The bank panic has momentarily gone quiet as Mr. Market waits to see what the Fed will do in its March 21-22 meetings. The Dow was up 383 points, which by the standard of crisis market volatility, is pretty mild.
That does not mean monetary and regulatory authorities won’t continue to screw things up. This crisis was preventable. The Fed should have started inching rates up when the Fed first got religion, in 2014. Even if over time it amounted to only a half a point a year, the US would have gradually starved financial speculators of cheap leverage and have spared homeowners serious pain.
With getting this late start, the monetary authorities should have recognized even more that it would not take that much in the way of interest rate increases to produce meaningful bond losses, which would inevitably hurt at least some, and potentially many, banks. Yet the regulators were caught with their pants down.
But we are where we are. And even granting that, we still have incompetence run amok. For instance, a dyed-in-the-wool bankster hater yesterday lamented to me, “Where is Mario Draghi?” He said the ECB would do whatever it takes to save the financial system. Even though it was not clear that he could deliver, it was the right thing to say. And Draghi said it with enough conviction to get Mr. Market off the edge of the balcony.
An even more impressive stunt was Draghi’s smoke and mirrors of the OMT, or Outright Monetary Transactions program. Draghi announced it with great fanfare when periphery country spreads were gapping out. The risk premia dropped smartly.
But the OMT was nothing new! All Draghi had done is put a bunch of existing powers in a pile and give them a clever name.
Where is Lagarde? She’s photogenic and articulate. She’s capable of giving a bank industry pep talk, particularly since Credit Suisse is not her mess. But she’s been awfully quiet.
Similarly, I can’t believe I’d be wishing to have Paulson, Geithner, Bernanke (and too often sidelined Sheila Bair) back. They (ex Bair) had bad objectives, but at least kept throwing stuff at the wall to see what would stick. The fact that they were regularly in the press, trying to reassure the public, as low a bar as that is, is better than what we have now. During the crisis, the heads of the regional Feds would also regularly be enlisted to make soothing noises.
Instead we have Jamie Dimon trying to play the reincarnation of JP Morgan in getting his bank CEO cronies together to put together a better rescue scheme for wobbly First Republic, the first one having gotten a raspberry from the rating agencies (First Republic’s bonds were downgraded to junk over the weekend). If he manages to succeed, that mean a bank consortium will probably convert some or all of their $30 billion of deposits into equity of some sort. They are likely to demand concessions and additional control rights, at a minimum certain veto powers. If that happens, whatever this group gets should serve as a template for ownership/additional governance rights in government rescues.
But Warren Buffett has also been holding court. If he makes any bank investments, you can be sure Uncle Sam will be partly holding the bag.
Here we have an Administration often depicted as mainly in the business of propaganda, revealed as lousy at that too. Jerome Powell and John Williams, the head of the New York Fed, who ought to be out firefighting, are missing in action. Janet Yellen has been negative value added. The grandma-not-used-to-the-limelight act psychologically amounts to a statement that she can’t be expected to take any heat. That’s an anti-leadership posture.
Yellen appears to have learned nada in her many appearances before Congress. She should have at least been able to wrestle Senator Lankford to a standstill, but her grown up little girl act seems to constrain how she operates under pressure:
This is truly incredible.
Here is an exchange with Senator James Lankford & Yellen.
He asks, “Will every community bank … get the same treatment as SVB?”
Yellen: “Banks only get the treatment if … the failure to protected uninsured depositors would create systemic risk.” pic.twitter.com/JvAX3Hhb6F
— unusual_whales (@unusual_whales) March 17, 2023
Yellen could have disputed Lankford’s facts: “SVB in value terms had 97% of its deposits as uninsured deposits. I am unaware of any community bank that has that exposure and thus is at risk of having an SVB overnight run. If you can show me otherwise, we can have a follow up discussion.”
Or she could have admitted to the fact that discount window changes and the Bank Term Funding Program got ~95% of the way to backstopping all uninsured deposits. But the Administration has been bizarrely loath to admitting it’s already done close to a full bailout by stealth, meaning they couldn’t use it to call on the Confidence Fairy.
Later, Lankford complains that his banks will have to pay higher FDIC premiums. Yellen could have easily turned that around and given him a lecture than in any insurance scheme, most insured overpay by design because they can’t afford the tail risk. And yes, sometimes premiums go up system-wide to recover for past underpricing, just like property & casualty insurance after a big hurricane year. A speech like that would have put her in charge of the exchange and also run out the clock.
Consistent with this pattern of ducking responsibility, Biden has not only abdicated as far as his office is concerned, but he’s trying to fob the crisis off on Congress instead of having the Treasury and FDIC roll up their sleeves. Congress is slow-moving and divided, and therefore the worst place to send anything that need urgent action. That is the business the Executive is supposed to be in, even to the degree of FDR-like “Do something now and let the judiciary yell at you later.”
So with that background, get a load of this Bloomberg account:
The White House has a message for those watching for a sweeping US response to the global banking crisis: It’s now in the hands of Congress.
Since President Joe Biden spoke last Monday to reassure nervous depositors that their money was safe in financial institutions and tout a series of regulatory moves to shore up troubled banks, he has said little about the turmoil that has shaken markets….
“We should not let Congress off the hook,” said White House Press Secretary Karine Jean-Pierre. “More actions need to be taken for sure. The president has taken action to deal with the moment that we’re in.”…
Jean-Pierre repeatedly ducked questions at Monday’s news briefing about what more the administration might do on its own to address the situation, even after the historic sale of Switzerland’s Credit Suisse Group AG and uncertainty surrounding the future of Silicon Valley Bank. Instead, she pointed to actions regulators have already taken.
She declined to detail what other specific measures might be taken, like additional assistance for the struggling First Republic Bank or higher limits for FDIC insurance on bank deposits.
If you read the article carefully, it is painfully clear that White House spokescritters are trying to turn public demands for “What else are you going to do to save the banks” as being about regulations, as opposed to the possibility of needing additional backstop/bailout measures.
Although circumstances may yet force their hand, it’s clear the Administration wants nothing to do with fixing the banking mess. That is neither a responsible nor a tenable position.