Further Fed Tightening Will Be “Deadly” For Banking System | Mustafa Chowdhury
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- เผยแพร่เมื่อ 5 มิ.ย. 2024
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Macro Hive sample report on Silicon Valley Bank (co-written by Mustafa Chowdhury): macrohive.com/hive-exclusives...
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Just how bad was the risk management at Silicon Valley Bank (“SVB”) when it came to the threat of rising rates? And now that rates have exploded higher over the past year, is this interest rate risk limited to only a few banks, or are these risks spread throughout the entire U.S. banking system?
Jack’s guest today is uniquely qualified to answer these questions. Mustafa Chowdhury, chief rates strategist at Macro Hive, practically invented the field of interest rate risk management, and two decades ago he was successfully managing interest rate risk on Freddie Mac’s giant portfolio of mortgages worth hundreds of billions of dollars (several times that of Silicon Valley Bank). Chowdhury argues that, contrary to claims otherwise, the U.S. banking system was not sufficiently hedged for last year’s rapid rise in interest rates.
Filmed on March 16, 2023.
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Timestamps:
00:00 Intro
01:33 Mustafa Chowdhury's Background
4:39 "That's The Mortgage Game"
11:27 Collapse of Silicon Valley Bank: Interest Rate Risk Lurking At The Scene Of The Crime
21:14 How To Properly Hedge Interest Rate Risk Properly
27:37 Chowdhury Pioneered Use Of Swaption In 1990s
29:36 Silicon Valley Bank (SVB): Who To Blame?
33:20 Accounting Treatment (Available For Sale Vs. Held-To-Maturity)
41:47 The Fed's Convexity Quantitative Easing (QE) Continues
50:35 Bank Profitability With Higher Deposit Costs
01:03:50 Interest Rate Risk Is Spread Throughout The U.S. Banking System
01:11:52 "There Will Be Fewer Bank Runs" Because Of FDIC Relief
01:19:29 Will Fed Cut In 2023?
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Disclaimer: Nothing discussed on Forward Guidance should be considered as investment advice. Please always do your own research & speak to a financial advisor before thinking about, thinking about putting your money into these crazy markets. - บันเทิง
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For 40% off an annual subscription to Macro Hive Prime (220 / year instead of 374 / year), go to macrohive.com/jack or use discount code JACK at checkout.
What a guest, his detailed understanding and explanation of rates and mortgage security risk .
Fire Powell & hire Chowdhury for Fed Chair!!
Excellent interview. Mustafa is the embodiment of financial experience and prowess. That was a lot to digest.
Brilliant !!! … such great learnings in understanding … well done Jack ! … thank you Mustafa !!!
I wished you asked: Who's your counterparty on these swaptions? Is there counterparty risk?
Always a 'Counter Party'... Often an 'Insurance Company'. Look what happened to AIG during the GFC. 😉
Watch the movies:
The Big Short
Margin Call
Rollover
Great q on CP risk. Seems unknowable. U could have a CP. Who's insuring your risk on the presumption their risk is insured. It's been described as who br I ught the STD to a week long orgy. The FED had to fight the inflation THEY created and the whole idea of zero rate was absurd. Ask yourself. Would you loan your money for free? Each induced bubble results in a socialist rescue of the wealthy and a double dose of rugged capitalism for the working people and small business owners. It's simular to some jerk stockbroker churning an investor's account. Sad. Very sad. Surely we can do better.
That was the best and most informative interview related to our financial system I have ever heard. Wow and thank you. I'm now a new subscriber.
Agreed. It's amazing what listening to experts without financial incentives can clarify.
Wow. Mustafa is great
Wow, what an incredible interview. I’ve worked in banking and trading and I learned a lot.
A question I have is, with all the talk of ‘hedges’, who is on the other side of the hedges? Someone must lose money. Either the unhedged bank, or the counterparty to the interest rate swap. Who are the counterparties?
We should all be somewhat sickened by the idea of the central bank having a mortgage portfolio, let alone not reporting the loss that it's made on it. This means all of us absorbing the loss-making loans of the US banking sector. We should be outraged.
What are the additional risks for the banks as their RE portfolio value drops when the recession arrives and employment reverses?
Mustafa was a great guest, thanks for this interview.
I don’t understand optionality or why in 1987 the insurance hedge didn’t prevent the losses on the portfolio’s and this is why I am unsure of the FDIC protection as it appears that it works if it is voted for by the Fed to work. What happens in a third or fourth wave of bank failures? Will the FDIC not cover those depositors meant to be covered as funds will previously have be paid out to those depositors with uninsured deposits who should not have been paid out? Mergers and maybe even nationalisation…….
