Mark and Marisa welcome third time returning guest Aaron Klein, Senior Fellow of Economic Studies at the Brookings Institute to discuss the recent bank failures. They converse and debate about how things went so badly off the rails, the government’s response and what could have been done differently, and the implications for the Fed’s interest rate decision next week.
For more on Aaron Klein, click here.
Follow Mark Zandi @MarkZandi, Cris deRitis @MiddleWayEcon, and Marisa DiNatale on LinkedIn for additional insight.
Mark Zandi: Welcome to Inside Economics. I'm Mark Zandi, the Chief Economist of Moody's Analytics, and I'm joined by my co-host Marisa DiNatale. Marissa, good to see you.
Marisa DiNatale: Hey, Mark. How you doing?
Mark Zandi: We're missing Chris this week.
Marisa DiNatale: We are.
Mark Zandi: Where is he?
Marisa DiNatale: He's traipsing through the Red Light District in Amsterdam. No, I'm just-
Mark Zandi: Ooh.
Marisa DiNatale: ... kidding. He's in the Netherlands.
Mark Zandi: Oh, that's right. His mom is... He's... His dad is Italian, and his mom is Dutch, I believe, and-
Marisa DiNatale: Grew up in Argentina. Yeah-
Mark Zandi: Oh, I didn't know-
Marisa DiNatale: ... he's a worldly guy.
Mark Zandi: No, really? He grew up in-
Marisa DiNatale: Yeah.
Mark Zandi: Argentina?
Marisa DiNatale: Mm-hmm.
Mark Zandi: Oh, so he... Does he... He speaks Italian, I know that. Does he speak Spanish? He must, right?
Marisa DiNatale: I would assume so. I've never heard him speak Spanish, but I would assume so.
Mark Zandi: Dutch is not an easy language. I wonder if he knows Dutch.
Marisa DiNatale: I don't know.
Mark Zandi: I can't even read that.
Marisa DiNatale: We'll ask him next week.
Mark Zandi: Yeah. Very good, and we've got a guest, Aaron Klein. Aaron, good to see you.
Aaron Klein: It's a pleasure to be back.
Mark Zandi: Yeah. This is your third time on Inside Economics, and I don't think anyone's been on three times. Am I right, Marisa? I think that's the case.
Marisa DiNatale: An outside guest? No, I don't think so.
Mark Zandi: No.
Aaron Klein: Oh my [inaudible 00:01:24]-
Mark Zandi: Yeah, right.
Aaron Klein: ... I'm setting a record?
Mark Zandi: Yes, you-
Aaron Klein: [inaudible 00:01:27]-
Mark Zandi: ... are. You're setting-
Aaron Klein: ... you know?
Mark Zandi: ... setting the bar. Yeah, absolutely.
Aaron Klein: If I get to five, do I get a free sandwich or a coffee cup or something?
Mark Zandi: Well, that's an interesting question. That's an interesting question. We do have these cowbells. You know about our cowbells, so-
Aaron Klein: No.
Mark Zandi: Yeah. We play this statistics game, which I don't think we're going to do today.
Aaron Klein: Oh, yeah. No, I played that one time with you-
Mark Zandi: Oh yeah.
Aaron Klein: ... guys, I think.
Mark Zandi: That's right, and you get a cowbell if you get the statistic right off the bat, but we'll make sure you get that, and also a bottle of wine. Unfortunately, the bottle of wine is under Moody's gift policy, so-
Aaron Klein: Yeah. I [inaudible 00:02:03]-
Marisa DiNatale: It's a good [inaudible 00:02:04]-
Aaron Klein: ... it doesn't [inaudible 00:02:04]-
Mark Zandi: [inaudible 00:02:04] bottle of wine, but you know.
Aaron Klein: One of the best lines in the season premiere of Ted Lasso, which we just watched the other night, was, you know, "The thing, a great bottle of wine doesn't have to be expensive."
Mark Zandi: Yeah. Is that right?
Marisa DiNatale: It's true.
Aaron Klein: That was a line set in the classic, and the cowbell will make me very popular among the other parents on the opposing side of my kid's soccer games.
Mark Zandi: Well, these cowbells are heavy duty. I've learned a lot about cow bells. Apparently, there are many all over the world, and every valley and dell, I think they're the word you call, you would say, dell in Switzerland has its own cowbell apparently. I... Go figure, so we're on the quest for getting the cowbells. Anyway, it's good to have you, and you're a Senior Fellow of Economic Studies at the Brookings Institute at Yale. You're focused on anything financial-related, and obviously financial-related is all we are talking about this week since the failure of Silicon Valley Bank and Signature. It's hard to believe, but that wasn't even quite a week ago, right? I mean-
Aaron Klein: Yeah. No-
Mark Zandi: ... geez, it feels-
Aaron Klein: ... at some point during the taping of this podcast [inaudible 00:03:18]-
Mark Zandi: Oh, that's right.
Aaron Klein: ... took the one week because they closed it while the markets were open, which they are loathed to do. The history of bank failures is they want to do it after the bank closes on a Friday and work all the way. They keep the bank closed on Saturday and work all the way through the weekend and have the resolution. In fact, during the financial crisis when we had the record high number of bank failures in 2009, they would be called Friday Blue Light Specials so that the FDIC would close all these institutions on a Friday night and send out notes to all the other banks. "Who wants to buy this?" The joke was like if you wanted to buy another bank, you waited for Friday night to see who was on special.
Mark Zandi: Oh, that's great.
Aaron Klein: The fact that they closed the bank in the middle of market day is really a sign that the thing was collapsing faster than a house of cards.
Mark Zandi: Right, and today's Friday, so a week later, and so I think everyone's kind of sort of on edge here just waiting to see if there's going to be any other failures. I guess we'll have to wait till hopefully after the market closes to see that. Hopefully there are no other failures, but I think the markets-
Aaron Klein: No, you know-
Mark Zandi: ... are a little nervous.
Aaron Klein: ... look, it's an interesting question about, how many bank failures do you want? So I... Look, if you want to play-
Mark Zandi: Interesting.
Aaron Klein: ... game-
Mark Zandi: Yep.
Aaron Klein: ... uh-huh, America starts, right? I'm going to move us to the founding of the Constitution. Not quite 1776, there was a declaration, but we didn't really have our own legal system. America starts. What year in America is the first year where not a single bank fails?
Mark Zandi: Oh, now that is a great question, a great question. Let me think. I'd say probably, and this is just a wild guess, 1832, because that's the year Tom Jefferson and John Adams died.
Aaron Klein: All right, so you think we make it to 1832 without a bank failure, Marissa?
Mark Zandi: Probably... it's probably 1956 or something. Go ahead.
Aaron Klein: The '50s were pretty stable, right? Supposed to be-
Mark Zandi: Yeah, yeah-
Aaron Klein: ... [inaudible 00:05:28].
Mark Zandi: ... they probably was that, yeah.
Marisa DiNatale: I'm going to guess there wasn't a year without a bank failure until-
Mark Zandi: Not 2021. I know there was no failures in '21 or '22.
Marisa DiNatale: Right. That's all I...
Aaron Klein: The first-
Marisa DiNatale: ... [inaudible 00:05:42].
Mark Zandi: [inaudible 00:05:43].
Aaron Klein: ... year in American history without a bank failure, 2005.
Mark Zandi: Aah. That is a great-
Marisa DiNatale: Wow.
Mark Zandi: ... statistic. Man, we should have played the statistics game. I would have been... You were ready.
Aaron Klein: I'm kicking the bell.
Mark Zandi: Yeah.
Aaron Klein: I'm kicking the bell, so-
Mark Zandi: Oh man.
Aaron Klein: ... the second year in American history without a bank failure is 2006, and I was this chief economist of the Senate Banking Committee at the time. The regulators come up and they say, "We have done such a great job. We are such good regulators that we have such a great financial system where banks aren't failing because we're regulators." It made me think, "Is your goal no bank failure?" We have like a little bit under 5,000 banks in America, and I started asking myself an intellectual question. What is the right number of failures? I came away convinced the answer shouldn't be zero.
Mark Zandi: Mm-hmm.
