Yet the bankers don’t get any punishment for their actions: they get to keep their millions and the public bails out the banks. It’s a job where you can be as incompetent as you want, yet suffer no repercussions. Public bailouts then lead to cuts in public services and austerity, so everyone suffers except for those who caused the problem.
The whole thing is totally fucked.
Larry Fink of Blackrock:
Since the financial crisis of 2008, markets were defined by extraordinarily aggressive fiscal and monetary policy. As a result of these policies, we’ve seen inflation move sharply higher to levels not seen since the 1980s. To fight this inflation, the Federal Reserve in the past year has raised rates nearly 500 basis points. This is one price we’re already paying for years of easy money – and was the first domino to drop.
Bond markets were down 15% last year, but it still seemed, as they say in those old Western movies, “quiet, too quiet.” Something else had to give as the fastest pace of rate hikes since the 1980s exposed cracks in the financial system.
This past week we saw the biggest bank failure in more than 15 years as federal regulators seized Silicon Valley Bank. This is a classic asset-liability mismatch. Two smaller banks failed in the past week as well. It’s too early to know how widespread the damage is. The regulatory response has so far been swift, and decisive actions have helped stave off contagion risks. But markets remain on edge. Will asset-liability mismatches be the second domino to fall?
Prior tightening cycles have often led to spectacular financial flameouts – whether it was the Savings and Loan Crisis that unfolded throughout the eighties and early nineties or the bankruptcy of Orange County, California, in 1994. In the case of the S&L Crisis, it was a “slow rolling crisis” – one that just kept going. It ultimately lasted about a decade and more than a thousand thrifts went under.
We don’t know yet whether the consequences of easy money and regulatory changes will cascade throughout the U.S. regional banking sector (akin to the S&L Crisis) with more seizures and shutdowns coming.
PT 2
It does seem inevitable that some banks will now need to pull back on lending to shore up their balance sheets, and we’re likely to see stricter capital standards for banks.
Over the longer term, today’s banking crisis will place greater importance on the role of capital markets. As banks potentially become more constrained in their lending, or as their clients awaken to these asset-liability mismatches, I anticipate they will likely turn in greater numbers to the capital markets for financing. And I imagine many corporate treasurers are thinking today about having their bank deposits swept nightly to reduce even overnight counterparty risk.
And, there could yet be a third domino to fall. In addition to duration mismatches, we may now also see liquidity mismatches. Years of lower rates had the effect of driving some asset owners to increase their commitments to illiquid investments – trading lower liquidity for higher returns. There’s a risk now of a liquidity mismatch for these asset owners, especially those with leveraged portfolios.
As inflation remains elevated, the Federal Reserve will stay focused on fighting inflation and continue to raise rates. While the financial system is clearly stronger than it was in 2008, the monetary and fiscal tools available to policymakers and regulators to address the current crisis are limited, especially with a divided government in the United States.
With higher interest rates, governments can’t sustain recent levels of fiscal spending and the deficits of previous decades, the U.S. government spent a record $213 billion on interest payments on its debt in the fourth quarter of 2022, up $63 billion from a year earlier. In the U.K., as gilts plunged last fall following the announcement of significant unfunded tax cuts, we saw how swiftly markets react when investors lose faith in their government’s fiscal discipline.
After years of global growth being driven by record high government spending and record low rates. The world now needs the private sector to grow economies and elevate the living standards of people around the globe. We need leaders in both government and corporations to recognize this imperative and work together to unleash the potential of the private sector.
Credit Suisse is way more worrisome than SVB. Credit Suisse is a Global Systemically Important Bank (GSIB), big and very much entangled in the whole system - Too Big To Fail for the financial sector. While the Bay Area bros howled until they got their no moral hazard bailout, SVB probably would not have gone too far by comparison. The Bear Stearns to Credit Suisse’s Lehman
the timing of moving my RRSP’s to a financial advisor last month couldn’t be better. will be interesting to see what his thoughts are on all this. buy low, sell high.
so interesting how this is being reported. Bloomberg (as an example) is reporting this Credit Suisse dropoff as being instigated by a statement by its largest investory (Saudi National Bank)
*"All it took was a few tough words from Credit Suisse Group AG’s biggest shareholder on Wednesday to spark a selloff that spread like wildfire across global markets. *
Asked whether Saudi National Bank was open to further cash injections, Chairman Ammar Al Khudairy said “absolutely not.” It was a reminder about the precarious situation facing the Swiss bank just one day after its CEO, Ulrich Koerner, had sought to shore up investor confidence by pointing to signs of improvement in its business."
