I love it when a former Congresscritter speaks the truth out loud.

New Yorker: It seems to me that we don’t necessarily want to count on the banks or the regulators always being perfect, so having these requirements might be useful.

Frank: I agree, but there’s no way to. You can require greater liquidity, etc. But there’s no way to force people to do their job well. By the way, are you assuming that, under Donald Trump, the regulation of Bank of America and JPMorgan Chase was everything it should be because they were still covered by the law?

Oh, but there is when someone is in a position of public trust.

You hang them when they play with themselves instead of doing their job.

Who remembers IndyMac?  Uninsured depositors (and there were quite a few) got hosed on that one, and the reason they got hosed is that the bank was backdating deposits to avoid violating reserve requirements.  The problem is that the regulators knew it and deliberately ignored it; in point of fact the examiner who knew it specifically had done the same thing during the S&L crisis and not only didn't go to jail, he still had his job.

And by the way, for those who think Sheila Bair would be a good choice to bring back would you like me to repost some of my articles from the 08-09 timeframe aimed at her, specifically, and her failure at the FDIC to enforce a law called "Prompt Corrective Action" which requires the FDIC to act before a bank invades its bond portfolio and thus is insolvent?

Said law is not a suggestion -- it is a law.  Yet exactly nobody has been indicted for their failure to do their actual job and enforce the law.

Its been fifteen years since that crap blew up the banking (and asset market) world generally and the people who stole the money not only got to keep it they got to ruin you -- and not a single thing changed.  These jackasses are still running around screaming about how "wonderful" they all are and, of course, how diverse!

It is absolutely true that OCC is responsible for examining the financial condition of banks.  It was back in 2007 too, along with OTS for thrifts (one of the changes is that OTS and OCC were folded into OCC.)  These requirements are not suggestions -- they are laws.  Yet we see the same thing happen all over the country, including gang-bangers being let out of jail because racism made the dude pull a gun as he was a poor blaaaaaaack or bwowwwwwwn boy, laws against carjacking and similar thuggery be damned.

We allow little hooligans to remain in schools because its too much to expect them to actually sit in class and not attack their teachers and, since we won't take those little thugs and put them somewhere else (like a reform school or even a rubber room) we then wonder why we have teachers who can't and unions who we allow to stay in power even when their members are drawing a salary while failing to do their job.  Of course the most important factor in all of this is whether a boy who claims he was born into the wrong body can go into the girl's locker room and leer at the actual girl's breasts.

We have a Treasury Secretary who ignores any law she finds inconvenient just as she did when she was at The Fed; why its important to talk about how climate is going to ruin financial conditions if we don't kill whales with windmills which disrupt their navigational capacity but its perfectly ok that our banking system enables the expenditure of gigawatts of power, all of which must be dumped as heat into the environment, for the trading of mathematical formulas with no intrinsic value of any sort (so-called "crypto" assets) when that same heat could do something productive -- like, for example, turn coal into synfuel or build a LFTR that can then do so, remove the alpha emitters from said coal and use them for power instead of causing lung cancer, and make the lights and heat in your home work.

This very same Treasury Secretary is well-aware that fully one third of the funds spent by said Treasury Department goes to Medicare and Medicaid and that is 80% unfunded, which is in fact more than the entire federal deficit.  Said person also knows that 15 USC Chapter 1 forbids any sort of scheme to fix prices or monopolize trade including internationally and that every drug company in the land does exactly that with their differential pricing between nations, say much less between individuals in the United States which virtually every medical provider in the US violates on a daily basis.  She also knows that this practice was challenged twice all the way to the Supreme Court and found to be illegal.  As the person signing the checks she thus also knows she's suborning, permitting and furthering felony violations of laws that have stood on the books for more than 100 years and yet rather than demand the DOJ put a stop to it and refuse to issue said checks until it is stopped she gives a speech about how women and minorities are under-represented and, once again, your Suburban is ruining the environment.

In 2006 it was blatantly obvious that the Option ARMs and other similar hinky products were fraud-riven packs of lies and everyone knew it.  There were tapes and emails of bankers having conversations with each other calling those securities vomit yet three minutes later they were off selling them to customers as "good investments"!  Not a single one of those institutions or persons went to jail and neither did any of the regulators who were quite-clearly doing anything other than regulating -- perhaps they were watching porn on the Internet in their offices?

