So why did the Biden Administration and Janet Yellen bail out Silicon Valley Bank (SVB), regulated by San Francisco Federal Reserve (run by Mary Daly)? And then tell the US Senate “That’s it!”??
Where was Mary Daly when SVB increased loans to INSIDERS before its collapse? And will Daly/Yellen actually punish the CEO of SVB who jetted off to Maui after the collapse rather
Perhaps SF Fed’s Mary Daly should be prosecuted for negligence. Or thinking that SVB is unreserved.
I feel like I am watching the Star Trek original series episode “The Doomsday Machine” as former Fed Chair and current US Treasury Secretary effectively just guaranteed ALL US bank deposits. Aka, a massive bank bailout. The episode was about a robot space vehicle that destroy planets … and anything in its path. And if it changed course to destroy something, it gradually returned to its original destructive path. Like The Federal Reseve.
But after a few days of declining Treasury yields because of the mess created by Bernanke/Yellen’s too low for too long policies, and the Biden/Congress insane spending, the US Treasury 2-year yield is up 16.1 basis points.
Whether it was politcally motivated to protect Obama/Biden or Obama/Biden’s economic recovery was terrible, The Fed only raised their target rate once before Trump’s election. And then Yellen raised rates like crazy. Only to hand her mess off to Powell who had to drop rates like a rock and massively expand the balance sheet … again … to fight Covid.
For all the focus on whether the Federal Reserve is about to pause its interest-rate hikes, there’s another critical policy decision sure to draw plenty of attention come Wednesday: What the central bank does with its massive pile of bond holdings.
The banking-sector turmoil that has only appeared to deepen, combined with a previous increase in funding pressures, has left financial markets keenly attuned to what the Fed will say about its $8.6 trillion balance sheet.
Until this month the stash had been shrinking as part of the Fed’s efforts to return it back to pre-pandemic levels. But now it has started to expand again as the Fed acts to bolster the banking system through a slate of emergency lending programs. Its latest step came Sunday, when it moved with other central banks to boost US dollar liquidity.
Some say financial-stability concern may spur policymakers to dial back the runoff of its bond portfolio, a process known as quantitative tightening that’s designed to drain reserves from the system. Still, others argue that even if the Fed does pause its rate increases, the central bank’s overarching goal of taming inflation means it’s unlikely it will signal any shift this week in efforts to shrink the holdings of Treasuries and mortgage-backed debt. The one exception, they note, would be if stress in the banking sector were to become much more severe.
The Fed’s move to backstop US banks “clearly expands the Fed’s balance sheet,” said Subadra Rajappa, head of US rates strategy at Societe Generale SA. If usage of the Fed’s liquidity facilities is “small and contained they probably continue QT, but if the take-up is large then they probably stop as it then starts to raise concerns over reserve scarcity.”
The fate of the Fed’s portfolio is a subject of debate after the collapse of several US lenders led the central bank to create a new emergency backstop, known as the Bank Term Funding Program, which it announced March 12. Banks borrowed $153 billion from the Fed’s discount window — lenders’ traditional liquidity backstop — in the week ended March 15, Fed data show, a record that eclipsed the previous all-time high set during the 2008 financial crisis. They also tapped the new program for $11.9 billion.
The central bank’s various liquidity programs added about $300 billion to the Fed’s balance sheet last week, reversing about half of the reduction the Fed has achieved since the runoff began last June. But some economists say the two programs can work in tandem, with the banking efforts targeting financial stability and QT remaining a steady part of the Fed’s plan to remove the support it provided during the pandemic.
It looks like a 25 basis point increase at the next meeting, then cuts in The Fed Funds Target Rate to 3.820% by January 2024.
The labor market is still tight. So tight, we get this!!
Its the start of a new week after the closure of several US banks (SVP, Signature) and the failure of Credit Suisse. But swaps spreads have calmed down a bit and are no where near the credit crisis highs of late 2008. Or the plain vanilla swap between fixed and variable contracts (white line) has simmered down a bit. BUT was never as high as it was during the financial crisis. Panic by The Fed and FDIC much?
And the 2-year Treasury yield dropped -10 basis points … again.
The Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, the Federal Reserve, and the Swiss National Bank are today announcing a coordinated action to enhance the provision of liquidity via the standing U.S. dollar liquidity swap line arrangements.
To improve the swap lines’ effectiveness in providing U.S. dollar funding, the central banks currently offering U.S. dollar operations have agreed to increase the frequency of 7-day maturity operations from weekly to daily. These daily operations will commence on Monday, March 20, 2023, and will continue at least through the end of April.
And once the USD swap lines are reopened, the rest of the cavalry follows: rate cuts, QE (the real stuff, not that Discount Window nonsense), etc, etc. In fact, we have already seen a near record surge in reserve injections:
The Fed may as well formalize it now and at least preserve some confidence in the banking sector, even if it means destroying all confidence left in the “inflation fighting” Fed, with all those whose were in charge handing in their resignation for their catastrophic handling of this bank crisis.
Its Gov’t Gone Wild! Insane spending budget by “Sloppy Joe” Biden, Yellen asking Warren Buffet for banking advice (seriously??), a war in Ukraine that America doesn’t seem to actually want to win, etc. But its the banking system where banks are getting crushed by rising inflation and interest rates (but failed to hedge). Sigh.
As I always told my investments and fixe-income students at University of Chicago, Ohio State University and George Mason University, a 10 basis point change in the 2-year and 10-year US Treasury yield is a big deal. This morning, the US Treasury 2-year yield fell -32 basis points while the 10-year Treasury yield fell -14.8 basis points.
At the same time, gold 3.8% and silver rose 4.7% on banking fears.
