Posted March 15, 2023
By Sean Ring
The SIVB Bailout Just Keeps Getting Worse
- The FDIC somehow overruled the Treasury and the Fed.
- The FDIC insisted on nationalizing Silly Valley even though it was unnecessary.
- Now, the American taxpayer is stuck with a needless blank cheque they’re writing.
Good morning on this Ides of March from a sparklingly sunny Asti!
Yesterday, I let Jim Rickards do the talking for me.
Today, I’ll summarize the latest information I’ve found and try to chart a path forward.
Funnily enough, there’s a kernel of truth in what everyone says. It’s the deeper dive that proves them wrong.
For instance, Senator Elizabeth Warren is partially correct in saying that Jay Powell started this mess by hiking rates as fast and far as he has. (The Rude has long said Powell had a savior complex.)
But what Chief 1/1024th misses is that the Fed left rates on the floor for too long. Fourteen years too long! She wasn’t complaining then. They never do, do they?
Remember, the boom comes before the bust. The manipulation of interest rates far below their natural level causes incorrect incentives and accompanying malinvestments. That’s what started this mess. But it felt so good, didn’t it?
Jim Grant has long gone on about how the Fed destroyed the pricing mechanism through this malpractice.
This is part of the reason the US Treasury market crashed all last year. When rates go from 0.25% to 4.75%, you’ve increased rates 18x in less than a year!
And even when entrepreneur David Sacks and hedge fund manager Bill Ackman are talking their books, they’re partially correct. This is a government and central bank-induced mess.
Again, if you’re bitching when the Fed is raising rates too fast, then you really ought to have started shouting when the Fed put its foot on the yield curve.
But they’re wrong when they say depositors over the $250,000 insurance level must be protected. No, they must get burned. And yes, this may cause contagion (though I think, in this case, it’d be minor).
As I’ve written before, unless and until the government’s poor decisions start burning The Lax Rich, the government will continue to make poor decisions.
And what about the soft stuff, like how we view those who’ve been bailed out?
Last night I tweeted:
I honestly feel for VCs now. Last week, they were the world’s great innovators. This week, and forevermore, they were in the right place at the right time, benefitted from the largest credit expansion in human history, and bought the right politicians. In other words, they got lucky. It would’ve been better for them to take the “L” and remain respected.
I mean every word of that.
Now, let’s get to the business of finding out more.
The FDIC Nixed a Free Market Merger
The Wall Street Journal Editorial Board isn’t having any of it.
They inserted this little nugget into their piece titled “Biden’s Bank Bailout Whoppers:”
The Federal Deposit Insurance Corp. says it couldn’t find a private buyer for SVB, though a source tells us Treasury and the Federal Reserve favored one. FDIC Chairman Martin Gruenberg nixed it owing to hostility to bank mergers.
How the FDIC gets to overrule the Fed and the Treasury on a bank merger is beyond me.
Perhaps it’s because Janet Yellen is MIA due to “migraines.”
Zero Hedge reported:
Kevin Hassett, former Chairman of the Council of Economic Advisers under Trump, told Fox Business that "there were buyers who were willing to step in & buy [SVB, but] the radicals at the @FDICgov basically weren’t going to allow that to happen ... the Biden Admin had a whitelist of companies that were allowed to buy the failed bank & companies that weren’t."
"If this is true," said Grabien founder Tom Elliott, "then this is another Biden scandal."
Great, so we’ve got microwaved Soviets running the FDIC
Of course, that couldn’t be it. It had to be Trump!
No, Trump’s Deregulation Didn’t Cause This Mess
The Wall Street Journal Editorial Board smacked Joke Biden in the mouth over blaming Trump’s 2018 deregulation for this mess.
Before I get to Trump, let’s just say we were correct that ordinary folk are financing this bailout (bolds mine):
The White House says special assessments will be levied on banks to recoup these losses. That means bank customers with less than $250,000 in deposits will indirectly pay for this through higher bank fees. In other words, this is an income transfer from average Americans to deep-pocketed investors.
