RE:So Who has Biden bailed out with his decision on SVC?The Obvious:
Biden admin bailed out the depositors, not the investors. Bailing out the investors was no longer an acceptable option after 2008.
The not so Obvious:
The Dems had their finger prints all over the crime scene. If the depositors hadn't been bailed out, they would have been all over the media to find out who "stole" their money. In the case of SVB, the Dem investors could take the financial hit but not the media hit. As soon as the Biden admin made the depositors "whole", the media's attention shifted to Credit Suisse and then to First Republic Bank.
The move by the Biden admin accomplished three things.
The first good thing is that they slowed down the run/stampede long enough to give the gov't and FED time to prepare their next moves which might have possibly saved the collapse of the entire financial industry.
The second good thing is that with the extra couple of days to strategize, the Adminstration (in cahouts with the FED) flexed their power and demanded that the banking industry itself take care of the problem which is another good thing. That is moral suasion at its best which was undoubtedly backed by what was likely an unspeakable threat
The third thing, which could be good or bad depending upon your point of view is that the banking industry is forever changed. Kevin O'leary described what took place at SVB and Signature Bank as a nationalization of the banking industry which had him declaring that he would never invest in banks again. O'leary assumption was that banks are going to have to tow the line in the future instead of blatantly breaking the rules in order to maximize returns. As such, banks become MUCH less attractive to investors. What O'leary didn't say is that the banking industry has remained massively corrupt post 2008 in spite of the Dodds Frank Act. In other words, the legislation was put in place but was not being policed.
Where does all of the above leave us?
The FED Funds rate today (before the FOMC meeting next week) is currently 19x what it was a year ago.
The FED was telling us a year ago that inflation was transitory and someone that they had to keep an eye on as opposed to be worried about.
The banks are in the business of taking in deposits and using that money to lend to others or invest. The fact that the banks only have to retain 10% of deposits on hand makes the banks heavily leveraged as they take your $ in and turn it into $10 of investments.
Banks are not typically stock investors, they are bond investors. As such the bond industry dwarfs the stock market in size
Banks have to match maturities. That means that they have to have enough money maturing (from the bonds they buy) to match the maturity date of funds they have to pay out
When interest rates increase, the value of bonds decrease. It doesn't have to be a one to one correspondence, but bond prices have to match real time expectations. That means, my investment in the TDB8150 fund is now paying 4.05% interest for what is virtually a daily interest fund. If TD didn't pay that much, I would go somewhere else. A year ago, the rate was likely around 1% (I didn't have my money in cash a year ago so I don't know the number without looking it up). Sooooo....a bond that was purchased a year ago with a 2% yield would only be worth half as much today if the maturity was years down the road.
For those that care, there is a bond calculation formula:
Price=(Coupon×1−(1+r)−nr)+Par Value(1+r)n Price = ( Coupon × 1 − ( 1 + r ) − n r ) + Par Value ( 1 + r ) n , where: Coupon is the cash flow received for each intermediate payment before the par value.
Basically, the FED screwed over small and regional banks by jacking up rates 1800% over the period of less than a year. Small regional banks don't have the insanely profitable trading desks in New York that manipulate you and I. So, the Administration and FED got together this past week and told the big banks (JPM, Chase, BoA etc) to cough up the money to stop the bleeding at First Republic or everything would be up for grabs. As I mentioned above, moral suasion at its best.
Here's the real problem imo. Every bank is faced with a liquidity problem due to maturity matching problems. As such, every bank is upside down on its bond portfolio.
If a bank is big enough, it can survive from historical reserves and from all of the money it has banked (hehe) from bending the Dodd Frank Act. The really big banks can make back the billions in no time by maniputating the stock market.
What happens if the banks can't save all of the small banks on a timely basis?
Given time, the maturity matching problem will work itself out, which means banks won't have to liquidate their bonds at huge losses. But, the FED has indicated that we are going to see rates go Higher for Longer. Not only did the FED act WAYYY too late, but the fierceness of the raises has caught the entire industry offside.
It is easy to point fingers at the bad guys at the banks and they deserve what they get. However, the FED has played a huge role in putting the entire financial industry at risk. Cathie Wood has been preaching this exact argument for months, but nobody was listening. It will be very interesting how the FED reacts this week and what comes out of JPow's mouth on Wednesday.
Sorry for the long post but if you read this far, you get what you deserve :)