- Jun 6, 2007
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America's banking system is still at heightened risk of significant numbers of banks sliding into a state where they need to be taken over by Federal regulators and shutdown. The problem with America's banking system is America's regulation of the industry is deficient and the reasons for that are a microcosm for what is wrong with our government in its entirety which is we have the wealthy and special interests controlling things at the expense of the interests of the American people, there is few champions for the American people in Washington seeking laws based on the merits of the issues not politics! Specifically with the current banking system trouble there is a lot of wealthy people and Wall Street players that would make a lot of money if a lot of America's Banks failed they would make money off of derivative investments that benefit when stocks go down and they would make money from investing in the surviving banks which would eventually prosper from less competition in their industry. What the country needs is a short term plan and a long term plan to protect, preserve and support the system and accompanying legislation for the nation's short-term and long-term needs.
In the short-term look at the failure of Silicon Valley Bank which shows some of the things that needs to be done on Thursday March 9th the banks stock dropped sixty percent in value that day that slide was unrecoverable for the Bank. One does not have to be a rocket scientist to know that America needs regulation that puts price circuit breakers on bank stocks trading on the nation's exchanges; there should be circuit breakers on bank stock prices so that if a bank stock drops twenty percent from its opening price that day, trading in that bank stock is suspended for the entire balance of that trading day. Think of what is involved here we have a bank which holds depositors money deposits which are insured by a federal agency, being responsible warrants the view that if a bank stock in one day drops twenty percent in value the nation's bank regulators should want to know what the hell is going on with this bank is this bank in danger of failing if there are problems with this bank in the area of solvency can they be fixed by federal regulators and if yes than fix them circuit breakers would give federal regulators the time before it is too late and the bank's capital value is destroyed to find out what the problems are and fix them! Silicon Valley Bank probably could have been saved on March 9th when a run on the bank's stock and deposit accounts began SVB had $91 billion dollars of investment grade bonds on its books granted they were long-term bonds where because of the recent rise in interest rates had loss $15 billion dollars of market value but if on that day Federal regulators stepped in and did what they ultimately did for the banking industry is opened up a lending window where they took as collateral investment grade bonds and utilized the par value of the bonds to determine the collateral value. This would have put Silicon Valley Bank in the position to publicly say late on that critical Thursday the Federal Reserve Bank just loaned us $50 billion dollars in cash and the only think we have to do is ask and they will loan us another $41 billion that likely would have stopped the run on the bank and saved a bank that was a great and unique asset for the American economy because SVB had an outstanding reputation amongst small businesses especially high-tech start up ones of being a go to bank because they were easy to deal with the fact that SVB was eventually sold doesn't mean that valuable bank for the U.S. economy still exists because that type of SVB reputation is not readily transferrable such a reputation is earned by a track record!
Similarly, Congress should in the short-term be passing legislation that gives the Chairperson of the Federal Reserve Bank alone and the head of the Federal Deposit Insurance Corporation in joint agreement with the U.S. Treasury Secretary the power to suspend for a definite or indefinite period of time the trading of options and shorting of any individual or groups of individual (including the entire sectors) bank stocks and financial industry stocks. In times of market stress these devices morph from being tools to achieve accuracy in the price of a stock to drivers that destroy the price of a stock. The illegitimate stock price destructive power of these devices becomes magnified when they are juiced with social media hyping the demise of an individual and/or group of individual bank stocks which happens during the time of market stresses.
The Treasury, FDIC and the Federal Reserve Bank did a great thing facilitating the Fed opening this loan window for banks where they can use investment grade bonds as collateral because it gives these banks access to cash to honor the withdrawals of their depositors. This is the real troubling factor about this action is that media reports are that this window will only be open for a year. Congress has got to get with these players and have this window kept open for four years the nation needs to see this open for the entire fight of the Fed against the inflation beast, four years should be enough. One year from now is not enough we are going to see the March 2023 bank scare again if this program is allowed to expire. Interest rates are going to need to be kept high for a long period like two years to break the bank of inflation, with the tightening of bank lending and higher interest rates recessionary conditions will be strong maybe extremely strong America's banks will see high losses on the loans they carry on their books and a high account drainage rate from depositors as depositors make withdrawals because they need the money to live on banks are going to need this capacity to borrow against their bond portfolio; Congress with urgency needs to get this issue settled to boost confidence within the bank industry and for the banking industry! Frankly, to address the same concerns Congress should either mandate or get a commitment from America's banking regulators that if things get dicey they will facilitate the Federal Reserve Bank opening up a lending window where banks can borrow against home loans that are not in default where the borrower has a good credit rating and borrow "at par" because a lot of small and medium size banks have long-term residential loans on their books at low interest rates where if they sell them to repay redemptions on depositors account they would get much less than par because of higher interest rates so the solvency of the respective bank will be hurt if they are sold!
