More Bank Shenanigans
Just as the last bank crisis was fading from memory, a new bank crisis is emerging, this time staring First Republic Bank. Despite upbeat earnings, the bank’s stock has collapsed this week. The market cap has fallen below one billion for the first time in the bank’s existence. They are currently begging the big banks to shift some of their deposits into Republic to stem the outflow. Depositors are worried that the Feds may shutter the bank, putting their deposits at risk.If this sounds like the crisis that brought down Silicon Valley Bank or Credit Suisse, that is because it is the same problem. Large depositors and insiders got worried and began to shift their money out of the bank. Because there are no secrets in this age and the plutocracy is relatively tiny, it does not take long for word to get out and the other large depositors begin to pull their money. Banks that rely on large dispositors will always be prone to these sorts of bank runs.
Oddly, this reveals some Dirt People wisdom. Silicon Valley Bank did not cater to the Dirt People, so Dirt People did not put their money in the bank. Instead, Dirt People end up at the big banks. The whole too big to fail thing in the prior financial crisis taught the regular guy a good lesson. The big banks are friends with the regime, so the regime will always protect them. If you want to protect your money against shenanigans from crooked bankers, put your money in a big bank.
The trouble comes when insiders in a particular industry, like the tech sector, want to conduct shenanigans away from the prying eyes of other oligarchs. This is why Silicon Valley Bank existed in the first place. It was the bank for the connected in the tech sector, so they could conduct shenanigans amongst other tech insiders. If you wanted to know what would be promoted as the next big thing in tech, you needed to be at that insider table, so doing business at SVB was necessary.
Since the American economy is nothing but shenanigans by insiders, it means all of the other areas have their insider tables too. That is where these other regional banks come into play. They will serve the large developers in a region, for example, who will park lots of cash in these banks. Those developers will draw in local warlords and potentates to their shenanigans, who will put their cash in the same local banks, so that moving money and information is simpler.
The information portion is the key to modern shenanigans. The reason the hedge funds operate in sleepy villages in Connecticut is that it is much easier to conduct shenanigans in person at a dinner party or on the golf course. If you are in New York, someone could hear you talking or you may be tempted to trust the wrong person via e-mail, so it is much safer to deal in person out in the leafy suburbs, free from the hoi polloi and the ambitious government regulator.
You can be sure this used to happen at Silicon Valley Bank. Part of what they provided to clients was introductions to other clients. One tech insider could socialize with another insider at his friend the banker’s house. If after a few drinks there were some shenanigans, who would know? This sort of thing plays out across the economy and regional banks often operate as junction points. A part of their service is putting likeminded investors together for shenanigans.
In the world of shenanigans, there is no honor, so when the money could find better deals outside of tech startups, they no longer needed Silcom Valley Bank and they pulled their money. A similar problem is happening in the commercial real estate sector, which is facing tough times. The work from home craze kicked off by Covid is here to stay, so that has cratered demand for office space. Crime waves in cities are killing urban commercial and retail properties.
The big drag on commercial real estate, as far as the banks are concerned, is the way in which property owners manage debt. If you own an apartment building, you never pay down the debt on the property. Instead, you keep borrowing against it as rents pay down the debt. That is the source of income. Of course, there are investors, who get paid from these periodic withdrawals of equity. Commercial real estate is not about the rents, but the equity, which can be pledged as collateral.
Imagine you have a property worth a million dollars. The rents far exceed the cost of maintaining the property, so it has a remarkably high cash flow. It means you pay taxes on those profits. If on the other hand, you take a mortgage against the property, the cash flow decreases, along with the taxes, but you now have a pile of cash to do things like buy another property. As rents pay down the debt, you periodically refinance the property to create a big pile of cash.
The trouble is interest rates are going up at the same time that occupancy is going down, which is driving down the value of properties. The bank is not only demanding more in interest payment, but they are also willing to loan less against the property, because of the declining occupancy. What is happening in commercial real estate is similar to what happened when the housing bubble popped. All of a sudden, lots of people are upside down on their mortgages.
This is what is pressuring regional banks. A bank that primarily works with commercial real estate is seeing a sharp decline in deposits, but also a sharp decline in many of the assets they are holding on their books. This is why everyone is suddenly nervous about the regional banks. Many of them were tied into the regional real estate markets, which are now in decline due to rising interest rates. First Republic Bank is probably the first shoe to drop in what will be another banking crisis.
Of course, the question that lingers over all of this is whether the Federal Reserve can keep the plates spinning while they work out decades of bad policy. As of this week, the Feds are not coming to rescue the local banks. They were not going to rescue Silicon Valley Bank until they had no choice. Commercial real estate has just as many powerful oligarchs as the tech sector, maybe more. That means everyone is going to be betting on yet another massive bailout of the banking sector.
All of this is a good reminder that America stopped being a market economy a long time ago due to the outsized role of banking. When you have control of the global currency, you can conjure money from thin air. When you have that power, you use it to command things of the economy that otherwise would not exist. That means this command economy is going to keep faltering as the people commanding it lose their power to command it to do things it should never have done.
More Bank Shenanigans | The Z Blog
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