Are You Ready? Banks Postitioned For A Bail-in As Silicon Valley Bank Fails (FDIC, Fed Weigh Special Vehicle After SVB Collapses, AOC Alert!)

Are you ready?

Despite cries from Summers, Yellen and other the DC illuminati (Biden is oddly silent), US banks are NOT fine. In fact, banks in general are suffering from Fed rates increases due to holding of long-term Treasuries and MBS.

In fact, The Federal Reserve’s fight against inflation is causing serious problems, as exemplified by AOC. No, not THAT AOC. but bank Accumulated Other Comprehensive Income.

Accumulated Other Comprehensive Income (AOCI) are special gains and losses that are listed as special items in the shareholder equity section of a company’s balance sheet. The AOCI account is the designated space for unrealized profits or losses on items that are placed in the other comprehensive income category.

On the regulatory call reports, AOCI is added to regulatory capital. Since SVB’s AOCI was negative (because of its unrealized losses on AFS securities) as of Dec. 31, it lowered the company’s total equity capital. So a fair way to gauge the negative AOCI to the bank’s total equity capital would be to divide the negative AOCI by total equity capital less AOCI — effectively adding the unrealized losses back to total equity capital for the calculation.

Getting back to our list of 10 banks that raised similar red margin flags to those of SVB, here’s the same group, in the same order, showing negative AOCI as a percentage of total equity capital as of Dec. 31. We have added SVB to the bottom of the list. The data was provided by FactSet:

Or this chart of vulnerable banks from Morningstar of unrealized losses and liquidity risk.

Here is a snapshot of SVB’s balance sheet. Or UNbalanced sheet.

After Congress passed the greatly flawed Dodd-Frank banking legislation, bailouts of banks are prohibited. But bank BAIL-INs still exist. Banks use money from their unsecured creditors, including depositors and bondholders, to restructure their capital to stay afloat. Put simply, they can convert their debt into equity to increase their capital requirements. Although depositors run the risk of losing some of their deposits, banks can only use deposits in excess of the $250,000 protection provided by the Federal Deposit Insurance Corporation (FDIC).

In any case, the FDIC and Fed are weighing a special vehicle after SVB swiftly collapses. Special vehicle? Sounds an awful like the mega bank bailout of 2008 under Hank Paulson.

No, not THIS AOC!

Bernanke/Yellen’s Bear Trap Ensnares SVB And Other Banks (Bets Taken During Pandemic Blow Up As Long Duration Debt Gets Scorched)

Silicon Valley Bank (SVB), the nation’s 16th largest bank, got caught in Ben Bernanke and Janet Yellen’s bear trap, the trap set when Bernanke/Yellen kept interest rates 25 basis points for too long (from December 2008 through December 2015) and then raising rates only once during Obama’s Presidency, only to raise rates 8 times after Trump was elected President. Then Covid struck in early 2020 and Powell dropped rates to 25 basis points again until inflation struck and Powell started raising rates at the fast pace in history.

Of course, banks got clobbered with interest rate increases, such as Silicon Valley Bank.

SVB’s collapse into Federal Deposit Insurance Corp. receivership came suddenly on Friday, following a frenetic 44 hours in which its long-established customer base of tech startups yanked deposits. But its fate was sealed years ago — during the height of the financial mania that swept across America when the pandemic hit.

US venture capital-backed companies raised $330 billion in 2021 — almost doubling the previous record a year before. Cathie Wood’s ETFs were surging and retail traders on Reddit were bullying hedge funds.

Crucially, the Federal Reserve pinned interest rates at unprecedented lows. And, in a radical shakeup of its framework, it promised to keep them there until it saw sustained inflation well above 2% — an outcome that no official forecast.

SVB took in tens of billions of dollars from its venture capital clients and then, confident that rates would stay steady, plowed that cash into longer-term bonds.

In doing so, it created — and walked straight into — a trap. Set by Fed Chair Ben Bernanke and now US Treasury Secretary Janet Yellen. To be sprung by current Fed Chair Jay Powell.

Becker and other leaders of the Santa Clara-based institution, the second-largest US bank failure in history behind Washington Mutual in 2008, will have to reckon with why they didn’t protect it from the risks of gorging on young tech ventures’ unstable deposits and from interest-rate increases on the asset side.

Outstanding questions also remain about how SVB went about navigating its precarious position in recent months, and whether it erred by waiting and failing to lock down a $2.25 billion capital injection before publicly announcing losses that alarmed its customers. Investors and depositors tried to pull $42 billion on Thursday, leaving the firm with a negative cash balance of almost $1 billion, regulators said.

The KBW Bank index shows the slaughter of most banks on Friday.

Of course, the notorious Too Big To Fail (TBTF) banks JP Morgan Chase and Wells Fargo actually rose in value on Friday while regional banks got clobbered like Signature Bank, First Republic and Western Alliance Banks all losing over 10% in price on Friday.