Part of America's banking system problem is that depositors are pulling money out of their bank and putting it in money market funds because they can get a higher interest rate return than their bank offers. And the reason why money market funds are able to offer a higher interest rate is because they participate in the REPO market this is a market where one loans money for a short term and receives high grade bonds as collateral and gets a return on the money loaned. Practically how the market works is the entity lending money buys high grade bonds from the borrower and the borrower agrees to buy the bonds back in short term at a higher price thus the borrower is agreeing to repossess the bonds hence the word REPO. The really disconcerting aspect of this whole issue is that the entity running this REPO market where money market funds are getting the higher rate of return than banks offer is the Federal Reserve Bank. That is right the Federal Reserve Bank whose mission is too see to it America has a strong banking system is facilitating competitors for deposits for America's banks, only in America right? Congress should see to it that the Federal Reserve Bank winds down its REPO program posthaste maybe if need be in legislation in the future give the Treasury Secretary and Chairperson of the FDIC, if they both agree a veto on such a program is in order, the power to block such a FED program.
America's regulatory system for in-trouble banks isn't the most prudent or sensible system. The recent chapter in the annals of America's banking system demonstrates this. Silicon Valley Bank and Signature Bank get into a dire financial state and the Federal regulators step in and shut them down and sell them and during the sales process which at this point the law allows Federal Regulators are permitted to open their check book and help the buyers make a sensible purchase. What the Federal Regulators are doing is essentially liquidating the bank and for the liquidation of SVB bank and Signature bank it cost the FDIC $22.5 billion from its insurance fund eighteen percent of the fund and now all banks are going to have to incur a special assessment to pay for this loss which means less monies available at these banks to make loans. Steve Liesman the journalist and economist from CNBC recently made this observation recently why doesn't the law allow the Federal Regulators to step in and help finance the sale of an in-trouble bank before they have to shut it down and liquidate it for it would be less costly on the system doing the intervention earlier. Why couldn't the trigger for Federal regulator action be if there is a run on the bank or the bank is insolvent!
Elected officials and regulators and leaders in our society should stop giving credence to this label or concept of a "too big too fail" banks such is fiction there is no such entity and it just feeds into foolish analysis and public policy it makes these $250 billion plus size banks scape goats for U.S. government failure and it feeds this mentality that we should be breaking up these large banks when in truth these banks are super valuable assets of America. There is no such thing as a "too big too fail bank" let us say one of these CEO's of America's five largest banks went insane, that is; Jamie Dimon of JP Morgan, David Solomon of Goldman Sachs, James Moynihan of Bank of America, James Gorman of Morgan Stanley and Jane Fraser of Citigroup. The CEO totally went off his or her rocker had their staff make all kinds of risky loans, take huge risks with derivative products and built huge risky inventories in stocks and bonds and everything went south and the bank became completely insolvent. Federal regulators would shut down that bank as fast as the hammer could be dropped and there would be no discussion of saving that bank and that bank could be easily broken up and sold off; such banks are largely comprised of a wealth management arm, investment banking arm, a commercial bank and a securities trading arm. The first two arms would be as easy as pie to sell off and the latter two would only need the bad assets hived off and then could be easily sold. These banks are not too big too fail they are "if this bank gets into trouble the system will be in trouble and this bank because of its size will impact the systems trouble so it will be saved". So when the America public is bombarded in the media with America has these banks which are too big too fail and these banks are the problem it is a bunch of nonsense because what these people are referring to is that if America's banking system gets into trouble banks that have a meaningful impact on the trouble will be saved if America breaks up these banks and no bank is permitted to have assets more than $200 billion if the system gets into trouble banks with $150 billion will be saved because if such a bank fails when the country is in a state of fear about the safety of banks such a bank fear will impact that fear it will have a contagion effect. This "too big too fail bank" debate is a total red herring it is a deflection from addressing real problems in the system that need to be addressed.
