Welcome back everyone. I am Cass PNC.
I'm joined as usual by my partner in crime, Mr. Bennett
Tomlin. It's wonderful to be talking to
you for an extended period of time.
Today we're recording two episodes.
Right now we're going to be talking about banks.
We talked about a bank in the last episode, Deltek, and this
episode we're going to be talking about regional banks in
America. We're going to revisit the
banking crisis from last year. I I think we should go over it a
bit. I, you know it has been a a a
year since we had Rohan Gray on to to talk about it.
If you are interested in that discussion, which I think was
valuable and insightful when it comes to moral hazards
insurance, all of this stuff, give it a listen.
If not you know we're going to just quickly go over some of the
the talking points that we had in that.
But I also want to discuss, I know we're no banking experts,
but I I do want to see what our opinion is as to the lessons
learned and the takeaways that were made.
And whether the future for community banks, regional banks
and larger banks, too big to fail banks, I suppose, looks
bright or looks bleak. Where do you want to start,
Bennett? Because there's a lot of places
we can start here. I think one of the most
interesting places to start with this is as you mentioned, the
bank in trouble right now is New York Community Bank Corp, which
merged with Flagstar. And what makes them interesting
is they were struggling quite severely.
They got a billion dollar investment led by one of my
least favorite people on earth, Steven Mnuchkin today, which
should hopefully allow them to continue operating.
Hopefully it allows them to continue operating in a way
where Steven still loses all of his money.
That's my goal for this investment.
I doubt it. But what's what's interesting
about it is that Flagstar was the entity which acquired a lot
of the Signature Bank assets after their difficulties.
And so that's the crypto connection that initially jumps
out at me is that we saw Signature Bank became Signature
Bridge Bank after its failure. As is typical, those assets were
then acquired by Flagstar as Flagstar was merging into New
York Community Bank Corp And now we've had kind of this chain of
failures chase this set of assets up the chain, right?
Silvergate fails, which puts more pressure on Signature,
eventually causing Signature to fail.
So Signatures assets get bought by Flagstar which eventually
after it merges with New York Community Bank Corp ends up in
this situation where they need a billion dollar let's call it a
lifeline. And it's kind of funny at least
to me that it's that same in part set of assets that have
been passed along that chain the entire way I.
I just imagined being one of these customers and how
infuriating would be like imagine having this is what I
said to to Bennett before. Imagine having $300,000, you
know having over the insured amount in a bank account at
Signature Bank and then they fail and the FDIC swoops in and
you're thinking like Oh no, I lost like $50,000 like a
significant sum of money if that's my all the money that I
have. And then the FDIC eventually
assures you like, no don't worry we're giving everybody their my
like it's going to be fine. And also this this other bank is
moving into swoop up assets everyone's getting everything.
So you you kind of let out a a sigh of relief you think OK good
my $300,000 is safe again. Maybe you didn't learn the
lesson because of this, to not just get a sweep account or have
more than one bank or you know. Or get insurance on the
secondary market like we should Be explicit if you're if you're
a rich person and you have uninsured deposits, you can go
to like insurers and buy insurance.
Sure. So, so there's multiple ways to
go about this. There's a lot of different
things you can do to alleviate these, these risks and these
issues if you have over $250,000 in the account.
But imagine being someone who didn't learn that lesson from
that first failure and now you're having to deal with that
stress again of like, Oh no, is my bank going to fail?
And just to be that person to see the two banks you're banking
with fail within a year of each other Pretty much, right.
So it's not a failure, but to me it might as well be.
If you need a single individual to come give you a lifeline to
me, that means your bank has has ultimately failed.
We we we should be clear. It's not just Steven.
His firm is bringing about half the total with 450 million, but
it's filled out with with a bunch of other firms.
Still horrending like. Citadel and preference and
whatever. Yeah, no.
Listen, any situation where you start to feel like Steven
Mnuchkin might be like your hero might be the solution to your
problem instead of a problem Citadel, you're in deep shit.
If you're relying on Citadel as your hero, you are definitely in
trouble. What I'm saying is more to the
effect of like, you're kind of teaching a really horrible
lesson to any distracted investor.
