Thursday Relaxed Mailbag
Q: Why's the market so relaxed?
Wall Street folk wisdom tells us that when the Fed starts panicking, the market stops panicking.
But this time, with the quick-trigger response to the bank failures that already seem so long ago, it feels like the Fed panicked preemptively so that the market wouldn't have to.
Why the quick trigger this time? They likely felt a need to nip the banking crisis in the bud, so they can get back to fighting inflation — because they can't do both at the same time.
It seems to have worked: We haven't had a bank fail in nearly two weeks!
But it also feels like the solution to this problem came a little too quickly and was maybe a little too simple.
Which may raise the risk that it's also wrong.
Reminder: In 2008, the market rallied after Bear Stearns failed…and remained calm right up until Lehman failed. So, we may not be out of the woods just yet.
What could our Lehman moment be?
Commercial real estate is the next risk people are most worried about.
(So it'll almost certainly be something else.)
Q: Why's crypto so relaxed?
Buoyant token prices do seem inconsistent with recent news flow: Operation Choke Point looks increasingly real, the only two crypto-friendly banks have been closed, the SEC is taking on Coinbase, and the CFTC is taking on Binance.
The case of Signature Bank looks like a particularly egregious attack on crypto, as it seems to have been seized Minority Report-style (i.e., before it could commit a crime).
And the CFTC complaint filed against Binance looks like an existential risk to crypto's dominant exchange.
Maybe token prices are telling us it's all not as bad as it seems.
But if nothing else, crypto has officially been assigned to the undesirable bin along with "gun stores, pawn shops, tobacco stores, [and] payday lenders," per this white paper from Cooper & Kirk.
Q: Why's Binance so relaxed?
Binance CEO Changpeng Zhao (CZ) brushed off the CFTC complaint as "FUD" and, judging by the unresponsive price action in Binance's BNB token, the market seems to agree with him.
In a blog post, CZ said Binance adheres to the "highest standards in KYC and AML" and I'm sure that's true now.
But, per the complaint, it hasn't been true for long: The CFTC somehow got access to Binance's chat logs, which are full of comically self-incriminating statements (many from CZ himself).
The whole 74-page complaint is a must-read for compliance officers in need of a good laugh, but this gem from CZ will give you the basic idea:
"Give them a heads up to ensure they don't connect from a US IP. Don't leave anything in writing. They have non-US entities…Do you have Signal?"
Here's a suggestion, CZ: Maybe ask if your employee is on Signal before instructing them to break the law?
And don't leave "don't leave anything in writing," in writing.
They left A LOT in writing.
Why the market's so relaxed about it, I'm not sure.
Q: Is Powell's de facto guarantee of bank deposits good news?
The consensus view here is that people can't be expected to be bank analysts, so they shouldn't pay the price if the bank they choose turns out to be a bad one.
Even companies that employ CFOs cannot be expected to have an opinion about the banks they use, apparently.
But how expert do you have to be to know what a money market fund is? Or to know it's unwise to keep all your cash in an uninsured checking account at Silicon Valley Bank?
I'm asking, because there's a cost to guaranteeing deposits, and it's far greater than the $20 billion the FDIC is likely to lose on SVB.
If insurance is unlimited, deposits will flow to the banks paying the highest yields, and the banks paying the highest yields will be the ones doing the riskiest stuff.
The fastest-growing banks will then be the worst banks — which means unlimited insurance is likely to lead to more bank failures, not fewer.
So we should maybe ask people with more than $250,000 to park their car somewhere and spend a few minutes thinking about where to safely park their cash.
It will cause problems if they don't.
Q: Why do we have such a fragile banking system?
I'd say it's a combination of 1) we want banking services to be cheap (or free) and 2) our bank regulator is also our inflation regulator — and raising rates to fight inflation is at cross purposes with banking stability.
Banks capture the upside of the investments they make, while the government and (in theory) uninsured depositors capture the downside.
We allow this because banks provide an essential service.
We could ask banks to take smaller bets. But if returns are lower, banks will have to be bigger, and we don't like big banks.
We could ask banks to take no bets at all. But we'd have to pay fees for our banking services, which we don't want to do — we prefer the costs we pay to be hidden.
And we could get our loans directly from savers, but they would charge a lot more than banks do. We don't want that, either.
So we allow banks to capture a spread by borrowing from us short and lending to us long.
And we foot the bill when it occasionally goes wrong.
It's looking like the bill will be modest this time, but, still, people are getting less relaxed about the banking system.
Which is maybe why they're getting more relaxed about crypto?
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