Now share two write-ups about the upcoming banking crisis that almost no one is worried about. Be be prepared as when it explodes, it will be too late to run!
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The demand to use the BTFP continued through early this year.
In fact, BTFP total loans peaked at $167 billion this January… and have only receded a small amount to $164 billion. That means that the problems were far worse than the Federal Reserve and the U.S. Treasury ever expected.
As a reminder, the program was expected to be $25 billion at the high end. How’s that for being way off?
Which is why Monday, March 11, 2024 is so concerning.
The Federal Reserve has put an end to the BTFP lending, as of yesterday. It was only ever supposed to be in place for one year. And that day has now come.
The BTFP is being hailed as a great success, having stabilized the banking sector. It certainly stopped the collapse… but the sheer existence of the BTFP in the first place is the result of catastrophic failure of both the Federal Reserve and the banking sector.
And we can’t forget that $164 billion dollars still needs to be paid back by the banks in the weeks that follow. That first large chunk of $79 billion will need to be paid back within the next 6-8 weeks, and the rest over the course of the next 12 months.
There is one massive problem, however…
The Fed Funds rate is still sitting at 550 basis points.
Which means that the bonds that these banks used as collateral are still only worth a fraction of what they borrowed. Not only have interest rates not dropped since the beginning of the BTFP, they actually increased by 50 basis points.
In other words, the situation is more dire today than when the backstop was introduced.
So what’s going to happen now?
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As $1.5 trillion in loans come due on empty commercial office buildings in the next four years, it's going to be hard to re-fi that debt at anything but exorbitant interest rates.
A lot of those properties won't get refinanced and will have to be sold... to anyone brave enough to buy them, at pennies on the dollar.
And when they're sold, banks will "realize" the losses they've been carrying in hidden "hold to maturity" buckets.
Those losses will kill their earnings and capital.
Clearly... banks are in trouble.
The Fed's Bank Term Funding Program was born on March 12, 2023... thanks to a Federal Reserve Act provision that lets the private central bank do whatever it feels it has to under "unusual and exigent circumstances."
The program has a 12-month sunset provision. It lets cash-strapped banks borrow from the Fed on a one-year term basis by putting up grossly underwater collateral the Fed would lend against at par value.
Flagstar's assets were underwater, especially its mortgage portfolio and CRE portfolio. But the Fed lent against those assets, valuing them at par. That's how Flagstar was able to buy Signature assets and deposits.
How insane is that?
The program expires on March 11, 2024. And it's unlikely to be revived, especially in an election year.
Why? Because besides providing liquidity to banks teetering on insolvency, especially if they had to sell any underwater assets to raise money, the program is a very profitable arbitrage opportunity for all who employ it.
Borrowers put up underwater collateral and get full-value cheap term loans from the Fed at low interest rates, which they turn around and deposit back at the Fed and reap the Fed's hefty interest of reserves, which was 5.4% in January.
That's free money for banks, baby! It's not going to be extended in an election year.
And banks that need cash will be hit hard.
Why would banks need cash? Because the clock is ticking on CRE refinancing.
NYCB's assets were $116.3 billion in December 2023. That meant the bank would face tougher reserve requirements... would have to submit to stress testing... and was subject to an all-around tougher regulatory regime.
When NYCB reported earnings last week, it announced it had to set aside $552 million for loan losses, 10 times what analysts expected. The bank lost $185 million in the fourth quarter, while analysts expected a $50 million profit.
The stock dropped 46% in intraday trading and closed the day down 38%.
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