As for “Trump’s Deregulation” being the cause of this mess, that’s about as real as “Putin’s Price Hike.”
For clarity, the Barney Frank (of Dodd-Frank fame) you see quoted below is indeed the former Chairman of the House Finance Committee and sat on the board of Signature Bank before its nationalization.
Again, from the Journal’s Editorial Board:
As he so often does, the President also blamed the bank panic on the Trump Administration—in this case for modifying some 2010 Dodd-Frank Act rules. He seems to be referring to the 2018 bipartisan banking law, which raised the threshold for systemically important financial institution (Sifi) classification to $250 billion from $50 billion in assets.
But not even Barney Frank, the Dodd-Frank co-author, believes that is to blame. The point of the 2018 law was to ease costly compliance burdens on mid-sized banks that made them less competitive with the giants, which benefit from a lower cost of funding owing to their implicit government backstop. Excessive Dodd-Frank regulation was driving more deposits to big banks.
Before the 2018 law, most mid-sized banks had to comply with the same regulations as big banks. But these wouldn’t have prevented either bank’s failure from their risk-management mistakes. The 2018 law didn’t absolve mid-sized banks of the requirement to conduct quarterly liquidity stress tests to ensure they could weather “adverse market conditions” and “combined market and idiosyncratic stresses” such as interest-rate shocks.
They also must hold a liquidity buffer of “highly liquid assets” such as Treasurys and government agency mortgage-backed securities. Dodd-Frank encouraged banks to load up on these assets, which were especially sensitive to the rapid rise in interest rates. Yet somehow regulators failed to monitor this interest-rate duration risk.
And what will happen because of this bailout?
Now, the Fed wants stricter rules on mid-sized banks. And more deposits will go to the biggest banks. It’s not ideal if you want a genuinely free market banking system.
What the Fed Will Probably Do
In short: they’ve got to hike.
The President unleashed an inflationary storm. That’s thanks to a blank cheque he signed on behalf of the taxpayer for the banking system.
It’s an expansionary policy totally at odds with your contractionary story.
You’ve got to signal you haven’t lost sight of the inflation story.
The CME FedWatch Tool puts the probability of a 25-bp hike at 85.6%, while unchanged currently sits at 14.4%.
Credit: CME FedWatch Tool
This makes sense to me. Fifty basis points would have been too much at this time.
How the Market Will Probably React
But I still think the stock market will react badly to a 25-bp hike.
Something tells me the yahoos over in the equity department think the hiking cycle is over.
If they believe that, they’ll surely be disappointed.
But one place that should do well is gold.
If you were on the March 3rd Rickards Uncensored call with Byron King and me, you would’ve heard us shouting to buy gold.
If you read the 2023 Daily Reckoning Gold Buying Guide Byron and I published on March 9th and bought some gold, you’d be in a great position now.
Yesterday, Jim Rickards wrote in the Daily Reckoning regarding future dollar weakness (bolds mine):
As payments move from dollars to other currencies, the exchange value of the dollar should decline, and the exchange value of the other currencies (mostly the euro) should go up. This means that the dollar price of commodities will go up as the exchange value of the dollar goes down.
This is basically inflationary. Still, inflation can be a good thing if you’re the owner of hard assets including gold. The U.S. dollar value of those assets should rise.
While gold and silver are money substitutes (or actual money), this does not mean that the commodity price inflation will be limited to gold and silver. We’ll see it in:
Gold, silver, oil, natural gas, water, copper, strategic metals, agricultural produce, farmland, and other commodity assets. Mining stocks are definitely in the mix.
Byron gave away five “golden” opportunities in our Rickards Uncensored talk.
The FDIC is the new Soviet on the block.
No, this mess has nothing to do with The Donald.
The Fed will almost certainly hike only 25 basis points next week.
The stock market will probably hate it, but gold and other commodity assets look good.
And there you have it.
Have a wonderful day ahead!