Great info, great show, thanks! 👍
The market was pricing 100 bps cuts for the end of last year, and it were wrong. Then up until recently, it priced higher for longer. Now practically over night, it's pricing huge cuts in the near term again. What I can derive from that, is the market is clueless, and it's guesswork is as good as any other talking head's.
One of the best interviews I have heard
great guest
Perceptions determine the direction of the market. The Fed must be held accountable.
Jack...very smart interview, thank you.
I believe that any "Tightening" higher than 5.25% Fed Rate will destroy The Banking System. That is where "The Pause" is needed.
❤Another Great interview Jack! Thank you!
Another critical view. Extremely important. The implications of Another 100 basis point increase is crucial information. Thank you .
Why do people, even your guest, assume that higher rates lower inflation? How? How are higher rates pumping more oil, or producing more eggs? Doesn't it just increase the cost of capital that could be deployed into something productive? Also, don't higher rates suck the capital into the non-productive US T-bills market?
I don't understand this either. This isn't about money supply, and more about the supply-chain and supply constraints. Although I think that 0% interest rates for the long-term is dangerous.
I kills employment. The idea is that NAIRU, the level of unemployment that stops workers demanding pay rises, around 5 percent is considered normal. It also increases the cost of capital, making it harder to borrow.
It's.morally outrageous that in normal times we keep unemployment high to manage inflation. Then we subject the unemployed to torment and misery.
Higher interest rates makes people more poor even star a recession and it could even cause a depression . Not much to understand here . Higher rates stop inflation period . But also destroy everything else on the way and no one is ready for that
It reduces very broad aggregate demand which very broadly puts pressure to keep prices and wages down. This could be achieved with massive++ fiscal restraint, but why would governments do that when they can give the dirty job and the blame to the Fed. As you say, it could also be achieved by major productivity gains, the kind we have seen through digital revolution; but making that kind of productivity gain is extremely difficult with any confidence.
@@brandon-hh7jf But is there evidence that hikes actually reduce the agg demand? I just don't see the evidence. Food, cars - have plenty of demand. What difference does it make for an average person whether they pay 15% on their CC during ZIRP, or 20% now? This is what I'm getting to - do the hikes hurt the supply more than the demand? In my opinion, based on what I see so far - yes. By extension, ZIRP is deflationary, as confirmed by Japan and US in 2008-2016.
Very interesting, the possibility that hedges as an insurance may not work. Strangely it seems very quiet on the insurance front. How stable are they?
Since it's really the movement of the 10y that sets value for the MBS, it's it true that the Fed's rate rises don't directly affect it and the steepness of the yield curve has a huge effect. In fact, if the Fed is not expected to break inflation that could cause long term rates to rise even higher... which would cause MTM losses to increase even more.
Great work! Mustafa has explained the aspect of behavior change when interest rates change greatly. The hedge has to tailor to behavior change.
Thank you guys
Thank you for the trade !
I wonder who currently is taking the opposite of some of these swaption used to hedge against higher rates ( i.e. is now receiving the low fixed rates and paying the higher short term fed rate and taking huge market to market losses) - life insurance companies maybe?
A big thanks to Jack and Mustafa! QUESTION: I’m a homeowner and I’m having a hard time understanding how The Fed is taking risk from my balance sheet to its balance sheet?
If you have a 30 yr mortgage at 3% you have no risk wrt rising interest rates. You're the borrower. The lenders have the risk if/when rates rise.
Bond purchasers/holders are lenders. The longer the time to maturity the more the bond price will fluctuate on a change in interest rates. That's what he called duration.
If you buy a long term bond at the peak of interest rates,.. the bond price willl rise as rates come down. You benefit like an increase in stock price
If you buy a long term bond at interest rate lows, the bond price will fall as rates rise. You lose like a decrease ina stock price.
If you intend on holding the bond to maturity,... none of this matters. You'll get the rate and principal you signed up for in the end.
It matters if you bought bonds with depositor's money when rates were low and have to sell these bonds to give depositors their money back after interest rates have risen significantly.
Does this mean I should be bearish on banks?
55:28 - Interest rates should be at 8% currently. Starting to look like it will take years of "higher for longer" to reach 2% core inflation, while backstopping poor decisions made by bankers.
