The unwind is taking place.
When we separate reality from fiction, we are in a corrective phase. The latest came in the form of the closing of Republic First Bank in Pennsylvania. This naturally gets the doom and gloom people going, with calls for a bank crash. Of course, the financial media spurs this on.
This bank was relatively small. It had only $6 billion in assets with $4 billion in deposits. It is a much smaller situation as compared to Silicon Valley Bank and some of the others in recent past.
So what is really going on here? That is what this article will dig into.
Post Pandemic Insanity Coming Home
The response to the pandemic was insane. Shutting down the global economy causes a supply shock like we have not seen since, perhaps, WW2. This causes a massive shift in the economy, one that was unnatural and caused a massive problem.
This was compounded by government "stimulus" which basically sold bonds to get cash for transfer payments. money was in the hands of households, people who had little to do. Services were shut down so the only place to spend was on goods.
Companies like Walmart and Amazon cleaned up.
None of this comes as a surprise to anyone. There was, however, another layer to all this.
When money is passed around, banks end up with a boat load of cash. These deposits mean the balance sheets of the banks were skewed. This caused many to undergo expansion during this period, something that was reflected in the general economy. Many businesses followed suit, believing things were going to keep going at an accelerated rate.
After all, the GDP numbers, after the initial drop, were strong. The rhetoric from the politicians was how great the economy was doing.
Unfortunately, while this was true for some, it was not the case for others. We saw evidence of this with the bank failures from 2022.
Fortunately, The Fed stepped in and was able to backstop that. The instituted another alphabet program which allowed the banks to post their assets, at face value, for loans. My sense is Republic First Bank did this. Sadly, for the bank, there was a 1 year window. If I had to guess, it realized it could not pay the money back especially after a $35 million funding deal fell through in February.
Hence, we wave bye-bye to this institution.
Corrections Are Painful
After a period of insanity, corrections are inevitable. They also hurt a great deal.
This is not going to be the last bank that is in this situation. By the same token, we have no seen the last retail outlet go under. commercial real estate is toxic at the moment, at least in major cities. The defaults are starting to mount, something that is going to affect the balance sheets of a lot of financial institutions.
Lucky for us, there is a lesson from the Great Financial Crisis that is being implemented. While this is painful, there is a smart approach being undertaken. A goal is not to stop the carnage as much as space it out. The parties involved realize what is taking place. It is up to them to try to slow it down.
The Fed implemented the BTFP after the Silicon Valley Bank mess. This was effective in solidifying the banks, at least for a year. It ended the program in March.
Unfortunately, of the $170 billion that was taken out, we are not sure how much was actual loans versus entities just using it to arbitrage. Either way, there is a large chunk that went to banks that were troubled.
Now that the piper needs to be paid, we are seeing the results.
Of course, these banks are trying to kick the can down the road. Commercial real estate makes up a sizeable chunk of the loans, especially for smaller banks. Here we see the banks being rather lax when payments are late. There is no desire to foreclose on the properties.
Throughout the entire system, we see the results of the insanity.
For example, look at all those people who are still upside down on car loans because they paid $20K more than MSRP on a vehicle they could not afford. NOW they are stuck making payments for a few more years until things reverse, or default.
The Business cycle
The business cycle is undefeated because it is based upon human psychology. There is no way to avoid it unless humans change how they behave.
We watched how crazy people got when a few checks showed up in their mailbox. They acted like lottery winners, doing some of the dumbest stuff financially.
Sadly, this was not limited to the buying public. Business owners and corporate executives believed the same nonsense. We saw companies hit a wall when they realized they had major inventory issues as they kept ordering believing the shortages (and demand) would continue forever.
Whenever there is an oversized expansion, contraction will follow. This clearing out inevitably happens. Over time, the excess is peeled away. The challenge is that destruction occurs along the way.
We are seeing that play out. It is likely we are only at the start of this process since so few believe it is really taking place. After all, the financial media is telling us how well everything is proceeding.