Ram Ahluwalia Predicts MORE Bank Failures

Bankless Nation, we have an episode today talking about the bank crisis season two. David, I feel like we're about to do all of this all over again. The content that we put together back in March when the first banks uh started failing, well, there was a brief hiatus, a pause, and now last week they resumed. The second largest bank failure since 2008 just happened last week with the failure of First Republic Bank.

Uh we talked about this on the roll-up, David, and we described it as uh look at the snowman on the right here.

All these bank failures that have just happened. So uh who do we have on? What are we gonna talk about? What uh what is this season two characterized by so far?

Uh, we're bringing on now returning guest Rom Aluwalia, who helped us navigate banking crisis season one. Uh, and was a supremely useful episode to understand while everyone was giving very emotional, very hot takes. Rom was able to make uh us very feel very grounded. Uh and so uh that was season one.

Uh it turns out that they're season two. Uh, and it's very different when a bunch of banks collapse inside of one local time frame. Uh, but now that was in March, and now we're in May, and now banks are collapsing again. Uh, so how has this changed the game? Is the big question that we should ask. But first, before we get into the episode, want to talk to our friends and sponsors over at

All right, David. So

we had First Republic Bank fail last week. I think the big question on my mind going to this episode with Rom is is this a harbinger of things to come? Like you know, you know when you always feel like the last

domino to fall has fallen and and yet still there's another domino?

yeah.

What happens after this? Uh it's it it's things are feeling kind of shaky. And yet last week one of the commentary I I have, which I'm gonna ask Rom, is like felt like no one was talking about this.

Or it wasn't quite the the hoop law we saw with with Silicon Valley. Has the market just gotten used to oh bank failures or bank failures?

So just what we do now. That's just the what how we live in 2023. We just our banks just fail.

That can't be how it is, but that's what we're going to ask Rom about. Anything else on your mind as we get into this episode?

Yeah, uh it is important to note that the nature of TradFi just moves slower. Uh back when we were having our DeFi pool two summer of 600% APYs, things in in that era, in that period, I move really fast. So things move slower when things are just at the you know single digit yields, which means to uh the uh the question that I have is like how long of a phase in the market should this be? Had some bank failures in March. Now it's May. Is this 2023? Uh, there is the conversation of commercial real estate and credit risk there, uh, which is the conversation to be had in TradFi. And so there's another thing to pay attention to, and really just overall the paradigm of the too big to fail banks and what that means for our financial markets. Uh these are the themes, this is what we're getting into.

We are going to be right back with a bank failure season two. The new crisis is upon us, it seems. We're trying to make sense of this with Rom, but before we do, we want to thank the sponsors that made this episode possible, including our number one recommended exchange for 2023, which is, you know it.

But episode one of season two of the banking crisis has just dropped, where the second largest United States bank failure ever

since 2008 has just happened. So we are here to ask Rom how many episodes

will season two have? So, Rom, I will ask that first question to you. How many episodes are we gonna have of this second phase of the uh banking crisis?

First off, thank you for having me. I'd I'd hope that this is a two-season serial and it ends with a whimper, not a bang. Unfortunately, I don't think that's the case. I think there's a

uh another one or two uh seasons ahead of us, uh especially as we get into some of the content around the commercial real estate.

Okay, so this is the era that we are going into. This is not just a blip on the story of United States finances. This is

uh so we're at the we are at the beginning of the story, is what we are saying.

Yes, exactly. We're seeing the uh

an unfolding and it was precipitated by the most rapid pace of rate increasing since 1981. And

You know, similar patterns at work, but nothing's quite the same, similar to kind of the issues around the SNL crisis.

And uh we're going through the

interest rate part of the storm, the repricing, as you know, of these

uh securities, which were held to maturity.

Uh, and that the next part of the storm will be around the credit risk,

namely in the commercial real estate.

Yeah, so you have um thank you, by the way, for putting together a bunch of slides. So for the podcast listeners, this is also a YouTube video for the YouTube people that are watching live. What's up? Thank you for being here. Uh uh gonna be a graphics heavy uh podcast episode. So, Rom, thank you for coming, uh prep for all the slides that we're gonna run through.

Uh, but first, uh, we've done a ton of banking crisis content before. So we've kind of gotten the gist. Uh, long-term held hold to maturity assets, uh, got whiplashed around by very rapid interest rate increases. All of the regional banks, in order to have any sort of profitability, had to go really far out on the the time frame. And then the value of those bonds just got absolutely nuked when the Federal Reserve jacked up interest rates. And now all the regional banks are underwater, and there's a flight to safety up to the too big to fail banks. That's uh we've covered that part of that story pretty damn well. But the the new story is what we would like to like what is new now that we are in season two of banking crisis, uh, and what is the new elements of of this whole phase of the market? So I'm wondering if we could kind of start with that basal level of understanding as we go into your slides and as we uh unpack the story a little bit further. What are the new elements of the story here?

It's an it's an excellent summary. So I think there are a few new elements. One is the issues we saw with the earlier set of bank failures around the securities portfolio and the mark to market issues you described there.

But there's another saga that's going to unfold around the loan portfolio. So a good example that's First Republic Bank. First Republic

was originating these mortgages at a 2.5% interest rate.

And of course, those loans are not worth as much as they were in a low rate environment. So the repricing

of the loan book is what we are navigating through.

And another part of the story, which has yet to unfold, but we're starting to see tremors around it, is in the commercial real estate market.

So

uh we're we're seeing some more volatility from banks that are exposed to commercial real estate,

but we haven't yet seen a bank go through receivership that had uh a lot of exposure to commercial real estate.

So, Rom, I just want to um get a recap because it it sort of happened and I was somewhat paying attention, but not fully, of what happened last week, which is First Republic Bank um failed, I believe that was early last week. And this is on top of in our season one, uh there was Signature Bank, and there was Silicon Valley Bank, and there was Silvergate Bank that um all kind of failed in season one. Now we have season two, which is kind of kicking off with a new character arc here. Uh brief character died off, you know, the first uh few minutes of of the season here, which is First Republic Bank. Did First Republic Bank die fail for different reasons than the season one cast of characters, like Silicon Valley Signature?

It seems like what you might be saying is that had to do a bit with kind of like treasuries and bonds. Maybe First Republic is a little bit different, but but help help us understand that.

So there are some shared comorbidities, and the common factor to all was negative equity. Now, how they got to negative equity was a bit different.

So, what did they have in common, First Republic Bank and the other banks? One is a high percentage of uninsured deposits.

That's one.

The second thing they had is a high level of unrealized losses in the whole to maturity portfolio.

For Silicon Valley Bank, that was in the mortgage backed securities portfolio.

For First Republic Bank, that was in the Jumbo mortgage portfolio.

Then the third issue that they both experienced

due to these preceding issues, because people look at the financial statements, they say, hey, this bank has negative equity.

Is a bank run.

In the case of First Republic Bank, there was a

call it like a

panic of 1905 style

private bailout. You know, that was a bailout where

the big banks got together, including JP Morgan and others, and made a $30 billion deposit infusion

to First Republic.

And

uh, you know, First Republic announced their earnings. They took no questions and answers on the QA component of the earnings call.