How did this happen? Well bets placed during Covid with The Fed keeping rates at 25 basis points got clobbered when The Fed finally started raising rates again. Modified duration, a risk measure indication the weighted-average life of a bond and mortgage-backed securities (MBS), has been increasing steadily since the initial Covid shock.

SVB’s management’s solution appears to have been to seek out yield through a lot of long-duration bonds. The bank started to lose deposits as VCs pulled cash/burnt through operating capital. Whoops!

Unrealized losses killed SVB, thanks to their long duration bet as The Fed tightened.

The most terrifying thing was when former Treasury Secretary Larry Summers and current Treasury Secretary Janet Yellen went on TV to exclaim “Remain calm! All is well … in the banking sector.” You know when they wheel out Summers and Yellen that all is NOT well.

Fed Terminal Rate Falls To 5.475% On Only 311k Jobs Added After 504k Jobs Added In January (Silicon Valley Bank Seized By Regulators)

Its just like The Fed. The Taylor Rule says that The Fed’s target rate should be 10.29%, but now the terminal rate has been lowered to 5.475%, almost half of where the target rate should be.

Today’s jobs report for February was a huge disappointment IFF you expected another blowout jobs report like the one from January (504k jobs added). February saw just 311k jobs added, a decline of -38.3% MoM.

And just like that, The Fed’s terminal rate fell to 5.475%, a far cry from the 10.29% rate according to the Taylor Rule.

Today’s Fed Funds Target rate is 4.75% leaving only 72.5 basis points to move.

Today’s market hurl? The Dow fell -300 points and Europe looks like WWIII just broke out.

And the US Treasury 2-year rate plungeed -26.1 basis points.

Of course, Powell until recently followed the Yellen Rule. That is, keep rates at 25 basis points.

This is a classic communications breakdown between The Fed and the economy.

Let’s see if The Fed holds course with Silicon Valley Bank collapsing in biggest failure since 2008.

Silicon Valley Bank became the biggest US lender to fail in more than a decade after a tumultuous week that saw an unsuccessful attempt to raise capital and a cash exodus from the tech startups that had fueled the lender’s rise.

Regulators stepped in and seized it Friday in a stunning downfall for a lender that had quadrupled in size over the past five years and was valued at more than $40 billion as recently as last year.

The move by California state regulators to take possession of the lender, known as SVB, and appoint the Federal Deposit Insurance Corp. receiver underscores the impact that the US’s rapid interest-rate increase is having on smaller lenders. SVB is the second regional lender to fold this week after Silvergate Capital Corp. announced it was voluntarily liquidating its bank, spurring a broader selloff in bank stocks.

The FDIC has set up a bridge bank to handle the failure of SVB. VERY rare. The last bridge bank was for IndyMac Bank from LA.

SVP is the second biggest bank failure in US history after Washington Mutual (WAMU).

RIP Gary Rossington, the last remaining Lynyrd Skynrd original member.

Big 4 Banks And SVB: Canaries In The Economic Coal Mine? (SVB Racing To Prevent a Bank Run As Funds Advise Pulling Cash)

While waiting on the February jobs report from the US Bureau of Labor Statistics (BLS), I noticed that the big 4 banks (Bank of America, JPMorgan Chase, Citi and Wells Fargo) are drowning in net realized losses as The Federal Reserve combats 1) too many years of loose monetary policy under former Fed Chair Janet Yellen and 2) too much spending under Pelosi, Schumer and … McConnell.

At a micro level, we have Silicon Valley Bank (SVB) SVB Is racing to prevent a bank run as funds advise pulling cash.

Panic is spreading across the financial world as concerns about the financial stability of Silicon Valley Bank prompt prominent venture capitalists including Peter Thiel’s Founders Fund to advise startups to withdraw their money.

The turmoil followed a surprise announcement from Santa Clara, California-based SVB that it was issuing $2.25 billion of shares to bolster its capital position after a significant loss on its investment portfolio. The stock plunged 44% in premarket trading before exchanges opened in New York on Friday, set to extend its 60% decline on Thursday. Bonds had posted record declines, igniting a broad selloff in US bank shares that also spread to Asia and Europe.
In the US, the KBW Bank Index on Thursday had its worst day since June 2020, as its members shed more than $90 billion of value. In Europe, the biggest banks lost more than $40 billion from their market caps on Friday.

Management’s solution appears to have been to seek out yield through a lot of long-duration bonds. The bank started to lose deposits as VCs pulled cash/burnt through operating capital.

Are banks the canary in the economic coal mine?

Mortgage Purchase Applications Increased 6.9% In Weekly Survey (But Purchase Apps Down 42% YoY, Refi Apps Down 76% YoY As Fed Tightens Monetary Noose)

Mortgage applications increased 6.9 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending March 3, 2023.

