
Quick question that this post raised for me. I keep FDIC maxed out accounts with a few banks, at 1.6 and 1.7 interest.
Is that risky? Should I just suck it up and take my 0% from Treasury Direct?
Thank you!
Joe in LA,
FDIC insured amounts are fine. That would be the last thing I’d worry about these days.
Wolf, In this greatest time of uncertainty in my lifetime, 71 years, I’m not sure anything is fine. When we come out of this nightmare we maybe living in America 2.0, a term coined recently along with covidiot. By nature Americans of my generation and after are used to comfort since WW11, the better term maybe spoiled.
I’m in the room with my 94 year old mother dying in a day or two, she knew the contrast between comfort and uncertainty after living through the Great Depression and WW11.
America 2.0…indeed.
Face masks from this point forward for trains, planes and buses.
and that’s just for starters….
sporting events?
2.0 will not be pretty
FDIC should be abolished and all citizens should be allowed to have a cash deposit account with the Fed that will pay the fed interest rate and be totally risk free.
Let all other private banks compete in the free market for depositors by offering interest rate commensurate with risk and let citizens freely risk their money without any bailouts for the banks or the depositors.
This will immediately put our society on sound financial footing.
But it wont happened because our government is captured by the financial vampire squids.
Before my time, but I think that was known as U.S. Postal Savings. AOC mentioned something like that about 6 months ago.
Millions of checking accounts centralized in one institution?
One tiny thing goes wrong with the record keeping system, then what?
There is overriding value in decentralization, sometimes.
Could a very large company even begin to take all of its money out of banks? Where conceivably could it go? Its inconceivable to pay your employees and vendors in cash or coin. Treasuries? Hahahahahaha. I recall there was a ‘white paper’ that made some waves back in 2008 which attempted to address this very real problem when it first surfaced during the Great Financial Crisis. The author’s name escapes me, Wolf…. Samauri or something like that?
The company could take its mega-deposits from BofA to JPM, not problem, and if enough companies do that, BofA will be in trouble and JPM will shine.
I will gladly concede that bank balance sheets are not my area of expertise. As a result, perhaps I’m just naive, but I suspect that most of the big corporate players know quite well which banks are weak. Am I wrong about that?
Also, isn’t there a risk that opacity could backfire and leave all banks under suspicion? A bank need not be weak to suffer a run. It may suffice that it is merely perceived as weak. Can someone more knowledgeable than I comment?
Runs on the banks happen when corporations, financial entities, and counterparties lose confidence in the bank and yank their millions and billions out.
And where do they then deposit those funds?
Is Chase Safer than Bank of America?
I doubt credit unions are viewed as an option for large institutions.
I doubt foreign banks nor off shore banks are considered as options either.
If you need daily access to your funds treasuries won’t work either.
Local and Regional banks such as Zions, TCF and Apple bank etc are the banks most at risk.
That’s precisely how runs happen, when deposits go from bank A to banks B through Z. And there are lots of banks to choose from. And it’s true, some banks are a lot riskier than others. The hard part is finding out which is which.
It is not the real estate mortgages or credit cards that will produce a bank run now (maybe in a few months) but the collapse of oil companies, especially shale. That can go fast if oil demand is not restored fast.
Thinking out loud here. If banks operate on 10x leverage (i.e. 10% reserves) lets say bank A loans out depositor Joe’s $1,000 ten times. Now lets say of those ten loans 30% fail.
Wont this bank still make $$$ b/c it only started out with $1000 and the other 10 loans were just basically made up loans???
bruce,
That’s not how it works. A bank can lend out the cash from a deposit only once. Until the rules were changed a week ago, it couldn’t even do that. It could only lend out 90% of that deposit, and the other 10% of the cash had to be kept as reserves (either at the bank or deposited at the Fed).
“Leverage” means liabilities in relationship to “regulatory capital” (a form of equity). Deposits are liabilities. Reserves (cash) are assets. If a bank can operate at “10x leverage,” as you say, it means it can lend out 10x its “regulatory capital,” not 10x its liabilities.
Greetings from India Wolf ,
Bank run by corporates , local authorities and state goverment, this clearly resembles the recent collapse of Yes Bank, the forth largest non-goverment bank in India. Just last month the bank had to be bailed out by RBI by mostly through funds from government owned State bank of India. And just before bailout the bank was suffering from run on the bank by corporates who were taking out their deposit en masse. Thus RBI had to resort a very fast and messy bailout. Of course post bailout another big bank named Indusind Bank in now suffering from run on the bank as now state governments are withdrawing their money from this bank. Indusind bank has lost 10-11% of its deposit after Yes Bank collapse i.e. during the last months. Read this:-
https://www.livemint.com/market/mark-to-market/a-battered-indusind-bank-lays-bare-rbi-s-financial-stability-challenge-11585634396063.html
Before the Yes bank another bank called PMC bank had collapsed because run on the bank by corporates though it was very tiny compared to Yes bank, which is clearly a TBTF.
