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2023-03-13 08:24 by Karl Denninger
in Banking System , 2685 references Ignore this thread
Sorry, No Empathy, No Bailouts And YES I MEAN IT
[Comments enabled]

Oh but so many climate-related firms are going to fail to make payroll!  - Any one of a thousand Internet scolds.

My answer: So what?

Next up - Republic, which apparently had lines out the door (if you believe the Internet) on Saturday.  Again: So what?

Folks, bubbles attract stupidity.  Stupidity is a constant in the universe; in fact it is likely the only thing that is truly infinite (with all due respect to the late Mr. Einstein.)

The so-called "Chief Risk Officer" at SVB had a masters in..... public administration.  Anyone care to bet if she passed any form of advanced mathematics -- you know, like for example Calculus or Statistics?  Do you think she understood exponents and why this graph made clear that concentration of risk and duration was stupid and likely to blow up in everyone's face -- including hers?

How about Bill Ackman and the others on the Internet screaming for a bailout?  How about the CFOs of public companies like Roku that stuck several hundred million dollars in said bank?  Was it not widespread public knowledge (and available to anyone who took 15 minutes to do research, which you'd think someone would do before putting a hundred million bucks somewhere) that this institution was chock-full of VC-funded startup companies which, historically fail 90% of the time and their debt becomes impaired or even worthless?

Where are the indictments for fiduciary malfeasance among these people?

It takes a literal five minutes with Excel to prove to yourself that if debt is rising faster than GDP no matter the interest rate eventually the interest payments on that debt will exceed all of the economy.  This of course is impossible because you cannot use over 100% of anything as its not there, but long before you reach that point you're going to have trouble putting food on the table, fuel in the vehicle and paychecks are going to bounce.  It was for this reason that one of the first sections in my book Leverage, written after the 2008 blowup which I chronicled and laid bare upon the table featured exactly this chart.

The last bit of insanity was just 15 years ago by my math.  Did we fix it?  No.  What was featured in the stupidity of 2008?  Allowing banks to run with no reserves.  Who did that?  Ben Bernanke, who got it into the TARP bill that eventually passed and which I reported on at the time.  It accelerated that which was already going to happen because Congress is full of people who think trees grow to the moon, leverage is never bad and exponents are a suggestion.

Oh by the way, your local Realtor thinks so to as does, apparently, the former SVB "risk officer" who, it is clear, didn't understand exponents -- or didn't care.

The simple reality is that it must always cost to borrow money in real terms.  This means the rate of interest must be positive in said real terms, which means across the curve rates must be higher than inflation -- again, in real terms, not in "CPI" which has intentional distortions in it such as "Owner's Equivalent Rent" when you're not renting a house, you're buying it.  Had said "CPI" actually had home prices in it then it would have shown a doubling in many markets in that section of the economy over the last three years.

In other words housing alone would have resulted in a roughly 10% per year inflation rate, plus all the other increases, which means the Fed Funds rate should have been 300bips or so beyond that all the way back to 2020 -- which would put Fed Funds at about 13% for the last three years.

It isn't of course but if it had been then all those "housing price increases" would not have happened at all.  Incidentally even today the Fed Funds rate is below inflation and thus the crazy is still on.

It's a bit less on however, and now you see what happens when even though they're still nuts being slightly "less" nuts means that these firms are no longer capable of operating without the wild-eyed crazy; even a slight reduction of the heroin dose caused them to fail.

Never mind the wild-eyed poor choices of executives (who signed off on all of this?) at SVB which the regulators all knew about and ignored.  The CEO?  A director of the San Francisco Federal Reserve.  Why don't you look up a few of the other "chief" positions and what they used to do.  Bring a barf bag.  No, really.

And what did Forbes think of all this?  Why it was good for five straight years of SVB being rated one of their BEST BANKS!

