Good Monday AM,

There are more words to write today than there are minutes to write them.

Let me first start with this stat as I won’t lose sight of our mandate to help the consumer, our clients, our communities, and the industry. Three Million U.S. Households Making Over $150,000 Are Still Renting. Why? We need to fix this!

I am sure everyone has seen the headlines. More banks on top of SVB (quick aside, during Thursday’s run on SVB, $1million per minute was being withdrawn) being shuttered or under pressure of being shuttered, creating chaos in markets today. The Government (FDIC, Treasury, and The Fed) decided to step up with some extraordinary measures to protect the assets on deposit, but will not bail out the investors (regrettably, the way it should be). That policy is helping keep markets somewhat in check but there is a rush to safety and bonds are winning again today. The 10-yr is down to 3.50 and the 2-yr is down to 4.17.

Both are huge moves in our favor.

In the last 14 months, the Fed raised rates, and raised rates, and raised rates, and didn’t wait to see how those hikes were going to be felt in the economy heading like a runaway train towards something off in the horizon. The comments abound how the Fed was going to hike rates until they broke something. They (the Fed) thought they were going to break the back of employment, instead, they broke the back of the banks.

I’ve shared several times the cost of interest expense on government bonds today vs in the past. The higher interest expense (100b more expense to the Treasury today than 15 months ago) and lower market value of those bonds (as a result of the higher interest) is now a problem that has come home roost. We are a long way from finding our way through this and I do expect that we will see a lot more pain but in adverse times, bonds and rates do well.

I am including a few slide to show how large our interest expense has become.

It is now 275% of GDP. Think about that for a moment and to add a little more icing on this cake (he said sarcastically), a 1bps increase in deposits at banks equals 250mm in interest expense (1bp is the equivalent of $1 on a 100k in deposits). The Fed meets next week, and where last Wednesday markets were predicting a 50bp rate hike, now there is growing talk of no rate hike.. I am not sure we get no hike but I don’t see 50bps as a possibility.

As if today’s news isn’t enough, this week is busy.

Tuesday

The Labor Department releases its February consumer-price index, a closely watched measure of what consumers pay for goods and services. Consumer prices rose 6.4% in January from a year earlier, reflecting a slight cooling of still-high inflation.

Wednesday

The Commerce Department releases February retail sales figures covering spending at stores, online and at restaurants. Retail spending increased a seasonally adjusted 3% in January from the prior month, the largest monthly gain in nearly two years, following two consecutive months of declines. The Labor Department releases its February producer-price index, a measure of prices that suppliers charge businesses and other customers. The index rose 6% in January from a year earlier, compared with the prior month’s 6.5% rise.

Thursday

The Commerce Department releases February figures on new residential construction and building permits. Housing starts fell 4.5% in January from the prior month, while building permits inched up 0.1% in the same period. The Labor Department reports the number of worker filings for unemployment benefits in the week ended March 11. Initial jobless claims rose in the prior week, but remained historically low. The European Central Bank announces its latest interest-rate decision. The ECB raised interest rates by a half-percentage point last month, its fifth large increase in a row, and signaled another half-point rate increase is possible in March.

Friday

The Federal Reserve releases February industrial-production figures, which measure the output of factories, mining and utilities. U.S. industrial production increased 0.8% in January from a year earlier, the smallest annual gain since March 2021. The University of Michigan releases its preliminary reading of U.S. consumer sentiment for March. Consumer sentiment improved last month for the third consecutive month as households became more optimistic over the economic outlook.

And some deep thoughts from Bloomberg on Silicon Valley Bank and the banking sector at large.

In the end, all of Silicon Valley Bank’s depositors were protected, while the shareholders and executive team got nothing. This is what a bunch of people were calling for to happen.

It has a whiff of tough-mindedness to it. It sounds like you’re not just describing a bailout. You still believe in real capitalism. You don’t want a repeat of anything like what happened in the Great Financial Crisis, with TARP and all that.

But the difference between this time and that time is not as wide as it seems. The bailouts in that crisis were largely about protecting depositors as well. For example, it’s commonly claimed that Citigroup was bailed out. And yet Citigroup shareholders ended up losing about 98% of their money over the course of that bank run. Yes, not 100%. But clearly the massive bailout was not about protecting shareholders, who are still to this day down over 90%.

Same with AIG, except replace depositors with policyholders. Here’s its chart. Same story.

Now it’s commonly understood that AIG was bailed out. There are a million stories from the time calling it a bailout. And yet not only was the equity virtually wiped out, several of its top executives were replaced. However, under this new definition, where if the action is just about protecting the innocent depositors/policyholders, then AIG wasn’t bailed out.

It is true that as the fire continued to rage throughout 2008/2009, a number of major Wall Street Banks were given cash injections to keep them going. And there’s (understandable) resentment/anger/confusion about why their equity wasn’t wiped out as well. On the surface it’s easy to say “Well, all of these other banks should’ve had their stocks zeroed too. Why didn’t shareholders pay a steeper penalty?”

But that’s much easier said than done.

The problem is once you establish that receiving public support is conditional on shareholders getting demolished and management leaving, then no bank would ever want to take public support. And then what stops the run on the banking system at that point? There might have been better ways to do things in 2008. But as that was almost 15 years ago now, it’s been forgotten that that was also about protecting the innocent customers. There was no new argument made this weekend.

What’s more, even if you want to go with the new definition of bailout (it’s not a bailout if management isn’t saved) then the events of this weekend qualify. Sure, SVB is a zero. But as of this morning, there are CEOs of other banks who still have their jobs, who likely would have been out of a job already had it not been for the efforts to contain the SVB fallout. Maybe SVB wasn’t bailed out (defensible view) but then A) Its customers were (just like Citi’s and AIG’s customers were) and B) Other marginal banks were bailed out (those CEOs are still here and their stock is not worth $0).

There are other dimensions here too.

There’s a nice, short column in the FT this weekend from the famed VC Michael Moritz about the role SVB played in fostering the growth of Silicon Valley. A number of tech people have posted about the services the banks provided founders/startups/VCs that other banks wouldn’t. So for at least some subset of depositors, they enjoyed non-commodity banking services that were in retrospect subsidized by implicit guarantee that became explicit last night.

What’s the point of even having this “bailout” debate?

A lot of it is semantics, sure. But as Fed historian Peter Conti-Brown notes, there’s never been a conceptual meaning of the term, let alone a legal one. All we know is the term is pejorative. Everyone thinks bailouts are bad. So it’s worth getting history right, that a lot of the impulses behind the latest actions aren’t that different from the actions in the past. Some different details. A different scale. A different crisis. But similar motivations, similar instruments, and similar end results.

This of course gets to another point that it’s hard not to shake the feeling that over the last 72 hours or so the US financial system has changed profoundly. Will we ever pretend depositors aren’t always fully covered ever again? And if so, why shouldn’t there just be a public option checking account service available to anyone at the Fed? Also as part of the rescue, the Fed (with some Treasury backstop) is offering loans against certain collateral valued at par, helping to eliminate mark-to-market losses on certain bank holdings. Will this temporary elimination of interest rate risk for banks become permanent?

The full implications of what we just saw, starting with the speed of the run (perhaps aided by group chats and social media?), to the speed and completeness of the rescue, could be significant.

Please remain safe and stay healthy, make today great!