Thank You Cards for Federal Reserve
For Creating Such a Financial Mess
Barry Sternlight of Starwood Capital summed up in his interview on CNBC Thursday this past week. The federal government has created the rules by which banks follow. These rules limit the risk management thinking within the banks. What was not taken into account was that the creator of the rules would actually break the rules therefore, putting the followers of those rules into severe jeopardy. Mr. Sternlight sums this up in this interview. Please watch if anything it’s very educational.
In light of all that is pointed out in this interview, markets went up on Friday. Those who follow me add QQQ Trade Ideas know that I am very pessimistic about these markets and the present economic system. But as one financial advisor told me 20 years ago, you could be right, but the market has more capital and patience than you do, and eventually the markets will win. I see this today in the amount of money that has been injected back into the banking system. The Federal Reserve opened its discount window, which is where banks can go and access capital.
With all that is happening with small to midsize banks, and the outflow of over $100 billion in deposits in the last two weeks small, mid-size banks are in trouble. It is important to understand the anatomy of a bank’s income. With deposits they are able to invest those assets in to hold to maturity assets, tradable assets, and all other assets. What has gotten small and midsize banks and I would even say some of the larger banks in trouble is that when the Fed raised federal funds rates, these banks are holding US treasuries or mortgage back securities that only produced 2% yields or lower than present yields, those assets lost value. With the scare of Silicon Valley Bank, many small and midsize banks have seen a decline in their deposit rates as it was pointed out in a CNBC and Bloomberg article of the $100 billion dollars of assets that have left banks and gone elsewhere, most likely T-Bills at 4%
To sum this up, the problem is not necessarily the banks manage their overall assets and business, but rather the rulebook that they follow. It’s when your rule creator goes the opposite direction of the rules, and the rule followers end up getting crushed in the end.