To anybody. Not even investor, just
somebody. And this is going to get to a
bigger point that maybe we'll make a little bit later.
But to me, most of what these banks are supposed to be
providing, I understand the mechanisms they engage in now,
and a lot of it is speculative nonsense.
But largely what they're supposed to be doing is
providing a public good. They're supposed to be giving
people access to, access to a place to store their wealth,
access to vehicles that could earn them conservative amounts
of interest or higher, more speculative amounts of interest,
if that is what they're seeking. But overall, the goal is to
bring a community in, bring a bunch of individuals together
and work with them and provide them something that is very
important everywhere in this country, everywhere in the
world, and it is a public good. And so I like I reflect on that
and I just think they're really not performing their duty and
the lessons being taught to these people who are using these
banks aren't good lessons. Like if you're if you should
only have $250,000 in these accounts, then we need people to
be responsibly behaving with their money in different ways
than just throwing it all into one single account.
And that is not the lesson being taught when signature fails and
you say never mind when Silicon Valley Bank fails and you say
never mind when when these banks fail and you say don't worry
about that legal limit that we said was necessary.
But then you continue to pretend that that that that is the
enforceable legal limit. I have no idea what lesson
you're even teaching, other than you're lying.
I think we got into this really well in our episode with Rohan
naturally, where we talked about how banking is this
extraordinarily unique industry, right.
It is the only industry in the United States that's allowed to
take deposits of people's money, right.
Lots of other places can extend loans and do the rest of like
the banking business. But the taking of the deposits
is a uniquely bank activity and like that has this like strange
effect on the way we treat banking, both in like how we set
up the FDIC and how we deal with the insurance, how the Federal
Reserve provides the quiddity. But also like the strange
crossroads you or cross heads you end up with in some moments
in the banking industry. And we you see this in the great
financial crisis, right? And the movements afterwards,
where it is reasonably straightforward to make an
argument that the bailouts after the great financial crisis did
more good than harm by preventing knock on financial
consequences due to the failures of some of these institutions.
However, that still leaves us at where we were when we were
talking with Rohan. If you're in a situation where
the state where the taxpayer funds are being effectively
extended as this de facto guarantee that these firms,
these institutions need to continue existing and will
continue existing and the state is willing to step in to ensure
they continue to exist. Then it is only reasonable that
there are additional expectations placed on those
firms and those institutions because they are, they are
filling that role. And so when we had Rohan on one
solution we talked about was like this restructuring a
banking where you change how the deposits are held so that you're
able to offer the that full insurance.
And when banks fail, like they just fail and get wiped off and
the deposits are still insured and you don't actually need to
worry about the people, the bank, the equities, whatever
that can all end up worthless without harming the individuals.
But, and you were getting at this before we were got, before
we got on, you were I think frustrated with the way the
expectations of the stock market and the fiduciary duty
executives are meant to hold till shareholders often seems at
odds with responsibly managing a bank.
I broaden this because to me it's important that I mention
other things in in this sense because I do think that banking
is a public good. I do think that things like
electricity, water like things that are going to you know even
like I I I guess I understand more with like pharma, right.
Like, as much as I might not like farm like pharmaceuticals,
I understand needing to profit to put the not that they all do
this, but profit so that you put a lot of that money back into
doing research and development so that you can help help people
that way. Like, are banks doing that right
with their profits? Are they putting the money back
into finance to change it so that it's better for everyone?
Are electricity companies putting a ton of money into R&D
instead of maintaining the lines and making sure that there's not
giant wildfires in California? Like, no, I don't think they
are. I don't think that's where those
profits actually are going. And if those aren't where the if
the profits aren't going into fixing the system, if it's
broken, then what are you? Why are you profiteering?
Why is this something that needs to be traded in in a public like
on the New York Stock Exchange? Why does it need to be traded on
the NASDAQ? Like, it's crazy to me that we
simultaneously expect these banks to be protecting customers
and building communities and helping, helping people.
Fiduciary duty, you mentioned that right?
Fiduciary duty. These people have a duty to you
to protect your money. But they also have a duty to
their shareholders. This, this, like how can you
possibly make those two ends meet?
And I don't think you actually can And that's where I go.