Negative real rates are never sustainable.  The insidious nature of that nonsense is that it extends duration in pre-payable debt, specifically mortgages.  Mortgages have had a roughly 7 year duration forever, despite most of them being 30 year paper nominally because people move for other than necessity reasons (e.g. "I want a bigger house", "I want to live here rather than there" and so on.)  A huge percentage of said paper was issued at 3% and now is double that or more.  Since a mortgage is not transportable (when you sell the house you extinguish the old one and take a new one) and changing that retroactively would be both wildly illegal and ruin everyone holding said paper you can't retroactively patch the issue -- which is that now nobody with a 3% mortgage is going to prepay it and move unless they have to and so the duration is extending and will continue for the next couple of decades.  This in turn means if you have a 3% mortgage bond, the new ones are 7% and there's 10 years left on the reasonable expectation of its life you're now going to have to discount the face value by the difference in interest rate times the remaining duration or I won't buy it since I can buy the new one at the higher rate!  This is not a surprise and that it would happen and accelerate was known as soon as inflation started to rise and thus force The Fed to withdraw liquidity.  The Fed cannot stop because inflation is a compound function and at the point it forces necessities to be foregone the economy collapses and, if continued beyond that point THE GOVERNMENT collapses because tax revenue wildly drops as well.  The only sound accounting move at that moment in time as a holder of said paper was to dispose of the duration or immediately discount the value of that paper to the terminal rate's presumption and adjust as required on a monthly basis.

Nobody did this yet to not do it is fraud as these are not only expected outcomes they're certain.

Where was the OCC on this that is supposed to prevent such mismatches from impairing bank capital?  How about The Fed itself, or the FDIC?  The San Francisco Fed was obviously polluted as the CEO was on their board (until he was quietly removed on Friday) but isn't it interesting that all these people who were intimately involved in firms that blew up in 2008 were concentrated in one place in executive officers with direct fiduciary responsibility?

And isn't it further quite-interesting that all the screaming you're hearing right now is about how "terrible" it will be that "climate change" related firms will be unable to make payroll and the new upcoming VC-funded startups won't because their favorite conduit has been disrupted?  What's that about -- the entire premise of these firms requires them to not only force their startups to bank in specific places with large amounts of money (since they don't earn anything they have to have access to and consume tens of millions or more a year) but cash management, you know, putting all of it other than what you need to make payroll next week in 4 week bills is too much to ask?

There's a rumor floating around (peddled by Bloomberg) that over one hundred venture and investment firms, including Sequoia, have signed a statement supporting SVB and warning of an "extinction-level event" for tech firms.  Really?  Extinction for technology or extinction for cash-furnace nonsense funded by negative real interest rates which make all manner of uneconomic things look good but require ever-expanding, exponentially-so, levels of debt issuance?

Again, that is not possible on a durable basis and once again the reason why is trivially discernable with 5 minutes and an Excel spreadsheet and graph.  It takes about an hour to do it manually using graph paper, a basic 4-function calculator or the capacity to perform basic multiplication on said paper and a pencil.

Now some basic facts on SVB specifically.

The capital structure of a bank in terms of who loses and in what order looks like this:

  • Stockholders; first to go, and go they shall.  If you owned stock in this firm you have a zero.
  • Bondholders, second to go.  Rumor on the street is that the bid on those bonds is about 40 cents on the dollar.
  • Uninsured depositors; next up, those with over $250,000 per TIN/EIN/SSN in the bank.
  • Insured depositors; those are guaranteed (if necessary) by the FDIC.

Here's reality folks irrespective of the screaming on the Internet and elsewhere in the media: The bonds still have a bid, which means those people who do this stuff for a living, and when they're wrong they lose a lot of money (they're not wrong, in other words) do not believe the bank has lost all of its bond-based capital.  They're insolvent - which just means the bond capital has been invaded.  In other words the actual loss when all is said and done for uninsured depositors is likely to be zero or close to it.  Of course this presumes we have a basic failure due to stupidity here and not fraud on top of that, which is yet to be determined with finality.  However, it may be a while before said uninsured depositors can get their money since if there was fraud then indeed some of that is gone and, if there was an interest rate being paid on it, well, it isn't anymore.  That is, the most-likely outcome for uninsured depositors is that some of their funds have been converted into a forced-time-deposit (e.g. "CD") paying zero interest until the bank can be either sold off or wound down and the assets disposed of.