Aaron Klein: Zero bank failures has to be the wrong answers because that means that no bank is doing any different type of this model from each other, which means that they're all serially-correlated risk. If you have 5,000 banks, a couple should try different things, and in the course of trying that, some will be good, some will be bad. Who knew that the answer to cellphones were little towers a couple of thousand feet... thousands of feet away from each other as opposed to satellites in the sky where a lot of capital... because they thought that was going to be how we were going to implement cellphones. A lot of people lost money investing in those [inaudible 00:07:13] right? We had plenty of history, Netscape, Pets.com. There are plenty [inaudible 00:07:19] should it be that zero banks fail? That's got-
Mark Zandi: Although-
Aaron Klein: ... to be wrong.
Mark Zandi: ... although... Yeah, I hear you, although the most... I'm sure a lot of years we had failures, a few failures, and they're all pretty small institutions-
Aaron Klein: That's-
Mark Zandi: ... right?
Aaron Klein: ... so-
Mark Zandi: Right.
Aaron Klein: ... so that's right. The answer has to be twofold. One is you want a few failures, but not a ton. You don't want a domino, right? Banking is at its core a confidence gain. It's trust. No bank can withstand the loss of trust of its depositors. A mass run will take out any bank no matter how great the bank is because of the structure of the nature of the business and banking. One, you want to have it so that it isn't a domino. Now, the second question is, do they have to be small failures? That's a little tricky because if you go too far down the road, then you fall into too big to fail, which is no bank. Well, it's okay for banks to fail, as long as they're not big, then they can never fail.
Well, now you've created a problem. There's a bunch of problems associated with too big to fail. The goal, I think, ought to be it's okay for banks to fail regardless of their size We have a system design where banks that take risks and make idiosyncratic bad choices, it's contained and it doesn't create a contagion that creates a loss of trust throughout the system where otherwise safe and sound banks fail, not because of their bad business practices, but because of just the loss of trust in the entire system.
Mark Zandi: Well, I'd also say I'm not sure bank failures is a good guide either because I'm sure there's a lot of failures that never fail because other institutions come in and buy them up. I mean, I'm sure in all those years in '05, '06, 2021 and 2022 when there were no failures, we saw a lot of M&A activity, right?
Aaron Klein: Yeah.
Mark Zandi: I think we're down to 4700 banks.
Aaron Klein: That's right.
Mark Zandi: 4900 in 2021 and steadily declining, so there's effective failure-
Aaron Klein: Well-
Mark Zandi: ... you know-
Aaron Klein: ... look, I think you're right about that. In fact, if you look at most banks that technically that actually fil, they tend to be acquired, right? It-
Mark Zandi: Right.
Aaron Klein: ... tends to be the FDIC sells their assets, and from the depositor standpoint, there's almost no change and it's kind of a different way to make a merger and acquisition. There weren't... People said there weren't mergers between healthy banks in 2009 because it was cheaper to buy a failed bank because the failed bank doesn't mean it's gone to zero. It tends to have a tremendous amount of value. Uninsured depositors, historically, get paid out over 90 cents on the dollar I believe. There's a lot of value in the institution. It's just insolvent and its equity's gone down. I think we've all on this, all three of us have flow on a bankrupt airline as the airlines.
Mark Zandi: Oh, I must... Almost by-
Marisa DiNatale: Proposition, yeah.
Mark Zandi: ... proposition I'm sure that's true.
Marisa DiNatale: Yeah, exactly.
Aaron Klein: Unless you just fly like Southwest and Cortez, right? Like Quantas never crash, right? Wasn't that Rain Man?
Mark Zandi: Yeah.
Aaron Klein: All the others have bankrupted at least once, and so I agree with you, failures is a perfect measure, but it captures this concept that I think is important to appreciate that the goal of regulation shouldn't be perpetuation of all existing charters. Now, the other point you raise, Mark, is a spot-on one, which is we've seen a huge decrease in the number of banks. The question starts like, "Oh, we're down to below 5,000. We used to have 16,000 banks in the 1980s. The point I always like to make about that is we don't have 5,000 banks because that's the economically optimal number of banks today. We didn't have 16,000 banks in the '80s because that was it. We had 16,000 banks because up until 1994, interstate banking was kind of very difficult to do legally. We had a country, it shocks... I would... Most folks, even older listeners to the podcast who lived through the experience of the savings and loan crisis may not really remember that it was banks kind of couldn't really branch and operate across state lines up until passage of what was known as the Riegle-Neal Act of Interstate Banking.
Mark Zandi: You want to know quick tangential point, the company I started along with my brother in 1990 started because of the breakdown of interstate banking because at that point, banks needed information outside of their state, and that's what we did. Our company was called Regional Financial Associates. That was our bread and butter, providing that information to these banks looking outside their immediate footprint to say, "Where am I going?" That's the company we sold to Moody's like 16-
Aaron Klein: [inaudible 00:12:05]-
Mark Zandi: ... years ago, so yeah [inaudible 00:12:06]-
Aaron Klein: ... so I didn't realize that you got your start being ahead of the curve realizing this interstate thing was coming and you-
Mark Zandi: No, no. It was [inaudible 00:12:13]-
Aaron Klein: ... would find the information.
Mark Zandi: ... no, it was I wasn't that smart, you know?
Aaron Klein: It sounds like it. When I write the history-
Marisa DiNatale: Don't give him that much credit.
Aaron Klein: ... it's sounds like the... that's what's coming.
Mark Zandi: No, what happened, and we could see what it meant, and then the other beautiful thing was the PC. The PC was just coming into commercial use. We went out and bought some IBM PCs and data was becoming more accessible, and so you marry the PC, some data, the breakdown of the interstate banking, and then we're off and running.
Aaron Klein: You know, it's interesting you mentioned PCs because there was a brilliant conversation I once heard where they talked about the rise of computing power changing the economics of banking because the ability to essentially process information and data, which is a lot of what banking is. I mean, banking's the movement... I always say when I do a talk on payments, payments are two things, the movement of money and the movement of information. Who's paying whom, how much, when is a very separable element of the payment. Then, the actual movement of the money between the two people. In fact, the actual movement of the money lags the movement of the information and that's okay. Banking is very information, and that the rise of this has changed the core economics of banking in a way that favors economy of size, so in addition to-
Mark Zandi: I'm sorry, you just broke up there. What was that? The economies of what?
Aaron Klein: The economies of information and data-
Mark Zandi: [inaudible 00:13:48] okay, right.
Aaron Klein: ... processing changed the value of scale and size in banking in a way that favors the bigger, the better-
Mark Zandi: Mm-hmm. Absolutely.
Aaron Klein: ... and so the decline in the number of banks in America is a combination of the removal of prior regulation that created more banks that were economically "the market would've created." Two, the rise of Moore's law in computing power, which changed the economies of scale to favor consolidation. Both of one, we can argue how temporary it was. I keep saying, "Well, we keep changing the law so that to try and help smaller banks or to try and help bigger banks."
We can debate what the recent bailout of SVB does in moving that ledger, but Moore's law is just a thing. It's keeps going and you it's you can't legislate it away. You can't regulate it away. It's its own power, but I think you're very wise to connect the rise of computing power and the changing nature of our banking system because I think they're deeply intertwined.
Mark Zandi: Well, I want to come back to the U.S. banking system is somewhat unique in that we have so many banks. Most banking systems around the world are very concentrated. A few banks dominate and there are very few smaller institutions. I want to come back to that at some point in the conversation, but let me bring this back to the recent events. The basic question is, how big a deal is this? What caused the failure of Silicon Valley Bank, and let's say SVB from now on and Signature? How unique are those failures? Or is this symptomatic of something broader in the system? What's your sense of that?
Aaron Klein: Right, so I've done a deep dive on SVB, and first of all, what caused the failure of SVB was absurdly bad management. I've identified four core factors within the bank that are clear red flags, and why their regulator allowed it is beyond me.
Mark Zandi: The Fed?
Aaron Klein: Correct, the Federal Reserve regulated Silicon Valley Bank from head to toe. Usually in bank failures, we start talking an alphabet soup of different regulators because you have a bank regulator, you have a holding company regulator, you have blah, blah, blah, blah, blah. The Silicon Valley Bank was one of the largest banks in America that the Fed regulated from head to toe along with the California State Regulator. America has state and federal bank charters. In fact, per our earlier conversation in Marisa's historical insights, we only had state charters up until 1863. We didn't have a Federal Bank Charter until it was created under President Lincoln, who created it because it's hard to have state-based banking when half your states are trying to secede.
