The Fed ended Free Money, and the only thing it broke is the consensual hallucination that spawned during the Free Money era. And look what we got.
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It’s been an absolutely wonderful day for picking up fantastic going out of business fire sale bargains in the world of banking and UBS (the largest bank in Switzerland) scored big time with an 80% off book value ($8.9 billion) dollar deal to pick up Credit Suisse for only $2 billion this morning. Warren Buffet is now earnestly looking about around 200 mid-tier banks for some terrific bargains which may be announced as early as tomorrow morning! Warren will be shopping for banks all week and into the rest of this and if anyone knows about running banks and instilling expertise, it is certainly is Warren and crew!
Any time Uncle Warren is “used” to instill faith in the system, its a pretty good indication that things are not going well.
In this case, letting shareholders of these smaller banks know that should they sell their shares, Warren may be right behind buying the back up.
+1 to Mike R, when long bloated valuations meet reality, it’s not called “cheap”, it’s called “corrected”.
Bravo Wolf!!!!
Brilliant video!
Consensual Hallucination is Heroin Addiction.
Very, very difficult to change free-money drug addicts into working for a living, honest citizens.
It is far, far easier to get hooked to addictive drugs than getting off.
Warren knows how to pick up a good financial company cheap. Picked up American Express shares fo $2 I think when they got caught up in a scandal. He is limited to 10% stake in a bank I believe.
I feel like I can value Berkshire pretty good. Probably only mid single digit long term return at $300 per share. Need to pick it up during a recession to lock in hope of long term 10% plus annual returns. Anyway its a stock and nothing is guaranteed.
I agree but what is up with the OXY purchase he keeps adding too?
We’re not going to stop needing oil in any of our lifetimes.
Did Warren call and tell u this personally,or is it just speculative BS
Its a little b.s. but Buffet has built a big lumbering compound machine of completely owned companies plus stocks. This year its operating plus what he calls look through earnings of the stocks he holds is about $38B and current market cap is $645B. That rounds to 6% if you pay today’s market price.
To get long term 10% you need market cap to fall to about $380 billon and hope the long term compounding machine continues.
These suckers are still waiting for the pivot, they feel entitled to it!
Any investor (individual or professional) who bought 10/20/30Y treasuries back during the pandemic with ultra low rates & high prices were crazy. They should have known that it wouldn’t be long before the Fed started to raise rates, thus putting downward pressure on their bonds’ value. It was just CRAZY to buy into anything more than 1-2 year bills & notes. At least you’d have a better chance or letting them mature before you really needed the cash. Just absolutely horrible decisions to go so big into long-dated bonds with investments you know you weren’t going to hold to maturity.
Yes, protecting these incompetent banks is equivalent of providing insurance to Fed Pivot bets.
When stupid bets start making printed money through FDIC insurance claims, we can expect more stupid bets.
Buffet has pretty good logic about not buying long term treasuries. His logic seems to be if you are a company you can never run out of cash.
If you borrow, borrow long so that you only have minimal servicing cost. Keep a huge chunk of money in t-bills in case banking system seizes up and for deploying in recessions. Long term investments should be in businesses that have the pricing power to keep up with inflation which a long term treasury does not have.
“Any investor (individual or professional) who bought 10/20/30Y treasuries back during the pandemic with ultra low rates & high prices were crazy.”
That should have been obvious to everyone. Brains turned to mush.
What did these investors think as long term bond and MBS rates dropped to close to an all-time record low of zero?? That they’d keep going into negative rates? I guess some of the most crazy thought negative rates were possible.
What is really crazy is that the US government Fannie and Freddie assumed almost all of the risk for mortgages, They packaged them up into MBS’s and sold them to banks. Now the banks are still failing due to buying too many worthless MBS’s. Is this called irony or stupidity?
The banks have a stormy future. They hold commercial loans that have low rates and many are defaulting due to WFH. They also purchased house MBS’s which put them in a riskier position earlier than if they actually held the mortgage.
The geniuses at the banks decided to fight the Fed and they are losing. Actually, the bank officers won biggly and are walking away with all of their massive bonuses and stock options.
Why the f is Too Big to Fail still a thing?
Were Dodd Frank, Basel III, the yearly stress tests, living wills, etc. all for show?
Credit Suisse just passed its 2022 stress test. Now it’s getting bailed out by UBS & the SNB because apparently a bank that’s been struggling for years and has already been priced for bankruptcy ($2/share) is “too big to fail.”
Not a bailout for shareholders, LOL. Looks like shareholders are getting nearly wiped out. The offer values CS shares at CHF 0.76. On Friday it closed at CHF 1.86. So that would be a takeunder for shareholders, instead of a takeover.
Back in 2007, shares were still at CHF 80.
SNB offered some backstopping to UBS to take this thing. Too much uncertainty to evaluate the books over the weekend.
Bargain hunting is a classic money-making activity. Nearly anything can be a bargain if you can buy it at the right price.
I’m glad. It finally gets CS out of my hair. Four days ago, I wrote this in a comment:
Credit Swiss has been teetering for years, for as long as I have had this site, which is over a decade, during which time is has been hobbling from scandal to scandal, each time losing billions along the way, and each time, its shares get beaten to a new record low. The SNB is not going to let it collapse, but they could bail in shareholders (there isn’t much left) and contingency convertible bondholders and other unsecured bondholders to recapitalize the bank and make it shrink further. TBH, after a decade of this same thing over and over again, I’m just tired of Credit Suisse. It needs to get out of my hair.
When politicians around the western world promised “no more bailouts” after 2008, it was understood to mean no stakeholder (equity holders, debt holders, employees, customers) of a failing institution would need to be backstopped, either explicitly or implicitly.
I understand this time around, shareholders are eating the losses, but governments & central banks are still doing a lot of intervention.
Private-sector bailouts (LTCM, First Republic Credit Suisse) are less offensive compared to taxpayer-funded rescues, but the whole purpose of stress tests & living wills is to make them unnecessary.
