Desperate FSOC Meeting Augurs More Financial Crisis Ahead

By Victor Sperandeo with the Curmudgeon

FSOC Meeting Participants Try to Calm Markets:

Stocks rallied late Friday afternoon due to NOTHING the mainstream media reported! Instead, it was a surprise call by U.S. Treasury Secretary Janet Yellen for a virtual meeting of the Financial Stability Oversight Council (FSOC) [1.], which led major market players to expect positive results.

Also, three Federal Reserve bank presidents said in separate remarks that there was no indication that financial stress was worsening. Do you sincerely believe that?

Note 1. Additional information regarding the FSOC and its work is available here.

Every major head of a U.S. government agency associated with finance attended. During the meeting, the Council heard a presentation from staff of the Federal Reserve Bank of New York on market developments. The Council discussed current conditions in the banking sector and noted that while some institutions have come under stress, they believe the U.S. banking system remains sound and resilient (we’re not so sure). The Council also discussed ongoing efforts at member agencies to monitor financial developments.

The Friday FSOC meeting came as global banking contagion fears again caused European bank stocks to fall sharply, with Deutsche Bank and UBS knocked by worries that regulators and central banks have not yet contained the worst shock to the sector since the 2008 global financial crisis.

“Grandma” Yellen’s Double Talk:

Janet Yellen, who was the first woman to serve as both the Chair of the Federal Reserve Board and U.S. Treasury Secretary, has been incredibly inconsistent on the crucial topic of which depositors (with over $250K in savings/checking) will be bailed out if a bank fails.

Yellen again sought to calm fears of further bank deposit runs on Thursday, telling U.S. lawmakers that she was prepared to repeat actions taken in the Silicon Valley and Signature Bank failures to safeguard uninsured bank deposits if failures threatened more deposit runs. However, no criteria was given for banks to be bailed out. It will depend on who the regulators choose to save, but that’s a huge unknown at this point.

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I’m not a believer of bailouts as I am a diehard Capitalist. In fact, the Dodd-Frank law states that no bank should be bailed out as the Curmudgeon and I pointed out last week.

Sadly, “the law” now means “maybe law” these days?

Smaller Bank Runs Set to Continue:

This uncertainly of which banks will be bailed out will likely accelerate the run on many smaller banks, with the redemptions invested in short term Treasuries and/or big money center banks (which are too big to fail for depositors over $250K).

Cash-short banks have recently increased borrowing money from the Fed. The Fed said Thursday that emergency lending to banks in the past week was $164 billion which is very high.

Banks are borrowing money from the Fed’s via its discount window and the new Bank Term Funding Program (BTFP). The latter offers loans of up to one year in length to banks, savings associations, credit unions, and other eligible depository institutions pledging U.S. Treasuries, agency debt and mortgage-backed securities, and other qualifying assets as collateral. These assets will be valued at par even though they’re worth much less if marked to market.

Regional Banks Face Daunting Challenges:

Many smaller banks face a debilitating exodus of customers, similar to what helped cause the failures of Silicon Valley Bank and Signature Bank. A big worry is that all the pressure on banks will cause a pullback in lending to small and mid-sized businesses across the country. That in turn could lead to less hiring, a weaker economy and a higher potential for a U.S. recession which many economists think is likely due to the Fed’s aggressive rate increases.

Another huge problem for regional banks is their unrealized losses on commercial real estate loans. There are $2.2 Trillion in loans that are not marked-to-market. The banks don’t want to mark to market these loans, due to the huge losses they would realize on their balance sheets that would certainly cause more bank runs.

Minutes from last month’s Fed Open Market Committee meeting confirmed economic pressures on commercial real estate assets. The FOMC minutes state, “In particular, the staff noted that measures of valuations in both residential and commercial property markets remained high, and that the potential for large declines in property prices remained greater than usual.”

With this knowledge the Fed still raised rates for a ninth consecutive time within one year. In the 110-year history of the Fed, that has never been done before! Should we now assume that reality has changed or is there a hidden agenda?

Victor’s Conclusions:

For sure, the banking problem is due to the Fed’s irresponsible monetary policy; NOT banks failing to hedge interest rate risk. The Fed deserves 95% of the blame here, as no one could have confidently hedged interest rate risk.

We are going to have a “Great Recession/ Depression” due to the Fed’s reckless monetary policy which has greatly weakened many banks.

That’s why gold and bonds have gone up and will continue to move higher, while stocks will go down due to lower earnings.

No other conclusions can be assumed from history and logic.

End Quote:

“When government - in pursuit of good intentions - tries to rearrange the economy, legislate morality, or help special interests, the cost come in inefficiency, lack of motivation, and loss of freedom. Government should be a referee, not an active player.” Milton Friedman

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Be well, stay healthy, wishing you peace of mind. Please email the Curmudgeon (ajwdct@gmail.com) if you have any comments, questions, or concerns. Till next time…...

The Curmudgeon
ajwdct@gmail.com

Follow the Curmudgeon on Twitter @ajwdct247

Curmudgeon is a retired investment professional. He has been involved in financial markets since 1968 (yes, he cut his teeth on the 1968-1974 bear market), became an SEC Registered Investment Advisor in 1995, and received the Chartered Financial Analyst designation from AIMR (now CFA Institute) in 1996. He managed hedged equity and alternative (non-correlated) investment accounts for clients from 1992-2005.

Victor Sperandeo is a historian, economist and financial innovator who has re-invented himself and the companies he's owned (since 1971) to profit in the ever changing and arcane world of markets, economies, and government policies. Victor started his Wall Street career in 1966 and began trading for a living in 1968. As President and CEO of Alpha Financial Technologies LLC, Sperandeo oversees the firm's research and development platform, which is used to create innovative solutions for different futures markets, risk parameters and other factors.

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