Speaker 1: Welcome to the Bloomberg Markets Podcast. I'm Paul Sweeney, alongside
Speaker 1: my co host Matt Miller. Every business day we bring
Speaker 1: you interviews from CEOs, market pros, and Bloomberg experts, along
Speaker 1: with essential market moving news. Find the Bloomberg Markets Podcast
Speaker 1: on Apple Podcasts or wherever you listen to podcasts, and
Speaker 1: at Bloomberg dot com slash podcast. Let's get into the
Speaker 1: details here of what actually happened at SVB. How should
Speaker 1: we think about in the context of regional banks in general.
Speaker 1: Let's bring in a couple of experts. These geeks do
Speaker 1: this every day. They look at regional banks. Herman Chan
Speaker 1: he covers the equity Arnold Kakuta, he covers the credit side.
Speaker 1: Both for Bloomberg Intelligence. They're both in our Bloomberg Interactor,
Speaker 1: a broker's studio today. We appreciate it. So Herman, let
Speaker 1: me start with you. It seems painfully clear to me
Speaker 1: that what happened in SVB is pretty much an SVB
Speaker 1: type of thing, and it's probably not that indemniue. It's
Speaker 1: an unique situation. They were absolutely horrible at managing their
Speaker 1: duration risk, is what we're saying, Like so worse than
Speaker 1: anybody else in the entire banking industry. What are you
Speaker 1: telling your client's termoring about just the regional banks in general. Yeah,
Speaker 1: it's a very dynamic market that we're in today. SBB
Speaker 1: was indeed a unique bank that took on a lot
Speaker 1: of interest rate risk, and the fact that their deposits
Speaker 1: were exiting the door really exasperated their problems. What we're
Speaker 1: seeing today. Let me quantify that. So I noticed on
Speaker 1: the FAGO function on the Bloomberg terminal, if you're clicking
Speaker 1: the balance sheet, you can see that they had at
Speaker 1: the end of last year over ninety one billion dollars
Speaker 1: in a hold to maturity portfolio. How much do you
Speaker 1: think that was actually worth? So they were talking about
Speaker 1: a fifteen billion dollars unrealized loss at the end of
Speaker 1: the fourth quarter on that health of maturity perform at
Speaker 1: the end of the fourth quarter, and since then we'd
Speaker 1: seen the your treasury go above four percent, So probably
Speaker 1: much bigger, correct, And if they would have taken a
Speaker 1: loss on the health of maturity book, that effectively would
Speaker 1: have wiped out their book value. Arnold, you cover the
Speaker 1: credit side for all these banks. What's happening in the
Speaker 1: credit markets for regional banks over the last four or
Speaker 1: five days. Yeah, not good even even for the bigger
Speaker 1: guys as well. It's just remarkably shocking how all this
Speaker 1: can transpire in a day, right, and this is a
Speaker 1: you know, investment grade credit maybe about three four billion
Speaker 1: of debt, so it's not a huge per se, but
Speaker 1: it's just quite shocking how this could transpire. So doing
Speaker 1: what I'm doing, and I'd know nothing about a bank accounting,
Speaker 1: and I'm pretty happy about that. This whole heald to
Speaker 1: maturity thing. As Matt was just pointing out, I'm now
Speaker 1: looking at the balance sheet on the FA function for
Speaker 1: a lot of these companies. Is that what talking about
Speaker 1: health to maturity? And how where should it be? A
Speaker 1: what is it? Where should it be for most banks?
Speaker 1: And where was it for SBB? YEH know, SBB, like
Speaker 1: I think you know, as you guys mentioned fifteen billion
Speaker 1: of unrealized losses in the healthy maturity, but I think
Speaker 1: even the fourth quarter correct, which looks way worse on
Speaker 1: March ninth. But but the thing is, I think the
Speaker 1: important thing is is is the liquidity and the deposits, right,
Speaker 1: and the velocity of these deposits um you know at SVB,
Speaker 1: and in particular this you know tech community that was
Speaker 1: very very tight, right tech NVC. You know, once they
Speaker 1: started recognizing the stock was down thirty they recognize, oh,
Speaker 1: they said, hey, there might be some risk there, take
Speaker 1: your deposits out. So in that situation, you know, any
Speaker 1: bank where you know, let's say twenty five percent or
Speaker 1: more of whatever deposits fleeing, not many really can survive, right,
Speaker 1: And so I think that is the situation. Can't they
Speaker 1: borrow from other banks? Isn't there an overnight lending policy
Speaker 1: at a very low rate so they can just take
Speaker 1: the cash and then cover it at a certain point
Speaker 1: point because those are collateralized right by by your liquid assets,
Speaker 1: So it's only up to a certain point. So even
Speaker 1: if some of these measures were necessarily in place before,
Speaker 1: you know, could they have stemmed everything? Okay? Maybe maybe
Speaker 1: yes or maybe no. But it's you know, when a
Speaker 1: lot of these deposits run out the door at the
Speaker 1: same time, you know, you can say I have this
Speaker 1: much access to liquidity, but okay, over what time period? Right? Yeah?
Speaker 1: If if like I think it was at forty two billion, right,
Speaker 1: deposits tried to flee the door in a day at SVB,
Speaker 1: and I think they had a total of one hundred
Speaker 1: and seventy billion deposits, right, So and then they came
Speaker 1: out that day with a negative one billion a cash account.
Speaker 1: So that's that's what we that. Those are the numbers
Speaker 1: we know. We only know that they tried to get
Speaker 1: forty two million out customers tried to pull forty two
Speaker 1: billion sorry out. We don't know how much actually came out,
Speaker 1: So the remaining negative billion doesn't really mean very much.
Speaker 1: So it's before you even kind of get to that.
Speaker 1: So the fear is okay, yeah, there is that, um,
Speaker 1: you know, solvency concern if they have to recognize that
Speaker 1: fifteen billion loss. But before all that stuff, you know,
Speaker 1: you die because of liquidity, right, And so I think
Speaker 1: what needs to be addressed is, okay, fine, the unsure
Speaker 1: deposit holders of SVB and SPNY, they were made whole,
Speaker 1: but maybe something like that make that bigger guarantee to
Speaker 1: the rest of the market. Right, what is stopping There's
Speaker 1: nothing I happened to fed already implicitly done that. They
Speaker 1: said in their in their memo yesterday that they have
Speaker 1: a big enough backstop to cover the entirety of US deposits,
Speaker 1: which is like nineteen trillion dollars. So even though they're
Speaker 1: not saying, hey, we promise we got you, they're saying
Speaker 1: we could get you if you need it. I mean,
Speaker 1: I think the program that they've announced, I mean the
Speaker 1: you know, you correct me if I'm wrong, But it's
Speaker 1: it's a way for the banks to manage kind of
Speaker 1: when they get the deposit outslow. Notice, oh, you can
Speaker 1: pledge collateral to the FED at par right, but then
Speaker 1: once it kind of glows below a certain amount, you know,
Speaker 1: if deposits run out of the door. This is a
Speaker 1: lifeblood of funding for these institutions. Right, if your blood
Speaker 1: drains out so much, there's only so many like temporary
Speaker 1: you know body that you know, what this issue really
Speaker 1: hits telling you is that the posits are the source
Speaker 1: of the value of banks, and when that value disappears,
Speaker 1: then there's really get You don't have any legs to
Speaker 1: really stand on. Hey, I only ask you one question.