It’s frustrating that government always puts bad incentives in place, then looks to regulation to keep things under control, when they don’t have the smarts or budgets to regulate. It’s much simpler and less costly to take bad incentives out of the system in the first place.
What the banking system needs is increased capital requirements, say 3x today’s levels. That would be more effective than 100,000 regulators.
I realized that I was one of the dummies that rode Credit Swiss down to sub $1. I always keep at least $20,000 in Vanguard Total International Fund to have some diversification out of USA. I didn’t work out my loss from the top but maybe somewhere around $100. Probably millions like me were shareholders without really thinking about it.
CS should have been taken out the back and shot years ago. There isn’t a banking scandal in the world that CS wasn’t involved in, it seems. Their risk culture was simply beyond salvage.
Deutsche Bank says: “I have such sights to show you!” :)
In most things today, there exists a strong “consultant culture”, expressed by proposing what is politically possible “to sell” instead of proposing what is required and necessary.
“Politically possibly” is typically 30% underfunded, obviously things will keep blowing up going down the road. This is normal – and even expected. We might get used to it for an easier life!
Wolf-
What do you think about the plan to wipe out the AT1 bondholders while still paying out shareholders $3bil? While I shed no tear for either one, it does seem unfair that shareholders get something (~40%) while bondholders who are nominally ahead of them in seniority get nothing.
Even from a purely practical perspective, this jumping of seniority status reduces confidence in other bank bondholders probably leading to sales of the bonds and — more importantly — higher interest rates for banks that issue them. If you’re the Swiss authorities and you want to calm nerves about bank solvency, the last thing you should be doing is needlessly raising the cost of their capital…
They’re wiping out shareholders too. That’s just pennies for each share, they’re down 99% from 2007.
Those AT1 (additional tier 1) bonds — aka contingency convertible or CoCo bonds — are designed to get bailed in when the banks gets in trouble, like preferred shares (see SVB) in the US. And that’s why they typically pay a higher yield.
Normally, holders of AT1 bonds get bailed in after shareholders got bailed in. That shareholders are getting a few pennies and AT1 holders aren’t even getting a few pennies is controversial and may eventually get litigated.
Personally, I don’t care. We’re just talking pennies. I’m just glad CS will finally vanish.
Okay, what the hell.
As I am soon-to-be-retired I’ve been looking at the yields on bonds recently and planning to go safer with my investments by purchasing some.
I’ve never seen any reference to AT1 bonds, or co-co bonds as you called them, before reading these comments. I’ve been on the fixed income page of my investment account and see no bonds described as AT1.
What makes these bonds so odiferous that commentators would cheer these bond holders getting wiped out?
CoCo bonds are commonly used by European banks, and they count as regulatory capital (additional tier 1 capital). In the US, preferred stock is used in a similar way. They both pay higher yields than bonds that are higher up the capital structure, such as senior secured bonds. When the bank gets in wound down, they’re treated like shares usually, which are usually zeroed out. So the risk of getting wiped out is generally about the same as with shares, but you collect a higher yield as long as the bank is doing OK.
My guess is they ripped off the saudis
While it is too early for anyone to have fully analyzed the UBS-CS deal, it is striking that the CS common shareholders are getting UBS shares while the CS AT1 bondholders are getting nothing. This is an inversion of the normal priority. Why is this happening?
My thought is that there was no deal acceptable to UBS that would have not have resulted in a lawsuit from AT1 bondholders. Since UBS was going to get sued anyway, and any such lawsuit would probably get settled by negotiation, UBS thought it best to start the negotiations at zero.
Does anyone else have any thoughts?
That one gets a few pennies (-99% from 2007 price) and the other doesn’t even get a few pennies, when both should have gotten 100% wiped out, is going to get litigated.
They would have had less of an issue if they just wiped out both. Then the bondholders couldn’t complain. Sure CS was trying to get something for their shares (probably since executives I’m assuming have a lot of previous compensation tied up in CS stock) but they weren’t exactly in a position to negotiate.
The real question is why did FINMA allow UBS to pay the shareholders and not the bondholders. My two theories:
1. CS shares are held by lots of Swiss retail investors. AT1 bonds are generally not sold to retail. They’re supposed to be held by professionals. So politically it’s easier to give a few pennies to Swiss voters than allocate it to hedge funds and other professional investors.
2. The Saudis own 10% of the bank. Perhaps they felt the need to pay them back something.
Wolf, you keep saying it’s pennies on the dollar regardless but that’s not quite accurate. CS share price months ago has been down 90% from 2007 i.e. most of the 99% decline you cite happened over years, leaving plenty of time for stock investors to get out. I believe the AT1 bonds are trading at close to par just a couple of weeks ago. So the loss definitely stings more.
Regardless I guess I’m glad that both took a hit, as they should. But I wonder what these decisions will do to the bond market come Monday morning. Will any bank be able to issue AT1 bonds again? Who would buy them knowing they have less seniority than equity?
They always seemed like a stupid buy to me (classic picking up pennies in front of a bulldozer) but now, they’re confirmed to be riskier then equity. I could easily see investors fleeing bank bonds thanks to the uncertainty now of where exactly in the seniority ladder they stand.
We live in a time when long-standing norms, social contracts, and promises are no longer respected. Instead of accountability and responsibility, we get hidden agendas and narratives.
Either way the CS deal has just killed off AT1s/CoCos and they are in for a dramatic repricing and/or will never be issued again in their current form
Simplistically, UBS gets CS for -3 (equity) + 16 (AT1). If you accept that was a good deal, the old (well ~10 years old) bail-in hierarchy would suggest it should have been 0 (equity) + 13 for the AT1s.
Where am I wrong that the current deal has upended central banks design of AT1s, presumably for political expediency (forget whether it’s a good or bad deal for a moment)
What arguments will UBS put forward for legally rewriting the hierarchy. Time to get the legal popcorn ready for the fireworks show
The issue is not one of liability, but of damages. The AT1 bondholders should have been paid before the common shareholders. But how much?