In the case of Silicon Valley Bank, head to toe Fed plus California. Here are the four red flags I've identified. One, explosive growth. The bank quadruples in asset size over five years, going from around 50 to 200 billion. Anytime you see a financial institution grow this fast, it's a little tricky because the types of internal controls, risk monitoring, all the rest are very different when you start to hit that hockey stick of growth. That's not usually how banks grow, even larger institutions.
Mark Zandi: You know, just on that point, a CEO of a major bank who's no longer with us, said to me once, he goes, "Mark if it's growing like a weed, it's probably a weed." I thought that was to me like the key principle to good risk management. If it's going hockey stick, it could be real for sure, but you got to go take a really hard look at why that's happening, and that's really critical.
Aaron Klein: Yeah, so banks are different. This isn't like a social media platform where you want that kind of growth. Banking is different that way, so two-
Mark Zandi: Yep.
Aaron Klein: ... paper reliance on uninsured deposits, so banks.. When SVB failed, it was $200 billion, 16th largest bank by asset size. It had 16 branches. I actually think the true number's closer to four. The definition between a branch and an office can be a little squirrely, but I'm just going to use the Federal Reserve's own data on this because let's not get into a data debate, so 16 branches. The other $200 billion banks, KeyBank, M&T, Fifth Third, Huntington's, these are the banks that are around 200 billion in assets that are banks, mainstream banks, community banks. Regional banks they'd be called.
They have about a thousand branches. If you're a $200 billion normal bank banking people and businesses and communities, you have about a thousand branches, add 16. They didn't bank people. They banked business, specifically tech businesses, biotech businesses, venture capital businesses. Businesses have a lot of money in the bank, and most of it is uninsured. Uninsured depositors, when there's a sign of trouble, are more likely to run from the bank than insured depositors. That's the purpose of insurance, and so anybody who's listening to the podcast who has under $250,000 in their bank account, which is the vast, vast majority of Americans, your money is safe, whether your bank is or not.
Don't run around and try to move your money. It's there. You'll have access to it. Whatever happens, the government stands behind the first $250,000, everybody's bank, money in a bank account, and that's people, but businesses behave very differently. When a business runs, it takes a lot of its money with it if it's afraid. That's 95% of their deposits were uninsured. That's insane relative to their peer group.
Mark Zandi: Okay, here's a statistic I'm going to ask you, and I'm going to turn this on you. What was the average size of a deposit at Silicon Valley Bank before its failure?
Aaron Klein: Ooh, average or median?
Mark Zandi: Yeah, that's a good question, but I don't know the median average.
Aaron Klein: Average. Oh, that's lovely. You had one crypto with over 3 billion, so that's going to knock it over here. I'm going to
Mark Zandi: I didn't even know-
Aaron Klein: ... guess
Mark Zandi: ... 3 billion. Wow.
Aaron Klein: Yeah, yeah, yeah.
Mark Zandi: Yeah.
Aaron Klein: They got bailed out.
Mark Zandi: Yeah.
Aaron Klein: I'm going to guess the average deposit was 15 million.
Mark Zandi: No, no. Well, okay. 1.25 million, 1.25 [inaudible 00:20:51]-
Aaron Klein: Over a million bucks.
Mark Zandi: Over a million bucks, 1.25 million. Okay, here's the other for context.
Aaron Klein: Yeah.
Mark Zandi: What's the average size of a deposit account at a regional bank?
Aaron Klein: Ooh.
Mark Zandi: These are the big [inaudible 00:21:02]
Aaron Klein: Yeah, yeah, yeah.
Mark Zandi: ... that you just mentioned.
Aaron Klein: This I think I'm going to be much closer, so-
Mark Zandi: Yeah.
Aaron Klein: ... I was doing something about it and if you just took Americans, forget about businesses, but just people, and you took 20 people in a room together and you lined them up by income and you grabbed the 19th highest earner and you said, "What's your bank account? How much money you got in the bank?" 19th out of 20th, he'd say $69,000. That's under a third of that for the 19th average high, forget about the 18 below him. I'm going to guess for the average regional bank the average amount in their bank account is like eight grand.
Mark Zandi: Oh, no. Well, that's too low. Well, I like the deductive reasoning, though. That's kind of cool. 177K.
Aaron Klein: Okay.
Mark Zandi: 177K, it's [inaudible 00:21:53]
Aaron Klein: Again, these are averages.
Mark Zandi: Yeah, I think that's-
Aaron Klein: Not medians.
Mark Zandi: ... not medians. I think the median I'm sure would be closer to the number, the 8K that you mentioned, but-
Aaron Klein: Yeah.
Mark Zandi: ... nonetheless, that gives you context, so that's reason number-
Aaron Klein: So that-
Mark Zandi: ... two.
Aaron Klein: ... right, right. They're abut seven or eight times-
Mark Zandi: Tenfold.
Aaron Klein: ... as high, and the core insight isn't just that it's seven times as high an average balance, it's that 177 is fully guaranteed, so you don't have to worry, and 1.25, a million bucks of your money is not insured-
Mark Zandi: Yep, yep.
Aaron Klein: ... or wasn't before the bailout.
Mark Zandi: Yep. What's number three?
Aaron Klein: Okay, number three, interest rate risk. When this thing exploded, they went, and I did a little Twitter thread on this. You can follow me, @Aarondklein. You pull up their call report, their publicly available information from like 2019, and they have like 20 million bucks in Fannie/Freddie mortgage-backed securities. Two years later, three years later, they have a hundred million bucks. You remember when you could get a mortgage at 3.5 and 4%? You were wondering who's buying? Silicon Valley Bank didn't originate those mortgages. They didn't really lend to people that much. Somebody else originated them. Fannie or Freddie securitized them, and they bought that mortgage security, and then they didn't hedge it.
I couldn't find any hedging in their balance sheet, so you have a hundred billion dollars of mortgages and some treasuries was the most that I saw unhedged against interest rate risk. As you know and most listeners I'm guessing to this podcast know, when interest rates... When you hold low-yielding securities, the value of that security falls, and that eats into your balance sheet, right? Now, whether they're-
Mark Zandi: [inaudible 00:23:48].
Aaron Klein: ... the accounting rules on that, whether you have to realize or unrealize that has to do if you're holding the security, holding the this or that, but it was unhedged interest rate risk-
Mark Zandi: Here's another statistic-
Aaron Klein: ... banking 101.
Mark Zandi: ... here's another statistic to strike that point home, and I'll play another game.
Aaron Klein: Oh.
Mark Zandi: What do you think SVB's Tier 1 capital ratio, and Tier 1 is like-
Aaron Klein: Oh God.
Mark Zandi: ... high-quality capital, and capital is the cushion that banks have to digest any losses on their lending.
Aaron Klein: I want to say it was a book value like non-accounting for the actual losses that they had, I think was around like 8%.
Mark Zandi: 12%, 12%-
Aaron Klein: [inaudible 00:24:26].
Mark Zandi: ... 12%, and what was it if you marked to market-
Aaron Klein: Zero.
Mark Zandi: ... securities? Zero? To your point, if you take the securities and value them at current market values because of the rise in interest rates and all of these securities had interest rates with coupons very low, the value of those securities, and this is both in their so-called "held to maturity book," where they had no plans to sell sensibly, and also they're available to sell, where they did need to mark. If you did both, then there would be no capital left and they were effectively insolvent, so that's your point?
Aaron Klein: Right, so that's number three, and by the way, this begs the question, the Federal Reserve saw this as their regulator. I would think the Federal Reserve might know that interest rates are possibly could rise. I'm not saying the central bank should have inside information and regulate banks in a way that isn't what they're telling the world, but last I remembered when they started rate hikes, Chairman Powell was very clear to the entire world that the Fed was going to aggressively raise interest rates to stamp out inflation. This wasn't like a secret thing the monetary policy people and the Fed weren't telling the bank regulation people. It's like if you're a bank regulator and you see your bank that you're regulating doesn't have interest rate hedges, and the Chairman of the Fed is out there saying, "We are going to aggressively raise rates to stamp out inflation," like alarm bells? Where's your cowbell? Who's ringing that?
Mark Zandi: Mm-hmm, mm-hmm.
Aaron Klein: That was three, unhedged interest rate.
