A new second-largest bank failure in the history of the US just happened as I predicted it would last Friday. Over the weekend — for this is the way it always happens — the Fed and feds seized First Republic Bank and sold it at a fire-sale price to the nation’s largest bank, JPMorgan Chase. That they would sell it to a bank that has for decades been too-big-to-fail was also predictable. It is always the Fed’s and Treasury’s joint plan to make the Fed’s top-five owners bigger with every financial crisis just to make certain they are too-much-bigger-than-too-big-to-fail.
That is because the Fed never resolves any problems. It never sees problems before they hit even though it is often the cause. It just reorganizes and reinflates them because inflation is what the Fed does best. So, now, the nation’s largest bank has consumed a bank that seizes the silver-medal from Silicon Valley Bank, the last second-largest-to-fail bank.
“The banking system remains sound and resilient,” announced the Treasury – a refrain that has also become as predictable as rain in May in Washington State. “Americans should feel confident in the safety of their deposits and the ability of the banking system to fulfill its essential function of providing credit to businesses and families,” came the second predictable part of the old script.
Also predictable years ago was the bank’s reason for failing during a time when the Fed is intentionally plunging the value of all Treasuries held in bank reserves. The Fed knew it would be damaging bank reserves in exactly this manner because it is simply math, but it did absolutely nothing of use to regulate the situation as it developed.
The Fed’s first rescue effort or Republic — a $30-billion infusion by eleven of the nation’s largest banks — failed to stem the outflow of bank deposits, 70% of which were uninsured, compared with the 55% median for banks. That high risk, alone, should have made the Fed more watchful over this particular bank, and the Fed has full access of information to know that condition existed.
Of course, in these situations where failing banks are looking hard for another bank to buy them, the buyers all hold out to wait for the Fed and feds to seize the bank and sell it in a weekend fire sale at a far better price. So, the chance for a troubled bank to get a good deal on the way out is rendered to zero by the upcoming assurance of seizure and a fire sale with government backstops for those who patiently wait.
Reuters predicted seizure over the weekend on Friday afternoon. I predicted it here Friday morning, always preferring to scoop Reuters when I can with accurate predictions. The government prefers weekends because it gives time to arrange bids and a sale while the news cycle is slowed down and as sleepy as Uncle Joe so they can report the sale at the same time they report the bank’s closure on Monday in order to blunt the bad news with some supposedly good news.
“Our government invited us and others to step up, and we did,” JPMorgan Chase CEO Jamie Dimon boasted of his own bank’s charity. “Our financial strength, capabilities and business model allowed us to develop a bid to execute the transaction in a way to minimize costs to the Deposit Insurance Fund.” So thoughtful of them! Thank the Fed in whom we trust, according to their green notes, e pluribus unum, et al, that we have some too-big-to-fail banks that are robust enough to step up to the rescue when needed! (At least, the Fed appears to be the god their own notes are referring to, for it is to them our nation faithfully returns to in every crisis.)
As a result, First Republic’s 84 branches reopen across the republic this morning as additional tenacles of the JPMorgan Chase squid, while the cost to the FDIC to complete the sale will only be $13 billion, an extraordinary bargain compared to the $20 billion they spent on their receivership of Silicon Valley Bank a little over a month ago. And, hey, at least JPM got its money back from its share in that earlier $30-billion infusion. So, there is that!
Yet, look at how charitably the dull-witted financial media covers this when giving Charlie Munger’s analysis of the banking situation in the US:
“Berkshire has a long history of supporting US banks through periods of financial instability. The sprawling industrials-to-insurance behemoth invested $5bn in Goldman Sachs during the 2007-08 financial crisis and a similar sum in Bank of America in 2011.” (WorldNewsEra)
Supporting banks!? Berkshire has no such history at all. It has a long of history of waiting until banks fail and then jumping in to hose up all the bargains it has saved its cash to seize. Thus, it is not surprising at all that …
“… the company has so far stayed on the sidelines of the current bout of turmoil, during which Silicon Valley Bank and Signature Bank collapsed…. Their reticence stems in part from lurking risks in banks’ vast portfolios of commercial property loans. ‘A lot of real estate isn’t so good any more’ Munger said. ‘We have a lot of troubled office buildings, a lot of troubled shopping centres, a lot of troubled other properties. There’s a lot of agony out there…. Every bank in the country is way tighter on real estate loans today than they were six months ago,’ he said. ‘They all seem [to be] too much trouble.’”
Ah, but the Treasury just assured us our banks are fundamentally sound … again. Berkshire, in other words, is one of the wise ones – the old more conservative money — waiting for the best bargains, sure to arise during times of sound banking. Even Jamie Dimon says only that THIS part of the banking crisis is over, as if to hint a second part will soon be coming, which, of course, has been the opinion here at The Daily Doom all along. So, three strikes and first inning is over!
The good news here for Berkshire is that the Fed is set to raise interest rates (by which I mean lower the value of existing bonds that banks are holding as unsellable reserves) again this week, assuring the second inning the Berkshire is holding out for. In spite of the obvious, I have already read some greedy marketeers who are predicting the Fed will lower rates at this week’s meeting so that stocks will soar. I boldly predict to the contrary: The Fed will make one last incremental raise and simultaneously announce it as their likely holding level. That will afford the Fed the opportunity to sound stable and confident by saying it has completed the course it forecast as most likely at the start of the year and is now entering the holding pattern it had said would likely begin at this juncture. Everything, in other words, is on track.
Investors, however, continue to wistfully believe the Fed is their sugar daddy and will actually lower rates to feed fodder to the stock yard. Not so when the Fed has an inflation war to win, as other headlines today clearly show. The Fed’s course in the face of inflation has been predicted with absolute precision on my own site (The Great Recession Blog) since prior to the time when the Fed began this journey, but it is equally predictable that greedy investors will continue their fantasies until the crash gets much rougher. (Don’t believe me, read all the back issues tagged “Federal Reserve” of the past two years.) Then, it is predictable stock investors will all run to the opposite side of the boat together and swamp themselves because that is the market’s wisdom – the farce be with them.
I have consistently predicted the Fed will tighten until its chief indicator of stress limits — the labor market — cracks, but the labor market will crack late in the game because the labor market is broken, not strong. Labor is tight, not because of soaring demand for products and, thus, additional workers, but because of dying supply of labor to such an extent labor cannot even meet flat demand for products. That, I have said, assures a decline in production, which we eventually saw in the latest GDP report where growth fell to a pre-recessionary 1.1%, likely to be revised down further in the next report. This is the level from which GDP typically toddles over the cliff easily.
The Fed’s misinterpretation of this kind of labor market tightness, as indicating a resilient economy, means the Fed will not stop tightening until way too late, shoving us deeper into recession. That will be a stagflationary recession as I have been saying we were moving into because the loss of products and services to buy due to the labor shortage assures inflationary pressures continue because scarcity is a major driver of price inflation. We are now finally at the point where I am willing to predict the labor market will begin to show the signs of stress the Fed needs to see to stop tightening any harder.