The common shareholders got $3.3 billion in UBS stock, compensation that should have gone to AT1 bondholders. So a reasonable outcome in the end would be for UBS to issue $3.3 billion in common shares to the AT1 bondholders…
The Credit Suisse shareholders are being given the UBS shares on a 22 to 1 exchange basis as a mere tiny token in this deal.
Indeed, and $19 Billion in Credit Suisse Coco Bonds are now wiped out and worthless.
@WolfRichter:
IMO – Nearly every publically traded company has been hobbling along via reverse splits, pulling off the shelf shares or merger for as long as there has been public trading stock operators.
Each time the ‘public’ is fleeced in favor of the Kings and their Kings (who shall not be named).
The PPT has become so front and center – no longer hiding – that the rug pull crypto reset is upon the public: if you let it. MadMax and Barterville was our future lesson: project plan.
Yellen, Powell and Lagarde praise fast action by Swiss officials to ensure Credit Suisse deal
Now Elizabeth Warren wants to raise FDIC insurance and premiums. That’s how the BOJ created a lost decade. It has unlimited deposit insurance. That destroys Vt.
–Danielle Dimartino Booth’s book: “Fed Up”, pg. 218
“Before the financial crisis, accounts were insured up to the first $100,000 by the FDIC. That limit kept enormous sums in the shadow banking system. After the crisis, the FDIC raised the insured account limit to $250,000.
Spencer,
Unrelated to this comment here… your comments fall into two categories: 1. excellent comments on various things; and 2. comments that promote some kind of crazy economic theory (that I cannot figure out where it’s coming from). And I block those comments.
When I first started the predecessor site, and even in the early years of this site, I had lots of comments that promoted the principles of MMT (without actually naming MMT). I didn’t realize it for the first few years, but as I got wiser about this stuff, I saw the pattern. So I reached out to these commenters via their log-in emails. I suppose most of them were fake. But one of them actually worked. He replied back and said he was an old guy in Australia making a little money posting these comments. A paid MMT troll. They were swarming the blogs. That’s how MMT became a big thing in the blogosphere. I’ve been blocking all comments that promote MMT principles since then.
But the theory you’re promoting is not MMT. I don’t know what it is. But it’s pretty crazy. Maybe some professor is trying to do with his theory what Prof. William Mitchell (University of Newcastle, New South Wales, Australia), was able to do with his MMT.
Can you give me any clues, such as which economics professor is trying to promote what theory?
The MMT cult is pretty damned sure that a country can print till the cows come home, which has never had very good results.
Blows my mind that MMT would have paid shills posting on blogs. I never really cared about MMT, since it just seemed like a philosophical take on the role of money or an explanation for why governments can get away with huge deficits. Then I’d hear it in popular media as a synonym for unlimited spending (“Bernie is going to do MMT”), which is kind of silly. Is there an article on these blog shills somewhere?
Maybe start with all the badly NEEDED “modern miracles” we all now enjoy thanks to genius entrepreneurs getting filthy rich using…….drum roll…… FRACTIONAL BANKING?
Just a crazy thought, I’m sure.
Meanwhile, like any good consumer, I look forward to my self crashing car, huge new churches and homes, my talking refrigerator, drugs that cure ANYTHING, and long intelligent conversations with my AI box, to name just a FEW wonderful and exciting things coming…
……..on behalf of those not yet born, of course……
Wolf, A few years ago, when Biden was deciding on who would be Fed Chair, Lael Brainard wanted the job. She spoke favorably of MMT then .
Perhaps she was currying favor with all the free money advocates in Congress.
Nevertheless, she never got castigated for her those comments. Instead she got promoted, to Head of Biden’s Economic team.
She needs to answer for that. Why do the Fed press always give her a pass?
And npw unlimoted insurance
Not to defend the bankers, but aren’t they obliged by regulations and financially driven by the nominal risk weighting to hold treasuries? I kind of assumed banks (insurance companies, pension schemes as well) were forced to maintain treasuries as reserves irrespective of preference.
When Bernanke became Fed Chairman in early 2006, Federal Reserve assets were $836B. Fed assets skyrocketed to $4.0 TN in Feb. 2014 by his departure. Fed assets peaked at $8.97 TN in April 2022.
Federal Reserve Total Assets up $297 billion last week to $8.639 TN. While this is happening the, Treasury has drawn down its General Account over $611B since last April, almost exactly the amount of QT. The trends are basically unstoppable, and the prior peak in Fed assets is going to be soon bested. Look for $10-11T by year end.
Unrestrained Fiscal spending, slowing economy hitting tax receipts, the already vast and growing tentacles of governenment loan guarantees, higher aggregate net interest rates paid on US debt as maturities roll forward, and more – Fed Money Printing over the long haul is basically unstoppable.
Our entire economy and its long term and growing obligations, are tragically very similar to our current banking system:
great credit ratings, with a terrifying mis-match of short term demand deposits(government spending) vs. long duration system assets(present value of future tax revenue vs. present value of future spending), going ever deeper in the red.
As of last Thursday, the Treasury’s GA only has $285B, and it’s a long way until early June when D-Day arrives.
Worldwide “coordinated” USD swaps?
The new pivot?
When does inflation hit 15%.
When does ole Yeller and Powster reign to Ms. Warren?
ZH is blasting non stop tweets about the fed capitulation and new qe. It’s nauseating. I rely on wolf for my sanity.
Yeah, I’ve had it with ZH anymore. They have been wishing and hoping for a pivot and spewing that BS for almost a year now. I used to like ZH, but something has changed.
For a decade ZH blasted QE (rightly so).
But when the FED raised rates, it was ZH that pivoted.
Call it “non domestic” propaganda. Good riddance.
ZH needed money. Crypto-bro’s, Accellerationists and of course Russians/FSB had money. So ZH stopped cirkling and went down the drain for good.
