Trading/Investing Thread - Page 130

Among the first calls made by Yellen and other policymakers was to Jamie Dimon, the chairman and CEO of JPMorgan Chase & Co. There may have been a sense of déjà vu: Back in 2008, Dimon was the go-to banker for Washington to find private solutions for that banking crisis.

“We have our marching orders,” Dimon reportedly said after the call with Yellen. He then proceeded to build a coalition of banks willing to place deposits with First Republic.

This rescue would be simple compared with the 2008 crisis. First Republic needed money to replace any deposits that were being pulled out. The Wall Street banks have been flush for years, and deposits are one of the cheapest forms of capital a bank can get.

It was clear First Republic was struggling with short-term fears. Between March 10 and Wednesday, the bank borrowed $109 billion from the Federal Reserve’s so-called “discount window,” a mechanism that allows banks to get 90-day loans using high-quality bonds as collateral. The window is often used in times of crisis.

First Republic wasn’t alone. As of Wednesday, the Fed had loaned $153 billion through the window, more than during the 2008 financial crisis.

A spokesman for First Republic did not respond to requests for comment on the package or the bank’s financial health.

Such rescues are intended to protect the system against further bank runs. But they do not address banks’ “vulnerability to excessive interest rate risk, which was the root cause of these banks’ distress,” analysts at the credit rating agency Moody’s wrote this week as they put half a dozen midsize banks on a list for a potential downgrade.

Over the next 48 hours, the roster of institutions willing to come to the rescue grew to 11 banks, representing a broad swath of the U.S. banking industry. It was an effort to show that the banking industry would stand behind even its competition as a sign of confidence.

“We are deploying our financial strength and liquidity into the larger system, where it is needed the most,” the banks said Thursday in a statement.

The coalition included some of the “super regional” banks such as Truist, US Bank and PNC. These were banks that had grown through mergers in recent years and constituted the second tier of large national banks, behind the “too big to fail” institutions like JPMorgan, Citi and Wells Fargo. Even the custodial banks — normally quiet institutions such as BNY Mellon and State Street that hold assets for investors and don’t have retail operations — came to the rescue of First Republic.

But it’s not clear yet that the bleeding has stopped, even at First Republic.

The FDIC estimates that American banks have $620 billion in unrealized losses on their balance sheets. Many of those losses stem from bonds that have lost significant value as the Fed has raised interest rates to combat inflation. Banks don’t have to account for the declining value since the bonds would be held to maturity and not traded at a loss.

But in the case of Silicon Valley Bank, the bank faced a growing number of withdrawals and had to sell its bond portfolio to free up cash for depositors. That required the bank to post a $1.8 billion loss on that $21 billion bond sale.

On March 19 2023 07:27 GreenHorizons wrote:
We've been assured multiple times it won't be taxpayers paying, just anyone with a bank account. There may be some overlap between the two though.

That's bad, but the obvious moral hazard this ongoing bailout clearly provokes is probably a bigger deal.

On March 18 2023 17:48 RvB wrote:

The Federal Reserve is also making huge losses and the equity position of the SNB is actually better than the equity position of the Federal Reserve. But none if that really matters. The profit and loss of the central bank does not reflect the strength of the banking sector. Here is a blog from Brookings where they explain what the consequences of losses are if you are interested.

I don't think the problems in Switzerland are worse. They are different. In Switzerland the problem is contained to one mismanaged bank but that one is globally systemically important. In the US the problem is spread out among medium sized banks. The potential scope of the BTFP is actually in the trillions although the estimate is more like 500 billion according to JP Morgan.

On March 19 2023 07:53 KwarK wrote:

Who do you think is being bailed out by preventing a run on the bank? The shareholders of the banks have still lost billions, it’s the depositors being protected by the promise. Furthermore it’s unlikely to cost a cent because the act of underwriting the deposits in the event of a run on the bank prevents that run. Bank runs are a classic example of group antisocial behaviour, there is enough for everyone if everyone acts for the collective good but if individuals act in a strictly rational selfish manner then the whole group loses. It’s the prisoner’s dilemma, a problem created by acting to limit how much damage you take from the problem. The government stepping in to get ahead of a run stops the run from happening without spending a penny.