Like what what are we doing and have we have we learned anything
in the past year? We you know you you and I were
talking before and I was saying this regional banking crisis
just essentially just never ended and like if this bailout
if this buy in for for investing in in Flagstar this is not the
end of this. And you were like well maybe it
is and I'm like in what sense in what sense do we not see this
happen again because all it takes.
We've seen how little it takes it's it takes this there's a
bank run which as you've said there's ways to actually protect
customer deposits in situations like that.
And then there's things where it's like it's already outside
the scope of a bank run when now we're talking about the stock
price just plummeting, whether or not the assets are there,
whether or not like they're not toxic assets.
Like I had an argument with with another friend of the show back
when Silicon Valley Bank was already toast and First Republic
was looking really bad. I love I loved First Republic.
They like my mom had banked with them.
She always had talked about how great they were and I saw what
was happening to them and I said it doesn't matter.
Doesn't matter if the customers love them.
Doesn't matter what the banking experience has been forever.
First Republic is going to get crushed now because it is just a
symptom of this disease. And this person was like no that
like their their book is better. Their assets are better.
They don't have the same issues that Silicon Valley Bank has.
And I said it doesn't fucking matter.
And I hate to say this because they should have been right.
They should be right. If the book is better and the
assets are better, the the efficient market would say that
they're right. And I'm wrong.
And yet, First Republic was dead like a week later.
I think that the point you're making there is really
interesting because there is this potentially really strange
feedback loop where the struggling stock price, the
struggling equity value of like the equity value of the bank,
even if the assets and liabilities are seemingly okay
solvent, whatever. You can end up at a point where
because people start pulling their deposits in reaction to
fear from the stock price, declining equity, things like
that causes the bank to go from safe to unsafe because of this
drop in the stock price that might be unrelated to the actual
like assets over liability of the bank.
And that is a problematic tension.
And I think that we were really trying to get at this when we
had Rohan on. And it's one of the things that
frustrates me a bit with the banking system is because that's
bad people, people should not be expected to assess their bank's
solvency before they deposit money.
That's not a reasonable expectation, apparently, even
for top flight venture capitalists, right?
So we've established that no one can do that.
Even investors, apparently. Not even bank executives.
Even even the top minds of a generation, apparently.
That's not reasonable. The solution to me ends up
feeling like if you want to have investment banking banks doing
lending, things like that, you need to somewhat disconnect
those activities from risk to depositors.
We talked about that with Rohan is by basically restructuring it
so that they have to hold certain assets to cover those
with certain insurance to cover it and changes in how the FDIC
is capitalized to manage that. I think that gets part way
there. The other solution I'm a big fan
of is things like postal banking, right.
When you are, when the state actually directly offers a lot
of these services to people, you kind of put a floor on how bad
other banks can be because there's this like easy broadly
available alternative, right. If you're worse than the postal
banking, you won't get enough deposits.
And without changes to the banking structure, you can't do
all your risky shit unless you're convincing people to put
deposits in, you're somewhat limited, right?
There's structural limits on how much you can do and stuff like
that. And so like there are partial
solutions there. But it does feel like especially
post great financial crisis, we've created a system that
makes it so you can't prosecute these big entities because the
knock on risks of that risk financial damage to many, right?
Lenny Breuer said that when he was Obama's head of DOJ, when we
consider these prosecutions, he said he did the right thing and
not going after any of these people because the consequences
would have been better than any benefit that would have been
brought by those prosecutions. And regulators down the line
generally seem to agree with that.
The Federal Reserve, the OCC and the FDIC very much prefer a
consent order to not getting the consent order right.
They want you to agree, sign off and say you're going to make
these changes and all these things.
And so because of that, there is this kind of as long as you're
not too bad, for too long, too blatantly, you'll kind of skirt
on by. Yeah, too big to prosecute,
which is kind of crazy, I guess It's exactly what you're talking
about. If these people are saying we
can't prosecute people for for white collar crimes at banks,
because basically if we do that, there's going to be bank runs
and then all the banks are going to have bank runs and then
everybody's screwed, well then that points to a broken system
to me. And that isn't just a person
saying I didn't go after them. Let's move on.