Speaker 1: You're talking to a really smart hedge fund manager who
Speaker 1: invests in regional banks. What is he or she doing today?
Speaker 1: Do you think there's net buyers or net sellers? Unfortunately,
Speaker 1: it's it's not going to be helpful to the market today,
Speaker 1: You're you're seeing a lot of fear and you're you're
Speaker 1: not going to fight the tape no matter what you
Speaker 1: think fundamentally, and selling M ANDT Bank because I don't
Speaker 1: because it's down a little bit and I think it's
Speaker 1: going to be brought down by some contanging risk. Why
Speaker 1: am I not at there buying M ANDT Bank Because
Speaker 1: I know it's a seein. If you think that these
Speaker 1: banks are going to be around for a long run,
Speaker 1: which I think MMT will be that, then it is
Speaker 1: a buying opportunity. But you really have to pick your
Speaker 1: spots because the contagion risk is looking to continue and
Speaker 1: extend and we're in a some uncharted territories seasons. Are
Speaker 1: there any other banks that have such uniform depositor base
Speaker 1: as we saw with SVB? I mean all of its
Speaker 1: depositors were like early tech startups and VC. So what
Speaker 1: you're saying is, if you the banking community and the
Speaker 1: analysts and the buy side are are looking at deposit
Speaker 1: concentration and the concentration of assets above the FDIC insurance
Speaker 1: limit uh SVB signature, those are are the ones that
Speaker 1: have high business concentration that have very lumpy deposits, and
Speaker 1: so that that's why you've seen them fall um. There
Speaker 1: are others that have similar issues. This is crazy, you know, Matt.
Speaker 1: Let's get these guys back at twelve or nine, okay,
Speaker 1: because they're not going to have time. They have time.
Speaker 1: When I tell them to be there, they'll be there.
Speaker 1: These guys are the best. Herman Chin on a cocuta
Speaker 1: that cover the equities of the credit side. He started
Speaker 1: out saying, you guys are geeks, but now you're the best.
Speaker 1: Now you did a good job. You're of the nerds
Speaker 1: exactly the nerds, are you? Guys? Thanks so much for joining.
Speaker 1: I want to get right into this segment. Joe Wisenthal,
Speaker 1: host of Odd Lots podcast Bluebird News, joins us here, which,
Speaker 1: by the way, thanks to his partner Tracy Alloy, that
Speaker 1: is a great listen. I highly recommend now it's all
Speaker 1: Tracy to be honest. Yeah, Joe, we're haven't you perfect
Speaker 1: timing today? Perfect timing? Why the US backstop after svb's
Speaker 1: failure is a bailout? I don't even know why. It's
Speaker 1: a debate, Yeah, I don't. Someone someone this morning I
Speaker 1: think Shinali Bassett suggested it was a non bailout bailout,
Speaker 1: but it's a bailout equity out. Yeah, but here's the thing,
Speaker 1: and this is why, like I mean, yes, in the
Speaker 1: case of SVB, the equity was wiped out, but you know,
Speaker 1: like a lot we misremember two thousand and eight City
Speaker 1: Group sharers fell ninety eight percent that year. That was
Speaker 1: a de facto equity wipeout. So even the most quintessential
Speaker 1: parts you have City and AIG is. There should be
Speaker 1: a reminder to people that even in the most famous
Speaker 1: bailouts of all time, these were not some big shareholder rescues.
Speaker 1: And the arguments for why this different innocent depositors, people
Speaker 1: that just wanted to get their money out. That was
Speaker 1: why we did tarp at all. That people think was like, oh,
Speaker 1: we're like protect the CEOs. Very look, of course there
Speaker 1: are some details, different circumstances, very different, but fundamentally those
Speaker 1: bailouts were not about protecting management. The AIG management was replaced,
Speaker 1: the government installed Ben Moche and the summer of two
Speaker 1: thousand and nine not that much different fundamentally a little bit,
Speaker 1: but like this is what we call this is what
Speaker 1: a bailout is. I think it's so clear that I
Speaker 1: can't even believe anyone would question. Well, now that Joe
Speaker 1: explain it to me, I get it now. I mean, look,
Speaker 1: if you would have had you had depositors who were like, Okay,
Speaker 1: we know FDIC insurance goes up to two hundred and
Speaker 1: fifty thousand, but we're gonna put three billion dollars in there.
Speaker 1: I mean, that's just a dumb risking is And now
Speaker 1: they're getting bailed out, you know. I think, like, what
Speaker 1: is the different between a bailout versus like the FDIC
Speaker 1: just doing its job. I say, if you have if
Speaker 1: you announced a new rule over the weekend that was
Speaker 1: not in place, And the FED definitely did that because
Speaker 1: they say, well, one of the key things it did
Speaker 1: is for all banks they can now for the next
Speaker 1: year pledge their treasure can be as at a part
Speaker 1: at part, which is a pretty big thing after like
Speaker 1: the mark to market hit right. So that's a de
Speaker 1: facto capital injection that the FED did, which is another thing.
Speaker 1: You don't want to start this bad policy, Joe. And
Speaker 1: this goes back to two thousand. I'm gonna say I'll
Speaker 1: say this, I'll say two things I don't feel like
Speaker 1: comfortable assessing, like the exact implementation smarter people than me.
Speaker 1: But you gotta stop a bank run, okay, and so
Speaker 1: I mean I think that's clear. Look, there's multiple failures
Speaker 1: would likely have happened today, and you just get those
Speaker 1: don't stop on their own right once they get going.
Speaker 1: You can't. No country can like have a wholesale run
Speaker 1: on its banks. The interesting thing to me is that
Speaker 1: they did just that, and I thought, yeah, no, I
Speaker 1: mean exactly, there could be unintended consequences. Who knows what
Speaker 1: they'll be. There will be, I'm sure, but they put
Speaker 1: a stop to the bank run so swiftly that it
Speaker 1: surprises me to see so many shares down today. Why
Speaker 1: I am surprised too. I mean, it may just be
Speaker 1: even still, I have to say, I'm surprised. And you know,
Speaker 1: like to me, yesterday ended the debate about whether there
Speaker 1: will ever be a cat on deposit insurance all deposits.
Speaker 1: To my mind, that's what they're effectively doing. Yeah, and
Speaker 1: I don't see It's like when when I just don't
Speaker 1: see this, I think the debate is over that all.
