by Mish Shedlock, Mish Talk:
I must have lost my mind to think there actually might be haircuts. Apologies offered.
Second Financial Rescue in 15 Years
That is a free link to a WSJ article.
The Treasury and Federal Reserve stepped in late Sunday to contain the financial damage from Friday’s closure of Silicon Valley Bank, guaranteeing even uninsured deposits and offering loans to other banks so they don’t have to take losses on their fixed-income assets.
This is a de facto bailout of the banking system, even as regulators and Biden officials have been telling us that the economy is great and there was nothing to worry about. The unpleasant truth—which Washington will never admit—is that SVB’s failure is the bill coming due for years of monetary and regulatory mistakes.
Wall Street and Silicon Valley were in full panic over the weekend demanding that the Treasury and Fed intervene to save the day. It’s revealing to see who can keep a cool head in a crisis—and it wasn’t billionaire hedge-fund operator Bill Ackman or venture investor David Sacks, both frantic panic spreaders.
In a world of near-zero interest rates, SVB put the money in long duration fixed-income assets in search of a higher return. Regulators after the 2008 crisis had deemed these Treasury bonds and mortgage-backed securities nearly risk-free for the purpose of measuring bank capital.
The San Francisco Fed regulates SVB and somehow missed this rising vulnerability. The Fed and Treasury will try to blame the bankers, but they are as much if not more culpable. The idea of elevating San Francisco Fed president Mary Daly to the Board of Governors seems preposterous after SVB.
The feds said they will guarantee even uninsured deposits at SVB as well as at Signature Bank in New York. Typically in a bank failure those depositors would get their money back with a 15% to 20% haircut. This would no doubt be a hardship for many customers, but the $250,000 limit was known.
But there is political risk from a bailout too. If the Administration acts to guarantee deposits without Congressional approval, it will face legitimate legal questions.
Frantic Panic Spreaders
It won’t matter but I am pleased the Journal blasted Bill Ackman and venture investor David Sacks, as “frantic panic spreaders“.
There’s more in the article about how Rohit Chopra, an Elizabeth Warren acolyte on the FDIC board, is hostile to bank mergers on ideological grounds, perhaps preventing a merger.
The Journal speculates how Biden might illegally act to guarantee all deposits or pressure House Speaker Kevin McCarthy.
No More Financial Crises In Our Lifetimes
Here’s a flashback hoot of the day. On June 27, 2017 then Fed Chair Janet Yellen said she expects “No New Financial Crisis in Our Lifetimes”
“Would I say there will never, ever be another financial crisis?” Yellen said at a question-and-answer event in London.
“You know probably that would be going too far but I do think we’re much safer and I hope that it will not be in our lifetimes and I don’t believe it will be,” she said.