That's actually someone saying I didn't go after them.
The system's broken. We need to fix it.
And the if, and we have not done that, I guess is what I'm
whether we're talking about prosecuting people for crimes or
we're talking about simpler things like ensuring that
depositors don't get hurt when a bank fails, right.
These very, very important things have been completely not
addressed. And that that's after Silicon
Valley Bank which was one of the bigger regional banks in America
had this insane collapse occur and the knock on effects were
very real because it was First Republic, it was Pack Pack W it
was like there was a bunch of these, it was signature, it was
a bunch of banks actually big big regional banks that got
screwed. And now a year later we're still
dealing with the ramifications of this.
And no, no process has changed. Nothing about the system has
changed. Even when the FDIC had to go in
and say never mind, forget the insurance limits, even when you
had regulators essentially shitting themselves, you had the
Fed freaking out. You had everyone scared in this
moment. But then we move on like nothing
happened. You actually probably remember
better than I do, because you were older than I was when it
was happening. But Arthur Andersen, their
prosecution, we've talked about Arthur Anderson on here before
for their role in World Common Enron.
But their PR push after the prosecution, when they were
working on appealing eventually all the way up to the Supreme
Court and getting a lot of it reversed, their PR push was this
is a firm of 26,000 innocent people, right?
You can't go after us. You can't do that because most
of these people didn't do anything and you wouldn't want
to hurt them. And that sentiment has become
deeply embedded in a lot of like the regulatory state and things
like that, where that is a serious consideration made by
SCCCFTCOCC and DOJ individuals before they bring a case.
And even recently in cryptocurrency.
I was struck by some of Christopher Blodgett's comments
in a deposition related to the SEC case against Finance US
where he was kind of complaining that the SEC suit against
Finance US was a near mortal blow that led to them needing to
lay off 200 people and all these things and basic and that they
lost 15 out of their 20 market makers and all these banks cut
them off. And all this and the kind of
insinuation seems to be that like the SEC caused all this
damage, destroyed our thing, and have yet to even prove their
case right. And like that tendency for firms
to so heavily emphasize the cost of any kind of regulation,
oversight, anything seems deeply embedded in a lot of our
corporate and regulatory culture.
And I don't really have a good feeling and how to solve it.
Well, I mean, it's funny to me that, you know, it didn't work
for Arthur Anderson. Right.
I mean, it kind of did, though. They never went bankrupt.
Yeah, all their assets just got bought.
Yeah, fair enough. And they lost their accounting
license, right? And Accenture still exists.
And like if you read the stories of people working there, the
consulting site had a ton of huge conflict of interest issues
and stuff like that that were never addressed.
I don't know either, but I will say that like, I guess this this
even gets into like Trump stuff with him where the Supreme Court
sidestepped the the actual issue.
And the Supreme Court sidestepped the issue in Arthur
Andersen too. I don't know if you remember.
That is when it came up to them. It the the reason the charges
got dismissed was because of the way the judge instructed the
jury. And they found issue with
specific jury instructions and how broad they were.
And that was enough to basically overturn the conviction.
Yeah. And then the government wasn't
going to go for a retrial because Arthur Andersen's
partners had put so much money into this, like, broad PR thing
that had gone like all the way up into like a blue.
Dobbs was really pushing it and stuff at that point, that it had
started to reshape the narrative around those type of things.
My point here being the the question for a lot of these
things becomes for Trump it would be something like is he
allowed to break any law because of presidential immunity for a
large company, for a bank or a bank for that matter, with
millions of customers, let's say.
Are they immune? You know, Do they not need to be
transparent? Because actual transparency will
hurt people more. And and I'll tell you, I know
that you and me have the same feelings about this, right?
You and me know that to us, the answer is that's insane.
That's insane. Like, yeah, I'm sorry if every
bank is doing something atrocious.
The answer isn't OK, well let's just hide it for a while and fix
it. It's expose this to sunlight and
let's work on a solution. If every cryptocurrency exchange
is front running their customers or something, these are all
hypotheticals. Yeah, it's not all of them.
