Morning Report: First Republic Bank is rescued, sort of…

Vital Statistics:

S&P futures3,972-22.5
Oil (WTI)68.25-0.12
10 year government bond yield 3.46%
30 year fixed rate mortgage 6.50%

Stocks are lower this morning as Credit Suisse is declining again. Bonds and MBS are up.

Treasury has cooked up a quasi-rescue of First Republic. A consortium of 11 banks have agreed to deposit $30 billion at the bank. “We would like to share our deep appreciation for Bank of America, Citigroup, JPMorgan Chase, Wells Fargo, Goldman Sachs, Morgan Stanley, Bank of New York Mellon, PNC Bank, State Street, Truist, and U.S. Bank. Their collective support strengthens our liquidity position, reflects the ongoing quality of our business, and is a vote of confidence for First Republic and the entire U.S. banking system. In addition, we want to share our sincerest thanks to our colleagues, clients, and communities for their continued and overwhelming support during this period.”

The company also suspended its dividend. That said, investors are cool to the measure and the stock is down 22% pre-market. Ultimately the banks are going through something similar to the the 1970s – disintermediation. People are pulling their money out of the banks because you can get better returns elsewhere. The short term Treasury market is a much better place to put your money than a bank right now, and money market funds saw $108 billion in inflows this week. There really isn’t a policy lever that can change that. We are re-experiencing the 1970s, when rising short term rates caused people to pull out their deposits for higher returns elsewhere, while the banks balance sheets were full of 3% mortgage loans that kept falling in value.

Meanwhile, Janet Yellen said that the banking system is safe.

The Conference Board’s Index of Leading Economic Indicators declined in February. “The LEI for the US fell again in February, marking its eleventh consecutive monthly decline,” said Justyna Zabinska-La Monica, Senior Manager, Business Cycle Indicators, at The Conference Board. “Negative or flat contributions from eight of the index’s ten components more than offset improving stock prices and a better-than-expected reading for residential building permits. While the rate of month-over-month declines in the LEI have moderated in recent months, the leading economic index still points to risk of recession in the US economy. The most recent financial turmoil in the US banking sector is not reflected in the LEI data but could have a negative impact on the outlook if it persists. Overall, The Conference Board forecasts rising interest rates paired with declining consumer spending will most likely push the US economy into recession in the near term.”

Industrial Production was flat in February, while manufacturing production rose 0.1%. Capacity Utilization fell to 78%.

Consumer sentiment fell in February, according to the University of Michigan Survey. Most of the survey was conducted prior to the recent banking failures, so the data doesn’t really reflect it yet. Importantly, inflationary expectations fell, which is good news for the Fed.

19 Responses

  1. Does Goldman think this piece makes them look good, or even less bad?

    I read this piece and would want to pull out any investments that pay Goldman for advice. Jesus are these people dinosaurs.


    • Why? Because they couldn’t line up investors? Or because they made money on the bond portfolio? Of course this is mark-to-market money. Nobody is going to buy these deep out-of-the-money MBS.


      • It’s their advice on how to handle public perception and for timing. To me, the correct approach is public awareness of bad news as soon as possible, if you’re a bank, the small mistakes add up as you refuse to acknowledge their impact. GS is advising the suppressing of information until the “right time” instead of telling them to disclose there bad news and the reasons for it immediately.

        I guess I’m shocked that they think they can manage information in today’s technological environment.


  2. This post and the comments are amusing.

    The neocon left. Slavs are the real enemy I guess. You’re either for WWIII with the Ruskies or a Ruskie. Shades of Bush’s statement re the War on Terror – you’re either with us or your with the terrorists.


  3. Awesome! The spectacle will be amazing!

    Seriously, if I were Trump I’d insist on the cuffs, maybe even resist so I get a black eye!

    I seriously cannot believe how lucky I am!


  4. They got him now!

    Frogmarch that bastard!


  5. Fascinating thread.


  6. Baby, why you make me hit you?


  7. Devastating!


  8. Thank goodness he said the Covid liturgy.


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