If you're a company and have a huge amount of money there under these conditions obtaining a short-term line to cover that for operating purposes within days should be no big deal -- unless, of course, you are a money-losing operation and can't subordinate those deposits to secure the line because you have loan covenants that make that impossible or worse, you can't borrow or bank anywhere else without violating your other covenants such as, for example, with said venture fund that, along with SVB, loaned you the money you're operating on.  If you did that then yeah, you're screwed (and so are your employees) but that's not a function of the bank going out of business its your own fault because you were stupid and were operating an unproved, money-losing outfit funded by the leverage games that were created by said negative rate environment.  If you're in that position or employed by someone in that position what you deserve is nothing because you were stealing from the public at-large via these machinations and your bet that you could grow out of it proved false.  That this was "legal" does not change the essential character of what you were either doing or living on.  You gambled and lost so shut up.

Folks, you may personally think the "bubble" side of such things is great.  You may even have a job as a result of it.  You might be a "coder" even though you can't really code as you don't understand assembler or even how a computer actually works and thus you rely on some other piece of nonsense (like "Android Studio" or some other "abstraction" layer) to keep your software from blowing up. You might be a "Chief Risk Officer" who has a Masters in Public Administration and, it appears, never managed to pass a math class requiring the understanding of statistics or, for that matter, even exponents.  You might be one of the 90% plus who makes their living extracting funds from others in the medical system but never provides a single second of care to a single person and thus, when you get down to it, your job is to steal rather than heal.  And you might be one of those so-called property owners who thinks AirBNB is great with not a care in the world that the bartender in the local tourist establishment has nowhere to live because on that salary they can't pay $500,000 for your one or two-bedroom cabin with no closet space.

I think I want to update Einstein's observation on stupidity being infinite to include insanity, which, it appears, is in danger of exceeding stupidity in terms of prevalence.

You learned nothing from what happened 15 years ago and you demanded nothing change either.

Now there are people screaming that The Fed has "caved" and is bailing people out. Nope.  Here's their term sheet for the "Bank Term Funding Program" (Bring The Frapping Punch!). 


You'll note a few things.

First, the collateral has to be good.  The list of things you can pledge is found here under 201.108(b); it includes Treasuries, Fannie, Freddie, Ginnies and similar.  Note that FHA insured loans are not eligible because it is not an unconditional guarantee.  This is important.

Second, yes, they are allowing them to be pledged at "par" rather than with a haircut, but there's a price to that, which is that the lending against it is at a penalty rate and the advances are made with recourse, so if there is fraud (for example) and the collateral is not actually good the bank that does it is boned.  Second, since you must pay interest on the advance (and that ain't zero anymore!) you are digging a bigger hole and had better have a way to get out of it.

In short all this does is stop the predatory circumstance that people like Ackman were trying to incite over the weekend.  The basic problem, which is that OCC and the banking system generally, along with the ratings agencies, have sat on their hands with a known duration extending event, that is basically locking people in 3% mortgages that will not prepay as usual except under extreme duress, and on top of it with an interest rate mismatch that have a lower cash flow than current note issues of the same type and character which means their current value, if sold, is less.

But if not sold, while their face value is "good" in that they have unconditional guarantees you still get a much smaller coupon, which is what you're operating the institution on and with which you'd like to pay interest on your deposits, than you have with more-current paper issued at a higher rate.