The other comments in reply to yours already covered most of the points that I would have made, but I would add that ZH had been in decline for a long time. You may recall that when it first was around from about 2009 until 2012, it had very high quality analysis. Then it went through a populist phase until about 2017, and the articles weren’t quite as high quality, but sometimes there were still good articles. Then during the Trump years and through the pandemic it really seemed to lose the plot. It reads more like propaganda / disinfo than news (sadly, a very common thing these days). Since the new era of the Fed starting last year they’ve been consistently wrong about everything. I don’t even visit the site anymore.
Wolfstreet and Zero Hedge I say they’re the two best sites on the internet.
Maybe I’m bi-polar ? ha
Danno,
1. Those swap lines have been open for many years, and I have been reporting on them monthly in my Fed balance sheet update for a LONG TIME. And now they’re new? LOL
2. Swaps are not QE; they’re an exchange of currencies. 7-day swaps unwind after 7 days, the Fed gets its dollars back, and the other central bank gets its currency back.
3. not “worldwide”: but Bank of Canada, Bank of England, Bank of Japan, ECB, and the SNB.
4. Today they changed when the 7-day swaps can be initiated. Used to be once a week. They changed it to any day of the week.
5. The change seems to be designed to give dollar liquidity to SNB (in exchange for CHF) for the UBS-CS deal on Monday.
6. The SNB last used those swap lines in Oct 2022 to provide dollar liquidity to CS. After a few weeks, the last swap was unwound and the balance was 0.
This is the exact wording from the Fed:
“To improve the swap lines’ effectiveness in providing U.S. dollar funding, the central banks currently offering U.S. dollar operations have agreed to increase the frequency of 7-day maturity operations from weekly to daily. These daily operations will commence on Monday, March 20, 2023, and will continue at least through the end of April.”
Thank you for setting me straight Wolf!
Wolf, you know I’m a total fin dummy, but per #2 above “the Fed gets its dollars back “, is that not inflationary for the US? Is that why you think rates will still go up? I’m confused..
No, the Fed exchanges (“swaps”) US$ 1 billion with the SNB for CHF 925 million. Seven days later, the Fed gets the US$ 1 billion back and returns the CHF 925 to the SNB. The Fed charges some interest for this, currently ca. 4.8% APR. That’s all it is. But this way, the SNB can give temporary USD liquidity to CS. It did that last October for a couple of weeks. And it looks like they’re planning to do it for the USB-CS deal today.
Pro pivot types are saying it’s capitulation with more to follow. It better not be. I’m sure Wolf will enlighten us.
There is no Fed pivot and no new QE.
So far, QT is controlled demolition. Blowing up reckless bankers is what QT does. With ongoing QT, insolvent banks can now borrow at the BTFP. Expect reserves to decline further due to ongoing QT, an almost drained TGA account, and a rush to MMFs (look at past recessions; when unemployment rose, there was a flight to MMFs) and thus to RRP (further draining liquidity).
Expect QT to further weigh on risk on assets in a risk-off environment (recession, unemployment) as the dash for cash takes over. This is not like 2018–2019, where despite QT, risk on assets rose. That was because there was no risk-off environment. The Fed had already announced the end of QT in December 2018, so risk on took over. The repo spike happened because risk on assets were bought despite declining liquidity.
This time it will not be repo spiking. The demand for cash in a risk-off environment with declining liquidity will eventually lead to a panic sell off in risk on assets.
It will be interesting if Fed can ease us out of the bubble. The French tried to ease out of their paper bubble in late 1700’s but confidence was totally lost in the paper. They even burned the paper instruments in the street to show the over supply was being extinguished.
Its just human nature to panic when you fear your asset will lose most or all of its value.
Apologies if this was discussed in earlier posts. About the legislation passed in 2019 to change banks subject to stress tests – from minimum threshold of 10B to 250B. If that legislation had not passed, would SVB’s ‘problems’ been caught ahead of time? Would they have simply blown up sooner? Would they have had time to look for investors? Would it have been tamped down with phone calls to the right politicians? And, if that Legislation was indeed poorly thought out, who is to blame for passing it?
The Fed has just opened daily US Dollar swap lines again, because there’s no issues whatsoever. Nothing to see here.
I’t’s only paper Jim, only paper..
1. Those swap lines have been open for many years, and I have been reporting on them monthly in my Fed balance sheet update for a LONG TIME. And now they’re new? LOL
2. Swaps are not QE; they’re an exchange of currencies. 7-day swaps unwind after 7 days, the Fed gets its dollars back, and the other central bank gets its currency back.
3. not “worldwide”: but Bank of Canada, Bank of England, Bank of Japan, ECB, and the SNB.
4. Today they changed when the 7-day swaps can be initiated. Used to be once a week. They changed it to any day of the week.
5. The change seems to be designed to give dollar liquidity to SNB (in exchange for CHF) for the UBS-CS deal on Monday.
6. The SNB last used those swap lines in Oct 2022 to provide dollar liquidity to CS. After a few weeks, the last swap was unwound and the balance was 0.
This is the exact wording from the Fed:
“To improve the swap lines’ effectiveness in providing U.S. dollar funding, the central banks currently offering U.S. dollar operations have agreed to increase the frequency of 7-day maturity operations from weekly to daily. These daily operations will commence on Monday, March 20, 2023, and will continue at least through the end of April.”
“highly paid geniuses” … also highly “educated” geniuses. Peter Theil said that “a degree is a dunce cap in disguise.” So what is the value of “ivy league?” I would say it has negative value. I would rather some average person be in charge of a bank than these pompous self-entitled “well educated” morons, as it would be hard to do much worse than has already been done. This proves that “education” endumbificates those that fall within its clucthes. Obviously I am ignoring deliberate criminal elements as I like to think that most people are basically decent. But just as in “medicine,” the “education system” is designed to weed out those with moral fibre, and develop and encourage sociopathic and psychopathic tendencies.
In medicine the education system used to flunk out the people who could not take the abuse. Because the job is abuse. It is the smartest people you will ever know being thrown at a person who is dying. They either need to be a navy seal of medicine or they will crack and get their azz sued off.
