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I love how everyone pretends the bank crisis is over…
Simon Black

Practically on cue, politicians began their public hearings yesterday about the recent banking crisis.

This was so predictable; every time there’s a major crisis, Congressmen book a committee meeting to express their shock and outrage. They pass new laws to prevent a future crisis. Then their new laws fail to work properly, so they hold another public hearing to express more outrage.

This is the cycle of political problem solving, and yesterday was no exception.

The Senate Banking Committee summoned key officials from the Federal Reserve, FDIC, and US Treasury Department. And the tone was quite angry.

Senators were flummoxed that their thousands of pages of banking legislation had once again failed to provide adequate protection to the US financial system. And they were looking for someone to blame.

This, too, quite predictably, fell along partisan lines. The people on the left somehow found reason to blame everything on Orange Man, while describing bank regulators as “gutsy” and “courageous”. It was bewildering.

Most absurd was how the officials in the hot seat (who, again, represent the primary bank supervisors in the United States) managed to avoid any culpability whatsoever.

The Fed’s Vice-Chairman for Banking Supervision admitted that his agency’s supervisors had rated SVB as a poorly managed bank. And the Fed was further aware of several material weaknesses in the SVB’s risk compliance.

They acknowledged that they had advanced knowledge of the banks’ problems.

They acknowledged they should have done something about it. They acknowledged they had the tools and authority to do something about it.

Yet they did absolutely nothing… and somehow ended up being praised as gusty and courageous.

It’s natural to blame the bank executives for making such idiotic decisions with their customers’ money. But culpability is not mutually exclusive. It’s not either/or. And the regulators had a major role to play in this crisis.

Not only did they escape culpability at yesterday’s hearing, but the regulators even managed to pat themselves on the back for their swift and decisive response to the crisis.

After SVB’s failure a few week ago, government officials invoked what’s known as the “systemic risk exception”. This exception essentially gives them sweeping power to deal with a crisis by whatever means necessary.

And all the key officials unanimously agreed that SVB, First Republic Bank, etc. posed systemic risk, and that justifies the massive bailout response.

Isn’t it interesting, though, that “systemic risk” only seems to apply to banks? 

You never heard these officials say that baby formula shortages pose systemic risk. Or that inflation itself is a systemic risk. Or that dwindling US oil production is a system risk.

Yet whenever the banks and their somnambulant regulators fail, they call it “systemic risk” and pull out all the stops to save them.

Energy companies, on the other hand, which produce the very thing that all economic activity requires, are tossed out in the cold and demonized at every available opportunity by the President of the United States. It’s bizarre logic.

The biggest falsehood of yesterday’s hearing, however, was the continued insistence by all that “our banking system is strong and resilient”. Coincidentally they presented zero evidence to support that assertion.

In fact most evidence would support the opposite conclusion– that there are still a number of major problems in the banking system.

The FDIC itself reported that banks across the US have a total $620 billion in unrealized losses; this is due primarily to the steep decline in bond prices, which are a result of the Federal Reserve’s aggressive interest rate increases.

And bear in mind that the FDIC’s estimate was before the most recent rate hikes. So the updated estimate on unrealized losses right now is most likely higher than $620 billion.

But risks in the banking system go way beyond these unrealized bond losses.

Commercial real estate is an obvious one; Fed data show that banks across the US have loaned out nearly $3 trillion of their customers’ money against commercial property, including office space. Other estimates go up to $5.5 trillion including commercial mortgage-backed securities.

But thanks to new, pandemic-related remote work policies, companies across the US are using less space.

Moody’s Analytics recently reported office utilization rates at roughly 50% of pre-pandemic levels based on security-badge swipe data at office buildings.

Workers simply aren’t showing up to the office like in the past, and office occupancy rates have been steadily deteriorating as a result.

Office vacancy now stands at 12.5% nationwide according to the National Association of Realtors. That’s about a third worse than in 2019.

To make matters worse, the economy is slowing, which will likely trigger additional cuts in office space.

All of this is bad news for banks. They have trillions of dollars of exposure to a rapidly declining commercial real estate market, so even a small increase in loan defaults could spark another panic.

The Wall Street Journal recently reported that estimates of total unrealized bank losses right now, including commercial loans, is a whopping $1.7 TRILLION. That’s the vast majority of all bank capital in the United States… so this is still an enormous problem.

But everyone keeps playing the same chorus again and again: “the banking system is strong, the banking system is strong.”

Even sophisticated Wall Street investors have joined the sing-along, given that bank stocks are once again on the rise.

As of this morning, shares of financially uncertain banks with enormous unrealized losses are now trading at fairly rich, double-digit valuations as measured by Price/Earnings and Price/Free Cash Flow metrics.

(Meanwhile, valuations of high quality, well-managed real asset businesses in the energy, mining, agriculture, and productive technology sectors are tiny by comparison.)

Everyone seems happy to close their eyes and pretend that the crisis is over despite so much evidence to the contrary.

Want to learn how to assess your bank’s health and check if your deposits are safe? Click here for the free report from Sovereign Man.





James Hickman (aka Simon Black) is an international investor, entrepreneur, and founder of Sovereign Man. His free daily e-letter Notes from the Field is about using the experiences from his life and travels to help you achieve more freedom, make more money, keep more of it, and protect it all from bankrupt governments.

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