market-ticker | 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.
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