In the short-term look at the failure of Silicon Valley Bank which shows some of the things that needs to be done on Thursday March 9th the banks stock dropped sixty percent in value that day that slide was unrecoverable for the Bank. One does not have to be a rocket scientist to know that America needs regulation that puts price circuit breakers on bank stocks trading on the nation's exchanges; there should be circuit breakers on bank stock prices so that if a bank stock drops twenty percent from its opening price that day, trading in that bank stock is suspended for the entire balance of that trading day. Think of what is involved here we have a bank which holds depositors money deposits which are insured by a federal agency, being responsible warrants the view that if a bank stock in one day drops twenty percent in value the nation's bank regulators should want to know what the hell is going on with this bank is this bank in danger of failing if there are problems with this bank in the area of solvency can they be fixed by federal regulators and if yes than fix them circuit breakers would give federal regulators the time before it is too late and the bank's capital value is destroyed to find out what the problems are and fix them! Silicon Valley Bank probably could have been saved on March 9th when a run on the bank's stock and deposit accounts began SVB had $91 billion dollars of investment grade bonds on its books granted they were long-term bonds where because of the recent rise in interest rates had loss $15 billion dollars of market value but if on that day Federal regulators stepped in and did what they ultimately did for the banking industry is opened up a lending window where they took as collateral investment grade bonds and utilized the par value of the bonds to determine the collateral value. This would have put Silicon Valley Bank in the position to publicly say late on that critical Thursday the Federal Reserve Bank just loaned us $50 billion dollars in cash and the only think we have to do is ask and they will loan us another $41 billion that likely would have stopped the run on the bank and saved a bank that was a great and unique asset for the American economy because SVB had an outstanding reputation amongst small businesses especially high-tech start up ones of being a go to bank because they were easy to deal with the fact that SVB was eventually sold doesn't mean that valuable bank for the U.S. economy still exists because that type of SVB reputation is not readily transferrable such a reputation is earned by a track record!
Similarly, Congress should in the short-term be passing legislation that gives the Chairperson of the Federal Reserve Bank alone and the head of the Federal Deposit Insurance Corporation in joint agreement with the U.S. Treasury Secretary the power to suspend for a definite or indefinite period of time the trading of options and shorting of any individual or groups of individual (including the entire sectors) bank stocks and financial industry stocks. In times of market stress these devices morph from being tools to achieve accuracy in the price of a stock to drivers that destroy the price of a stock. The illegitimate stock price destructive power of these devices becomes magnified when they are juiced with social media hyping the demise of an individual and/or group of individual bank stocks which happens during the time of market stresses.
The Treasury, FDIC and the Federal Reserve Bank did a great thing facilitating the Fed opening this loan window for banks where they can use investment grade bonds as collateral because it gives these banks access to cash to honor the withdrawals of their depositors. This is the real troubling factor about this action is that media reports are that this window will only be open for a year. Congress has got to get with these players and have this window kept open for four years the nation needs to see this open for the entire fight of the Fed against the inflation beast, four years should be enough. One year from now is not enough we are going to see the March 2023 bank scare again if this program is allowed to expire. Interest rates are going to need to be kept high for a long period like two years to break the bank of inflation, with the tightening of bank lending and higher interest rates recessionary conditions will be strong maybe extremely strong America's banks will see high losses on the loans they carry on their books and a high account drainage rate from depositors as depositors make withdrawals because they need the money to live on banks are going to need this capacity to borrow against their bond portfolio; Congress with urgency needs to get this issue settled to boost confidence within the bank industry and for the banking industry! Frankly, to address the same concerns Congress should either mandate or get a commitment from America's banking regulators that if things get dicey they will facilitate the Federal Reserve Bank opening up a lending window where banks can borrow against home loans that are not in default where the borrower has a good credit rating and borrow "at par" because a lot of small and medium size banks have long-term residential loans on their books at low interest rates where if they sell them to repay redemptions on depositors account they would get much less than par because of higher interest rates so the solvency of the respective bank will be hurt if they are sold!
