The ‘low rate’ junkies ignoring US banking crisis

Charles Gasparino

Business

By Charles Gasparino

March 25, 2023 | 10:55pm

This past week’s bounce-back of the stock market really is something to behold.

Stock prices climbed Thursday and again Friday, right after the Fed raised interest rates, and not because corporate earnings are killing it, inflation has been put to rest, or the economic forecast is so bright.

No, stocks rebounded because we have a banking crisis and the possibility of lower interest rates sometime soon. That means traders are betting, like drug-addled junkies, that the Fed could resume giving them their fix — pumping “heroin” in the form of low interest rates into the drug addict that is the US stock market.

That’s right. The modern-day stock market is an addict — and like an addict, it can’t be trusted. It will lead you astray with false promises. Steal from you to feed its habit, feign health and strength when it has neither. More than anything else, it needs help — a treatment center, if you will, that removes its addiction to free money and allows prices to reflect the real condition of the US economy and forecasted corporate profits. 

The treatment is painful, as we’re seeing. It’s the higher interest rates now imposed by the Fed to quell inflation in food and fuel and bloated financial assets. Stuff like crypto, meme stocks, then tech shares and a lot more have recently tanked, exposing a pernicious bubble that only free money could create and higher interest rates can cure.

Now the remedy of higher rates is painfully exposing a similar rot inside the banking system. Buttoned-down commercial bankers as opposed to meme-stock-pumping retail traders took wild gambles on commercial real estate and early-stage VC companies. They, too, are getting crushed by higher rates as asset prices begin to wean themselves off their risk-on addiction.

More banks might fold

First there was Silicon Valley Bank, or SVB, then nearly simultaneously Signature Bank that succumbed to the cold turkey. There will be others, as many as two dozen, I am told. All have balance sheets remarkably similar to SVB and Signature. If things continue to go south, they are ready to fold, too, guaranteeing a steep recession.

Again, you’re not seeing this logic that much in the stock market, where the combined wisdom is one of a stupefied giddiness of a junkie who just got his fix whenever he hears lower rates are in the offing. 

Thankfully, there are people on Wall Street who are not high and you can trust for the straight story — people like Jamie Dimon of JP Morgan and Larry Fink, the head of money-management powerhouse BlackRock. They have nearly a combined century of risk-management experience, and while people in DC fiddle with bromides about the strength of the banking system and stock traders salivate about lower interest rates, they are ignoring the noise.

They know stock traders are not the best barometers of the long-term health of the economy or even the markets themselves. They also know the risk-taking at SVB et al. is more endemic in the banking system than stocks are signaling. If we don’t play this right, we’re heading for a broader collapse, a steep recession and a market collapse.

Saving First Republic

One way they’re doing this is to try, possibly in vain, to save First Republic Bank and ultimately sell it. The once rock-star bank headquartered in San Francisco is no small fry; it has more than $200 billion in assets. It caters to rich people in tech and other ­major industries. 

Unfortunately, it made some of the same horrible portfolio choices as SVB: loans to businesses (tech and commercial real estate) that are underwater, resulting in a jittery deposit base that keeps yanking from accounts.

Dimon is looking to arrange a “club deal” to save First Republic. That means selling it after getting commitments to put real capital into the bank (above the recent $30 billion infusion of deposits). He and his people are talking to private equity firms (former Treasury Secretary Steve Mnuchin, now a PE banker, is said to be interested), other banks and some uber-rich dudes like maybe Warren Buffett or a member of the ­Saudi royal family.

Fink, meanwhile, is passing ideas to the White House on how to stop the contagion from reaching epic proportions, much like he did successfully back during the 2008 financial crisis, and warning his contacts in DC that we’re facing a possible crisis not unlike the one that afflicted S&Ls decades ago if the government doesn’t take action.

So far, it doesn’t seem like the White House is taking Fink’s words to heart, given its continued vapid happy talk. Dimon’s club deal and sale also appears to have stalled. As I first reported, bankers are weighing going to the federal government for a handout: Capital in exchange for warrants that would be repaid at profit once the thing is sold.

Yes, things could get pretty bad, so don’t trust the addicts trading stocks.