Speaker 1: If you have a deposit in the bank and they
Speaker 1: might change the rgs so that banks have to be
Speaker 1: more careful and have more liquid assets. But I think
Speaker 1: basically the FED has told us that from here on out,
Speaker 1: all deposits almost at any level are so does dot
Speaker 1: Frank does? Should it? Do you think it will be
Speaker 1: implemented down to smaller regional banks? So this is a
Speaker 1: there's backstory here because I guess twenty eighteen, yeah, there
Speaker 1: were a number people, including some SVB executives, who are
Speaker 1: lobbying against Dodd Frank m overseeing or regulating banks with
Speaker 1: smaller amounts of deposits like less than certain liquidity requirements,
Speaker 1: ability to make drawals. You know, the thing is maybe
Speaker 1: that will go into force right now. You know. The
Speaker 1: other thing I'll say is, however, um, when you have
Speaker 1: an instantaneous massive bank run, everyone that I'm not even
Speaker 1: sure that more liquidity requirements actually would have saved them.
Speaker 1: Maybe it would have a little bit, But the scale
Speaker 1: of the demanded withdrawals on Friday it was like so
Speaker 1: far like orders of magnitude off the charts. But it
Speaker 1: does seem likely now that people are gonna look, but
Speaker 1: it's gonna be tough. You know, there's like real like
Speaker 1: fights I think the big fight that's coming, in my opinion,
Speaker 1: is not even necessarily going to be about the degree
Speaker 1: to which certain Dodd Frank requirements applied to some of
Speaker 1: the smaller or sort of the regional banks. But like
Speaker 1: the deeper fight is like, well, like Canada has like
Speaker 1: six banks, like they know they don't have a really
Speaker 1: a small bank. We have like thousands of thousands of
Speaker 1: banks in this country. And I think there's gonna be
Speaker 1: a fight now about like, well, why do we have
Speaker 1: so many banks? And you're gonna like, and I think
Speaker 1: it will be very intense. Do we want to just
Speaker 1: have JP Morgan and City and Wells and a few others?
Speaker 1: Why is that? Why do we have so many versus
Speaker 1: say Canada, for example. I wish I knew the banking history,
Speaker 1: and I think it has to do with like our
Speaker 1: populist past. Yes, that there has been a deep discomfort
Speaker 1: throughout American history about the centralization of banking power. And
Speaker 1: I think that's like a very sort of like historical
Speaker 1: like thing we associate with us that like a lot
Speaker 1: of people do not want banking held in just a
Speaker 1: few hands. And I think we still have that today.
Speaker 1: But look a lot of people are asking. They're like, wait,
Speaker 1: do I want to be exposed to a bank that
Speaker 1: has very specific geography geographical exposure? I want to be
Speaker 1: exposed to a bank that is just like exposure to
Speaker 1: a specific industry, just open to chase a kin who cares?
Speaker 1: We have one search engine globally, and we have like
Speaker 1: three social networks, one of which is controlled by the Chinese.
Speaker 1: I mean, we don't care about anything like that anymore. Well, right,
Speaker 1: I think a lot of people are just gonna say,
Speaker 1: you know what, I'll just go to a chase and
Speaker 1: so I do think, you know, some of these moves
Speaker 1: that we're seeing might not be bank run type panics,
Speaker 1: but just could be like the expectation that a lot
Speaker 1: of their depositors are going to migrate anyway, even if
Speaker 1: they're not afraid. Do you think it's I mean, to me,
Speaker 1: this may just be a silly little detail that I
Speaker 1: can't get over, But they had a ninety one billion
Speaker 1: dollars portfolio of holding mat charity securities and only one
Speaker 1: hundred and seventy billion in deposits. It seems like the
Speaker 1: worst mismanagement of duration risk of any bank in America.
Speaker 1: I mean, I've been scanning the fays of every bank
Speaker 1: I can pull up on the Bloomberg, and nobody had
Speaker 1: that much. It does seem like it does seem something
Speaker 1: was off. And again this is I talk about questions
Speaker 1: that I personally don't feel particularly you know, I'm not
Speaker 1: a no one should hire me as a bank risk manager.
Speaker 1: It does seem there was something very strange about their arrangement.
Speaker 1: But like I think, in a normal time, like I
Speaker 1: also think that like why did everyone rush out of
Speaker 1: this like bank that was like operating? People seem to
Speaker 1: like in twenty four hours, this is the new world.
Speaker 1: I do think like social media group chats what's happened
Speaker 1: was also part of this. They announced like a couple
Speaker 1: billion dollars in equity raise and an equity raise, and
Speaker 1: all of a sudden, the most important vcas in California,
Speaker 1: like everybody get out. Yeah it's odd. It's so it's
Speaker 1: just like everything about this seems to like the way
Speaker 1: I think about it is like everything about this sort
Speaker 1: of like hit in this sort of like risk scenario
Speaker 1: that just people were not thinking about, not anticipate a
Speaker 1: very How about the signature bank that one kind of
Speaker 1: surprised me over the weekend. I don't feel like I
Speaker 1: don't know enough about it. But well, the thing is
Speaker 1: is that they have really like got They leaned pretty
Speaker 1: hard into crypto, and so if you look at their church,
Speaker 1: it's not it was like silver Gate at silver Gate
Speaker 1: a little bit, but they like sort and so then
Speaker 1: they also have this sort of like outflow of deposits
Speaker 1: because crypto is for the moment kind of a shrinking.
Speaker 1: I saw a Bloomberg story, so obviously we all know
Speaker 1: now that Circle had three billion, yeah at SBB of
Speaker 1: the forty billion circulation. Then I saw some other stable
Speaker 1: coin operators have much of their coins backed by Circle. Oh, yes,
Speaker 1: that's right. And the funny thing is, yeah, so the
Speaker 1: funny thing is a lot of the so called decentralized
Speaker 1: stable coins algorithmic ones. They have other cryptocurrencies that automatically
Speaker 1: serve as a form of collateral, but USDC usd coin
Speaker 1: is the backing of some of these so called decentralized
Speaker 1: even the d centralized ones are implicitly backed by dollars
Speaker 1: in a regulated bank account. There is this is which
Speaker 1: I mean, this is another conversation. There's a lot less
Speaker 1: decentralization to crypto than the people in the industry, clear,
Speaker 1: all right, So the US backstop for SVB was a
Speaker 1: bailout obviously. Oh come on, alright. I mean, it's just
Speaker 1: so silly to debate something like that. And I will
Speaker 1: say the same thing to the rest of my life
Speaker 1: about the raid at Marilago. To call it anything other
Speaker 1: than a raid, it's just a silly attempt to be political.
Speaker 1: I mean, oh, that was a test. It was obviously
Speaker 1: a raid. Alright, alright, alright, Joe, what all right? Joe,
Speaker 1: thanks so much. We really appreciated. Joe Wisenthal, host of
Speaker 1: Odd Lots podcasts along with Tracy Alloway for He's from
Speaker 1: Bloomberg News, as is Tracy. Odd Lots podcast really really good,
Speaker 1: one of my most popular ones out there. So take
Speaker 1: a listen, boy. The mark sent bouncing around open down
Speaker 1: pretty significantly, bounced up and now down a little bit.