Mark Zandi: Yep.
Aaron Klein: Point four I call Dash for Cash to the Federal Home Loan Bank System. You're Silicon Valley Bank, you're sitting on these mortgage-backed securities that are losing value. You can't... You don't want to sell them because then you're going to take the loss and realized the loss, but you need liquidity and money. There's this thing in American banking, it's an anachronistic holdover from the 1930s. President Hoover signed it into law called the Federal Home Loan Bank System, which existed in a time where there were things called thrifts, which were different than things called banks.
Thrifts made mortgages and commercial banks didn't really, and we can get into more of a history lesson on this. Freddie Mac actually comes from the Federal Home Loan Bank System if you go back, roots in history. The Home Loan Banks today will allow any commercial bank who's a member insurance company, some other people, to park mortgages on their balance sheet and give them an advance of liquidity and cash.
Mark Zandi: Which is what the Fed's doing now.
Aaron Klein: Correct. In fact, the Home Loan Bank System has been called the lender of next to last resort because folks do this, including there's a brilliant paper by Scott Frame who's then at the New York Fed and now is at the Dallas Fed, documenting how Countrywide, WaMu, IndyMac, all these folks ran to the Home Loan Banks in 2007 as their mortgage business was imploding. Remember, the real estate market peaks late '06. In '07, you're seeing all these troubles in this situation, but the bank failures hadn't started. You wonder, "Well, how do they hold off?" It's like, "What do you do when you're Wile E. Coyote and you've run off the cliff?" Don't look down. You fall when you look down, so you keep running. The Home Loan Bank is what kind of lets you keep going.
A year ago, the Silicon Valley Bank appears nowhere on the Federal Home Loan Bank's top list of borrowers from San Francisco, their Home Loan Bank. A year later, they're the number one borrower with $20 billion. Within a year, they've gone and put at least $20 billion of these mortgage-backed securities to the Home Loan Bank for cash. Now, one huge thing to realize. The FDIC when a bank fails goes in and takes over the bank. You think they own everything. Guess the only entity in America that legally has a right to the bank's assets before the FDIC, who gets payback in full before the FDIC gets to see how much is there to give to the uninsured depositors, other claimants, Uncle Sam.
Mark Zandi: FHLBs, the-
Aaron Klein: Yep.
Mark Zandi: ... yep, they're first in line. Yep.
Aaron Klein: The Home Loan Bank gets paid back, so the bank a year ago was in trouble. It starts hollowing out its assets, putting itself at greater risk of loss if it loses to the taxpayer, to the uninsured depositors, by running to the Home Loan Bank and blowing up its exposure there, which is exactly what equity does when in trouble. When equity's in trouble, it makes riskier and riskier bets to double down because if it wins, it wins. It can't lose below zero, and so this is all
Mark Zandi: So he... On this point I would... I disagree. I mean, I think the Federal Home Loan Banks play a very critical role in the system broadly, particularly the smaller institutions, to provide liquidity when there are panics, scares, events. Now, it can't solve every problem and you will have institutions that ultimately go belly-up like SVB, but there are many, many cases where because of the Federal Home Loan Bank liquidity, it allowed those institutions to survive and fight on for another day.
That goes back to the need, in my view, for keeping... having a banking system with a lot of smaller institutions because if you didn't have the Federal Loan Bank, we would probably, I don't know the the counterfactual, but my guess is it would probably be more like the banking systems overseas that are highly concentrated because liquidity is very fleeting, particularly in these smaller institutions. Having said all that, I don't... that's another podcast. That's a whole nother debate, which I'm going to have you on because I actually doing some research in this area, too, and take a different view than, I think it sounds like you're taking.
Aaron Klein: No, no, no, so let me be clear because we're actually in more agreement than it sounds.
Mark Zandi: Okay, okay.
Aaron Klein: Right. The Federal Home Loan Bank System put out $90 billion, over 90, I think almost a hundred on Monday in liquidity to help small institutions during a panic. I have no problem with that. I agree with you they play a vital role. What I-
Mark Zandi: It's not anachronistic, so you said you called them anachronistic.
Aaron Klein: No, I call them anachronistic in the sense that they were originally created to be a central bank when these things called thrifts existed, and they didn't have access to the Federal Reserve because the Federal Reserve was only for banks, so it was like a central bank for thrifts. Now, there is no different between thrifts and banks. In fact, both are members, both can access the Fed and both can access the Home Loan Bank, so-
Mark Zandi: But we digress, we digress, I [inaudible 00:31:45]-
Aaron Klein: ... but wait, guys, but let me make the core point. Let me make the core point. The core point isn't that the Home Loan Bank's system doesn't have a lot of value and provide a lot of incentives and should exist. The point is that when an institution off the radar to a massive amount of money during times of good, there was not stress last year. Not a single bank failed last year. I'll give you two other institutions that ramped up their Home Loan Bank exposure last year, Silvergate and First Republic. If you look on the list, number one was Silicon Valley, SVB. Number two is First Republic. What it is is it's a signal that an institution-
Mark Zandi: [inaudible 00:32:37] perfect. Yeah, I agree, totally agree.
Aaron Klein: ... is in trouble.
Mark Zandi: Yeah. That's another... That's a great point. You were saying number four, why didn't you... You should have seen this because the advances, the loans they were taking out from the federal bank were taking off, and that's a sign that there's a liquidity problem. Where was the Fed effectively based? That was another sign, hockey stick, a lot of uninsured depositors, the interest rate risk in the asset side of the balance sheet and the Federal Home Loan Bank advances. Yeah, totally agree.
Marisa DiNatale: A combination of all those things-
Mark Zandi: Yeah.
Marisa DiNatale: ... should have [inaudible 00:33:14]-
Aaron Klein: Yeah. That's exactly... Yeah, each one begets each one. Explosive growth, well, where's it coming from? Uninsured depositors. Well, what are they doing with the money? They're buying what they think are safe assets on the credit side, but they're not hedging the interest rate risk side. Then, oh, they got into trouble a year ago. How are they managing this trouble? How is it that they didn't implode then when rates started rising? Well, they kept going to the Home Loan Bank rather than take the expensive hedge.
If you rewind the tape when all this stuff was obvious, the supervisor needs to sit down with the bank and go, "Look, you built up a pretty unhedged exposure. You got to eat the hedge when the hedge is expensive and your earnings per share are going to fall, you're going to have an ugly earnings report and your stock price is going to lose value. Keep in mind, SVB triples in stock price from like 250 to almost 750 between 2020 and 2021 I think, 2022. The same time you're having the hockey stick growth in assets, the stock price is shooting up. Why? Well, it turns out they weren't paying the money for that interest rate hedge, right? Unhedged-
Mark Zandi: Right.
Aaron Klein: ... exposure is more profitable when the market's in your favor. Stayed longer than people expected, particularly COVID, right? 2019, rates went down. Your 2019 mortgage book looks better. You know, you're loving the ride up.
Mark Zandi: The broader point, though, here to bring this back to the beginning of the conversation, is that it feels like what you're saying, and I think I would concur, that this is idiosyncratic. This is a feature of a few institutions. Obviously, SVB and Signature and Silvergate were crypto banks, so they have their own idiosyncratic thing going on, but broadly in the banking system, these may be issues, but they're nowhere near the issues as they were in these institutions.
Aaron Klein: Right, so I mean, so one, broadly speaking, I think absent the run of confidence or trust, the system had some pretty strong points. There's a lot of idiosyncrasies, but you look at the FDIX, who published a chart on Monday, oh, a week ago Monday I think, that showed some pretty large unrealized balances across the system on the mortgage security, nothing like Silvergate. Silvergate was a total outlier. I think, Mark, you've [inaudible 00:35:41] between the Tier 1 capital at 12 and the unrealized at zero, and their chart, I think I saw it in the journal, they tried to do the same thing for all the rest of the banks.
Mark Zandi: Well, if you do just to, because I know the statistics because I calculated. I didn't look at the FDIC, so hopefully they're roughly the same. If you go look at the GCIBs, these are the globally systemically important banks, these are the big guys, they have a boatload of capital. If you look at Tier 1 capital, it was around 13, and then if you mark to market their security holdings, both they held to maturity, which they don't need to do, and the available for sale, which they do need to do, it's down to around 10, 10. By the way, 10 is higher than what it was before the financial crisis.