SVB board of directors and executive management was negligent in not establishing or adhering to interest rate risk policy limits on changes in market value of equity in rate stress tests. Policy limits would have prevented management from making long term investments that suffer significant losses in rising rate environments. Furthermore, Liquidity Risk Management policies should have prevented the held to maturity classification of such a large amount of investments making them off limits for bank liquidity needs.
I don’t buy the inexperience argument. If they were educated in finance even a new graduate would not be caught by this. The other issue is that the Fed telegraphed the interest rate increases so the hedges would get very expensive
I agree. I think I heard on another podcast that if Held to Maturity securities were hedged, the securities would need to be reclassified to available for sale and M2M. If, Freddie Mac (and presumably all the GSEs) hedges hundreds of millions of bonds, the products already exist. Wouldn't GS or JPM have salesmen pounding SV? California has at least five schools with faculty (even PhD students) who could come up with something that would protect against a disaster event. There is a reason why they didn't.
Why are deposits safe...just because we think the Gov't will honour its guarantee? If losses are potentially in the multi-trillion range, the government will have to print trillions $s. Won't that negatively impact the FX value of the US dollar? And also won't that spark further inflation?
"Further Fed Tightening Will Be “Deadly” For Banking System" Nope, the FED has our back... everyone's back... banks will be covered... market interference is the way of the FED now and forever more.
Have the medieval alchemists at the Fed figured out curing a symptom while killing the patient is unproductive?
Just devalue the USD. Everything will be OK. Think about it.
Are Regional Banks or smaller banks in danger of closing??
Did somebody say convexity? Where's the Maven
So bottom line--rate hikes are over and QT is dead👍
funny, i remember Freddie Mac completely exploded in 2008... this fellow is changing history, or forgetting parts of it. the hedge of Freddie Mac is the US printers at the Fed, haha.
Next hike should be 5.0%. Get it over with it.
Excellent guest - when do you address the effect of de-dollarization that has been accelerated by countries establishing alternative payment systems in non-dollar currencies- that is the USD no longer is the global reserve system after our current administration forced Russia out of the USD.
Smart guy
Mustafa do you think its high time to abandon BASEL and get a new model for banking system.
Mustsfa was amazing 🤩
Damn CS had a lot of GME shorts :D
We need a 1000 of these dudes in the banking sector - alas that is not the case
If the doves think interest rate increases are the problem... they are sorely mistaken.
The easing of rates, and more monetary games, are the absolute LAST thing we should be doing now.
Even in the face of SVB.
Inflation fighting is paramount.
Americans are looking for safe money storage, NOT necessarily scores of small or medium size banks.
We are in short supply of jobs and a strong, stable middle class jobs market.
We are not hurting for more banks.
Bottom line: Americans are NOT going to handle double-digit inflation indefinitely...no matter what happens to banks.
Powell...either you have the stomach for the right thing, or you should resign.
Be a Volcker...or be gone.
One thing is for certain, the Fed will continue to do the easiest thing it can.
Wrong.
My interest rate for interest rates is up 25 bps today
I think so.
I'm not sure if you got enough ads in this one, maybe a 5sec been each word next time?
For real, noticed that too
Using Twitter will ruin your unique thinking.
Every time he says but I expect something worse.
Fellow UCSD alumni ✊🏾
17:30
I experienced way more adds than content while trying to absorb this video. It's getting out of hand now
It is simply cheap click bait, and only seems to deliberately interview negative people.
❤
Jack you're the reason I left Real Vision after 7 years.
The Board members were a bunch of Inexperience Demos.
It's strange how this guy was able to hedge at the GSE's during the 90's, but then when the 2000's came around the GSE's went toshit and became major players in the cause of the GFC,... but banks aren't able to hedge now???
Kind of hard to believe that no matter what we do,... we're allphecked. Especially after Dodd Frank et al,.... and the banks are surprised by Fed rate hikes and had no way to prepare,.. and the Fed knew this?
This sounds a little too messy and incomplete.
A good video would be a full quatitative run down on how and what the TBTF banks are doing to hedge,.. including on and off balance sht numbers including that which is parked at the FDIC as mentioned.
Put all your fiat currency in Bitcoin, if you want some real money get silver and gold
Just gold to 6K. Bitcoin is nonsense.
SCAM
Jack, just speak in a normal manner, no need to ask questions so hurriedly. I don’t know why your guest was smiling while explaining how someone is going to lose money. Otherwise interesting .