Speaker 1: So market trying to digest what's going on. Market unrushed
Speaker 1: leavable to your treasury down fifty five basis point four
Speaker 1: point zero three percent. We were just at five percent, dude, exactly.
Speaker 1: I mean on Monday when I was last year, a
Speaker 1: week ago before I was struck down by COVID nineteen.
Speaker 1: We were talking about the entire yield curve above four percent.
Speaker 1: Now I'm looking at a tenure that's three forty five.
Speaker 1: I know, just amazing, so big, big moves there. Let's
Speaker 1: check in with a professional has to deal with this
Speaker 1: stuff every day. Efan Devitt, chief investment officer for Moneta Group. Ifan,
Speaker 1: thanks so much for joining us. What do you make
Speaker 1: of the last I don't know. Seventy two hours. We've
Speaker 1: kind of learned once again to except we forgot it
Speaker 1: what a bank run looks like. Yes we have. We're
Speaker 1: seeing bank round by smartphone or by Twitter. Certainly at
Speaker 1: the moment it's a whole new feel when everything can
Speaker 1: be communicated real time. Look, we have been dealing with
Speaker 1: our clients. We've been fielding calls. I will say it's
Speaker 1: not a drill. We are very much engaged now in
Speaker 1: assuring clients around the safety of their say, their custody
Speaker 1: accounts and money of which will not be would not
Speaker 1: have been with it with a small regional bank. But
Speaker 1: we're looking also we're fielding questions around money market funds.
Speaker 1: We're also seeing some concern about the different sectors, particularly
Speaker 1: the financial sector, which clearly took a hit on Friday. Overall, though,
Speaker 1: we're looking at context, and we're looking at the way
Speaker 1: these institutions have mobilized so quickly and so effectively to
Speaker 1: address this problem. This is almost like a repeat of
Speaker 1: what we saw going on in the UK around the
Speaker 1: time of another liquidity crisis, which was around the pension
Speaker 1: songs of LDI. We saw the Bank of England. They're
Speaker 1: mobilizing very quickly. So I think there hasn't some lessons learned, however,
Speaker 1: from these great financial crisis. However, what we're also seeing
Speaker 1: is this for something in the sense that we actually
Speaker 1: thought the banks were very robusted, that was the characterization
Speaker 1: of the financial institutions this time around. Did we miss this?
Speaker 1: Did financial analysts miss this? Very likely in the case
Speaker 1: of SBB. Now it's going to be a question of friends.
Speaker 1: They going through the other financial institutions to see who's
Speaker 1: in the same boat. Well, I went through all of
Speaker 1: the US listed US banks to see if anybody had
Speaker 1: as big whole to maturity portfolio relative to deposits as SVB,
Speaker 1: and nobody else had it even close. I mean they
Speaker 1: they were about fifty percent of their whole to maturity
Speaker 1: as was about fifty percent of their total depositor base.
Speaker 1: So it does seem very unique in that sense. You
Speaker 1: say there have been questions raised about money markets. Is
Speaker 1: there a possibility that they also have a duration mismatch. No,
Speaker 1: we don't think so. I think it's just that whole
Speaker 1: affect of the money markets breaking the book, which is
Speaker 1: of course what we saw financial crisis that has clearly
Speaker 1: lingered very much in the memory. We see that most
Speaker 1: money market, especially that the ones that are back by
Speaker 1: the full space and credit of the US government very safe.
Speaker 1: We see that for the most part, these are we
Speaker 1: don't think there's any concern they're they're they're run by
Speaker 1: robust institutions. They're not in these longer duration assets. But
Speaker 1: we still we have to make clients feel at ease,
Speaker 1: and we have to verify that we need and we're
Speaker 1: still in a process of discoveries getting that assurance from
Speaker 1: the very large group. So many, so many banks getting
Speaker 1: punished today, which is puzzling to a lot after you'd
Speaker 1: after you had this fed backstop, Are there opportunities that
Speaker 1: offer you opportunities even in terms of getting in there
Speaker 1: and buying something that everyone's too scared to own absolutely.
Speaker 1: What we are saying is this is, as I mentioned before,
Speaker 1: liquidity crisis, not a solvency crisis. It could have become
Speaker 1: a solvency crisis how the institutions and the government institutions
Speaker 1: not stepped in. But in any case there will be
Speaker 1: now some definitely, just as there was after O nine,
Speaker 1: there will be opportunities to step in. Generally, we are
Speaker 1: consonants in the large diversified institutions that they will be
Speaker 1: in the position to provide rescue entities in this situation,
Speaker 1: and and there will be opportunity. And anytime there's a
Speaker 1: massive set off indiscriminate as we've seen, they're going to
Speaker 1: be opportunities. Now it's a question of just patients trusting
Speaker 1: our equipment in the sense of trusting the managers that
Speaker 1: we've chosen for our clients. And overall, the equity exposure
Speaker 1: is really minimal. You know, we're looking at maybe at
Speaker 1: most one two percent in one or two smid portlios
Speaker 1: client hrount exposed to the equity loss in this bank.
Speaker 1: It's just that kind of systemic effect that this kind
Speaker 1: of chill will create on the other side, on the
Speaker 1: other side of the coin, EF What does this mean
Speaker 1: for the feder Reserve? Does that maybe give them some
Speaker 1: pause in kind of their rate hiking movements? What do
Speaker 1: you what do you think? Really good question, and I
Speaker 1: don't think I'd agree that this is going to radically
Speaker 1: undermine the position that their position around heightening. It certainly
Speaker 1: may mean the resolve around that fifty place point rise
Speaker 1: that everyone thought was coming. That's going to be changed
Speaker 1: quite significantly. Now what I see from the FED is
Speaker 1: we're still looking at this. They're still frosty indicators around employments. Now,
Speaker 1: certainly this will puncture some of that enthusiasm that's been
Speaker 1: in markets up to now, some of that kind of
Speaker 1: ongoing consumer optimism that seemed so resilient in the face
Speaker 1: of so many, so many indicators to the contrary. So
Speaker 1: I don't see them reversing course. I do see them
Speaker 1: perhaps taking a pause or having another repeat of that
Speaker 1: that the acceleration gesture, which was a course of twenty
Speaker 1: five basis point rise. I think there will definitely have
Speaker 1: to salt in the rhetoric. Now, this is that thing
Speaker 1: which broke which people said that we'll see race rising
Speaker 1: until something breaks for has we've seen that now and
Speaker 1: so there will be a pause that alat has not
Speaker 1: changed at the same time. Yeah, like the structural inflation
Speaker 1: that we see. So does the FED then come back
Speaker 1: and keep going? I mean, right now World Industry Probability
Speaker 1: screen on the bloomber Terminal WORP, I'm sure you use
Speaker 1: it all the time, has the highest peak at four
Speaker 1: seventy seven in May. Does keep going. I think it
Speaker 1: keeps going at a slower pace. I don't, As I said,
Speaker 1: I don't think that that that many the fundamentals have
Speaker 1: changed here at all, And I think that that we're
Speaker 1: very much looking at at the FED staying focused on
Speaker 1: that inflation target. We don't know what inflation is going
Speaker 1: to do now, but there there will certainly be sub
Speaker 1: some dude consumer sentiment which may well lead to remaining
Speaker 1: in of spending. So you are you, guys at Manetta
Speaker 1: buying on this weakness? Are you just kind of trying
Speaker 1: to stay out of the way of it for the
Speaker 1: next several days. We're doing no buying at the moment.
