The Lesson Of Bear Stearns

History has a way of repeating itelf.

It is almost 15 years to the day since Bear Stearns closed its doors for the last time, at least as an independent entity.

At that time, the Federal Reserve was all over it. We were warned beforehand that the Fed "had all the tools necessary" to handle any crisis. This was espoused by Chair Ben Bernanke.

Bear closed business on a Friday for the last time. On Sunday, the Fed announced another 4 letter "tool" they had created. It is amazing how the have all the tools they need yet they keep makig more.

Of course, we saw the same thing repeat itself. Wasn't it just last week Jerome Powell said the Fed had all the tools it needed to handle any crisis. Guess what happened on Sunday?

You got it. Another program.

So what is the lesson of Bear Stearns (and now Silicon Valley Bank)?

Do not trust the Fed.

Source

Lack of Liquidity Drives Firms Under

We often hear discussion about systemic risk. This is obviously something the Fed has to concern itself with. However, whatever decisions that are made, whether effective or not, do not matter to individual firms.

Even if systemic risk is alleviated, individual firms can go under. We saw this already. As the regulators, Treasury and central bank look at the entire landscape, individual banks are seeing their positions erode.

This leaves them only one choice: batton down the hatches.

Silicon Valley Bank was another Bear Stearns in one regard. This went from being a viable financial institution to unviable very rapidly.

The lesson: maintain your own liquidity while deleveraging your book. This is the only option for these firms.

Unfortunately, they are also deflationary for the economy, on top of an extended period of deflation.

A Lack of Money

How long has we been talking about deflationary money? When did we start pointing to this concept and saying all that is being espoused is wrong?

While people took the creating of reserves by central banks to equate to currency, the reality is commercial banks failing to lend has caused little growth in the money supply. Interest rates were low due to too little money, not too much.

We also covered the idea of balance sheets being constrained. Since short term funding accounts for more than 90% of global trade, this is a crucial market. Yet it was suffering since the Great Financial Crisis. This went into overdrive when the European central banks decided to go negative. That took that form of collateral, which is money in the wholesale system, off the table.

Here it is again: we have been in deflationary money for 15 years.

This is not a good thing. Bear Stearns, Silicon Valley Bank, and a host of others upcoming show up exactly what happens under these conditions. Liquidity is a major problem. It is one thing to have large value in terms of assets. However, if you have to liquidate just to meet upcoming claims, that doesn't work out so well.

Bet the ranch other small banks are waking up (small in the sense of non-national such as BAC or Well Fargo). They understand the difference between assets of book value and ones marking-to-market because they are being traded. Even worse, when you have to liquidate, these banks understand having to take a loss.

Bear Stearns went under when it received a collateral call from JP Morgan, the Repo custodian at the time, for $5 billion. The bank did not have that liquid.

As with Silicon Valley Bank, it was bye bye Bear.

The lesson is the same. When money, in all its different forms, dried up, bad stuff happens.

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