Nowadays the medical education system was dummied down and you are getting Pansies. Any doc under 48 years old prob had a watered down residency, where they had breaks. Older than 48 and they are the Navy Seals. So it is best to ask for the older MD.
It’s all about a hoover sound sucking the boomer’s fortune dry with nurse practitioners and physician assistants. Who legally need to be in the same building as their attending doc. But honestly they hardly supervise them. Pro tip: def ask for the MD or DO who graduated Med school in America and did their Residency here as well. Obviously Europe prob has similar standards, I’m just not familiar with it over there.
Toodles
Anecdotal based reply, far damn shore sufferer:
Some of the best MD type docs of my, unfortunately long experience as one with multiple ”dis abilities” due to very bad auto type ”accident” 50 years ago,,, have been from India and other countries ”outside USA”….
ALL of those MDs have been required and have done various and sundry ”USA” thorough ”vetting” exercises, including RE-doing their ”residences” and subsequent to be able to match their skills, many of which were very well earned in their countries of origin… to the ”absolute requirements” of USA…
Just saying from personal experience,,, have absolutely ”no dog in this fight” for anything other than truth in this.
Bill – I kinda half agree with you and kinda half don’t.
Sure, some of the dumbest people I have met have PhDs.
But I also agree with the old saying about “Education is the kindly of a flame”. And Cambodia / Kampuchea didn’t go so well in the late 70s.
I don’t think education is the problem here.
The problem is short-term bonus structures and the people with doctorates in shithouse cunning that manipulate those bonus structures for personal greed.
Bingo !
Interestingly, many of the top Khmer Rouge leaders were French educated teachers. Toul Sleng was originally a school. One wonders what Lycée Sisowath Faculty Lounge politics had been like…or if they led to what came in 1975.
Excess clever personal greed is the problem, but it also the motor driving Capitalism. Homo sapiens’ nature needs a big change: the great apes already had emotional greed.
“All of humanity’s problems stem from man’s inability to sit quietly in a room alone.”
– Blaise Pascal
Most really smart people ,have no common sense. I’ll take common sense anytime.
Saint Thomas Aquinas divides the intellect into logical and practical. What you are calling “smarts” and “common sense” I guess. Yes there are plenty of people with strong former and weak latter. IMO the US education system at least fosters this.
IMO as a teacher IN the CA system for a few years, although to be clear, in the ROP program designed to help those kids not really doing well in the ”Comprehensive Schools” at the time,,,
It certainly seems to me that the entire USA ”education system” needs to go back to the base or basics of the HSs I went to in the fifties and sixties.
Many, if not most, of my peers were mostly attracted to the ”hands on” type of education offered those days, and willing to ”put up with” the other stuff because they could see the math was going to help with their businesses based on their ability and skills at their business…
Somehow and some when, WE, in this case WE the WORKERS who actually Make and DO stuff have been ”SUCKERED” into some very badly managed and manipulated current situation where,,, EVERYONE ”MUST” go to ”college.”
Interest rate suppression was supposedly a product of the “wealth effect”. It was an attempt to drive staid funds towards riskier investments.
Secular stagnation is just the deceleration in the transaction’s velocity of funds due to the impoundment of savings in the payment’s system.
30 years after Pritchard said it, Dr. Philip George echoed it (see the Riddle of Money Finally Solved). The pundits are just astonishingly stupid.
That was excellent!! I pointed at my head every time you said “brains turned to mush”. LOL
I think we all have the neighbor or two who their brain is mush. They are still spending like there is no tomorrow, paid too much for their house and have a vacation house as well. I guess they will have to sell some things.
I liked the “mush brain” analogy Wolf.
Looks like a duck, quacks like a duck.
It is not a duck.
It is a Bull!
And it flies to the moon!
So, far the bond market is green, confirming Fed cuts in rates is in the cards!
It’s green now only because it is sea sick.
This just came out from Federal Reserve, “coordinated action to enhance the provision of liquidity via the standing U.S. dollar liquidity swap line arrangements ” Pro pivot types are calling it capitulation and saying rates cuts are soon to follow. God, I hope not. I’m so sick of all of it.
Opening daily Dollar Swap lines with all major central banks. I’m not sure what this will mean, but I’m sure Wolf will let us know.
Any deflationary impulse, they are quick to squash it…strange way to fight inflation, no?
Fed up,
1. Those swap lines have been open for many years, and I have been reporting on them monthly in my Fed balance sheet update for a LONG TIME. And now they’re new? LOL
2. Swaps are not QE; they’re an exchange of currencies. 7-day swaps unwind after 7 days, the Fed gets its dollars back, and the other central bank gets its currency back.
3. not “worldwide”: but Bank of Canada, Bank of England, Bank of Japan, ECB, and the SNB.
4. Today they changed when the 7-day swaps can be initiated. Used to be once a week. They changed it to any day of the week.
5. The change seems to be designed to give dollar liquidity to SNB (in exchange for CHF) for the UBS-CS deal on Monday.
6. The SNB last used those swap lines in Oct 2022 to provide dollar liquidity to CS. After a few weeks, the last swap was unwound and the balance was 0.
This is the exact wording from the Fed:
“To improve the swap lines’ effectiveness in providing U.S. dollar funding, the central banks currently offering U.S. dollar operations have agreed to increase the frequency of 7-day maturity operations from weekly to daily. These daily operations will commence on Monday, March 20, 2023, and will continue at least through the end of April.”
Hussman dropped his monthly article over the weekend. Always a good read when the Fed is active especially for peons like me trying to understand the banking system.
Been seeing a some good charts out there on equity risk premium. Latest one was by Morgan Stanley I think. It kind of comes down to why do you want to hold equities with an earnings yield of 5% when you can get 5% risk free. Usually equity risk premium will rip higher (PE lower) very quickly.
Looking in the rear view mirror from 55 years ago…
“On March 19, 1968, President Johnson signed a bill eliminating the gold cover for Federal Reserve notes and for United States notes and Treasury notes of 1890.”
