S&L Crisis 2.0? Uncle Sam's Short-Term 5% UST Is Sucking Capital Out Of Banks

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by Tyler Durden
Friday, Mar 10, 2023 - 02:00 PM

Excerpted from Larry McDonald's 'The Bear Traps Report',

Wall Street Banks just spent the last four weeks selling investors on a soft - NO landing scenario -- There are rare moments of social risk awareness in markets where everyone is huddled on the wrong side of the boat, and when the migration starts, the broad belief system flips and the swing can be very violent. We are here NOW...

Back to the Future

It´s a lot more like the late 80s (S&L Crisis), than 2008.

Most of the risk is spread out across hundreds of regional banks. Tertiary financials -- like ALLY above -- are important leading indicators. At 19x earnings, now... most of us can see an air pocket of the face of the S&P 500, hello 13x, next stop.

Available-For-Sale Securities

AFS is the term of the day - On the balance sheets of the regional - KRE Banks - there are hundreds of billions of dollars of AFS --- "available for sale securities" --- (US Treasuries, mortgage-backed securities, and high-quality investment grade corporate bonds).

For YEARS these assets NEVER had to be marketed to market -- they NEVER MOVED in price. Regional bank executives look more like your local -- overweight car salesman than Wall St. risk managers.

They are sitting on hundreds of billions of dollars of assets that FOR DECADES NEVER moved in price.

Now you have a US 2-year treasury near 5% vs. 3% in August -- there is an elevator shift drop in prices here, NOT marked to market at the banks.

We are told the macro-prudential risk crowd inside the NY Fed has been annoyed that FCIs (financial conditions) have NOT tightened all that much considering 5% front-end rates (tightening FCIs act like a fire hose on an inflation fire). We are hearing, the NY Fed (with the FDIC and OCC) is now forcing the regional banks to mark their collection of toys to market.

If you include HELOC, Auto loans, Commercial real estate, and MBS - the losses must be $1T across the regional banking ecosystem. Raising rates 500bps in 14 months comes with a price, it´s NOT free.

The brainless lunacy of Wall Street "economists" calling for a soft - NO landing with this kind of interest rate risk turning into credit risk - BLOWS ONE's MIND!!!

***To make matters worse, Tbills at 5% are sucking billions a day out of regional banks...

Deposit Beta

Again, for decades -- the "Deposit Beta" moved at 5mph, now 100mph. Regional Bankers are slow-moving, local -- sleepy fellows. As the Fed has juiced front-end rates, regional banks have NOT adjusted their bank deposit yields to keep up!

Precious capital is running out to the banks faster than a LA Lakers full-court press.

Some banks are being forced to liquidate AFS securities and sell stock to raise cash urgently with a massive dilutive impact.

Stay tuned.

S&L Crisis 2.0

Nasdaq banks weekly chart. Just a jaw-dropping disaster. Sliced through key support at the 200-week moving average (yellow line) like it wasn't even there. VERY pre-crashy.

As one NY PM told McDonald: "Banks have been very quiet about these risks for months."

What SIVB is telling us:

1) deposit data - run off zero cost deposits - deposits flight, run on deposits, deposit beta much faster, Uncle Sam's short term 5% UST is sucking capital out of banks!!!!!!!!!!!!

2) interest rate risk - mark to market available for sale securities, funding mismatch, bottom line fed hiking 500bps in 14 months is showing UP HERE!!!!!!!!!!!!

"Maybe that whole zero interest rate and QE thing wasn't such a good idea..," exclaimed another NY PM.

Breaking "news": 500bps in 14 months comes with a price, it´s NOT free --- Anything can happen, but when the banking sector breaks down like this, it usually last more than a day - like weeks or months. The Fed MUST be getting hysterical calls. They are aware. Just like a deer in headlights is aware before it is killed by a truck.

Memories of Non-Liquidity

"Our liquidity position is strong, we are adequately capitalized."

- Alan Schwartz, Bear Stearns, March 2008

McDonald ends with a very aggressive forecast: We think the Fed cuts rates 100bps by September.

We can only imagine the level of market stress required for that to come to pass. Brace!

"Black Monday?" -- PM NY