Of course “audited” balance sheet of both Yes bank and PMC bank before they collapsed looked very good and strong because banks were hiding bad loans with all sorts of shenanigans and reported very low level of NPA. However, people who withdrew their deposit seems to have studied banks loan books to assesses banks actual NPA level and determined that these banks are not safe for their money.
I wonder whether all this “empirical evidence” is nothing but a smokescreen and collapse of these Indian banks is what prompting new york fed and FDIC to make banks more opaque and limit information to the public?
If we have a Virus running amok. Doctor’s test to know where to stear their attention to and to try to contain the outbreak. So long as we don’t know where the biggest problem is and so long there is no cure, the only tool we have is social distancing as our medicine.
When we have debt running amok the financial doctors stop testing, because they don’t want (us) to know where to keep away from. (they only test in good times to show nothing is the matter). Instead attention is steared away from the problem, because they are afraid of the medicine the banks don’t want us to use: “financial distancing”.
Wolf. Would you consider shorting again? The Nasdaq seems incredibly overvalued
No, not considering it. This is way too crazy for me.
Alfred E. Neuman once quipped, “what me worry”? Where was he when you needed him?
Wolf, you should definitely read my tome again. I think you will see it in a different light. For example, do you remember the following?
“What we are witnessing are the final stages (the outcome, the moment of truth) of the completely experimental “trickle down” economic model that the Fed and other central banks unleashed in ’08 – ’09. It is described as follows in the Fed’s one-page Bible.
“First, there was only darkness. Then God said, ‘Let there be light.’ Then God said, ‘Let there be a firmament in the midst of the waters, and let it divide the waters from the waters.’ Then God said, ‘Let there be banks.’ Finally, God said, ‘Let there be man.”
As you can see, contrary to what one might expect, there is no complexity to this completely new, wildly-dangerous economic experiment. It all boils down to this: TBTF banks come first; humanity later. That is, Humanity’s Ultimate Purpose is to serve the TBTF banks; not the other way around. Before humanity will be allowed to enter Heaven On Earth (Utopia), TBTF banks must first control everything.”
Why stop with banks? Why not just hide all data from all companies – except the good news, of course.
If you don’t know that your portfolio has lost half its value, you’re less likely to sell.
This is just absurd.
John Malone, billionaire and former CEO of TCI, had over $200 million in the Primary Reserve Fund when it melted down in 2008. He was bailed out, and is but one example of the type of “institutional customers ” this piece refers to. He kept his money in too long, likely because he couldn’t get reliable information about the condition of the fund. The moral hazard created by this opacity borders on criminal.
I always feel that I will learn something each day that I read our blog Mr. Richter.
This is a good one.
Casting the “opaque” plan over banks books can only end up with the exclamation:
“DUH”
Have a good day and all stay healthy and safe!
Greeting from Montana:
I have always “wondered” about the inter workings of FDIC and “Bail-In” authority now active in the USA.
To wit:
You have $200,000 on deposit in Bank A as an individual (no trust)
Bank A sucks eggs on it’s derivatives one day, say Thursday (GMT)
At 4 PM local time to Bank A, they invoke Bail-In for 50% of deposits
On Friday 9 AM local, Bank A dips in for another 50% of original…
Your “balance” as of 9:01 AM local time is now ZERO – via Bail-In.
By 4 PM local, the Fed/FDIC moves in and seize Bank A…
Finding your account balance of record as/at ZERO…
The Derivative counterparty now has your money via SWIFT Wire, legally during the hours “before” 4 PM local time..
Does not FDIC now only have your recorded balance of ZERO for it’s calculation of any value due you? Have you any recourse at all??
Naw. That’s your fiction. Doesn’t work that way.
1. The FDIC does the bailing in, not the bank.
2. The first entity that the FDIC bails in are the stockholders, who lose instantly everything. When the FDIC moves in, it takes down the bank as an entity. What’s left are assets and liabilities.
3. If a bank employee cleans out your account, it’s basic fraud, and it’s easy to detect and prove. And the bank has to make you whole.
4. Bank records don’t just disappear, as they do in your fiction.
Mr. Richter, I agree that letting the FDIC insured banks hedge their loans with CDX derivatives is just transferring the risk to another entity who could end up like AIG with the Federal Reserve ultimately picking up the costs. The repeal of Glass Steagall started the US down this road. Paulson tried to rebuild the banking sectors equity with the $787 billion Stimulus act in 2008, which still wasn’t even close to being enough. The final solution was to nationalize the investment banks giving them unbridled direct access to the Federal Reserve. The banksters are now the ultimate bookies running the US financial system with the Federal Reserve as their backstop.
where would a corporation put it’s cash if it decided to withdraw it’s 100
million? Another bank? I’m assuming straight cash is not the answer.
What form of currency would it be?
Yes, exactly. That’s how a weak bank collapses. Deposits go out of this bank into other banks.