From there, it was off to the races!
Redemption of silver certificate banknotes for actual silver ended also in 1968 under lbj.
Life is mainly about incentives and with free money the incentives are wrong.
The Fed seems to be an echo chamber, where they can’t see the obvious. Seems like they would have old farts like Dave Stockman, Marc Faber or Jim Grant in the meetings once a year to give an alternate view of what the easy money policies might lead to. Maybe central bankers know all the downsides and its just a game for them in a representative democracy.
The incentive for a central banker is there are millions waiting for them in a cushy job or speaking engagements or book deal if they play the role the way Uncle Sam needs. I am undecided on Powell. He appears to want to get us out of easy money, but it might be too late without imploding the economy like John Law.
I don’t trust any companies or banks to put a long term stockholders interest first unless they have demonstrated it through good times and bad. Usually the signs are in the SEC filings on compensation and also how levered up the company is.
Jim Grant is a snitch.
“How can 4000 yr lows in interest rates be a good thing?”
J Grant
I couldn’t remember the number, but I just read Yellen got a little over $7 million for giving a few speeches between being Fed chair and treasury secretary. That is at least the appearance of a conflict of interest. Print money and get it returned to you.
best comment yet IMHO OS…
thanks for your continuing to help WE the PEONs on ”Wolf’s Wonder.”
PLEASE continue.
Thanks again…
All this “free money” has turned into a heavy anchor on banks’ balance sheets dragging them toward the bottom. They did let it turn brains to mush. It is time for the reckless bankers to take the hit, to whatever degree that can be done, and shareholders, versus any other stakeholders.
But this is like a hostage situation now. Bailouts sometimes must occur to avoid runs and systemic collapses. But the responsibility should be fixed where it belongs.
All my family and friends have been or are in process of moving money out of banks as the spread between t-bills/ mutual fund m/m got wide to deposits. Retail customers are known to be sticky, but now there is an alternative the deposits will flee and will not go back without being paid to move them back.
Banks and Credit Unions get a bird’s eye view of their own destruction. The money that moves into TreasuryDirect is transferred via direct debit.
It must feel like being stuck in traffic, with nowhere to go, when suddenly the semi-truck in front of you starts backing up.
What we are seeing in the way the Fed and Treasury are handling these bad decision making banks is akin to the decline of meritocracy.
The consequences for making bad is getting closer to the benefits of making good. Cushioning and forgiving bad moves with unwarranted relief does little to deter further bad moves.
Meritocracy was always a bogus system at its core. There is no decline, only a pulling back of the curtain.
Disagree.
The markets are the blind arbiter of decision making.
Those who make the best decisions SHOULD go forward with more good decision making. This makes things/markets more efficient.
Those who make bad decisions should be reduced in their impact to the markets or eliminated.
That is meritocracy in its purest form. No appointed panel deciding what is right or wrong……just a massive market of participants.
Disagree.
The markets are not some force separate from the agents participating or the regulators protecting it from itself, unless you want to cop to the Invisible Hand being subject to mass / group psychology.
It doesn’t follow the “best” decisions, whatever THAT means, lead to more efficiency in the market, and how are we defining an efficient market in the first place? I’ll admit ignorance on that last point as it is traditionally understood.
It feels like a tautology to say that those who make bad decisions should have bad outcomes …
I don’t think “meritocracy” as you’ve implicitly defined it is something to be applied to a market of participants, that’s just making a case that people who are good at sales or brokers are going to do better in a market without saying anything about the legality or long term consequences of their work. It doesn’t say anything about the effects of collusion or collaboration in manipulating markets.
TOTALLY AGREE with the longstreet on this question LK:
Unless and Until USA goes back to the very very clear situation that prevailed, far damn shore, from 7dec1941 until the end of world wide global WAR…
WE will have NO peace and NOT MUCH prosperity in ”real terms”…
Doesn’t matter much how many ” politically correct” so called solutions happen,,, USA MUST have meritocracy above all to continue to be the ”shining city on the hill” in spite of any attempts to do otherwise with various and sundry efforts to the contrary.
REAGAN talked a good GAME but the REALITY didn’t match his WORDS.
If you want to go back to the Golden Age of Capitalism in the United States following WWII, then I suspect what you mean is decimating the world’s industrial base and making them dependent on U.S. exports and largesse while also rolling back civil rights for a vast majority of the population. If you mean how America conducted itself DURING the War, well, let’s start lobbing nukes willy-nilly while no one can fire back and setting up the internment camps, then.
Back to reality, there is no going back, we live in a much different world where the U.S. wasted its economic gains, sold out its population, and abused its political leadership on the world stage. If you want to talk about Meritocracy, there are other countries that are kicking far, far more of our ass on a great deal many metrics when it comes to outcomes if one looks past American Exceptionalism and its blinders.
Though I’m with you that egalitarianism in its purest form has its limits, but I’m not with the crowd that wistfully states that capitalism is incompatible with democracy.
From what I see the Fed is simply flipping tiny little clever liquidity switches on to backstop a troubled system in peripheral ways these past few weeks. Just various creative peripheral outlets which have no real bearing on the main theatre of QT and interest rates.
“Negative feedback can reduce the total quantity of distortion, but it adds new components on its own, and tempts designers to use more cascaded gain stages in search of better numbers, accompanied by greater feedback frequency stability issues.
The resulting complexity creates distortion which is unlike the simple harmonics of musical instruments, and we see that these complex waves can gather to create the occasional tsunami of distortion, peaking at values far above those imagined by the distortion specifications.”
‘Audio Distortion and Feedback,’ by Nelson Pass, 2008, audio engineer and businessman.
It applies to banking and regulations too, I reckon.
Systems are nearly always complex. My son-in-law is a utility engineer. Evidently what happens on a transmission line is a whole lot mere complicated than a simple 60 Hz sign wave like I had in my mind.
Read somewhere that a plucked guitar string has some pretty complicated harmonics too.
In other words, you think it has minimal effect on the banking system, or is a zero sum game. I wonder where you got that idea from?