Aaron Klein: Yeah [inaudible 00:36:24]-
Mark Zandi: Regional banks-
Aaron Klein: ... [inaudible 00:36:26]-
Mark Zandi: ... regional banks, just to round that out, they're in a little bit different situation. I'm speaking from memory, so I might not have it exactly right, but they're Tier 1 before marking is like 9, 10 percent-ish. Now, with marking, it's down to 7 percent-ish. Something along those orders of magnitude. Tier 1, tier 1 capital.
Aaron Klein: Tier 1, and does that include any... When you say mark to market, does that include the hedging that they've done that would-
Mark Zandi: No.
Aaron Klein: ... buffer the losses-
Mark Zandi: No, no.
Aaron Klein: ... of the security?
Mark Zandi: No, no.
Aaron Klein: It could even be higher.
Mark Zandi: Yeah, because I couldn't count... I don't know how to count. That's pretty... I don't have the information to calculate.
Aaron Klein: The derivative hedge exposure is difficult. All you see in the banking call reports-
Mark Zandi: Yeah, so-
Aaron Klein: ... is like [inaudible 00:37:05].
Mark Zandi: ... I'm overstating the case because most of these institutions, they hedge. I mean, they didn't... They're pretty... they're well-managed and they hedge, but nonetheless, so it sounds like, though, then you're saying yes, the system is on pretty solid ground, but maybe there might be some other issues out here because of the unrealized losses on their treasury and mortgage security holding. That's what it-
Aaron Klein: Yeah.
Mark Zandi: ... sounds like you're saying.
Aaron Klein: That's right, that's right, but even when you... per your analysis even when you incorporate that, things are worse, but not insolvent.
Mark Zandi: Yeah, not even close to insolvent.
Aaron Klein: Right, so the level of the magnitude of it, and then the core question like, where was the hedge?
Mark Zandi: Yep. Yeah, okay. Let's move the conversation one step forward and, of course, the U.S. government stepped in aggressively on this Monday. The FDIC, the Fed, and the U.S. Treasury came together, proclaimed this a systemic event, and this is something they can do based on the post-financial crisis reforms, and said that they are going to guarantee the deposits, all the deposits of these failed institutions. Now, effectively signaling, I think, that if anyone gets into trouble here, or most anyone else who gets into trouble, any other bank, those depositors are money good. They're going to get their money, whether it's 250K or below or above, they're going to get their money.
The other thing the government did was the Fed stood up a credit facility to allow banks to use their security holdings to borrow against them to get liquidity, and they could borrow as if those securities had no unrealized losses, that they were at par so they can go out and borrow money. It's a one-year loan at a somewhat higher interest rate to make it a little less attractive, but nonetheless. Then, the third thing they did, the government did behind the scenes was the cajoled and organized 11 big banks to come in and provide $30 billion of deposits to First Republic, which is another banking institution that is headquartered in California that's under a lot of pressure with deposit outflows.
Those are the three things they did. The first question, two basic questions. The first question is, what do you think of those steps? Do you think they were appropriate? Second, are they going to work? Do you think they're going to work in restoring that confidence that you talked about in stabilizing the system? Question number one, what do you think? Was that the right thing to do?
Aaron Klein: I would've done something different.
Mark Zandi: Okay.
Aaron Klein: All right. You know, one, let me say, it's really easy to say I would've done something different and not be in the chair of the people doing it.
Mark Zandi: Right, right.
Aaron Klein: I was in that chair. I lived through TARP.
Mark Zandi: You were in Treasury, you were in Obama's Treasury, right?
Aaron Klein: I was in Obama's Treasury, and before that I was Dodd's Chief Economist on Senate Banking, so I helped write TARP. I lived through TARP from the two-and-a-half-page proposal the Administration sent us. By the way, fascinating little story tied together, the original proposal from Secretary Paulson was for the Troubled Asset Relief Auction. You may recall, Mark-
Mark Zandi: I do-
Aaron Klein: ... [inaudible 00:40:41]-
Mark Zandi: ... reverse auction. It was a wacko reverse auction. Yeah.
Aaron Klein: That's TARA, if you do the analogy, right?
Mark Zandi: Yeah.
Aaron Klein: All right, and what does TARA conjure?
Mark Zandi: I don't know.
Marisa DiNatale: Gone with the Wind?
Aaron Klein: Exactly.
Mark Zandi: Oh.
Aaron Klein: That's it, Marisa, right? [inaudible 00:40:58] right?
Mark Zandi: How does it do that? Gone with the Wind? TARA?
Marisa DiNatale: That was the name of the plantation in Gone-
Mark Zandi: It was Tara?
Marisa DiNatale: ... with the Wind? Yeah.
Mark Zandi: Oh, okay, okay [inaudible 00:41:06].
Aaron Klein: That is exactly the... right. Think about that idea. We're heading into a financial crisis, and the government's... like the name of the government's program is the decrepit plantation in Gone with the Wind.
Mark Zandi: That's funny.
Aaron Klein: All of us in Senate Banking are all baseball fans, and we're sitting around here, and one, we're debating the wacky reverse auction versus what we thought was the right thing to do, which was capital injections, which is what the Treasury Department ultimately did and we gave them the authority. The original proposal didn't even have authority for capital injection. We added that, even though at the time of passage, they still said they were going to do the auction. They reversed course wisely. They were wise-
Mark Zandi: Well, in theory, it was a brilliant idea-
Aaron Klein: ... but theory.
Mark Zandi: ... yeah, yeah, but actually implementing that thing, pretty... I don't now. Couldn't do it. Certainly not given the time that the Treasury had.
Aaron Klein: We thought to ourselves, what's the right analogy for the American public? It's Gone with the Wind. It's a TARP. When you're in a baseball game and the storm clouds come and the rain comes and everybody has to leave the field, you roll out the tarp, storm passes, you roll it back. Feels good. We can all-
Mark Zandi: Oh, hey, so-
Aaron Klein: ... come back out and play.
Mark Zandi: ... interesting. I didn't know that. That is so cool.
Aaron Klein: Right, so we just can't-
Mark Zandi: Is that widely known? Is it just me? Does that... Most-
Aaron Klein: I don't know if that... That was in some of the various books. I mean, you-
Mark Zandi: I just thought.
Aaron Klein: ... check around.
Mark Zandi: Yeah.
Aaron Klein: Just change one letter in the acronym-
Mark Zandi: Yeah.
Aaron Klein: ... but right, TARP is among the banking world a household name for good or bad.
Mark Zandi: Just for folks out there, we're kind of talking beyond folks, but this is the bailout. Remember the bailout? $700 billion bailout for banks, the housing industry, and the vehicle industry. That was TARP, and it got voted down by Congress initially. Chaos ensued, and then Congress reversed itself within 24 hours, I think.
Aaron Klein: Mark, since you point that out, when the House voted down the original bill and market chaos went absurd, we regrouped and said, "What can we add to this bill to get more votes?" One of the things we added, increasing the deposit insurance cap from a hundred to 250. You can go back and pull up the roll call vote on the text put before the House, which was the deal. If the House had passed that first deal, the Senate was going to pass it, the President was going to sign it, and that would've been the law. No increase in deposit insurance.
After the House votes it down and we need more Republican votes, we go, "What are the things we can give that will attract more Republican votes that aren't going to mess up the core premise of the bill? Some people want to do all sorts of different things, and one of which was an increase in the deposit insurance. That's how you even get from a hundred to 250, but the core kind of point that you're raising, which is, what should we... All of this is by way-
Mark Zandi: You said you would do something different-
Aaron Klein: I definitely did.
Mark Zandi: ... so what?
Aaron Klein: All of this-
Mark Zandi: Go ahead. Yeah.
Aaron Klein: ... is saying, I don't have access to the information they had. I wasn't subject to the time constraints that they were, and wasn't requiring the level of consensus that is required to turn all the keys, I mean, because the Treasury and the Fed and FDIC all had to agree. Even if Aaron was in charge or whatever of one of those levers, if I couldn't convince the other people to do what I wanted to do, one, could you have sold SVB on somebody else? Could you have sold the bank and its deposit network to another institution? That would've seemed to me to be preferable.