Yeah, exactly. If these things were happening,
I want them to be exposed and I want the people in charge of it
to be properly punished. And yeah, do I expect the public
to be concerned? Do I expect them to maybe close
accounts at certain places that are consistently awful in how
they treat their customers or how they've screwed their
customers over? It's always shocking to me that
Wells Fargo is still publicly traded, even like, that's crazy.
But whatever, right? Like something needs to change.
And I think the part that is disheartening to me, you never
expect things to change, certainly not for the good.
As you get older and older and more conservative and lame like
me, you hope still. And when I see crises like this
happen, and then I feel like the lesson learned again.
Silicon Valley Bank signature These aren't small banks.
They weren't small. They were big.
And to see them fail so quickly and to just like, I feel like
everyone's forgotten about it, like it.
No one talks about it. There's no congressional
hearings about Silicon Valley Bank anymore.
There's no like, no, no congressman is making.
I mean that should still be the main issue for a congressman in
my in in California. We should be talking about the
finance sector and the banking crisis.
That should be an an election issue this year.
I'll tell you, no one fucking cares.
And that's crazy. I don't know.
I guess I just wanted to record us on this because I am
disappointed because I I feel like there was a moment that
could have been capitalized and things could have changed, even
if only a little bit and we missed it.
Yeah. The last thing I kind of want to
add to my previous rant about like the nature of the public
private partnership in banking and the state's role in it is
that like the state ends up kind of borrowing bank capacity to
fulfil certain functions, right? Like financial monitoring of
criminals is primarily like initially done by banks filing
SARS and things like that, reporting, likely structuring
and things like that. There aren't enough government
investigators to be like investigating most of that kind
of stuff and so they rely on banks for that.
And then we saw during Trump's administration, I'm thinking of
like the PPP loans and the CARES Act payments and things like
that. A lot of the administrative and
managerial expectations for those were shifted on to the
banks instead of the state. And so there was kind of like
this and even in like 2008 or 2009, the great financial crisis
like it's the the government needed enough of these banks to
exist in order to inject the liquidity because you need
someone to take the liquidity and go buy the things in the
market, right. And so the banks were fulfilling
that role. I get nervous whenever the state
capacity depends on private entities and the private
entities end up starting to become powerful enough that they
have significant influence over the state right?
And that relationship can become deeply problematic.
And this gets into many of our rants about regulation in
general in the revolving door. And I think banking regulation
is like one of the ones that's been most stricken by that over
its history, where the people regulating the banks have most
commonly come from the banks and often go back to the banks.
Yeah. And this is at like the end to
be to be fair also this is like an issue with a lot of
regulatory bodies in general. We've talked about this with
like, with like the SEC. Even if we get into the history
of the SEC, it's like at the beginning, I can see how having
Joe Kennedy and a host of other bigwigs come in and say, like,
we're here to protect you, citizenry.
I could see how that could work in like 1934 or whatever.
You know what I mean? Like, maybe I get it.
But now the way that they operate and what they provide
for the public at large, like it's pretty difficult to
suggest. I I would imagine the public
that cares about the SEC is probably disapproving of the job
they're doing. And most of the most of them
don't even care about the SEC as a government entity because it
littles. So it like it matters so little
to them in their everyday life. And either way, that's kind of
like not the best like for especially if your job is to
patrol markets like that isn't the best reputation.
See, And it's funny to me that you mentioned Joe Kennedy and
the founding of the SEC there, because you can even kind of
pitch that moment or imagine that moment as like they didn't
want any more Pacora Investigations or similar,
right? They didn't want their names
being dragged in front of Congress every week and every
reporter like, printing all these documents that showed
these deals and whatever. And so by having a regulator in
charge of it, an entity they can like, exert influence over over
time, you can make sure that that kind of thing isn't in the
Congressional Record every week, you know?
And I think this really brings us to our final point, which is
obviously there is a solution to this and it's CAS coin.
CAS coin. After the multiple bankruptcies
and business failures and fraud charges and settlements, we're
here to stay. And I do have ideas that I think
a lot of politicians are willing to hear me out on.
I know that a lot of I, you know what I know a lot of big names
own cast coin in general. So, you know, take it with a
grain of salt, but credible sources have told me credible.
Sources have told me there's only 40 cast coin left on over
the counter trading desks.