There is no way to fix that, it was certain to happen and was not speculative thus not including that in your "models" is fraud as is ignoring it if you're a bank executive or regulator and it is for that reason that the OCC and Fed should have, six-plus months ago when it was clear inflation was not "transitory" and disappearing in a few weeks forced disgorgement and roll-down into the short end of the curve so as to prevent this from becoming an issue.  Yes, that would have hit earnings and of course the ever-sacred "buybacks" and thus stock prices in those firms would go down.

Well, guess what?  Stanching the predatory behavior of jackasses like Ackman does nothing to resolve the fundamental problem in that the monetary heroin cannot be restarted and as a direct result now, the time is for all this crap of the last fifteen years, and the entire reason this blog exists, to come back out of the system.

One of the best definitions of insanity I've ever heard is doing the same thing over and over again but expecting a different result.

Welcome to 2008, part deux.

Let me know when you're ready to force those who did it last time and now have done it again off the public policy playing field.  They won't go willingly; tyrants, thieves, brigands and other malefactors never do.


PS: Look to the right and you'll see my book, Leverage, is still there.  The inevitable result of bubble economics is still on the first set of pages and the reason its inevitable is that despite so-called "common core" 2 + 2 will always equal 4.  Here it comes.

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Comments on Sorry, No Empathy, No Bailouts And YES I MEAN IT
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Cmoledor 1k posts, incept 2021-04-13
2023-03-13 09:00:12

Morning Karl. Again Im grateful you can clear the bullshit that gets spread as news and get the realities to every situation out to the public. These money things are out of my league, but everyday you make me learn just a little more about how these things really do affect me and what I can do to better myself. Or us rather. So its all frauds and scams still. I imagine we got a while before anyone gets the balls to demand accountability. Cheers all.

The whole world is one big fucking scam
Why are you giving a vulgarity warning here? Our genial host is an advocate of both skullfucking and sodomy via rusty chainsaw. Credit to Rollformer
Sammuell 17 posts, incept 2022-12-11
2023-03-13 09:00:21

After falling ass backwards in deposits, If SVB simply bought T-bills, LESS than 1 yr duration, would this collapse have been avoided? or at least more manageable?
Geckogm 6k posts, incept 2007-06-26
2023-03-13 09:03:42

Tickerguy 193k posts, incept 2007-06-26
2023-03-13 09:03:25

Yep @Sammuell -- but they wouldn't have been paying anywhere near what they were on said deposits.

Fundamentally they did the same thing WaMu did; they were paying out money "on the come" expecting to actually make the books balance later. WaMu was counting negative amortization as "capital" (and technically, by the accounting rules it is) ASSUMING THE PERSONS IN QUESTION ACTUALLY PAY.

Their OPERATING cash flow as insufficient to pay the dividend they declared and paid in the the first months of 2007. That was why I started writing this blog in the first place -- the OCC should have shut them down INSTANTLY when they made that announcement as it was demonstrably unsound and for a bank to do such a thing in an "on the come basis" is ridiculously beyond responsible limits. It took quite a while for them to actually blow up, but blow up their did along with a lot of other people who did similarly hinky things -- or even worse, in the case of IndyMac, when they got in trouble doing it they turned to outright fraud by backdating deposits!

The difference between "kill" and "murder" is that murder, as a subset of kill, is undeserved by the deceased.
Ocdawg 429 posts, incept 2019-03-14
2023-03-13 09:12:12

Outstanding KD

Personally, I had cleaned up my personal finances where I'm cash or bonds except a leased truck trying to burn up some negative equity. After Friday, I'm dumping it this week and buying a beater truck I will own.

Kudos again Karl... your observations and advice are second to none... THANK YOU!!!

"Think of how stupid the average person is, and realize half of them are stupider than that."- George Carlin
USA= smiley... and... GO DAWGS!!!
Nashville 140 posts, incept 2018-02-27
2023-03-13 09:12:22

Watching Biden LIVE this morning (I think he's alive?) on GMA. Reading the teleprompter - just said its Trump's fault for rolling back regulations put in during the wonderful Obama administration. So there you have it. Nothing more to see. Biden has it all under control.
Tickerguy 193k posts, incept 2007-06-26
2023-03-13 09:13:06

Well Trump didn't do that -- BARNEY FRANK endorsed it, Congress passed it and incidentally yes, Trump did sign it.

