Over the weekend, another bank, Signature Bank, a popular crypto lender, followed Silicon Valley Bank over the cliff. And like SIVB, its creditors were also given unlimited retroactive insurance on their callable-on-demand loans to the bank, aka deposits.
The government is anxious for these bailouts not to be called bailouts. But they are gifts to certain parties that took known risks. Let’s not be under any illusions … deposits up to $250,000 were already insured. This ceiling was simply tossed aside like a mere inconvenience, and the money to make whole big depositors is being created from nothing … plainly inflationary. So it’s not the ordinary American that’s receiving federal largess; it’s the ordinary American who’s providing it.
This recalls the Fannie and Freddie bailouts of the summer of 2008. The federal housing giants’ securities were not guaranteed by the full faith and credit of the United States. Investors received higher yields than Treasury investors in compensation for their greater risk. So when these agencies were taken into conservatorship and their securities retroactively effectively converted into Treasuries, it was a gift. MBS investors were bailed out at the expense of ordinary Americans.
We could grant that maybe some relief was called for in both cases. Maybe 80, even 90 cents on the dollar, but 100%? Then what good was it to have been more prudent to have actually bought safer Treasuries and accepted the lower yields? What good was it to have restricted deposits to FDIC insured limits? What good is FDIC insurance at all? Deep pocketed investors just got it for free.
What do you call it when the rules are changed in the middle of the game? Rule of law is hardly the first phrase that comes to mind.
If there’s any law at all involved, it’s of the ex post facto kind.
Some comments on the markets. A few weeks ago we wrote
”We’ve seen blips and stretches of this expected relative performance but so far they have generally been offset by blips and stretches of the opposite. Aside from the advance notice given by the YC & SS, such turning points typically come with little warning, can happen fast, and can be hard to distinguish from minor, soon-to-be-reversed excursions before they’re well advanced. Not being fond of living on the edge of my seat, I prefer to maintain the stock:gold&treasuries under:over-weight. When its time to shine comes, it will be hard to miss.”
It did happen fast and we didn’t miss it. Gold and treasuries have certainly done their job so far in this crisis. The bailouts have so far limited losses for risk investors, but markets have nevertheless still managed to discern some difference between risk and safety. When the rules of the game can be changed instantly and retroactively, there can be no assurance that reason and prudence will confer reliable advantages, but for now I’m still comfortable overweighting safety.