Three Cockroaches

Article by Eben Burr, President, Toews Asset Management

I recently heard it said that if you see 3 cockroaches, there are sure to be more you can’t see inside the walls.

Let’s start with a quick chronology of nonsense. As we all know, over the weekend before last, JP Morgan won the bid to take over the failed First Republic. The following Monday, the most powerful man in Banking, Jamie Dimon, said that the banking crisis was behind us.

On Tuesday Signature bank failed.

Are we seriously supposed to believe Jamie Dimon did not know Signature was on the brink? I am pretty sure it takes more than a day to assess the viability of a $100B bank. It is hard to imagine that Mr. Dimon did not know what was going on, and given his might, may have even been part of the conversation.

The next day, Wednesday, Jerome Powell said “the sale of First Republic over the weekend to JP Morgan draws a line under that period” meaning the banking crisis was over, right? Thursday PacWest and a couple of other regional banks’ share prices were cut in half, after having already being crushed in March. Friday, PacWest regained around 80%, but is still down about 75% for the year, as of last Friday.

This kind of volatility in the regional banking sector implies a level of skittishness that is understandable, but not necessarily grounded in these banks’ financials.

To keep it fun, there are also investigations being launched into the possibility that the extreme volatility is the result of potential market manipulation.

A recent Bloomberg article mentions that about 75% of depositors at PacWest were FDIC insured and the bank had liquidity amounting to almost twice the deposits not covered. PacWest is well diversified, and a high percentage of their loans are not fixed rate, however, their margins are being squeezed by the increased funding costs and difficulty in attracting investments when alternatives like money market accounts are now paying up.?

We have had very few bank failures since the financial crisis when we had one big one, Washington Mutual, and tons of smaller ones. That was a totally different situation, but it is hard to imagine that there are not a lot of smaller banks that have lost assets to larger banks, suffering increased costs, unrealized losses, and slipping margins, which could cause share prices to drop. This could make investors less interested, which could spook depositors, who could continue the cycle until they fail.

The US has 4,000 banks - more than any other country. This competition is good and allows for regionally and locally specialized banking that I believe is important to the health of our small businesses and our country.

I hope I am wrong, and we only had three cockroaches, not an infestation.

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