Speaker 1: We are very much assuring clients about the safety of
Speaker 1: ore deposits. We're looking at the possibility of contagion. We
Speaker 1: are staying focused, which has been a core equity exposure
Speaker 1: that we've had for some time, and we're trusting our managers.
Speaker 1: Were in constant dialog with our managers. As I said,
Speaker 1: this isn't a drill, but we are fully engaged around
Speaker 1: this and we you know, our fundamental long term outlook
Speaker 1: for the markets for different afflect classes haven't changed. Heck
Speaker 1: of a lot better then it would have been had
Speaker 1: the Fed not stepped in last night, don't you think.
Speaker 1: I mean I was freaking out all weekend and then
Speaker 1: when we got that at six fifteen, I thought, oh good,
Speaker 1: I can get some sleep now. That was a critical
Speaker 1: move absolutely all right, Ifan, thank you so much for
Speaker 1: joining us. Efan Devitt, chief investment Officer of Manetta Group.
Speaker 1: Kind of standing on the sidelines here, letting the market
Speaker 1: kind of sort itself out. Let's go see what's going
Speaker 1: on in the UK as it relates to SBB. We
Speaker 1: do that with doctor Richard portis professor at the London
Speaker 1: Business School. So doctor portis this Silicon Valley bank now
Speaker 1: signature bank in New York. It has been front and
Speaker 1: center for markets here and certainly for here Bloomberg News.
Speaker 1: What's the feeling. Just give us a sense of kind
Speaker 1: of how you're viewing it from the UK and what
Speaker 1: is HSBC seeing in the SVB business in UK. Well,
Speaker 1: let's start with the last question. It's a good business
Speaker 1: and the the tech firms, the innovative firms that HSBC
Speaker 1: will have a customers. That's a very good business. And
Speaker 1: buying it for one pound, that's a very good deal.
Speaker 1: Look back, Baring Brothers was sold for one pound in
Speaker 1: nineteen ninety six and the Dutch buyers did very well
Speaker 1: with that. So I don't think that's an issue, huh.
Speaker 1: Now the issue is why did it come to that
Speaker 1: and was there a regulatory failure on this side of
Speaker 1: the Atlantic as well as on the other side of
Speaker 1: the Atlantic where there surely was a regulatory failure and
Speaker 1: bad risk management. I don't think we know enough about
Speaker 1: the subsidiary, the London subsidiary to know about its risk
Speaker 1: management and whether it was just brought down by contagion
Speaker 1: from the from the parent bank. That's not obvious from
Speaker 1: the data we have right now, doctor Poros. We had
Speaker 1: pretty swift action from the Federal Reserve together with the
Speaker 1: FDIC and the Treasury, and that seems to have contained
Speaker 1: any fears of a bank run certainly in this country.
Speaker 1: Do you think we're going to see similar statements from
Speaker 1: regulators around the world. Is there any concern of a
Speaker 1: bank run at a bank in the UK in Europe
Speaker 1: that needs to be stopped. I don't think there's any
Speaker 1: concern for a bank run in the UK. I do
Speaker 1: think that the SPV story here does suggest that somebody
Speaker 1: wasn't watching closely enough, but that's another matter. We are
Speaker 1: in general watching well and banks are well capitalized, and
Speaker 1: there's no risk of a bank run here. I think myself,
Speaker 1: by the way, that there are risks in the United
Speaker 1: States still despite the FEDS actions, You've seen big outflows
Speaker 1: of funds from some of the regional banks, and it's
Speaker 1: not clear how that's going to play out yet. But
Speaker 1: that's another matter. Why why why we were talking about
Speaker 1: this earlier. Maybe you can help us with an answer.
Speaker 1: Canada apparently has only six banks, big banks, but six
Speaker 1: that served the entire country. Here in the US, I
Speaker 1: don't know how many thousands of banks we have, but
Speaker 1: about five thousand. Actually, Why is the market here so fragmented?
Speaker 1: That is a very interesting historical question and is partly
Speaker 1: because of state regulation, which is significant. It was the
Speaker 1: New York state regulator that shut down signature right over
Speaker 1: the weekend. It wasn't the federal regulators. So you've got
Speaker 1: um individual states. There has been a fair amount of
Speaker 1: consolidation over the past and fifteen years, but but it
Speaker 1: hasn't been at the regional level. It's been at the
Speaker 1: national level. So the American system is still very fragmented,
Speaker 1: that's for sure. The British is not the continental Some
Speaker 1: continental countries very fragmented, Germany for example, So it varies
Speaker 1: a lot in the European Union. So doctor Ports, in
Speaker 1: your opinion, with a just a smidge bit of hindsight,
Speaker 1: did the system work here in a case of Silicon
Speaker 1: Valley Bank. It's not hindsight, excuse me. It's regulatory failure
Speaker 1: that was partly historically built in by Congress and by
Speaker 1: the Fed. By the FEDS acceptance of not imposing on
Speaker 1: so called small banks. Turned out, it turned the SBP
Speaker 1: wasn't a small bank. Yeah, not imposing on small banks
Speaker 1: the same the same requirements for the quidity, et cetera,
Speaker 1: as we're imposed on large banks. That's a regulatory failure
Speaker 1: and it was enshrined by Congress. By the way, in
Speaker 1: two thousand and eighteen. So um, so the the blame
Speaker 1: is widespread. And then you look at the credit rating agencies.
Speaker 1: Excuse me, we go back to two thousand and seven,
Speaker 1: two thousand and eight. What you know what provoked the
Speaker 1: final collapse of SBB. Part of it was Moody's downgrading
Speaker 1: them when on Wednesday, right up until Wednesday, they were
Speaker 1: a three. Excuse me? Um, you know, so, um, we've
Speaker 1: got regulatory we've got bad risk management. Yeah. Of course
Speaker 1: SPP didn't have a chief risk officer between April two
Speaker 1: thousand twenty two and January of this year. What how
Speaker 1: could the regulators not see that and do something about it.
Speaker 1: There's also that a lot of talk about the uniformity
Speaker 1: of their deposit base, and a lot of people have
Speaker 1: said you'd be hard pressed to find another bank in
Speaker 1: the US that has such a uniform deposit bases. And
Speaker 1: almost everyone who was a depositor there was a tech
Speaker 1: company or a venture capitalist. Of course, there were a
Speaker 1: few wineries in there as well, but everybody wants a
Speaker 1: piece of those. It's very important. But it is that
Speaker 1: the kind of thing that regulators need to be watching
Speaker 1: out for, because you know, if it's a small community
Speaker 1: of concentrated people, and Peter Teel all of a sudden says, hey,
Speaker 1: everybody get rid of this, everybody selling your position at SVB.