On March 19 2023 12:52 Sermokala wrote:

Yes I was saying that the fed taking on the equity position of better-positioned banks is good not only for the better position but the better total debt for the united states to get back its notes at a markdown from what they would actually be worth if held by an institution that can think decades in advance for these things. . I think it does matter when you're talking about the scale at whats happening. The swiss problem proportionately would be as if the fed had to talk about loans in the trillions rather than the billions the swiss central bank gave out, and the swiss central bank having a position three times worse than that does bend how bad the problem is past "just one bank" when "just one bank" can break the entire sector.

I would ask if anyone has a problem with the government taking the position that depositors will not be harmed in a bank failure. As in any bank failure, the deposits of the accounts would shift to a meta "fed bank" until they can be unloaded to a bank that can take on the accounts. The investors and executives should be prosecuted/ wiped out but I don't see a problem telling people that the banking system carrys the confidence of the US government the same as the dollar does.

On March 19 2023 14:34 Acrofales wrote:

sounds like insanity? what is stopping me from starting a bank that promises 1% extra interest on your savings accounts?

normally, you'd be running a risk. by promising you 1% extra, I must be investing your money in a riskier portfolio than my competitors. but under your proposal, ALL your money is insured regardless by the US government. That means *you* can take that deal risk-free, which means someone will offer it. This increases all the risks of stuff like Ponzi schemes, and ultimately plenty of banks will NOT have the assets to cover their clients' deposits, one of these will go bankrupt and the US government has go step in and foot the bill.

We aren't talking about insurance of Joe Everyman's money. He doesn't have more than 250k in his bank account, and thus the US government already insures it.

On March 19 2023 14:34 Acrofales wrote:

sounds like insanity? what is stopping me from starting a bank that promises 1% extra interest on your savings accounts?

normally, you'd be running a risk. by promising you 1% extra, I must be investing your money in a riskier portfolio than my competitors. but under your proposal, ALL your money is insured regardless by the US government. That means *you* can take that deal risk-free, which means someone will offer it. This increases all the risks of stuff like Ponzi schemes, and ultimately plenty of banks will NOT have the assets to cover their clients' deposits, one of these will go bankrupt and the US government has go step in and foot the bill.

We aren't talking about insurance of Joe Everyman's money. He doesn't have more than 250k in his bank account, and thus the US government already insures it.

On March 20 2023 00:59 plasmidghost wrote:
Something must be seriously fucked with Credit Suisse because UBS just lowballed the hell out of them

On March 19 2023 13:35 GreenHorizons wrote:


Essentially the entire system is being bailed out with the argument that if they didn't it could collapse. It's basically a free ride for millionaires and billionaires. Everyone with an FDIC insured bank account pays for their coverage up to $250,000. Instead of these depositors allocating their billions of dollars in those accounts, or purchasing insurance for amounts over $250,000, they are getting a free ride on billions of dollars over the cap guideline being functionally insured for free.

That said, my point was that maybe giving free unlimited deposit insurance to entities with millions/billions of dollars in deposits is an unsustainable kind of welfare and represents a moral hazard. Particularly in light of the ostensible end of low/no interest money being thrown at big banks in hopes of a trickledown effect that never really materialized. That trickledown largely didn't happen because they just basically pocketed it and bought a bunch of their own stock/gave out bonuses instead of using the money to be better companies. The former was a lot easier and often more profitable/bonusable as well as carrying another bonus of the downside being covered by the threat of systemic failure.

It's like an inverse of Wargames where the only way they can lose is by not playing.

Either the entire economy is going to have to adjust to a new normal without piles of cash being thrown at the system, or they have to just keep the money coming, further enflaming the moral hazard it opens space for imo.