That "zero" interest rates would not persist into the indefinite future because it could not, that M2 was driven up on a parabolic trajectory by both Democrat and Republican administrations with exactly neither Treasury Secretary doing a thing to stop it, that Trump bragged repeatedly about being "The King of Debt", that every penny of The Fed's bond-buying could only happen if the Treasury continued to deficit spend and thus issue said bonds was in fact driven by and caused by that issuance and that all of this was wild-eyed crazy, irrational and criminally negligent, akin to giving a convicted arsonist a five gallon can of gasoline, a pack of matches and several bricks to throw through the windows of buildings is fact.

That we, the people of this nation were given a prime, front-row seat as to what happens when you allow such conduct and refuse to jail those who are supposed to enforce laws but refuse, and instead they collude with entities interested in stealing everything they can is also fact.  That happened fifteen years ago, I reported on every bit of it and you would think the damage it inflicted on the average American would have forced reform -- if not jail right then and there a very clear statement that if it happened again we, the people, will not wait around to see if you suddenly decide to enforce the law -- we will do so on a summary and final basis, so you better cut that crap out.

But nooooooo!

Instead we're still screaming "Diversity!", "Equity!" and "Inclusion!" without a single care in the world as to whether before any of those the two most-important words of all are enforced:  COMPETENCE and JUSTICE.

Oh, so-called independent ratings agencies eh?

Just like the so-called "independent and wise" regulator called the OCC?

Or the so-called "independent, unbiased" auditor KPMG that passed on SVB's books just shortly before they blew up?

I'll be fair on the latter -- their job is to verify that what was presented is true; that is, there's no indication of fraud.  That doesn't mean what they looked at doesn't smell like crap, provided the crap is disclosed accurately in the financials presented.  So far nobody has said it wasn't.

But as I've pointed out since the inflation specter reared its head and was clearly not going to be "transitory" the very thing that made banks 10x more valuable in their stock price -- that is, a portfolio written at 4% interest where the prevailing rate is now 3% and there is time remaining on the bonds so you are (difference in rate * remaining duration) to the good.

But when rates rise and you hold the lower interest bonds the exact opposite happens.

This doesn't mean the bonds are not "money good" at maturity, but it does mean this, for say, a bond of $10,000, where there is 10 years left:

• The 2% one will pay $200 in interest per year for the ten years remaining or a total of $2,000 in interest plus the $10,000 principal, or $12,000.
• The 4% one will pay $400 in interest per year for the ten years remaining or a total of $4,000 in interest plus the $10,000 principal, or $14,000.

If you hold the 2% one and want to sell it to me you're going to have to discount the price so that on a percentage basis I make the exact same amount as the 4% bond or I'll buy that one instead of yours.

For those who say "well, but the Fed has eliminated the forced sale with the latest action" that's true, and fair too -- but what it hasn't done, because it can't do so, is eliminate the fact that over the next ten years your bond returns $2,000 less in cash flow.

Remember the basic principle of why you always make money buying things instead of selling them: If we both have overhead of rental for our office, but mine is $8,000 a month and yours is $30,000 a month then I have a $22,000 jump on you each and every month which means I can pay for a higher-quality staff or simply more of them, I can sell cheaper than you, I can buy better-quality inputs and out-compete you on quality, pocket some of that in additional profit, or some combination of all of those.

This is why you want recessions, bankruptcies and other similar dislocation events where those who do stupid things go out of business.

Yes, if you're the dumb one that's sad.  Same for your employees; they lose their jobs.

But the economy as a whole benefits and in particular the consumer benefits wildly because they get better products and services, lower prices or both and in addition the owners of the companies that don't do stupid things make more money with which they then go into the economy and spend on that nice evening out including a $100 steak and a few $20 cocktails.

If you bail out the fools then that innovation doesn't happen.  The consumer instead is forced to eat the overpriced products and poor service because the poorly run companies do not go out of business and the well-run ones don't get to feast on their remains at a huge discount.