Speaker 1: Then all of a sudden it happens. It herd behavior.
Speaker 1: Herd behavior is what we call it. And of course
Speaker 1: it's more likely when you have such a homo genius
Speaker 1: close knit community of big depositors. It's not clear that
Speaker 1: that holds for many other, many other banking institutions. I
Speaker 1: hear them the tech firms in the SBB subjidiary are
Speaker 1: not They're not as big as the American was, their
Speaker 1: deposits are not as big, and so forth. But um,
Speaker 1: there was of course at risk of her behavior there.
Speaker 1: So that's one reason I'm sure why the Bank of
Speaker 1: England acted. Doctor Portis. New York Governor Kathy Hokel said
Speaker 1: the takeover of Signature Bank by federal regulators on Sunday
Speaker 1: quote was not a bailout. Do you agree? Sorry, the
Speaker 1: takeover of Signature Bank in particular on Sunday, to be clear,
Speaker 1: to be a clear, doctor, everybody seems to be at pains,
Speaker 1: including Jeremy hunt Um in terms of the UK arm
Speaker 1: but also regulators and politicians here to say, hey, this
Speaker 1: was not a bailout. You know, look elsewhere, move on,
Speaker 1: nothing happening here. Why are they so worried that this
Speaker 1: was a bailout because of what we call moral hazard,
Speaker 1: which leads to immoral behavior. That is to say that
Speaker 1: if you bail out old depositors, then everybody thinks that
Speaker 1: you're going to bail them out next time around, and
Speaker 1: that there and therefore you get people taking riskier decisions
Speaker 1: than they would otherwise in the belief that they'll get
Speaker 1: bailed out if things go back. And that was after
Speaker 1: bear Sterns got rescued in February two thousand and eight.
Speaker 1: Nothing was done, okay, and so you came to Layman,
Speaker 1: and then the FED decided, no, you know, we don't
Speaker 1: want to create that moral hazard, we don't want to bailout.
Speaker 1: And then look what happened. Okay. So so that's one
Speaker 1: of the reasons why why more serious regulation was introduced,
Speaker 1: because because the system, the politicians, and the financial sector
Speaker 1: realized that we didn't want to go there anymore, right,
Speaker 1: you know. So uh, and that's you know, this, this
Speaker 1: bailout of all depositors is I think a risky decision
Speaker 1: to have made and what will be the fallout from
Speaker 1: that going forward? It may well be that that depositors.
Speaker 1: Now I say, well, oh well, you know, I don't
Speaker 1: have to worry about it, right right, all right, so
Speaker 1: we'll have to see our doctor Richard Porters. Thank you
Speaker 1: so much for joining us, doctor Richard Porters, professor at
Speaker 1: the London Business School. Right now, all right, Uh, let's
Speaker 1: talk a little bit more about what exactly happened here
Speaker 1: at SVB with a company that is connected, at least
Speaker 1: in a some small way. Mountain is a television a
Speaker 1: connected television marketing platform, and Mark Douglas is the CEO
Speaker 1: and co founder of the company. He joins us now
Speaker 1: via satellite from Miami. Where are you, Mark, I'm actually
Speaker 1: in Dallas, Texas? Dallas, Okay, I never know, dude, I
Speaker 1: never know where executive travel a lot. That's true, all right,
Speaker 1: so you do. And but I think I found it
Speaker 1: interesting to hear. I think this morning or last night
Speaker 1: one of our mutual buddies told me that SVB actually
Speaker 1: had a one percent stake in Mountain. Why is that?
Speaker 1: Were they an investor because you got some funding from them?
Speaker 1: Or how did that work out. Yeah, so SBB to
Speaker 1: explain that SBB is unlike really any other banks, So
Speaker 1: Pilcom Valley Bank. I think everyone at this point knows
Speaker 1: that essentially half of all tech companies banks with Silicon
Speaker 1: Valley Bank, and for merging companies, newly funded companies, the
Speaker 1: percentage was even higher than that. And the reason for
Speaker 1: that is Silcom Valley Bank was once you got funded,
Speaker 1: you raised twenty million dollars, was then willing to provide
Speaker 1: you receivables loans and what's called venture debt loans. Essentially,
Speaker 1: if you raised twenty million, they'll loan you another two
Speaker 1: million on top of that receivable zones to just run
Speaker 1: your business when most other banks wouldn't and there and
Speaker 1: those loans were actually very safe because they were backed
Speaker 1: by your cash in Silcom Valley Bank that you were
Speaker 1: required to keep there. But they also took warrants on
Speaker 1: those long So any company, most companies that had a
Speaker 1: loan agreement with Silicon Valley Bank, Silcom Valley Bank wound
Speaker 1: up with a small steak in their company and that
Speaker 1: the aggregate of that is an interesting asset on their books.
Speaker 1: So that means they may own small steaks and Airbnb
Speaker 1: or you know they do with Mountain and other companies
Speaker 1: that that's going to be an interesting asset to die
Speaker 1: best of in the future. But that's how that comes about,
Speaker 1: and that was true for many many companies. What does
Speaker 1: that mean in terms of you had to keep money there?
Speaker 1: Then essentially your deposits weren't cash You could just pull
Speaker 1: out on Thursday, even if Peter Teel advised you to
Speaker 1: do so. I wonder how many deposits they have like that. Yeah,
Speaker 1: so that is a substantial Essentially all of their loan
Speaker 1: agreements or a very substantial portion loan agreements would require
Speaker 1: you to bank all of your money with Silicon Valley Bank,
Speaker 1: and usually you have more money than the loan agreement.
Speaker 1: So if they had loan agreements a seventy four billion dollars,
Speaker 1: that means they had a substantial amount of cash that
Speaker 1: could not be withdrawn. And so on Thursday, I think
Speaker 1: myself and other folks like Mark Schuster, who's a found
Speaker 1: but from Venus and other folks were saying withdrawals who
Speaker 1: going to have to slow down? Because there are just
Speaker 1: so many Silicon Value Bank customers that literally cannot withdraw
Speaker 1: money because of all the intertwined loan agreements they had
Speaker 1: with them, and that was going to be a stabilizing force.
Speaker 1: But obviously the government made a different decision and shut
Speaker 1: the bank down within hours essentially that of that occurring.
