Sunday Night Links

• I am seeing estimates that over 97% of the funds are not FDIC insured, and many of those accounts are held by start-ups.  An outright failure would be calamitous for the Silicon Valley start-up ecosystem.  Likely the best outcome is if a major bank steps up and buys the thing, rendering depositors whole.  Without such a buyout, regulators are in an awkward position.  Leaving depositors hanging might generate additional bank runs or financial market runs.  Making depositors whole, however, sets a crazy precedent (“in fact, we’re raising the guarantee to $10 million!). So what exactly does the FDIC/Fed/Treasury have to do to get a deal consummated ASAP?  What kind of behind the scenes horsetrading will be involved? Here is NYT coverage of the basic facts.  Note that every now and then the U.S. banking system is semi-insolvent, but matters work out because “on paper” losses do not have to be either realized or reported as such.  Remember the 1980s?  One danger is that if other banks start selling their bonds at a loss, the problems in the system will become increasingly transparent and compound themselves. [Marginal Revolution]
• Financial regulators are discussing two different facilities to manage the fallout from the closure of Silicon Valley Bank if no buyer materializes, according to a source close to the situation. One way that the regulators would step in would be to create a backstop for uninsured deposits at Silicon Valley Bank, using an authority from the Federal Deposit Insurance Act, according to the source. The move would also touch the systemic risk exception that allows the Fed to take extraordinary action to stem contagion fears. [CNBC]
• Since 2007, the FDIC has served as receiver for over 525 banks. Only 9 of these failed banks had assets over $10 billion. Thus, the overwhelming majority, over 98 percent, had assets under $10 billion. Approximately 95 percent of resolutions conducted by the FDIC since 2007 involved purchase and assumption transactions, generally involving a single acquirer assuming nearly all of the failing bank's liabilities. This resolution approach, particularly applicable to community banks, is generally the least disruptive both to depositors and the local community, and the easiest for the FDIC to execute. Only 25 banks since 2007 were resolved through insured deposit payouts, reflecting the general availability of acquirers for purchase and assumption transactions for smaller institutions. In only three resolutions since 2007 was a bridge bank utilized, and only one of those three cases involved an institution with assets above $10 billion. [FDIC]
• Marlboro Friday refers to April 2, 1993, when Philip Morris announced a 20% price cut to their Marlboro cigarettes to fight back against generic competitors, which were increasingly eating into their market share. As a result, Philip Morris's stock fell 26%, and the share value of other branded consumer product companies, including Coca-Cola and RJR Nabisco, fell as well. The broad index fell 1.98% that day. Fortune magazine deemed Marlboro Friday "the day the Marlboro Man fell off his horse. [wiki]
• If you synthesize the best parts of Falkenstein and Redleaf, you predict that the next crisis is going to come in the investment that is currently perceived as riskless enough for highly leveraged institutions like banks to buy. In the 2000s that was mortgages, at other times it has been other investments like railroads. Right now, government bonds are accorded zero risk in calculating bank capital ratios. The idea that government bonds are riskless when governments are planning to flood the market and when the expenditures are consumed (building no collateral) may prove to be the latest delusion. [CBS]
• More Americans now favor legal cannabis than legal tobacco, surveys show, signaling a sharp societal shift from an era when cigarette-smoking was legal pretty much everywhere and pot-smoking was legal absolutely nowhere. [The Hill]
• Empire of Pain: The Secret History of the Sackler Dynasty is timely given that a lot of our American brothers, sisters, and binary-resisters were just paid $600/week to stay home for two years and consume drugs and alcohol (this Senate document says there was a 30 percent increase in overdose deaths, but blames the “pandemic” rather than the “lockdown”). The antiracism experts at Mass General say that heavy drinking increased by 21 percent during lockdown. If nothing else, reading the book will make you cautious about taking that first bottle of painkillers that a doctor prescribes! [Phil G]
• Ultimately, though, it seems unlikely that this will stop until the Fed stops tightening. Continued interest rate increases have been widening the gap between what bank deposits pay and what customers could earn by buying Treasuries directly. At some point, the dam would just burst and deposits would get converted to direct Treasury investments, never to return. Also, higher interest rates have already basically wiped out the equity in commercial real estate (just look at a stock chart of an office REIT like BXP or VNO), and if the rates increase further, these properties will start getting handed back to the banks. But once the Fed pauses, then no one will think that their bank deposits are at risk because of the interest-rate related decreases in value of assets which are still performing. Banks can then continue to earn their way out of their liquidation value hole, as they had been doing and as has normally happened at various points in past economic cycles. However, the caveat here is that inflation will come back. They have to give up on trying to get it back down using monetary policy. Maybe they raise taxes, maybe they put a sumptuary goods tax on Ferarris and private jet flights. Maybe they stop printing money to send to Ukraine. There are all kinds of fiscal and regulatory things that could be attempted. Inflation would have been better over the past two years if we had more sawmills and oil refineries and fewer cryptocurrency startups. [CBS]