That's very much how the traditional bank failures are resolved over a weekend. The other bank gets the business, they pay some money for it. In the United Kingdom, they did that. I think it was sold for one pound-
Marisa DiNatale: Yeah, to HSBC.
Aaron Klein: ... but that's one pound more than we got in this failure. In fact, it's a lot more because we're going to suffer the losses. That's option one, which I think was-
Mark Zandi: Okay, but-
Aaron Klein: ... preferable.
Mark Zandi: ... in all fairness, that goes to the information, right? I mean, you can't do that unless... I mean, they tried. I mean, at least reporting suggests that they tried.
Aaron Klein: Well, they-
Mark Zandi: Then, they failed.
Aaron Klein: ... well-
Mark Zandi: They failed.
Aaron Klein: ... they tried. They got some bids. The reporting says that one of the main hiccups was legal indemnification in case of lawsuits, which at various levels could be provided. If you go back, and one of the reasons we keep going back is because going back is deeply illustrative. A lot of banks going back bought failed banks. WaMu, which is the larger failure, everybody says Silicon Valley Bank is the second largest. These are all nominal terms. WaMu was larger, but WaMu was sold. WaMu didn't get uninsured deposit bailout because JPMorgan bought it, but WaMu got sued.
What JPMorgan underappreciated in that purchase, and I think Jamie Diamond has said this is, "I knew the assets of the bank. I knew their liabilities. What I couldn't know was what their legal risk was for the scuzzy practices that they'd been associated with and all the crappy toxic mortgages and subprime stuff that they had been part of, so I got sued. Not for what JP did, not for practices under my watch, but for practices under what I acquired's watch, and part of the people suing me were the government." He said, "Fool me once," right? Even if it's not JP and the other industry, could you have offered legal protection> Would that have made a difference? I don't know, but the reporting seems to indicate that was one of the hang-ups.
Mark Zandi: Well, I think most people would agree with you. If they could have sold it over the weekend, that would've been preferable maybe, although I'm not sure that would've stemmed the confidence slide that we're still... It's still... Even despite all the things the government has done here, which is massive, people have no reason to worry about their deposit, Nonetheless, there's still a lot of-
Aaron Klein: Well-
Mark Zandi: ... angst out-
Aaron Klein: ... [inaudible 00:47:28].
Mark Zandi: ... there, but there... That's a case where I would kind of sort of give them the benefit of the doubt because of information.
Aaron Klein: I mean-
Mark Zandi: Okay, fair enough. Okay. What else would you have done?
Aaron Klein: I would've had the uninsured depositors take a haircut.
Mark Zandi: Oh, you would have? Because of moral hazard? Why?
Aaron Klein: For a variety of reasons. It's not just moral hazard. It's the way the law is, right?
Mark Zandi: Well, no. The law says if it's systemic and they deemed it to be systemic-
Aaron Klein: Okay, well, but-
Mark Zandi: ... I can-
Aaron Klein: ... the Federal Reserve-
Mark Zandi: ... guarantee that's the law.
Aaron Klein: I understand that, but if SVB had been deemed systemic before that day, they would have been subject to enhanced prudential standards under the Federal Reserve. The Federal Reserve is the one who decides whether or not you're systemic for regulatory purposes, and the Fed had chosen not to subject them to enhanced regulation.
Mark Zandi: The reality was they were systemic. I mean... Well, at least that was the judgment of the people involved. I mean, they said-
Aaron Klein: That was the judgment of the people.
Mark Zandi: ... I don't do this, this system is going to evaporate in front of my eyes, right? It's a judgment call, right?
Aaron Klein: I mean... Look, I mean, the judgment was also said that if we didn't bail out money market mutual funds due to COVID it would be systemic. If the Fed didn't bail out junk corporate bonds, it would be... I mean, there's been a lot of deciding that things are systemic that have resulted in large taxpayer gifts to wealthy holders of investments who didn't quite turn out the way they had hoped.
Mark Zandi: The risks are asymmetric. I mean, you may be right, but if you're wrong, that's a problem for everybody, including and most importantly for low-income households and-
Aaron Klein: Well, you're getting-
Mark Zandi: ... they're going to get crushed. They're going to get crushed in that kind of scenario-
Aaron Klein: You're talking about-
Mark Zandi: ... if, in fact, it turns out to be systemic.
Aaron Klein: ... you're talking about getting crushed in the recession that would come-
Mark Zandi: Oh [inaudible 00:49:18]-
Aaron Klein: ... not-
Mark Zandi: ... yeah, yeah.
Aaron Klein: ... about the deposit.
Mark Zandi: Well, and maybe the bank... There could be a lot of bank failures, so it could be pretty messy to everybody-
Aaron Klein: Well, and-
Mark Zandi: ... and for everybody involved.
Aaron Klein: ... what you're saying is true. I mean, I believe there's some low-income people, and it would stagger me if there weren't, that experienced hiccups in their paychecks as a result of this.
Mark Zandi: Yeah, sure.
Aaron Klein: One of the arguments that was being said was, "Well, businesses need this to meet payroll." I'm dubious of that claim. I'm sure that's true in some business case, but Roku had 450 million bucks-
Mark Zandi: Well, just [inaudible 00:49:50]-
Aaron Klein: ... hold on one second.
Mark Zandi: ... talking now as a small business owner with cash in the bank, and at the time, it was a long time ago, so I had over a hundred K in the bank. If I didn't get that money, payroll would have been a problem.
Aaron Klein: Well, but hold on a second-
Mark Zandi: Definitely would have been a problem.
Aaron Klein: ... how much? How much of that money did you need? Roku had 450 million bucks. By the way, Roku had 450 bucks at Silicon. They had other bank deposits, and so they would've had access 60, 65% of that money Monday morning. Were you-
Mark Zandi: Yeah [inaudible 00:50:20].
Aaron Klein: ... running your business to the point that your bank account-
Mark Zandi: At times-
Aaron Klein: ... was going-
Mark Zandi: ... at times, I was trying to figure out whether I should pay my electric bill. Yeah, yeah.
Aaron Klein: Well, okay-
Mark Zandi: Yeah, it's [inaudible 00:50:29] yeah-
Aaron Klein: ... you were running-
Mark Zandi: ... yeah, I know, but-
Aaron Klein: ... real close to the [inaudible 00:50:31]-
Mark Zandi: ... yeah-
Aaron Klein: ... but-
Mark Zandi: ... I don't know how many of those guys at Silicon Valley Bank were-
Aaron Klein: At Silicon-
Mark Zandi: ... in the situation I was in, but no, no-
Aaron Klein: ... right, and-
Mark Zandi: ... yeah.
Aaron Klein: ... but we do know Roku, right? Roku had about I think about 470-something million, and they would have had access to a little bit under 300 of that immediately. Then, the rest they would have gotten access to over time. The history says that you probably would have gotten 90 to 95 cents on the dollar, but depends. By the way, one of the ironies is the tumult in the market has radically decreased interest rates, which has increased the value of the securities that they'd held that they'd lost-
Mark Zandi: Yeah, right.
Aaron Klein: ... right? The carcass of Silicon Valley Bank is worth more today than it was a week ago because of its own failure.
Mark Zandi: Yeah. Let me ask you another question on the moral hazard, just to explain that to the listener. The idea is that if you have big depositors, they need to be sensitive to the financial condition of the bank they're putting their money in. If they don't care, then that incense the financial institution to go out and take bigger risks with their deposits because everyone knows that they'll get their money back. By not forcing a haircut on these large depositors, you run the risk that no one's disciplining the financial institution and making it sure that it's prudent in its not practices.
Aaron Klein: Right. Not just-
Mark Zandi: Do you find that-
Aaron Klein: ... not just-
Mark Zandi: ... a good argument?
Aaron Klein: Yes.
Mark Zandi: You do?
Aaron Klein: Not just-
Mark Zandi: Okay.
Aaron Klein: ... Silicon Valley Bank, but all banks because as you point out, if another bank failed, it's implausible to imagine that their uninsured depositors wouldn't be made hold. This was a question that I think Senator Lankford-
Mark Zandi: At this time, at this point in time-
Aaron Klein: ... asked [inaudible 00:52:18] today.
Mark Zandi: ... because of the action. Yeah.
Aaron Klein: Friday, we talked about like... We're taping this on a Friday. Another bank could fail over the weekend.
Mark Zandi: Yes.
