Yahoo Finance Powell, Yellen killed First Republic Bank: Analyst
The fate of First Republic Bank is in question, as pressure mounts on the embattled lender after it revealed a massive fall in deposits during the first quarter. As Wall Street debates the cause of First Republic’s (FRC) troubles, one analyst blames the nation’s top financial regulators. Fed Chair Jerome Powell and Treasury Secretary Janet Yellen were “advocates of the strategy called ‘go big at the Fed’,” Chris Whalen, Whalen Global Advisors Chairman tells Yahoo Finance.
“After 2018…we had a big problem in the money markets, so I think Chairman Powell…panicked in Washington, and they decided to provide more reserves.”
As the COVID-19 pandemic hit, the central bank acted again, bringing the Fed’s balance sheet to nearly $9 trillion. “What they did, in essence, was throw a lot of money at a perceived problem, but they’ve created a real problem now, which is that interest rates have risen,” Whalen says.
"The Fed has created a huge market risk, so these outliers like Silicon Valley, First Republic, have tipped over in a difficult funding market.”
In his full interview, Whalen spoke with Brad Smith and Julie Hyman about the issues First Republic (FRC) is facing.
Key Video Moments
00:00:05: Powell and Yellen's strategy
00:01:10: Huge market risk
00:01:35: Unrealized losses on balance sheets
Video transcript
- Why is it Jay and Secretary Yellen's fault?
CHRIS WHALEN: Well, particularly, Chairman Powell, but also, I think, Secretary Yellen, were advocates of a strategy that's called go big at the Fed. After 2018, you recall at the end of the year, we had a big problem in the money markets. And so I think Chairman Powell and some of his colleagues panicked in Washington, and they decided to provide more reserves. They did so in 2019. And then we had COVID, and they even went bigger.
And they expanded the Fed's balance sheet to almost $9 trillion. So what they did, in essence, was throw a lot of money at a perceived problem, but they've created a real problem now, which is that interest rates have risen. All the paper that was originated in 2020 and '21 is now trading 15, 20 points below the price where it was issued. And the banks are facing huge losses. Also other investors-- bond investors, REITs, all sorts of people that own these high-quality triple-A rated securities-- we're talking about treasuries, Ginnies, Fannies, Freddies, right-- which are supposed to be low-risk, but the Fed has created huge market risk. And so these outliers, like Silicon Valley, First Republic, have tipped over in a difficult funding market. And even JP, even Bank of America, you can see how their cost of funds is rising. It's very rapidly year over year.
- Their cost of funds is rising, Chris. Hey, it's Julie. It's good to see you.
CHRIS WHALEN: Hey.
- Their cost of funds is rising. However, the whole issue of unrealized losses sitting on their balance sheets, like that in and of itself, isn't that much less of an issue, if it isn't-- isn't it even almost a moot point at the biggest banks-- at everybody besides the banks that seem the most distressed? I mean, those banks don't have to do anything with that stuff, right?
CHRIS WHALEN: No. You see, that's the issue. In a way, yes, it's an optics problem. So back at the end of the third quarter last year, it was horrible. It was almost a trillion dollars in market-to-market losses on available for sale, and also held to maturity securities. But the problem, Julie, is that we originated $25 trillion for the securities in '21 and '21, of all descriptions. That paper has very low cash flow. So if I'm holding Ginnie Mae II's and my cost of funds is now 5, I'm losing money. OK? And so the embedded cash flow loss is the problem.
And that's why you've seen some banks actually taking assets to the curb, taking the loss on a 2% or 3% asset, right? So they can go by a 6% or a 7%. And the whole industry is going to have to do this, Julie. They have no choice.