MCSNet feasted on such remains at several points in time with one of the most-significant being an $8/ft lease for Class "A" office space in 2 Prudential Plaza -- an opportunity that arose because Donnelly Directory did a dumb thing and walked away from that space -- and the building needed it leased to someone who could pay for it now.  We needed space at that particular time as we were out of places to put people at 1300 W Belmont and needed to hire several more warm bodies and we had cash because we were not levered up to our necks and thus didn't need anyone's approval process (e.g. for a loan at the bank) to be able to look at it, know it would meet our needs and sign the papers handing over a check for the first few months rent so the building folks knew we were both serious and could pay.

I wasn't responsible in any way for Donnelly doing the stupid things they did.  I don't even know the specifics of those stupid things; I only knew who the former tenant was but not why they were suddenly gone and the building had not just space but space they needed leased right now -- and were willing to offer at a very attractive price to make that happen.  All I know is that they had it available, we needed it, what we needed and what they had was a good fit and thus our name went on the door and there we were.

Banks are not entitled to rising stock prices; in fact banking is supposed to be a pretty boring and mildly-profitable business.  Banking is an essential thing as people need a place to keep money and an exchange mechanism to get it from one place to another with decent reliability and security.  When it stops being a boring, mildly profitable thing watch out because the odds go up a lot that someone -- or a lot of someones -- are doing something stupid.

It was screamingly obvious that anyone sitting on long-duration paper when rates started to go up had two choices: Sell it right now and accept a small loss or sit on it until it matured and accept the fact that you're going to get a lot lower return on investment until it does mature, which might take quite a while.  If you choose to do the second you had damn well better make sure you won't have to sell it early later on because you have no control over market rates but what you can certain of is that "zero" is not and cannot be permanent.  Hedging such a possibility costs money which is an even bigger kick in the nuts to go on top of your lower returns (as you have to pay for the hedge out of that return) when you just decided to take a 2% return on the paper for the next 10 years and the guy down the road is getting 4% on the newer issues!  Now your net return (ex the hedge expense) might be 1% -- or even negative.

We have regulators who, in the face of these facts, are supposed to make sure that all the banks, not just some of them, are ok under that scenario.  If someone's paying 4% interest as a bank and has a portfolio full of long-duration paper they took on in 2020-2021 its a certainty they are paying out a higher coupon than the risk-free rate (that is, either Treasuries issued during that time of reasonably short duration) or one which has proper hedging costs included and the hedges are on when one adjusts those costs for risk, interest and duration exposure.

Sheila Bair is now opining that The Fed "should hit pause" to assess the impact of the policy changes.  Sorry Sheila, nope.  The Fed knew what that impact would be because its a mathematical certainty; what happens to long-duration bonds when rates go up is known just as is what happens when they go down.  Banks profited mightily, and it is reflected in their stock prices that have in many cases risen by 10x and they've engaged in billions in buybacks on top of that over the last 15 years.  That's "profit" that they effectively siphoned off from the common person who got nothing for their deposits during the same time banks were selling assets they paid 100 for at 120 -- and pocketing the difference.  Now that its the other way around they're crying poverty and demanding protection -- that is, to steal again -- when it was their decision alone to engage in the buybacks and other spending, never mind not issuing stock into that price ramp and sitting on the money said secondaries would generate to offset the inevitable when rates went back up.

I started this blog in 2007 -- originally on Blogger (which is why you can't see any of the replies; they didn't transfer) -- because during the 2007 1Q earnings calls, which I started paying attention to in a big way after a financial dislocation in Asia a few weeks earlier, WaMu was paying dividends without having the cash income to pay them.  They were doing this by booking negative-amortization "gains" -- perfectly legal but it was wildly unsound to spend the gains as they're not cash and they will only turn into cash if the person who has the mortgage can pay yet the dividend is gone from the bank's operating checking account right now whether the mortgagee can pay down the road or not.

OCC/OTS (at the time there were two) along with The Fed -- both the DC and all the regionals -- sat on their hands and let this go on.  It wasn't a secret either as the details were disclosed in the quarterly filings which anyone could see.

