Credit Suisse Hits New Low as Top Holder (Saudi National Bank) Rules Out Bigger Stake (US Treasury 2Y Yield Falls -40.4 Basis Points, 10Y Treasury Falls -24.8 Basis Points)

Apparently, the NEO financial crisis (not the subprime, but The Fed’s “too low for too long” crisis) is still with us.

Credit Suisse Group AG’s top shareholder, whose stake has lost more than one-third of its value in three months, ruled out investing any more in the troubled Swiss bank as a bigger holding would bring additional regulatory hurdles.

“The answer is absolutely not, for many reasons outside the simplest reason, which is regulatory and statutory,” Saudi National Bank Chairman Ammar Al Khudairy said in an interview with Bloomberg TV on Wednesday. That was in response to a question on whether the bank was open to further injections if there was another call for additional liquidity.

Credit Suisse says it has identified material weaknesses in its internal control over financial reporting as of December 31, 2022 and 2021, according to the annual report.

The material weaknesses relate to the failure to design and maintain an effective risk assessment to identify and analyze the risk of material misstatements in its financial statements and the failure to design and maintain effective monitoring activities relating to:
– Providing sufficient management oversight over the internal control evaluation process to support the Group’s internal control objectives
– Involving appropriate and sufficient management resources to support the risk assessment and monitoring objectives
Assessing and communicating the severity of deficiencies in a timely manner to those parties responsible for taking corrective action

And it could simply be that Credit Suisse was caught in the Central Bank “Bear Trap” where banks get clobbered as interest rates rise.

Credit Suisse’s CDS (credit default swap) is soaring!

And on the “it ain’t over till its over” news from Credit Suisse, the US Treasury 2-year yield plunged -40.4 basis points.

And the US Treasury 10-year yield plunged -24.8 basis points.

The official logo of the Federal Reserve should be Munch’s The Scream.

Let’s get ready to stumble!

US Inflation Comes In Hotter Than Expected, Real Weekly Earnings At -1.9% YoY, Negative For 23rd Consective Week (Treasury 2-year Yield Rises 34 Basis Points!)

The Federal Reserve is some hard thinking to do. Inflation came in hotter than expected, so raise rates to fight inflation or lower rates to prevent bank contagion. Similar to Kevin Malone’s “Double fudge brownies or Angela” debate.

While headline inflation (CPI) came in a 6% (considerably higher than The Fed’s 2% target), core inflation came in at 5.5% year-over-year (YoY), which was expected.

The truly nasty number is today’s inflation report is that weekly earnings YoY remained the same at a terrible -1.9%. Meaning that inflation is higher than nominal wage growth. This is the 23rd straight month of negative real weekly earnings. Well done, Fed and Biden!

Food is up 10.2% YoY. Electricity up 12.9%, shelter up 8.1%.

On the news, the US Treasury 2-year yield rose 34.3 basis points.

Somehow I doubt that Biden’s press secretary will tout 23 straight months of negative weekly earnings growth as one of Biden’s economic accomplishments.

Gold Soars 2% On Failure Of Fed And Bank Regulators

All together now. The Fed has been printing too much money for too long and Biden restricts fossil fuel production. Ad in rampant Federal spending and we have INFLATION. Inflation led to The Fed to raise rates. And with rate increases and down go the banks.

Of course, The Fed and Biden Administration will overeact (e.g. offering deposit insurance on ALL deposits above $250,000 creating moral hazard risk). As such, we are seeing gold prices soar by 2% this AM.

In adddition to gold rising 2%, natural gas futures are up 6%

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.

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?

US Mortgage Rate Rise To 7.13% As Inflation Remains And Fed Counterattacks

As Americans are painfully aware, inflation is still haunting us. Despite Administration proclamations that inflation is declining, it is rising again. And with rising inflation (and an overheated labor market), The Federal Reserve is in full counterattack mode, withdrawing stimulus and raising rates.

And with Fed tightening comes rising 30-year mortgage rates.

Out of boredom, I watched the Clive Barker film “Hellraiser” and noticed perpertual Democrat Presidential candidate Hillary Rodham Clinton in the cast as the female Cenobite.

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.

Inflation Alert! US Unit Labor Costs Soar in Q4 2022 To 3.2%, 2x Expectation Of 1.6%, UP 6.50% YoY (The Worst In 30 Years)

Despite Treasury Secretary Janet Yellen claiming that inflation was only transitory and likely to disappear, we are seeing continued inflation. Now we see that Unit Labor Costs are up 3.2% QoQ for Q4 2022.

Even worse, US unit labor costs rose 6.5% on a year-over-year (YoY) basis, the WORST since 1982.

And yes, Q4 2022 unit labor costs are up 2x the expectations.

In normal times, The Federal Reserve would raise rates to cool down the economy. The Taylor Rule suggests a Fed target rate of 10.59% versus the current Fed rate of 4.75%. A long way to go!!

Damn it, Janet!

Here We Go Again! ISM Manufacturing Prices Paid Rises For 2nd Straight Month As Fed Slow Walks Balance Sheet Shrinking (Growing Inflation Warning!)

Treasury Secretary (and former Federal Reserve Chair) Janet Yellen kept saying inflation was simply transitory. And for a while, the US saw cooling inflation. But we just saw ISM Manufacturing prices paid rise in February for the second straight month.

Yellen is over in Ukraine handing Zelenksyy yet another couple of billions. This is after Biden just visited Ukraine. Why not VP Kamala Harris?? Or war monger Adam Schiff??