MacroVoices #374 Chris Whalen: Are More Banks Going To Fail?
Chris Whalen discusses the ongoing banking crisis, comparing the current situation to the 1980s when Paul Volcker's rate hikes left banks underwater with low-yield assets. He argues the Fed has created similar conditions today, warning of more bank failures unless they provide financing solutions for underwater securities.
Summary
Chris Whalen provides an in-depth analysis of the current banking crisis following the failures of Silicon Valley Bank and First Republic Bank. He argues this situation mirrors the 1980s when Paul Volcker's aggressive rate hikes left financial institutions underwater on their assets. Whalen explains that approximately $25-30 trillion in assets created during 2020-21 carry very low coupons (average mortgage around 3%), while current rates are much higher, creating massive mark-to-market losses. He emphasizes this is primarily a cash flow problem rather than just a mark-to-market issue. The Fed's rapid 600 basis point rate increase over 18 months has created unprecedented pressure on banks holding low-yield securities. Whalen warns that without creative Fed intervention - such as allowing banks to repo underwater assets at their coupon rates rather than market rates - more bank failures are inevitable. He discusses the vulnerability of commercial real estate due to permanent shifts in work-from-home patterns post-COVID, predicting significant losses similar to the 1970s Texas oil restructuring. On inflation, Whalen argues it's embedded in the system and much higher than official statistics suggest, with the Fed terrified of deflation particularly in housing. He believes the Fed will eventually be forced to cut rates but doesn't expect a return to 2% inflation. Regarding investment opportunities, he owns select banks like Western Alliance and mortgage companies like Guild Holdings, viewing current weakness as buying opportunities in fundamentally sound but oversold companies.
Key Insights
- Whalen argues the current banking crisis parallels the 1980s when Paul Volcker raised rates above the banking system, leaving institutions underwater on their assets
- He claims $25-30 trillion in assets created during 2020-21 have very low coupons (average mortgage around 3%), creating massive cash flow problems for banks at current rates
- Whalen warns that without Fed intervention allowing banks to finance underwater assets at coupon rates rather than market rates, more bank failures are inevitable
- He predicts significant losses in commercial real estate due to permanent work-from-home shifts, comparing it to the 1970s Texas oil restructuring crisis
- Whalen argues inflation is embedded in the system and much higher than official statistics suggest, with the Fed biased toward tolerating higher inflation to avoid deflation
- He believes the Fed's 600 basis point rate increase in 18 months has created unprecedented market distortions that the central bank must now address creatively
- Whalen contends that mortgage holders with sub-3% rates will stay in place, creating a fundamental shift in housing market dynamics for years
- He argues the real effective borrowing rate for businesses is now 7-8%, which will slow the economy significantly and force the Fed to eventually cut rates
Topics
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