Oh by the way, Signature Bank? Frank was on its board.

The difference between "kill" and "murder" is that murder, as a subset of kill, is undeserved by the deceased.
Ihsmta 878 posts, incept 2008-04-10
2023-03-13 09:19:02

The fact that the whole of the federal government stepped in and "back stopped" the entirety of the banking system after only two bank failures is telling.

What do they know that they aren't telling - but we'll soon find out?

"Economists are no different than the prophets of ancient Pompeii who reassured that Mt Vesuvius would never blow. After all, it never had before." Baxter Black, DVM and Cowboy Poet

"You can avoi
Hobbled 282 posts, incept 2011-02-09
2023-03-13 09:19:10

Any clue how long it takes to crash and burn? Saw one article last night saying the "relief" offered was great and would stem the panic. As if this morning it appears their relief is essentially gone.

This is not my world, I operate my business on cash basis not debt basis so this is ancient Greek to me. But I do know my vendors rely on this debt crap and I have no way of knowing how many of my clients employers rely on it for their paying of salaries. So I know it will affect me at some point. Will the effects be much higher inflation very soon, mass layoffs or outright bloodbath for many corporations so no products to buy or people to employ.

Just wondering how all this high finance chicanery will affect average schmucks like myself. I do get enough to know we are screwed by greed and bad math, but want to know how bad and how fast the tiger turns and bites us in the face.
Gotta go buy some chicken feed and gill up my gas tank.
Sammuell 17 posts, incept 2022-12-11
2023-03-13 09:21:27

Thanks for the reply! People like Ackman were saying "making depositors whole" is not a "bailout" because Equity/Bond holders should and will get hosed.
But it's clear people having deposits were getting subsidized, and Ackman basically made a veiled thread to protect those subsidies, ALL or nothing, as I make sense of this, w/o enough accounting skills.

Yeah, it's "muh regulation" from Dems vs. "Muh free market" vs Republicans. They're functionally meaningless with "bad cops."
Ihsmta 878 posts, incept 2008-04-10
2023-03-13 09:21:49

Barney Frank was on Newsmax as a remote commentator this a.m. pertaining to Dodd Frank and his position with Signature Bank. Usually, a remote commentator will "stage" their backdrop with neat rows of books, maybe a cover shot of their book for self promotion, flags, awards, etc. What did Barney display? A crappy, cheap, cluttered, particle board bookshelf partially full of books turned backwards and...drum roll...window screens leaning against the wall. Barney was his same old unkept self.

I pointed out to my wife, "See, not all gay guys have fashion/decorating sense..."

"Economists are no different than the prophets of ancient Pompeii who reassured that Mt Vesuvius would never blow. After all, it never had before." Baxter Black, DVM and Cowboy Poet

"You can avoi
Tickerguy 193k posts, incept 2007-06-26
2023-03-13 09:21:05

As I said when this started @Hobbled -- the fuse is in the box, I have no idea how long it is, nor how big the explosive is inside. It might be a firecracker.

It might also be a thermonuclear bomb.

How soon? Well, history does not repeat but does rhyme. Best guess given the shortening of time frames that social media shoves down the pipe is a couple of weeks to six months.

This one will be bad, likely worse than 2008.

The difference between "kill" and "murder" is that murder, as a subset of kill, is undeserved by the deceased.
Tickerguy 193k posts, incept 2007-06-26
2023-03-13 09:22:05

I'd say "Fuck Barney Frank" but he'd enjoy it.

The difference between "kill" and "murder" is that murder, as a subset of kill, is undeserved by the deceased.
Hobbled 282 posts, incept 2011-02-09
2023-03-13 09:23:20

Oh, and how exposed are the local credit unions. Got all my accounts in one.
Iou 1k posts, incept 2009-03-16
2023-03-13 09:24:37

Yep, here we go again. I'm not looking forward to see what these criminals have planned this time around. It well past time for public hangings to return.