I didn’t say these steps weren’t important to banking’s internal financial plumbing; I simply said they are peripheral actions against the main theatres of interest rates and QT.
In other words it’s going to be far more important for Powell to continue fighting inflation than saving regional banks.
FDIC: Subsidiary of New York Community Bancorp, Inc., to Assume Deposits of Signature Bridge Bank, N.A., from the FDIC
The Federal Deposit Insurance Corporation (FDIC) entered into a purchase and assumption agreement for substantially all deposits and certain loan portfolios of Signature Bridge Bank, National Association, by Flagstar Bank, National Association, Hicksville, New York, a wholly owned subsidiary of New York Community Bancorp, Inc., Westbury, New York.
The 40 former branches of Signature Bank will operate under New York Community Bancorp’s Flagstar Bank, N.A., on Monday, March 20, 2023. The branches will open during their normal business hours. Customers of Signature Bridge Bank, N.A., should continue to use their current branch until they receive notice from the assuming institution that full-service banking is available at branches of Flagstar Bank, N.A.
Depositors of Signature Bridge Bank, N.A., other than depositors related to the digital banking business, will automatically become depositors of the assuming institution. All deposits assumed by Flagstar Bank, N.A., will continue to be insured by the FDIC up to the insurance limit. Flagstar Bank’s bid did not include approximately $4 billion of deposits related to the former Signature Bank’s digital banking business. The FDIC will provide these deposits directly to customers whose accounts are associated with the digital banking business. Questions may be directed to (866) 744-5463.
As of December 31, 2022, the former Signature Bank had total deposits of $88.6 billion and total assets of $110.4 billion. Today’s transaction included the purchase of about $38.4 billion of Signature Bridge Bank, N.A.’s assets, including loans of $12.9 billion purchased at a discount of $2.7 billion. Approximately $60 billion in loans will remain in the receivership for later disposition by the FDIC. In addition, the FDIC received equity appreciation rights in New York Community Bancorp, Inc., common stock with a potential value of up to $300 million.
The FDIC estimates the cost of the failure of Signature Bank to its Deposit Insurance Fund to be approximately $2.5 billion. The exact cost will be determined when the FDIC terminates the receivership.
One phone number,you will never get through ,what a joke
10,000 fully insured FDIC accounts at $250,000 each = $2.5 billion.
An interesting number for the cost of failure estimate of Signature Bank, no?
When this is all said and done, the American banking system will look like the Japanese circa late 1990s: a few quasi-governmental mega banks swallowing up all the other banks.
Who would’ve thunk a US treasury bond would be one of the worst investments to hold last year?
Treasury notes aren’t supposed to skyrocket or plummet in value. Everything went downhill shortly after the Fed began to tinker with QE and the money supply after 2008, like a kid with matches.
“Who would’ve thunk a US treasury bond would be one of the worst investments to hold last year?”
What?
All bonds fall when rates rise. And there were worse investments.
Who wouldve thunk it? Anyone with half a brain cell. Powell was basically yelling from the rooftop that he was going to raise interest rates. If supposedly intelligent bank CEOs refused to believe it, or didn’t understand the simple effect that would have in their asset base, then they should be fired.
My point is that treasury bonds shouldn’t drop 40% in a year. It’s proof that monetary policy was severely mismanaged by the Fed for a long time.
For decades, the Fed swept moral hazards under the cabinets and shelves, and just about everywhere except the trash can. Now, the roaches are coming out.
We used to be able to take monetary governance for granted, and it was a background activity. Now, we can’t trust the judgement and tinkering of monetary authorities, so the markets put them front and center.
Can someone give an example of how the bankers could have hedged the interest rate/duration risk (not including paying higher interest on deposits)?
When people talk about “hedging” they’re probably trying to seem like geniuses with all their option trading on fancy derivative instruments (or they take on short positions). Seems to me the common sense thing to do is just buy 3 month or 6 month t-bills instead of >10yr bonds that you try to “hedge.”
To give you an example: you have fixed term investment, let’s say a bond or MBS. You enter into an interest rate swap where you pay fixed (paying out what you get from the investment) and receive floating rate. Had SVB done that not only wouldn’t they had mark to market losses (as losses on bonds would have been offset by gains on swaps) but they would have been getting market interest on floating leg of the swaps instead of paltry 1.6% of similar they locked in on their investment.
Interest rate swaps.
Sell 30yr bond futures on the CME
zero percent interest rates? Yea sure.
That’s close to what banks have been paying to depositors for the better part of 14 years, LOL.
Investors will do what it take to avoid the 10Y. They will park in the front
end.
The 10Y will rise above the 3M and the 2Y, cancelling the yield inversion.
If that happens, then interest rates will soar to the sky on 10 year and 30 year US Treasuries.
Only if they’re convinced no pivot is coming. That’s the reason they’ve bought the 10 year at such poor rates. They’re convinced ZIRP and happy days will be back in less than a year.
I’m wondering what the knock on effects of the SVB collapse might be on the tech sector. I’ve been reading that a lot of startups preferred SVB due to the ease of securing loans there. I know deposits were made whole but if all these companies have to do business with more conservative banks moving forward is that going to strangle the cash flow some of them depend on to keep operating?
I think it’s going to accelerate their demise. Tech, fintech, biotech – all the profitless unicorns are headed to the glue factory.
Also noticed credit Suisse offered 7% short term notes to try and attract capital. Are the people that bought those toast? I would think so.
Many if not most of those so-called tech companies such have never been able to obtain bank loans in the first place.
We are closely involved with a startup as a business partner and investor. They actually had an account at SVB. A few investors on their board are involved in a handful of other startup businesses too.
On our investor update call a few weeks ago, more than one board member said that the startup funding environment has dried up since late summer ’22. Good ideas can still find money, but the cash taps have been turned down to a trickle after being wide open for a few years.
I think this trend is just starting to show with the CVB collapse and news of layoffs in tech. There are a lot of cash-burning businesses are going to have to find a solid business model or close up shop.