The Market Composite Index, a measure of mortgage loan application volume, increased 6.9 percent on a seasonally adjusted basis from one week earlier. On an unadjusted basis, the Index increased 9 percent compared with the previous week. The Refinance Index increased 9 percent from the previous week and was 76 percent lower than the same week one year ago. The seasonally adjusted Purchase Index increased 7 percent from one week earlier. The unadjusted Purchase Index increased 9 percent compared with the previous week and was 42 percent lower than the same week one year ago.

Today, we saw mortgage rates climb further to 7.11% as the US Treasury yield curve (10Y-2Y) descends into Mortgage Mordor as The Fed continues to tighten.

Slippin’ Into Darkness! US Treasury Yield Curve Descends To -108 BPS (169 Days Of Inversion) As US Mortgage Rate Hits 7.11% (Fed No Longer Low Riding Interest Rates)

Slippin’ into darkness! The US Treasury 10Y-2Y yield curve, that is.

At the same time that the 10Y-2Y yield curve inverts to -108 basis points, Bankrate’s 30-year mortgage rate has risen to 7.11%.

Now that The Federal Reserve is no longer low riding interest rates, I expect to see a cooling of the US economy.

Hang ‘Em High! US Treasury 10Y-2Y Yield Curve Inverts To Near Lowest Since 1981, Credit/Equity Spread Turns Positive As Fed Tightens Monetary Noose

Hang ’em high!

As inflation remains persist (thanks to endless Fed stimulus and endless Federal spending splurges), we are seeing The Federal Reserve finally withdrawing the monetary stimulus (tightening the monetary noose). And with it, the US Treasury yield curve (10Y-2Y) goes down with it.

Another sign of distress is the spread between credit and equities which has turned positive as it does in times of crisis.

UPDATE! Recession predictor the US Treasury yield curve just went “red alert”, inverting to -100 basis points.

Price Of Insuring Against US Debt Default Highest Since Last Debt Ceiling Crisis In 2013 (Debt Up 88% Since The Last Crisis, $182 In Unfunded US Liabilites)

The last US debt crisis occured in 2013 when Congress finally raised the debt ceiling … and kept on borrowing and spending, But if you thought that a debt crisis would scare Congress (and the Administration) into balancing the Federal budget, you would be wrong. In fact, since the 2013 debt crisis, Federal debt is up 88% (+$14.7 TRILLION over the last 10 years).

And with the massive growth in Federal debt under Obama, Trump and Biden has resulted in an explosion in interest payments on the Federal debt.

And with $182 TRILLION in UNFUNDED liabilities, the debt issuance won’t stop.

Let’s see what is in Treasury Secretary Janet Yellen’s bag of tricks.

LIBOR cracked 5% for first time since 2007.

And the US Treasury 10Y-2Y yield curve is the most inverted since 1981.

Is Janet Yellen the “evil woman” from Crow’s song?

Sink The Economy! S&P 500 Down -6% Since Fed Started Raising Rates On May 4, 2022, Equity REITs Down -16% (Pension Pain From Interest Rate Increases)

Interest rates are an important driver of the economy and financial markets. And what has happened to the S&P 500 index since The Federal Reserve started raising their target rate on May 4, 2023 to fight surging inflation?

Since that fatal day, the S&P 500 index has fallen -6% and equity REITs (commercial real estate) has fallen -16%.

What about returns on US Treasuries and Mortgage-backed Securities (MBS)? Same thing. PAIN!

Although The Fed has pledged to keep raising rates to fight inflation (and further decimate retirement accounts), investors are pointing to a peak (terminal) Fed rate of 5.44% at the September 2023 FOMC meeting. Then rate cuts following the September 2023 meeting.

Of course, much of the blame belongs to former Fed Chair Ben (QE) Bernanke and current Treasury Secretary Janet “Too Low For Too Long” Yellen who never met a Fed rate hike that she liked. But Yellen LOVES giving away US taxpayer dollars … to Ukraine.

Give The Fed 3 Steps! The Fed’s Overreaction To Covid Shutdown (Over Twice The Reaction To The Crippling Financial Crisis Of 2008/2009)

There is a fascinating film about the 2008/2009 financial crisis called “The Big Short.” Actually, Iiked a similar film a little more called “Margin Call” where the infamous fire sale of securities (primarily subprime asset-backed securities).

But despite how bad the financial crisis of 2008/2009 was, the growth of Fed assets on it balance sheet (orange oval) paled in comparison to The Fed’s overreaction to the Covid outbreak of 2020. And the government shutdowns and mask mandates.

The good news? The rate of growth YoY of both The Fed’s balance sheet and M2 Money is negative. But it is still startling to see the comparison of Fed reactions to crises.

Give The Fed three steps to catch up to the mayhem they created. Particularly in inflation home prices.

They call Janet Yellen, former Fed Chair and current Treasury Secretary “The Breeze” because idiotic monetary policies just blow over her head.

After all, The Fed is way behind the curve on raising rates.

All this is happening as the interest paid on our rapidly expanding Federal debt is getting Titanic-like.