So far, the bank shutdown contagion hasn’t spread yet, but the stock market bear is growling even more loudly. Last I saw, the DOW is off 400 points. Maybe not as we close. You’ve got the Credit Suisse counter-party and capital problems headlining the early morning session, but that’s going to be up to the Swiss government, which will probably wind up backing them up.
Here’s some good news for the U.S.: The Fed-Treasury lending facility, which is an underreported development, is in fact a very good thing. It’s called the Bank Term Funding Program.
I mentioned it earlier in the week. It offers loans up to a year to backstop liquidity emergencies. The seed corn is $25 billion from the Treasury’s Exchange Stabilization Fund, now allows the central bank to leverage off that almost as much as they want or need, just in case.
Just in case what? You know, just in case. By the way, this was the way the Trump administration coordinated with the Fed during the COVID shutdown days for a number of emergency funds.
You might not like the idea, but you know what? You’ve got to go back to the 19th Century to famous British economic journalist Walter Bagehot, who said in times of emergency, “lend freely, on good collateral, with a small penalty rate.”
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That’s basically what the Fed and the Treasury have set up: a small penalty rate that will be 10 basis points above overnight paper called the OIS, which is the overnight index swap rate.
It’s basically the Fed funds rate. By the way, the paper of the collateral is good collateral. It’s treasuries and good, mortgage-backed securities. There is some good news here to stem the tide that could be a fire breaker, that emergency lending. Stop the contagion.
On the other hand, what’s bad is the FDIC insuring uninsured deposits. The left-wing ideologues at the FDIC, who still have not sold SVB, despite plenty of suitors such as KKR, Apollo, Blackstone and many others, they’re still sitting on their hands.
You know they could take taxpayers and the FDIC off the hook instantly if they just sell the damn bank. I don’t know what is holding them up. Also bad — and this is worse — is the ongoing story of the absolute failure of Mary Daly’s San Francisco Fed supervisors and examiners to step in on SVB with their wild investment strategy and long-term bonds while interest rates were soaring or their mismatched asset-liability risk-taking.
I haven’t seen a word about the failure of the responsibilities of the San Francisco Fed. They have supervisors, they have examiners and they should have done their job. You know what? It wasn’t just the last three weeks or the last three months. People have known about Silicon Valley Bank’s problems for at least a year, and where was the San Francisco Fed?
We have the House Financial Services Committee chair Congressman Pat McHenry to talk about that. Then there’s such a slew of crazy, left-wing stuff surrounding Silicon Valley Bank.
I mean, this is some weird bank. First of all, they gave $73 million to the Marxist BLM movement at the height of COVID and the race riots in 2020. They had a board of directors that was basically chockfull of Hillary Clinton donors and virtually no bank management.
Then, there is this $5 billion commitment to various climate and diversity, equity and inclusion woke investments, and they had a regional Fed head — that’s our Ms. Daly again — who gave a speech in Washington and wrote a paper saying, “as monetary policy-makers, our job is to navigate climate change.”
That’s not necessarily a sin, it’s just kind of odd when you throw that in with the rest of the Silicon Valley Bank crazy mix. Also at odds with this wise sentiment from Fed Chair Jay Powell. This is important. Remember he said this awhile back?
JEROME POWELL: We should stick to our knitting and not wander off to pursue perceived social benefits that are not tightly linked to our statutory goals and authorities. We are not, and we will not be, a climate policy-maker. Taking on new goals, however worthy, without a clear, statutory mandate, would undermine the case for our independence.
Now, that is exactly right, one of Jay Powell’s best moments. Now, whether Ms. Daly heard him or anybody else involved in this crazy bank game, I don’t know.
Jay Powell is correct. The job of the Fed is not climate change. It should be zero or at least less than 2% inflation. The problem here is, as we’ve said a million times, the Fed was in denial about the inflation two years ago. They waited way too long, zero interest rates, then they finally figured it out and of course, they ratcheted up interest rates. A lot of banks probably have securities that are way underwater because they either didn’t see it coming or didn’t believe it. That’s the Fed’s burden to bear, but at least Jay Powell’s got the climate change part right.
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By the way, on the East Coast in New York, we have the Signature Bank, which has also been closed, but now, their executives produced a Broadway-style musical to launch the bank in 2001, talking about how to start a bank that will “diminish and fail,” and another song, “How to build a bank for dummies.”
For me, I read this stuff and can’t believe it’s true. I must be losing my mind. At least get us new private-sector owners for these dumb banks, so the public doesn’t have to suffer anymore. This story is too weird.