Debt would hit a new record by 2027, rising from 98 percent of GDP at the end of 2023 to 106 percent by 2027 and 110 percent by 2033. Nominal debt would grow by $19 trillion, from $24.6 trillion today to $43.6 trillion by 2033.
Deficits would total $17.1 trillion (5.2 percent of GDP) between FY 2024 and 2033, rising to $2.0 trillion, or 5.1 percent of GDP, by 2033.
Spending and revenue would average 24.8 and 19.7 percent of GDP, respectively, over the next decade, with spending reaching 25.2 percent of GDP and revenue totaling 20.1 percent by 2033. The 50-year historical average is 21.0 percent of GDP for spending and 17.4 percent of GDP for revenue.
Proposals in the budget would reduce projected deficits by $3 trillion through 2033, including $400 billion through 2025 when it could help fight inflation. The budget proposes $2.8 trillion of new spending and tax breaks, $5.5 trillion of revenue and savings, and saves $330 billion from interest.
The budget relies on somewhat optimistic economic assumptions, including stronger long-term growth, lower unemployment, and lower long-term interest rates than the Congressional Budget Office (CBO). The budget assumes 0.4 percent growth this year, 2.1 percent growth next year, and 2.2 percent by the end of the decade – compared to CBO’s 0.1 percent, 2.5 percent, and 1.7 percent, respectively. The budget also assumes ten-year interest rates fall to 3.5 percent by 2033, compared to CBO’s 3.8 percent.
And then we have Sloppy Joe and Statist Janet Yellen meeting with mega donor Warren Buffet for advice on dealing with the banking crisis … made by Biden’s energy policy and insane Covid spending by the Administration. And, of course, The Fed’s “too low for too long” monetary policy. What is 92-year old Warren Buffet going to say?
Meanwhile, Fed Funds Futures are pointing to one more rate hike then a series of rate cuts down to 3.737 by January 2024.
Despite endless promises from Washington DC that there would never be another bank bailout, the Biden Administration bailed out Silicon Valley Bank (SVB) by removing the $250,000 cap on deposit insurance. Then Treasury Secretary Janet Yellen added that in the future, only banks that posed SYSTEMIC RISK to the economy will be bailed out. Translation: only the big four Too Big To Fail (TBTF) banks will be bailed out. Meaning that the Biden Administration prefers big banks to community banks. “Middle-class Joe” loves BIG Pharma, BIG defense, BIG tech, BIG media and now BIG banks. He should rename himself “Big Joe” Biden for the 2024 Presidential election.
Of course, we are aware of The Fed’s about face on shrinking their balance sheet (green line). While Bankrate’s 30-year mortgage rate has now declined below 7% to 6.97%, it has only fallen -15 basis points since the recent peak of 7.12% on 3/2/2023 when the 10-year Treasury yield was 4.056%. So, the 10-year Treasury yield has fallen -62.7 basis points since 3/2/2023 while the 30-year mortgage rate dropped only -15 basis points.
On the European banking front, Credit Suisse is kaput and both Swiss Bank and Deutsche Bank are considering buying the assets of Credit Suisse. In other words, MORE bank consolidation.
Here is a chart of US bank consideration as of 2009 with 37 banks in 1990 shriveling to 4 mega, TBTF banks in 2009 that remain today. But will the now unprotected community and local banks be absorbed into the 4 superbanks? Time will tell, but if history is repeated, the answer is yes.
The KBW bank index continued to fall despite the bailouts of SVB and Signature Banks. But at least total returns on Treasuries and MBS that banks hold increased with the return of QE!
Yellen and Biden compete for the Knucklehead Of The Century Award. While not as sloppy as the sudden Afghanistan withdrawal, bailing out the Silicon Valley elites will not end well.
Apparently, the only thing that is strong in the US economy is low-paying jobs. The economy as a whole is sucking wind as we can see with the Conference Board’s Leading Indictors plunging -6.5% Year-over-year (YoY) in February.
US consumer sentiment fell again … and has not been near 100 (baseline) since Covid struck.
And on the fears that the banking system is not well, the S&P 500 index is down -1.1% this morning.
Cry for Argentina! Their central bank boosted its benchmark Leliq rate by 300 basis points to 78%. The monetary authority’s board considered the increase in response to accelerating inflation and after leaving the key rate unchanged for several months.
Of course, the US Federal Reserve is going in the opposite direction to combat the US banking crisis created by inflation and Yellen’s “Too low for too long” Fed policies.
I am beginning to wonder in Treasury Secretary Janet Yellen and Chicago Mayor Lori Lightfoot are the same person. Both complete Statist screw-ups.
So, the Biden Administration made a horrible error by guaranteeing deposits at Silicon Valley Bank for deposits over $250,000. Essentially, Biden bailed out big tech that kept their deposits at SVB.
But what triggered the run on SVB and other banks? Simple. Biden and Congress spent like drunken sailors with Covid and The Federal Reserve went nuts printing money. Viola! We got inflation. But with inflation came The Fed’s attempt to get inflation back to its 2% target (difficult since Biden/Congress refuse to return spending to pre-Covid levels). But as interest rates rise, duration (weighted average life of MBS) rose dramatically meaning that risk increased. But banks like SVP ignored the risk, or didn’t hedge, or were spending time worrying about non-bank related issues.
So, what happened? Banks are holding Treasuries and MBS (orange line) that are getting clobbered with rate hikes (yellow line).
Talk about volatility. Today, the 2-year Treasury yield is up over 20 basis points as bond volatility hits levels last seen in 2008, just prior to the subprime credit crisis.
So, Biden’s bailout of SVP depositors stopped the deposit run for the moment. But if The Fed keeps hiking rates, banks are going to be hurting worse and worse. They could rebalance their portfolios and/or hedge. But with Uncle Spam (Biden) at the helm, bailouts are always on the table.
Confounded Interest - Anthony B. Sanders 
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