Aaron Klein: Could you imagine if it was small, like super small?
Mark Zandi: Not at this point, no.
Aaron Klein: That's where... Economists call that horizontal inequity, two equal... Peter Thiel had 50 million bucks in Silicon Valley Bank.
Mark Zandi: Yeah.
Aaron Klein: He's getting all 50 million of that. There's no way if you had the smallest bank in America fail and you had one person who had a thousand dollars, they're going to take a haircut, right?
Mark Zandi: Yeah, and this-
Aaron Klein: I mean, let's talk about-
Mark Zandi: ... goes back to it's systemic and I'm worried it's going to-
Aaron Klein: ... but I'm talking about-
Mark Zandi: ... take out the system.
Aaron Klein: ... the least systemic bank in America if it failed over the weekend.
Mark Zandi: Right.
Aaron Klein: Would their uninsured depositors be made whole?
Mark Zandi: I think in the current environment, I suspect they probably would be. Yeah-
Aaron Klein: I mean, if they weren't-
Mark Zandi: ... and they would be because I think [inaudible 00:53:05]-
Aaron Klein: It would be outrageous.
Mark Zandi: ... confidence is so fragile-
Aaron Klein: Right, so now-
Mark Zandi: ... and-
Aaron Klein: ... every bank is systemic.
Mark Zandi: In this current environment, yeah. It's we are in a systemic crisis.
Aaron Klein: It's all 4,700 are systemic?
Mark Zandi: Yeah, they are.
Aaron Klein: The same with the credit unions?
Mark Zandi: Yeah, every institution at... If I were king for the day and I was sitting there today, literally today, Friday, March 17th-
Aaron Klein: Aah, so everybody's-
Mark Zandi: ... [inaudible 00:53:25] was going.
Aaron Klein: ... right, yeah, so everybody-
Mark Zandi: In this environment-
Aaron Klein: ... [inaudible 00:53:26].
Mark Zandi: ... in this environment, absolutely. Yeah.
Aaron Klein: I'm going to read a quote from what became the Banking Act '35 by FDR's charity-
Mark Zandi: You just have this handy?
Aaron Klein: ... the FDIC.
Mark Zandi: You say you have the Banking Act of '35 on your computer screen. What the heck is that's all about? Okay-
Marisa DiNatale: It's framed on his wall.
Mark Zandi: Yeah, yeah, go ahead. Go ahead.
Aaron Klein: Okay, so they're debating what the deposit insurance cap should be in the New Deal, FDR era, in the midst of the Depression. This is the chair of the FDIC, Roosevelt's New Dealer-
Mark Zandi: Okay.
Aaron Klein: "We recommend that the maximum limit of insurance to any one depositor be retained at the present figure of $5,000. Congress, in establishing deposit insurance, was presumably most concerned with the mass depositors with small accounts. Our reports cover 51 million accounts, of which over 98% are fully insured with the $5,000 limitation. Many of the accounts not fully covered are interbank accounts, public funds, deposits of corporations, institutions, and trust estates.
"The actual number of individuals with deposits in excess of $5,000 is probably less than 1% of the total number of depositors, blah, blah, blah. To raise [inaudible 00:54:42] bit of insurance above 5,000 would materially increase the maximum possible liability of the FDIC. If all deposits were insured, this would be more than double. It would be increased, blah, blah, blah. The insurance corporation's interest in the sound operation of banks is more tangible and more vital than that of any supervisory authority. Deposits in practically all commercial banks and trusts," hold on one second.
"There are two courses open to the FDIC. Maybe a charitable institution which will pay for the mistakes, bad banking, and dishonest bankers, in which case the cost of insurance must be set so high that it will be an injustice to every sound bank. Or, by placing that on a sound basis, the corporation may be used as an instrument to improve the standards of bank management and reduce the losses to depositors through a bank failure course, which I prefer, requires that the standard of bank supervision throughout the country be improved, that the FDIC be given the right to protect itself against excessive risks. Finally, the FDIC not be handicapped by taking into the fund banks which are unsound or by continuing in the fund which are mismanaged."
Mark Zandi: Look, I'm not arguing that all bank deposits should be insured or guaranteed forever. I'm not arguing that. I think we need to roll that back, and maybe we take the 250K-
Aaron Klein: How?
Mark Zandi: ... up to something our... When the systemic crisis is over.
Aaron Klein: But-
Mark Zandi: We are now in a-
Aaron Klein: ... then the next systemic crises happens.
Mark Zandi: ... systemic... we are now in a systemic... In my view, confidence is so fragile that if we allow any depositor to not-
Aaron Klein: Right.
Mark Zandi: ... to get a haircut, we're toast. The whole system-
Aaron Klein: Mark, Mark-
Mark Zandi: ... is going to come undone.
Aaron Klein: ... Mark-
Mark Zandi: Yeah.
Aaron Klein: ... you're... Just so I understand your view, there's some systemic/non-systemic toggle-
Mark Zandi: Yeah.
Aaron Klein: ... which the government picks-
Mark Zandi: That's right-
Aaron Klein: ... and-
Mark Zandi: ... because they had information to make that judgment. Yes.
Aaron Klein: Well, but hold on a second. We know what their information of their judgment was 10 days ago-
Mark Zandi: Not really.
Aaron Klein: ... [inaudible 00:56:49].
Mark Zandi: We don't have full-
Aaron Klein: Yes we do... No, we do because under current law, the Federal Reserve is required to fill banks between a hundred and $250 billion as to whether or not their failure would be systemic.
Mark Zandi: No, no-
Aaron Klein: The [inaudible 00:57:04]-
Mark Zandi: ... no. Yeah, I understand that. I understand what you're saying. That's ex-post. Now, you know-
Aaron Klein: No, that's ex-ante.
Mark Zandi: ... I mean, it's ex-ante. Now, we're in the real world-
Aaron Klein: But this is-
Mark Zandi: ... where you're observing the-
Aaron Klein: Right, so the government-
Mark Zandi: ... [inaudible 00:57:17]-
Aaron Klein: ... got it wrong.
Mark Zandi: ... drained from the system, and because of the law change after the financial crisis, you now have the ability to say, "Okay, we're in a systemic crisis or environment-
Aaron Klein: I know, but-
Mark Zandi: ... "and in that period, I am going to guarantee all deposits."
Aaron Klein: I understand that. My point to you, Mark, is before the crisis, the government got it wrong-
Mark Zandi: Yeah.
Aaron Klein: ... but, I'm sorry-
Mark Zandi: Well-
Aaron Klein: ... the Federal Reserve got it wrong as to whether or not the failure of-
Mark Zandi: Well-
Aaron Klein: ... Silicon Valley Bank would trigger-
Mark Zandi: ... any legal institution-
Aaron Klein: ... this toggle.
Mark Zandi: ... may be non-systemic, but when you take it in the context of the environment that you're in, one institution [inaudible 00:57:49]-
Aaron Klein: But the context of the environment-
Mark Zandi: ... could put you over.
Aaron Klein: ... the context of the environment is a hundred percent predicated on the failure of SVB.
Mark Zandi: No, no, it's not. It goes beyond that. It goes [inaudible 00:57:58]-
Aaron Klein: Now it does.
Mark Zandi: ... well, no, even before that. I mean, the economy was weakening. There was a lot of angst over the economy and where that was headed, recession risks. Most economists think [inaudible 00:58:08] it's the entire backdrop of the environment-
Aaron Klein: So-
Mark Zandi: ... you're operating in.
Aaron Klein: ... so-
Mark Zandi: Also, since it's a global system, too, I mean, you could see the system seemed to be righting itself and then Credit Suisse becomes an issue over in-
Aaron Klein: Well, but-
Mark Zandi: ... Europe.
Aaron Klein: There's a great piece in the FT where the European regulators were trashing the U.S. decision to bail out the uninsured depositors. I think one of them called it a joke and said, "I've sat through years of their meetings and lectures about systemic risk, and now," right? It's the scenario that you're describing where sometimes uninsured depositors get bailed out and sometimes they don't, they only get bailed out if the failure is systemic, is going to lead all uninsured depositors to go to the too-big-to-fail banks. That's... There's no way to keep the community banking system, which I think both of us, you and I, agree-
Mark Zandi: I think-
Aaron Klein: ... [inaudible 00:59:01] is wrong.