However, if you read a different article from Barron’s:
"On Wednesday, Credit Suisse‘s top shareholder said in a Bloomberg interview that it wouldn’t invest additional money in the Swiss bank. Saudi National Bank Chairman Ammar Al Khudairy told the media outlet that taking a stake of more than 10% in Credit Suisse would trigger regulatory complications."
so, which is it???
I was told yesterday that the public doesn’t bail out the banks… 
Not by me, you weren’t.
Those two aren’t incompatible. The Saudis said no. One of the reasons might be they don’t want to go over the 10% threshold. But the market had evidently been counting on them to be a backstop for CS
Damn, CS is now worth less than 7 billion, versus 530 billion in assets under management.
Maybe. Never catch a falling knife comes to mind. People were saying that last week about SVB.
On the other hand, I did buy Citibank in 2008, and I am thinking about it
Bloody hell. You must be loaded!
When’s the TAN party in Barbados?
Getting my years wrong…it would have been early 2009. Near the bottom. It returned to being a decent dividend stock, but the capital appreciation isn’t going to be funding any parties in Barbados. It was looking OK a couple of years ago, mediocre now.
Should have just gone to Barbados in 2009.
The authorities will probably do everything to prevent this bank from collapsing entirely. If need be, it will be the taxpayer who will bail out CS, just as in 2008, when UBS and CS were on the verge of disappearing.
Out of principle, I wouldn’t invest a dime in such a shitshow, but for those who are are out for an easy, quick buck, it’s probably a good bet to invest some money in CS right now.
(I myself am not convinced of this way of approach. In that sense, I’m a hardline conservative: let the markets decide what happens with that bank. If it collapses, tough luck, and we move on. The lucrative parts of the bank will continue to exist under a new name, and the foul parts will be history. Most importantly, I’d want the corrupt bankers who created this situation to be seized and held to account for their failings. Naive, I know.)
I don’t think anyone thinks that CS will be allowed to fail, but that doesn’t mean shareholders won’t get it in the neck. The bailouts usually end up requiring new infusions of equity, made possible by taxpayer money to be sure, but the dilution effect hammers returns. I think it was 2011 that Citibank had a 10:1 consolidation in shares as part of the process of raising new equity, with the new shares ending up with a broadly similar value per share as the shares pre-crash.
CS shares up this morning, recovering most of their losses yesterday. CDS market telling a somewhat different story.
Red circles are the 2008 meltdown, Eurozone financial crisis, and start of the pandemic. I suspect not long ago this graph looked rather more dramatic through those times because it used a very different vertical axis.
I guess the good news is not much sign of contagion.
I think someone can and will probably correct me if I’m wrong, but I believe that was the approach Iceland took in the crisis? Bail out the depositors, and let the bank itself fail and the shareholder take the hit…
Some hard discussions going in central banks right now, most were on course for another interest rate increase but SVC and CS make it more complicated. Obviously, they don’t want to cause further financial turmoil. But the secondary effect of the financial system feeling some stresses is presumably some contraction in lending, effectively a larger reduction in money supply per basis point than would have occurred otherwise. However, very hard to get good data on the magnitude of that effect, especially in near real time.
The difference in approach is not purely political, but based on the impact to the rest of the economy (national and global) by letting a chain break in a system that is incredibly interconnected and whose health affects us all even if we dont have deposits at direct risk.
Iceland’s banks were far smaller than Credit Suisse, with total losses amounting to only about US $10B. The was enough to sink the national economy, but a blip that could be accommodated within the larger international sector. So the decision was largely taken out of their hands given they didnt have the means of bailing it out and no one else thought it was systemically important enough to step in for them.
ECB just raised 50 basis points. I’d be shocked if the FED didn’t follow now.