Speaker 1: So this is really unusual. This is not like your
Speaker 1: typical retail bank that has average deposits of six thousand
Speaker 1: dollars and then loans out on thirty year mortgages. Silkoon
Speaker 1: Value Bank had average deposits of over a quarter of
Speaker 1: a million dollars usually you know, over ten million dollars,
Speaker 1: and the loans were these revolving receivables lines which were
Speaker 1: against the invoices you sent to customers and had to
Speaker 1: be paid within the next sixty days. It was it's
Speaker 1: unlike any other bank in that regard. And yeah, did
Speaker 1: did you end or your company have money deposits at
Speaker 1: SVB And if so, what do you think your recovery
Speaker 1: will be? Well, so we at that we kind of
Speaker 1: so the largest most successful companies at a certain point
Speaker 1: outgrow SVB because you need now global banking facilities and
Speaker 1: other facilities. So we actually had reached the point where
Speaker 1: we were no longer SVB customer, and so you know,
Speaker 1: and quite frankly, if companies didn't grow to that point,
Speaker 1: Silton Valley Bank would have even more than half of
Speaker 1: all startups. So essentially, this is the interesting part. The
Speaker 1: companies that could withdraw money were the youngest ones that
Speaker 1: didn't yet have loan agreements. The companies that couldn't were
Speaker 1: the emerging and mid sized companies that couldn't withdraw money
Speaker 1: because they were successful and had all these loan It
Speaker 1: had loan agreements with sub and then the very law
Speaker 1: and as you got larger and law archer, you eventually,
Speaker 1: you know, went with a more global bank. And so
Speaker 1: it's it's an interesting it's a very unique cohorted customers.
Speaker 1: And the other thing to keep in mind is when
Speaker 1: you raise money from a venture capitalists, you're not going
Speaker 1: to risk any of them money on anything but growing
Speaker 1: your business. So if you raise twenty four million dollars
Speaker 1: and you want that money to go for twenty four months,
Speaker 1: so you're gonna spend a million dollars a month, it
Speaker 1: gave SVB a lot of predictability on the rate at
Speaker 1: which you were going to withdraw that money. And ultimately,
Speaker 1: what this crisis seems to be about is that SVB
Speaker 1: misjudge that startups we're going to need to withdraw their
Speaker 1: cash a little faster, and then you know, didn't fully
Speaker 1: have the cash on hand to do to deal with
Speaker 1: the increased rate of withdrawals, even though there was tremendous
Speaker 1: stable cash in the bank. And that's we got just
Speaker 1: about a minute left here, Mark. But I wonder what
Speaker 1: kind of problems you think this causes, at least in
Speaker 1: the short term. I can imagine it's hard to pay
Speaker 1: bills to companies whose only bank account was at SVB
Speaker 1: and their lines of credit that won't be h met
Speaker 1: as far as I can tell, Like, what are the
Speaker 1: what are the worries that you have for your peers
Speaker 1: that haven't uh, you know that needed SVB. Yeah, so
Speaker 1: pure cast flows, So you couldn't as a Friday give
Speaker 1: money out of the bank to set up for payroll.
Speaker 1: You couldn't get money to pay the loan. So in
Speaker 1: other words, I started having other tech companies eat send
Speaker 1: emails to my company to not pay them because they
Speaker 1: literally had no way to pay the CAST ironically, which
Speaker 1: would have given sv BE more cash on Friday. So
Speaker 1: it's just really a cash flow problem in the near term.
Speaker 1: In the but it'll give resolved, it appears because the
Speaker 1: government is saying that they're going to return one hundred
Speaker 1: percent of the money in the long term. There's no
Speaker 1: other source for these kinds of loans for receivables, loans
Speaker 1: for you know that the kind of lending and facilities
Speaker 1: that SVB IT did for these emerging startups having lots
Speaker 1: of casts and just needing banking services that a typical
Speaker 1: bank would not provide a startup. And so that's going
Speaker 1: to create a lot of hardship in the very near term.
Speaker 1: And just where do you go to get a line
Speaker 1: of credit for an office when your brand new startup,
Speaker 1: even though you have ten million dollars in the bank
Speaker 1: from Aventa Capolas. So it's just going to cause a
Speaker 1: lot of heartache and pain for all of these new
Speaker 1: up and coming companies because these typical big banks just
Speaker 1: don't understand them, even though they have a lot of
Speaker 1: casts that they just raised. All right, Mark, thanks so
Speaker 1: much for taking the time. We really appreciate getting your
Speaker 1: perspective right on the ground there. Mark Douglas, President and
Speaker 1: CEO of Mountain getting the latest perspective of kind of
Speaker 1: what this means for the up and upstart companies in
Speaker 1: Silicon Valley in technology going to be a real challenge
Speaker 1: for them going forward as this situation gets unwelcome. After
Speaker 1: the lists, reading everything I can on this SVB issue
Speaker 1: elsa intra bank, I think I've got an understanding of
Speaker 1: what happened, okay, but our next guest is gonna show
Speaker 1: me how much more I still don't know. And it
Speaker 1: happens every time. John Author's senior editor for Bloomberg Opinion
Speaker 1: joints us here in a Bloomberg Interactive Broker studio. John,
Speaker 1: let me just start with what you and I think
Speaker 1: Matt were talking about. And you know Joe Wisenthal from
Speaker 1: Bloomberg News and Odd Lott's podcast was in here earlier
Speaker 1: because he wrote a piece today saying, of course it's
Speaker 1: a bailout. What say you? Is this a bailout? Your
Speaker 1: governor Kathy Holkel says it's not. A bailout has come
Speaker 1: to be meant thoroughly pejoratively. It's certainly in some way
Speaker 1: a riscue, which is perhaps a less loaded synonym for
Speaker 1: a bailout. I guess the question is whose money goes
Speaker 1: towards it and who precisely gets bailed out. So what
Speaker 1: was most controversially No. Eight was that taxpayers money bailed
Speaker 1: out rich people running banks and the rest of the country.
Speaker 1: I mean, that's exactly what I think is just I
Speaker 1: didn't mind top rescuing my credit cards, my ability to
Speaker 1: get money out of an ATM, my ability to get
Speaker 1: paid my paycheck. That this was the thing that people
Speaker 1: didn't understand. Let the banks fail means let my bank
Speaker 1: fail and at least for a while, cut me off
Speaker 1: from access to my money, which is what happened for
Speaker 1: two weeks in Greece when they had the Grexit crisis.
Speaker 1: Little remembered now because of what happened the year after
Speaker 1: and that, but that single handedly created a depression in
Speaker 1: Grease two weeks of not having access to your bank,
Speaker 1: that was That's what we're talking about. So if we're
Speaker 1: talking about some kind of coordinate action to stop the
Speaker 1: banking system, which is in here urrently unstable because of
Speaker 1: fractional reserve banking, because if everybody wants to take their
Speaker 1: money out at the same time, even the best run
Speaker 1: bank will fail, then then yeah, there needn't be anything
Speaker 1: pejorative about it. The recent people are dancing around the
Speaker 1: topic of whether this is a bailout is because it's
Speaker 1: been decided politically in the discourse, I think, mainly because
Speaker 1: nobody got punished for two thousand and eight that bailouts
Speaker 1: of add Therefore, we have to say that this is
Speaker 1: not bad as it stands at the moment. Well, if
Speaker 1: so far it's not, I mean, look, there could be unintended,
Speaker 1: unintended consequences. I think right now, we're happy that there
Speaker 1: are no more runs on banks, right That's that's the
Speaker 1: good thing that they fed the FDIC and the Treasury
Speaker 1: did yesterday's they start people from freaking out and pulling
Speaker 1: their money out of a ton of other regional banks.