18 months later, roughly, it all went to Hell.

It was 100% predictable that it would go to Hell, and thus I said it would, because it was obvious -- either the people doing that crap were going to stop doing it or it was going to blow up in their face.  Rather than stomp on it as soon as that was detected, which is the regulators job, they sat in their offices and did God-knows-what -- everything except forcing the banks to cut that crap out.

15 years later here we are again and once again the regulators sat on their hands and doing nothing about that which is obvious and, if not stopped, is going to lead directly to ruin.

Let me be clear: So long as you shut the bank down before the bondholder capital is exhausted deposits are not at risk.  The stockholders and bondholders will get hosed but that's the price of owning said instruments issued by a company that is doing stupid things and those who buy such an instrument without paying attention to what management is doing deserve it.  While we need banks because the functions they provide are indeed crucial to our economy as I pointed out last time around the name on the door is immaterial to the function, and if the existing banks fail the real estate and other assets they own, when acquired at 10 cents on the dollar, mean the new bank is more efficient than the old one and that is a good thing from the perspective of the common person using the service.

So what should you expect as a consumer or business?

• If you have "open lines" available expect them to get slammed down to the outstanding balance at any time.  Revolvers in the corporate world and HELOCs and credit cards in the personal arena are particularly subject to this.
  
  
• If you need new lines in the coming months and years you are likely to find its very expensive -- if available at all.  Credit cards already are but part of bank analysis on this when offering one to you is the availability of other backstops you may have in the credit markets.  Expect the banks to consider all of those (including alleged "home equity") as zero.  On the corporate side if you're privately-held and need access to capital you may find the terms unacceptable -- if its available at all from a bank.
  
  
• Depletion of deposits is not going to stop, and forces the first two to ratchet tighter.  Why would you sit in a bank at 2% interest (which is all they can pay since they have long-dated paper they can't sell without a crippling loss, and its paying 3%) when you can get 4% or so in direct, short-term government securities?  We're talking bills here with a 4 week duration or similar; unless you have reason to believe you might need it right now why would leave that in a bank?  Now look at this from the bank's point of view: They can't entice you with higher returns as they don't have the ability to pay them.

No, there isn't an "answer" to this either folks and as long as government deficit spending continues it will get worse, not better.  Simply put that has to stop and the distortions that were into the system have to come back out or the ratchet job will continue until more and more things break.

There is a very interesting set of responses that Tucker Carlson obtained from most of the 2024 GOP candidates for President who have made clear they're in the game.  The specific topic was Ukraine and US foreign policy related to same.

Pay attention Washington, because the front-runners -- which means the most-likely set (collectively) of those on the ballot in another 18 months are all saying "Nope, nope and NOPE!" on the US "backing" the Ukraine position -- and instead marking China as the place to focus.

They're right by the way.

The vehemence with which they damn our current policy varies; of note Pence is still a warhawk and actually believes we have the right to dictate terms when it comes to Russia's government -- not just in THEIR foreign policy but as to who leads their nation.  Oh sure, he tries to couch this as "ask the thousands of Russians jailed in Russia" but perhaps Mr. Pence would like me to ask all the January 6th defendants how they feel about regime change in both the White House and whether the same sanction should be enforced against the preceding government, including him personally and his family.  

Why am I reasonably-certain that were I to take such a poll he wouldn't like the results?

The bottom line folks is that the so-called "GOP" within DC today believes as does Pence, but only when it comes to other governments.  Beyond our borders we should poll their political prisoners and then act as they direct.  Of course he would not last five minutes without swinging from a rope were we to ask our political prisoners the same question and that is out-of-bounds, naturally.

This, by the way, is not a unique position in history.  Indeed essentially every tyrant through the ages has taken the exact same position.  Stalin, Mao, Hitler (yeah, I know, Godwin's law) and more.  How about the King of England circa 1770?

The point that should be made here is that unlike those governments we at least pay lip service, at the present time, to the people having the right to set such direction and either endorse or repudiate it.  We hold elections in which said choices are allegedly made.  As things stand right now the GOP "in power in DC" is wildly out-of-sync with the Presidential candidates who, between them, have a near-certain lock on the nomination in the coming months.