"When plunder becomes a way of life for a group of men living together in society, they create for themselves, in the course of time, a legal system that authorizes it and a moral code that glorifies
Dingleberry 684 posts, incept 2011-11-06
2023-03-13 09:24:49

The Fed blinked. And caved. And (yet again) LIED. As predicted. It's not like we haven't seen this movie before. Chapter and verse.

This time, instead of shitty mortgages, it was backing all manner of VC scams and even crypto. Yes, the crypto bros ostensibly against the fiat system are being bailed out by...what for it....THE FIAT SYSTEM.

And you ALL get to pay for it via inflation. But remember..."it's for your own good". Think of the childenz!!!! Think of the side hustlers on Etsy!! Think of the crypto bro!!! This is what that "bank" was funding and backing. A complete woke toilet with ATMs. And this has systemic risk to our entire system?

Let that sink in.

Pro tip for you newbies who are too young to remember financial crises of times past: when the rubber meets the road....the banksters just buy the road. With printed money of course. Backed by YOU with a further diluted currency.

So the next time you hear someone bitch about the rising wealth & asset gap...."working harder for less"....etc. etc. etc......and they are ok with YET ANOTHER BAILOUT OF THE RICH AND CONNECTED.....tell them to fuck off and die. Right here. Right now.

Read up on Andrew Jackson and how he handled this bankster shit. Different time, but exact same people. Exact same "threats". But he was a different man who knew and understood the scam. He knew what caving to them would lead to....and eventually it has, because we prefer the printing press and a cabal of banksters to lord over us.

Accounting and legal gimmicks will ALWAYS be used no matter what the law says when the big boys (and woke girls) get into trouble.

We know what to do. We did it for centuries. But haven't the political will to do so. And the populace is too stupid and uneducated to realize it. So history WILL repeat.

The dildo of consequences from shitty decisions does not come with lube. Unless you are one of the financially connected.

And we aren't.


Tickerguy 193k posts, incept 2007-06-26
2023-03-13 09:23:46

Do not be over FDIC limits.

If you are, move the excess to a Treasury Money Market or Treasury Direct and just buy the bonds directly.

The difference between "kill" and "murder" is that murder, as a subset of kill, is undeserved by the deceased.
Andrew 167 posts, incept 2014-09-24
2023-03-13 09:25:34

What's funny (sort of) is a modern "Run On The Bank" can be done on a computer or with an Appy on a Smarty Phone.
So a "virtual line", people don't have to find a place to park and camp out on a sidewalk.
Hobbled 282 posts, incept 2011-02-09
2023-03-13 09:30:06

Thanks. May we live in interesting times.🥴😬😳
Tritumi 1k posts, incept 2008-11-29
2023-03-13 09:45:52


Maurevel 1k posts, incept 2009-06-14
2023-03-13 09:45:52

No spoilers please. I haven't experienced part 1 yet.
Iou 1k posts, incept 2009-03-16
2023-03-13 09:45:52

@Dingleberry, fitting number 666 post...

"When plunder becomes a way of life for a group of men living together in society, they create for themselves, in the course of time, a legal system that authorizes it and a moral code that glorifies
Winesorbet 962 posts, incept 2010-08-23
2023-03-13 09:45:52

KD, thanks for putting this current situation in perspective. There is so much noise out there on social media, you are the perspective that is needed.

That said, yields are plunging and the fed seems to have to pause rate hikes. Do you think we will see a re-acceleration of inflation as well as asset prices?
Tickerguy 193k posts, incept 2007-06-26
2023-03-13 09:46:15

@Winesorbet further inflationary pressures will trash asset prices. That's the spiral they can't afford to let occur.

The difference between "kill" and "murder" is that murder, as a subset of kill, is undeserved by the deceased.
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