Speaker 1: I'm not totally sure we can say that yet. If
Speaker 1: you look at what's happened to two year bond yields,
Speaker 1: somebody has been spending a lot of money buying short
Speaker 1: dated bonds today. It's the biggest fall in bond yield
Speaker 1: two year bond yields since Black Monday in nineteen eighty seven.
Speaker 1: That money had to come from somewhere, and I suspect
Speaker 1: quite a bit of it will have come from uninsured
Speaker 1: deposits at smaller banks. We need to find out. More Similarly,
Speaker 1: if you look at the share price, plainly, quite rightly,
Speaker 1: if anybody is bearing the brunt of it this, it
Speaker 1: will be bank shareholders. Because this is going to damage
Speaker 1: profits for banks across the system because because of the
Speaker 1: extra levy on them for bank insurance, for deposited insurance,
Speaker 1: and certainly what's happened to the retail bank index is
Speaker 1: pretty spectacular the way, are there still uninsured deposits at
Speaker 1: US banks? Or are all deposits insured now? Effectively, at
Speaker 1: this point you could say that, yes, all deposits are insured,
Speaker 1: but the bank, the government is still saying, but even
Speaker 1: if we come in in the very first resort, ultimately
Speaker 1: it's going to be the banking system that pays, because
Speaker 1: we're going to levy extra deposit insurance premiums. And that's
Speaker 1: what government Hogle is essentially saying, right, yes, And given
Speaker 1: that the great majority of US do have money on
Speaker 1: deposit with banks, and the great majority of US do
Speaker 1: pay tax, ultimately taxpayers are going to have to pay
Speaker 1: for this. That said, a functioning banking system is a
Speaker 1: public good, so if something goes wrong with it, presumably
Speaker 1: it's not unreasonable for us to have to pay something
Speaker 1: towards making sure it carries on. Yes, that in terms
Speaker 1: of getting back to the angels dancing on the head
Speaker 1: of a pin or whatever, you could say, it's not
Speaker 1: a public bailout because it will ultimately, we are being told,
Speaker 1: come from other banks, depositors, from the levy that's paid
Speaker 1: on the well until you get to the this new
Speaker 1: facility that was opened up by the FED. Now you
Speaker 1: can take assets that maybe worth only half of par
Speaker 1: yes and get the par as using them as collateral.
Speaker 1: That's yes. I can myself live with that because if
Speaker 1: this is a liquidity crisis, and I think it is
Speaker 1: more of a crisis of liquidity than solvency, then this
Speaker 1: is a way to deal with that liquidity crisis. Banks
Speaker 1: are sitting on a bunch of bonds that whose value
Speaker 1: has gone down dramatically. That needn't matter if they hold
Speaker 1: them until term. If they have a run and need
Speaker 1: to sell bonds for a loss, then things get very
Speaker 1: much uglier. This is a sensible way I hope of
Speaker 1: doing away with that liquidity issue. I don't myself have
Speaker 1: a conceptual problem with what the Fed is doing there.
Speaker 1: The issue is whether people are going to believe that
Speaker 1: it can be done. There's a twenty five billion dollar
Speaker 1: capacity so far. The hope is that the mere presence
Speaker 1: of this facility means that there is much less angst
Speaker 1: and it never gets called on, which is what happened
Speaker 1: with some of the rescues back in twenty five billion.
Speaker 1: Then they say that they can issue four times that amount,
Speaker 1: and then they can keep taking hits from the treasury
Speaker 1: at twenty five billion apiece. It seems like limitlessly if
Speaker 1: I guess, I mean, certainly, the ultimate potential scale of
Speaker 1: the losses is enormous. That's it. Capitalism does have some
Speaker 1: self balancing mechanisms. Given that bonds have just gained in
Speaker 1: value in a way that hasn't been seen in years,
Speaker 1: you could argue that the wave, the effect of what's
Speaker 1: happened to SVP, SVB is to rescue everybody else who
Speaker 1: has large holdings of bonds that are underwater. Whatever the
Speaker 1: losses are that banks are sitting on, and I don't know,
Speaker 1: I do know that they're less than they were because
Speaker 1: the value of bonds has just shut up. Yes, of course,
Speaker 1: all right, so John, let's fast forward to tomorrow. We
Speaker 1: can get the take a view off of this train wreck,
Speaker 1: which is the SVBS or the world CPI. Yeah, I
Speaker 1: thought I was going to spend all day writing about that. Yes, exactly.
Speaker 1: So does this give I mean, if we look at
Speaker 1: the warp function, boy, that's changing just the last few days.
Speaker 1: Has it ever? Has it taken it off? There is
Speaker 1: fifty basis points now after table is twenty five? Maybe
Speaker 1: after table are they going to start cutting this year?
Speaker 1: I think fifty is off the table unless the CPI
Speaker 1: print tomorrow is very very strong. Evidently people are now
Speaker 1: reckoning the work function, which for listeners that that's how
Speaker 1: Bloomberg derives predicted FED funds prices from futures market. If
Speaker 1: you believe the work function, then twenty five is off
Speaker 1: as well. Yeah, yeah, I am not totally convinced of that.
Speaker 1: I think what the curve at the moment is telling
Speaker 1: on work is this is going to be the beginning
Speaker 1: of a recession that the Fed has now completed its
Speaker 1: mission of tightening until something's something breaks, something has now broken,
Speaker 1: Banking is going to be much tighter. We finally are
Speaker 1: going to tighten the financial conditions and the Fed can
Speaker 1: start to ease. That's that's what it's saying. I suspect
Speaker 1: it's right if we get a very hot CPI reports,
Speaker 1: I'm not sure that the current numbers can be fulfilled
Speaker 1: by the fit all right, So I'm gonna take a
Speaker 1: snapshot of the WI RP GO function today, look at
Speaker 1: it tomorrow and see if it changes. I mean it
Speaker 1: changed a lot. When I came in at three, yep,
Speaker 1: it looked a heck of a lot different than when
Speaker 1: I went on are at five, yep. It looks a
Speaker 1: lot different. Now marketson movie before finding my call him
Speaker 1: at midnight, it was barely changed from Friday, and that
Speaker 1: was not the case. We could work a late day.
Speaker 1: That was not the case when I woke up. So
Speaker 1: the rate, what the interest rates you're telling you, is
Speaker 1: maybe not as high, not as long, and maybe some
Speaker 1: rate cuts later in the year. John Author, Senior editor
Speaker 1: for Bloomberg Opinion. Thanks so much. We appreciate that. Thanks
Speaker 1: for listening to the Bloomberg Markets podcast. You can subscribe
Speaker 1: and listen to interviews with Apple Podcasts or whatever podcast
Speaker 1: platform you prefer. I'm Matt Miller. I'm on Twitter at
Speaker 1: Matt Miller nineteen seventy three. And I'm fall Sweeney. I'm
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