Now how the population feels about this as a whole might be a different matter.  Or then again it might not.  Plenty of people think Putin is a thug (I'm one of them) but when it comes to taking a 20% pay cut in real terms on a durable, permanent basis, losing the ability to heat their homes, feed their families or even running the risk of glowing in the dark as a result of a nuclear war I suspect sentiments are a wee bit different than the DC table-pounders with regard to regime change.

Yes, Russia may be a nation with a modest GDP that exports black goo to the world in order to stay alive but it is a nation with a modest GDP that exports black goo and happens to have many thousands of nuclear devices on the business end of missiles and torpedoes both on land and sea.  If sufficiently threatened with political extinction I would expect them to use those rather than die in peace and if you don't you're more than a bit crazy.

Those (like Pence) who think Russia is the schoolyard bully who threatens but doesn't have a pistol under his jacket are even more-insane.  He knows the weapons are real, of course, as does everyone else, and for anyone to believe that a sovereign nation will simply fold to an outside influence rather than use whatever they have when facing their own political extinction due to said outside influence is to be imbued with a God Complex that should, in a Representative Republic, be an instant and permanent disqualifier from any high office in this land.

Why?

Because if you believe this then you must acquiesce under the principle of "All humans are created equal and are endowed by their creator with certain unalienable rights" to extend to those other nations and if it is our place to tell them what is "acceptable" in a government and remove by force those who deem not to be then the exact same principle applies to those other nations.

In other words if you hold this principle then you are endorsing Putin assassinating not just the present government (all of said government, including Congress, the Justices of the Supreme Court and the Executive) but also yourself ex-ante before the election!

Oh this "right", which you arrogate to yourself and the United States, does not just extend to Putin.

It also extends to Xi, never mind every other leader of every other nation.

That's madness, and in a world of nuclear hellfire madness can indeed lead to you glowing in the dark.

We would be wise to reject that with finality.

Oh, but inflation is over and Powell will cut rates!

Nope.

The Consumer Price Index for All Urban Consumers (CPI-U) rose 0.4 percent in February on a seasonally adjusted basis, after increasing 0.5 percent in January, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index increased 6.0 percent before seasonal adjustment.

The index for shelter was the largest contributor to the monthly all items increase, accounting for over 70 percent of the increase, with the indexes for food, recreation, and household furnishings and operations also contributing. The food index increased 0.4 percent over the month with the food at home index rising 0.3 percent. The energy index decreased 0.6 percent over the month as the natural gas and fuel oil indexes both declined.

Nobody needs to buy shelter, right?

The internals are a bit interesting; in particular foods you should eat, specifically meats, poultry, fish and eggs came down a bit.  Eggs I can confirm but heh, a double remains (its was 400%) so I guess we can call that sort of better.

Energy, specifically natural gas, was down quite a bit.  This is not really all that surprising in that we had a modest February temperature-wise and we're on the back half of winter; natural gas usually comes down about then for obvious reason.

All items less food and energy was up one tick over last month, which is hardly "coming down", but listening to CNBS (all the BS you can stand; buy SVB!) you wouldn't know it.  They're all in unison that The Fed "will pause and must pause" and gee, we can't upset the poor widdle banks who thought they could all play a wildly-unsound game and now are sitting on a big fat problem.

You have to chuckle at the idea that removing some of the screwing from the last 15 years "oh no, we can't do that or they'll be a nasty recession!" means they can't.  Well, yes they can and yes they must because the exponential rise in M2 over the last number of years can't continue and if they don't take it back out, not just stop it, there will be a spiral out of control.  The threat is still there of exactly that and in fact it gets worse by the day. 

The Feral Government must cut it out -- specifically, deficit spending -- right now.

But.... it won't.

Neither political party will enforce fiscal discipline and real rates are still negative.

So word salad it is on the squawk this morning, but the facts are that inflation is nowhere near the so-called "2% target" (when the actual statute says stable prices, which means zero -- you know, stable?) and has for decades.

The curve remains very inverted -- and yes, Mildred, there's a whiff of recession in the air.

It smells like dead skunk.