Part of America's banking system problem is that depositors are pulling money out of their bank and putting it in money market funds because they can get a higher interest rate return than their bank offers. And the reason why money market funds are able to offer a higher interest rate is because they participate in the REPO market this is a market where one loans money for a short term and receives high grade bonds as collateral and gets a return on the money loaned. Practically how the market works is the entity lending money buys high grade bonds from the borrower and the borrower agrees to buy the bonds back in short term at a higher price thus the borrower is agreeing to repossess the bonds hence the word REPO. The really disconcerting aspect of this whole issue is that the entity running this REPO market where money market funds are getting the higher rate of return than banks offer is the Federal Reserve Bank. That is right the Federal Reserve Bank whose mission is too see to it America has a strong banking system is facilitating competitors for deposits for America's banks, only in America right? Congress should see to it that the Federal Reserve Bank winds down its REPO program posthaste maybe if need be in legislation in the future give the Treasury Secretary and Chairperson of the FDIC, if they both agree a veto on such a program is in order, the power to block such a FED program.
America's regulatory system for in-trouble banks isn't the most prudent or sensible system. The recent chapter in the annals of America's banking system demonstrates this. Silicon Valley Bank and Signature Bank get into a dire financial state and the Federal regulators step in and shut them down and sell them and during the sales process which at this point the law allows Federal Regulators are permitted to open their check book and help the buyers make a sensible purchase. What the Federal Regulators are doing is essentially liquidating the bank and for the liquidation of SVB bank and Signature bank it cost the FDIC $22.5 billion from its insurance fund eighteen percent of the fund and now all banks are going to have to incur a special assessment to pay for this loss which means less monies available at these banks to make loans. Steve Liesman the journalist and economist from CNBC recently made this observation recently why doesn't the law allow the Federal Regulators to step in and help finance the sale of an in-trouble bank before they have to shut it down and liquidate it for it would be less costly on the system doing the intervention earlier. Why couldn't the trigger for Federal regulator action be if there is a run on the bank or the bank is insolvent!
Elected officials and regulators and leaders in our society should stop giving credence to this label or concept of a "too big too fail" banks such is fiction there is no such entity and it just feeds into foolish analysis and public policy it makes these $250 billion plus size banks scape goats for U.S. government failure and it feeds this mentality that we should be breaking up these large banks when in truth these banks are super valuable assets of America. There is no such thing as a "too big too fail bank" let us say one of these CEO's of America's five largest banks went insane, that is; Jamie Dimon of JP Morgan, David Solomon of Goldman Sachs, James Moynihan of Bank of America, James Gorman of Morgan Stanley and Jane Fraser of Citigroup. The CEO totally went off his or her rocker had their staff make all kinds of risky loans, take huge risks with derivative products and built huge risky inventories in stocks and bonds and everything went south and the bank became completely insolvent. Federal regulators would shut down that bank as fast as the hammer could be dropped and there would be no discussion of saving that bank and that bank could be easily broken up and sold off; such banks are largely comprised of a wealth management arm, investment banking arm, a commercial bank and a securities trading arm. The first two arms would be as easy as pie to sell off and the latter two would only need the bad assets hived off and then could be easily sold. These banks are not too big too fail they are "if this bank gets into trouble the system will be in trouble and this bank because of its size will impact the systems trouble so it will be saved". So when the America public is bombarded in the media with America has these banks which are too big too fail and these banks are the problem it is a bunch of nonsense because what these people are referring to is that if America's banking system gets into trouble banks that have a meaningful impact on the trouble will be saved if America breaks up these banks and no bank is permitted to have assets more than $200 billion if the system gets into trouble banks with $150 billion will be saved because if such a bank fails when the country is in a state of fear about the safety of banks such a bank fear will impact that fear it will have a contagion effect. This "too big too fail bank" debate is a total red herring it is a deflection from addressing real problems in the system that need to be addressed.