“Silicon Valley Bank CEO sold $3.5M in shares just two weeks before collapse” (MSN)
“Two of Silicon Valley Bank’s top chiefs dumped millions of dollars worth of stock just two weeks before the firm collapsed Friday, records show.
CEO Greg Becker offloaded over $3.5 million worth of stocks … according to a US Securities and Exchange Commission filing. That same day, the bank’s third-in-command CFO Daniel Beck sold $575,180 in stocks, Newsweek reported.”
So, they can skate with that? No claw back?
btw, a photo of Beck in the MSN article makes him look like a goofball.
Look at the bonuses in the US and in Europe.
Unconditional bailouts …. just like in 2008.
If I were king, any bank getting a bailout would have past salary clawbacks of say 50% and all bonuses clawed back for a year.
There must be some consequence for tapping into the FDIC.
Uninsured deposits were a form of market discipline…….in a world long ago and far away.
I wonder if the CEO of SVB was secretly shorting the stock after selling all of his shares before the crash. Seems like just the kind of guy to do such thing.
Since he was also on the SF FED, maybe he got a bunch of them to short it with him, too, sharing insider info. This is how much I trust these vipers.
Couple days before the end someone bought around $7500 in put options on SVB. Very unusual trade and was recognized as insider trading when it was recorded. They made millions.
“Or do you too believe, as do the many, that certain young men are corrupted by sophists, and that there are certain sophists who in a private capacity corrupt to an extent worth mentioning? Isn’t it rather the very men who say this who are the biggest sophists, who educate most perfectly and who turn out young and old, men and women, just the way they want them to be?”
— Plato, The Republic
I see a parallel to eh pre-2008 subprime mortgage mania: it was a money-machine created by financial engineering. The money appeared as free money endlessly spewing out of houses (and a chain of deals ending at the other end in sucker investors), until the bill came due. A big phrase back then (in hindsight) was, “risk was mispriced.”
Then came the cheap money decade. The mania went back into asset bubbles: houses, tech stocks, crypto. The Ponzi dynamics were there again. Last bagholder to leave the burning theater, gets burned. But the mania still persists (IMO) in equities and currently bitcoin. Now it is based on the (not entirely irrational) hope of a pivot. Now markets are more seriously playing chicken with Powell (and indirectly, us).
Google news now knows I go to Wolf Street. It regularly posts links for me to this site (even though I am never logged into google while there). It trackers have been upgraded.
Google News sends me a lot of traffic. Please don’t complain 😎
I for one appreciate seeing a Wolf Street article on my Google News feed. Far more value than the junk articles from sites I never heard of telling that could be AI-generated clickbait for all I know.
Google News is how I found Wolf Street because I read too much on the subject.
BTW, what doomsday line has to be crossed before this mess is officially called a BankDemic? I have a container full of toilet paper that I’ve been holding for three years waiting for another panic-buying x-demic event. Your call Wolf?
GOOGLE news KNOWs how valuable IS WS, in spite OF, or perhaps because of the daily wisdom IMHO…
Keep on clicking on WS when seen on Google…
Under Stand that HOPE is not a policy/strategy,,, but it certainly IS support for some of us,,, eh?
Thanks again for the CLARITY Wolf!!!
Free range banking was all the rage.
So now it is likely the Fed may balk, pause, or be impeded in their program for fighting inflation.
People will be subjected to the ill effects of inflation for longer at GREAT CONSEQUENCE.
All because of bad decision making in a gunslinging bank that will meet with LITTLE CONSEQUENCE.
Seems a bit unfair, doesnt it? Wrong people being punished.
WOLF – the FED looks to be cracking under political and “their to blame” pressure. A “pause” on their rates hikes, QT, and MBS sales (oh wait that’s right, they never did any mbs sales) is here. FED Team 2023 – Rate Pause up to bat, QE is in the on deck circle, with Rate Cuts batting cleanup. CPI over 6% and this FED still cannot get positive real rates without everything falling apart. So sad for the USA and everyone having to eat it on inflation for years to come. The FED has surrendered to their inflation master after a weak “fight”.
The pill may be bitter, but the poison is in the sugar.
More sugar is the answer.
1) The Fed will raise rate by 0.25% to fight the hyperinflation.
2) Investors will avoid the 10Y to avoid unrealized losses. They will park in the front end, taking less risk to avoid SVB bank problems.
3) The 3M might rise to 5.5%/6% anchored to Fedrates, the 2Y will dive and
the 10Y will rise above the 3M and the 2Y, ending the yield curve
inversion.
4) When the 10Y reach 8%/9% investors will move in and take it down. The yield curve will be a flat line tilting up.
5) During the next recession all rate will tank, the middle will dive the most and the 30Y will be at the top.
6) The Fed will win the war against debt and inflation during the next severe recession.
The nonsense narratives from CNBC are getting worse. Headline today:
“Dow rises 200 points as investors hope Credit Suisse rescue stifles bank crisis”
A bank crisis being “stifled” would be the WORST thing for the stock market, as it means that the Fed and other central banks can go back to fighting inflation, raising rates, and continuing QT.
Who writes these asinine headlines?
Make it 300.
Not sure who’s buying…gotta be the pivot hopefuls. May be they know something we don’t.
Amazon to fire additional 9K employees.
That will do it. This info should be good enough for 2% gain by eod.
The overall workforce peaked in March 2022 at around 1.6 million workers (this also includes warehouse workers).
This last decade will go down as the greatest monetary debacle in history, but will that be enough for Congress to take a look at the effectiveness of our monetary framework, as well Federal Reserve governance?
It’s time.
Thank you for this video. I have some questions. The members of the FOMC are preternaturally wise men and women. Why did they believe that they could keep interest rates low forever? Why did they think it was desirable to do so? Why do they refuse to acknowledge the existence of bubbles before the bubbles burst? And finally, if faced with the choice of saving the banks and their wealthy depositors, and saving the American people from inflation, what will they do?