Let's Talk Loans - Vol. 44

Thank you for returning for another episode of Let's Talk Loans. This has been a week, where each day itself has felt like a week. It has been, and continues to be a wild, wild ride. Is this what they meant by March Madness - or is that something else? For those joining the newsletter for the first time, we cover what's trading and trending in the whole loan market and recent chatter on the whole loan desk here at Raymond James. If you enjoy the content, please like, share or subscribe to these weekly musings.

Listening to Joe Kernen and Andrew Ross Sorkin on CNBC this morning, they asked an interesting question.

Is this Friday more or less scary than last Friday?

Rewinding to last Friday, SVB was starting to collapse. News broke that it would be the first FDIC institution to fail in 2023. My comment to that was "emphasis on first". Signature goes down over the weekend and felt like almost an afterthought headline. In what I'm sure was a very busy and interesting weekend, we wake up to having no buyer for SVB and a firestorm of a conversation surrounding deposits. Insured vs uninsured deposits. Are they all implicitly guaranteed now? Concepts like "moral hazard ", "unrealized losses ", is this another bailout , "contagion", a new program called the Bank Term Funding Program ; all swirled around discussions to save the banking system. We saw one of the largest drops in the 2 year since 1987 - moving from Wednesday the 8th at 5.07% to Monday the 13th of 3.97%. The 10 year from 3.99% to 3.57% respectively.

Before I dive deeper into the week, how did we get here? One of my most active posts over the last 6 months regarding regional banks. There is going to be plenty of revisionist, Monday morning quarterbacking on this topic. I've read over and over from talking heads about how irresponsible these bankers must have been. Or that regulators missed this and more regulation is now needed. Bankers should have known that rates would rise is the comment. I don't subscribe to this line of thought. When you drop rates to zero and then raise them by over 400bps in a very short window of time - things break. Let's go back to February of 2020. The pandemic descended upon us, the world stopped and rates fell. Emergency measures were taken and $5tn was showered down upon the consumer, which made it's way into the banking system in the form of deposits. Lenders couldn't make loans quick enough because of lock downs - but the loans they did make were at ultra low rates. CFO's were under pressure (at the time) to find earnings and margin. The excess cash these banks and credit unions had then went into bonds. Not risky credit, complex / odd derivative based, specter of the 2008 crisis type assets. Treasuries. MBS. To put it in context, in a matter of months we refi'd nearly half the 13trn mortgage market as mortgage rates dove into sub 3% coupons. Investors traded credit risk for duration and earnings. Should they have hedged, sure. Did they, no. Should they have match funded, of course. Deposits were flooding in the door, delinquencies were at all time lows and credit was pristine. Yes, they extended but inflation was transitory and no one had the crystal ball that the Fed would raise rates like they did in 2022. However, the Fed did hike aggressively and as such unrealized losses swelled to historic levels. Unrealized losses are just that, unrealized, until they aren't. It's a paper loss but as the FDIC chairman Martin Gruengerg mentioned in it's Dec 1st, 2022 speech .

"additional interest rate increases combined with longer asset maturities may present challenges for the banking industry in coming quarters. Unrealized losses on available-for-sale and held-to-maturity securities totaled $690 billion, up 47 percent from second quarter 2022."

Fueled by an unprecedented $42bn run on SVB's deposits in a matter of days, when forced to find liquidity, those losses went from unrealized to realized with a quickness. And here we are, the 19th largest bank in the country and the 2nd largest bank failure in the history of the US banking system comes to pass. Something broke and we might see more of it. Which I'm sure has several regional banks more than a little nervous.

Later in the week I came back to a quote that I feel I've said a lot over the last 12 months. I wouldn't want Chair Powell's job for all the tea in China. Balancing continued high inflation with a banking crisis is no small feat. CPI's number came in "stubbornly high" and continuing claims showed us that the jobs market remains strong. PPI was off and might give the Fed cover for a pause. That brings into question next week's Fed meeting and the direction of rates.

By Wednesday we had First Republic and Credit Suisse back in the box. The Swiss government steps in to give a life line to Credit Suisse. A group of banks start to form a plan to further stabilize FRB. In a matter of 2 weeks we've gone from a market that was anticipating 3 hikes to a market that is now pricing in multiple cuts. In light of the banking crisis and stabilizing the fear trade, bankers continued to call for a pause.

I did a quick poll to see what you thought. If I could do it again, I would have made it a 1 day poll, instead it was over 3 days. In your defense, you might have changed your mind over the course of the first half of the week. Somewhere between a pause and a 25bps hike is where 715 of you landed. Thanks for the feedback!

The news of the day to round out the week is the latest lifeline. A conglomerate of 11 banks come together to further avoid a "panic of 1907" type event. Perhaps we will read if it's successful on Monday...

"Jamie Dimon and Janet Yellen were on a call Tuesday, when she floated an idea: What if the nation’s largest lenders deposited billions of dollars into?First Republic Bank , the latest firm getting nudged toward the brink by a depositor panic.

On to other news and focusing more on the core purpose of the newsletter. Lending. We will host a webinar next Thursday (23rd) with Eric Neglia and Brian Ford, CFA to talk about the unsecured, consumer, fintech market - along with solar lending. Should be a great discussion and if you have interest in attending please contact your Raymond James sales rep or reach out to myself.

Back to my opening question from CNBC.

Is this Friday more scary than last Friday?

I'd love to hear your thoughts, please share them in the comments. Good luck with your bracket!

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