So now what? You don’t just lose Silicon Valley Bank, Signature Bank (used by fake heiress Anna Delvey) and Credit Suisse in a week without repercussions. We saw hundreds of billions in stock-market value and tons of debt vaporized. Yes, all U.S. bank deposits are now supposed to be fully insured. And yes, the Federal Reserve has rolled out a new Bank Term Funding Program that offers banks one-year loans against underwater Treasurys and mortgage-backed securities at par value. Wow. Last week the Federal Reserve announced a currency-swap line, basically to help foreign banks. But is that even enough?
More failures and quickie mergers are inevitable—banks are some $2 trillion underwater with their bond portfolios. First Republic Bank’s stock has fallen 90% in three weeks as depositors pulled their money. Like SVB, First Republic goosed returns by chasing yield. Unfortunately, it doesn’t have many of the bonds that the Fed’s Bank Term Funding Program will loan against, hence the $30 billion in “deposits”—almost charity—from 11 large banks.
I suspect someone will buy First Republic soon, similar to United Bank of Switzerland (UBS) buying Credit Suisse for a bar of Toblerone. The deal was helped by $17 billion in contingent convertible bonds, or Cocos, which went puff, wiped out in value. Plus, the Swiss National Bank will cover nearly $10 billion in losses and provide almost $110 billion in liquidity. But UBS inherits Credit Suisse’s First Boston curse. Everyone on Wall Street recalls the scandals that plagued First Boston: “Bid ’Em Up Bruce” Wasserstein, the 1989 Ohio Mattress “burning bed” deal, IPO kickback charges, and most recently Archegos and Greensill.
Last week I heard some crypto hypesters have been telling startups to put some of their future payroll into crypto for safekeeping in case of more bank failures—which probably is why bitcoin popped 40%. That might end up being expensive insurance. And circular reasoning, considering the stablecoin USDC had $3.3 billion deposited at SVB.
Even if there are no more bank failures, credit is tight and getting tighter. Last week saw February home prices down 0.2% year over year, the first drop in 11 years. By the way, the mortgage-debt market is $8 trillion. And $1.5 trillion in commercial real estate debt is due over the next three years. Work from home means future office vacancies, a ticking bomb. It’s starting: In late February, Pimco and its Columbia Property Trust defaulted on $1.7 billion in loans on seven buildings. Brookfield stopped paying $784 million in loans on two Los Angeles buildings. As all New Yorkers know, there’s never just one or two cockroaches.
It’s increasingly improbable that we escape a recession.