Mark Zandi: ... systemic events are rare. They're maybe once every decade or 15 years.
Aaron Klein: We've had three since 2007, third, right? COVID was systemic. People got bailed out, right? We didn't have to [inaudible 00:59:18]-
Mark Zandi: Okay, but banks [inaudible 00:59:18]-
Aaron Klein: ... a bank failure [inaudible 00:59:18]-
Mark Zandi: ... generally-
Aaron Klein: ... is not the money market.
Mark Zandi: ... COVID is COVID. I mean, okay.
Aaron Klein: Every recession is systemic. I mean, the 1990 recession we had the Savings and Loan Crisis. That was a systemic collapse of that. Every recession becomes systemic almost.
Mark Zandi: Yeah. Well maybe it gets abused. I don't know. Maybe as we move forward here, this becomes a regular occurrence for-
Aaron Klein: But think-
Mark Zandi: ... the folks powered to do it, but so far that has not been the case. Anyway, well, let's move on. Let's move on-
Aaron Klein: Right.
Mark Zandi: ... because there's a couple... there's so many things I want to explore with you and we're going to run out of time. The one other thing I wanted to talk about, and then last thing I want to talk about a little bit is if you've got any view of what this means for monetary policy what the Fed should be doing next week, but-
Aaron Klein: Oh-
Mark Zandi: ... before we get there-
Aaron Klein: ... yeah, yeah, yeah.
Mark Zandi: ... yeah, one of the things... debates that have come to the fore in this is around the rollback of some of the Dodd-Frank... Dodd-Frank was the piece of legislation passed after the financial crisis that reformed the system, more capital, more liquidity, stress test, and everything else. That was rolled back a bit in 2018, maybe more than a bit, and one of the things, one aspect of that for banks with less than $250 billion in assets and, of course, SVB and these others are less than 250 billion, they did not have the same kind of stiff requirements on capital, stress testing, liquidity, and risk management that banks over 250K, 250 billion. What do you think? Is that a reasonable debate argument? I mean, do you think that had an impact, that rollback on the events that are unfolding here today?
Aaron Klein: Let me say the following. Dodd-Frank subject banks over $50 billion to enhance prudential standards, tougher regulation. That threshold was changed in the legislation you're describing often called S.2155 from 50 to 250 mandatory. SVP, as we all know, went from just under 50 to 200. The key point... There are two key points. One is the law said it was mandatory over 50, and then it was changed to discretionary between a hundred and 250 at the discretion and mandatory above 250. One, clearly the Fed botched its discretion on whether or not to handle, put in enhanced prudential standards between a hundred and 250. This gets back to the conversation we're just having where the Fed judged SVB not to be systemically... their failure to be not systemically important.
Two, had the Fed judged it right, would enhanced prudential standards have caught this? My core point, getting back to the beginning of our conversation, is you didn't need enhanced prudential standards to catch this. It failed basic prudential standards. This isn't a question of whether or not the honors test would have caught you could you have passed the honors test. You shouldn't have passed the remedial test. Now, maybe the honors test would've flagged it sooner, maybe not. We can go back. I think there's already been varying pieces of analysis looking at each debate. The stress tests, which is another element of enhanced prudential standards, which the Fed touted as being a major advance, stopped testing for interest rate risk, I think, in 2015 on an upright scenario.
The third-level analysis is going to be, "Well, it depends which tests you were using. The test that was being used by the Democratic error regulators was tougher. The Republicans weakened the test." It wasn't just a question of whether you had the stronger test, the honor's test. It was this or that. My core point in this conversation is the basic is the basic test should have caught this thing, and I think that the bigger issues here have to do with the core competency of the Federal Reserve as a bank supervisor. We use the term regulation and supervision interchangeably in discourse, but they aren't. They're separable concepts. Regulation are the rules, supervision is the enforcement. I know, Mark, we share a fandom in football, not of the same team, but of the same game. My fandom shrunk as has the value and competence of my team. I've lived-
Mark Zandi: You're the-
Aaron Klein: ... Washington.
Mark Zandi: ... Commanders.
Aaron Klein: Right, so when I was a kid, Washington football was a great organization from head to toe with a great owner and a great coach in Joe Gibbs and won three Super Bowls. Then, we had a horrible owner who's like possibly the worst human being on the planet take over the team in Dan Snyder, and we've suffered through nearly 25 years of misery and disgust. Like I gave up my-
Mark Zandi: Has it been that long?
Aaron Klein: ... ticket.
Mark Zandi: 25 years, wow.
Aaron Klein: Just about. He took the team in like '97, '98. It's complicated when you take ownership and blah, blah, blah [inaudible 01:04:36] died for a while. When you have a bad owner, the toxicity of that franchise from head to toe is revolting, and I don't think I watched... I didn't watch a full game. I don't know if I watched more than 30 minutes. I watch soccer now mostly. My point to you here is in football, there's a rule as to whether or not something's a catch, and sometimes you watch a game and you see a play and you're like, "Oh, God, that's really tough." Two rules experts disagree and like the actual play doesn't comport with the rule book and it's so weird. That's regulation, the rule book. Supervision is the enforcement. It's the referee.
Sometimes the ref just botches the call. The rule isn't the problem. The rule's crystal clear. The ref just made the wrong call. Supervision can't be legislated. Congress can't legislate judgment or competence. They can make the rules and they can decide, "We're going to write the rule or we're going to vive you the discretion. You write the rule." Congress can decide how much of the specifics to fill in the rule and how much discretion to give the experts, the regulator, but they can't legislate competence and judgment, and-
Mark Zandi: In this case, if the old Dodd-Frank rules applied to banks down to 50 billion, that certainly would have helped with the supervision, right?
Aaron Klein: Maybe.
Mark Zandi: Would it? Well, almost by definition because then these banks would have had taken these stress tests that the big guys take every year, they would have taken them [inaudible 01:06:13].
Aaron Klein: The stress tests stopped testing for raising interest rates in 2015.
Mark Zandi: Which, by the way, you're right about that, which I'm so confused about. I mean, when I got the stress test, because we do a lot of work with the banks in helping them in their capital planning and their stress testing, and when I saw the stress test and didn't see an interest rate shock scenario, I was perplexed by that. What do you... That just blew my mind. What do you think? That was [inaudible 01:06:37].
Aaron Klein: I think this gets to the core thing, which is we keep being told over and over again, "Trust the Fed. They're awesome. They're super smart." You raised the point about monetary policy.
Mark Zandi: Oh, okay. Yeah, so-
Aaron Klein: I want to get to that because our time is limited, but-
Mark Zandi: One just-
Aaron Klein: ... [inaudible 01:06:54].
Mark Zandi: ... to nail you down, so you're saying you don't really think it matters is-
Aaron Klein: No, I think it mattered.
Mark Zandi: ... okay.
Aaron Klein: I think it-
Mark Zandi: If Dodd-Frank were rolled [inaudible 01:07:02]-
Aaron Klein: ... mattered.
Mark Zandi: ... yeah.
Aaron Klein: The Dodd-Frank rollback mattered, but-
Mark Zandi: At the end of the day, it's the supervision that really mattered, how well the regulation was implemented or not implemented.
Aaron Klein: If you're saying... Yeah, if you're saying enhanced prudential standards would have helped in the case of Silicon Valley Bank, yes. Would they have necessarily gotten it and had the thing happen sooner? Hard to know. Never know the counterfactual-
Mark Zandi: Yeah, yeah.
Aaron Klein: ... but if you can't pass the remedial test, why are we sitting here arguing whether the honors test should have been applied and should have been written better?
Mark Zandi: Yep. Okay, so let's move to the Fed and let me frame it in this way. The Fed obviously has been aggressively raising interest rates for the past year in an effort to slow growth and bring inflation back down to its target. Those interest rate hikes fundamentally did contribute to the stresses in the banking system, but that's by design. That's how monetary policy works, and one of the channels is it works through the banking system and makes banks more cautious in their lending and that slows economic growth.
Nothing unusual about that, but here we are. The Fed has a meeting next week. The question that is on folks in the market's minds at least is, should the Fed continue on with its rate hikes? Which it would most likely have done if we had not had the events of last week. Or, because of the events of the last week and concerns about financial stability, the ones I've been expressing and you've been expressing, should they pause? No one's quite talking about an interest rate hike being cut at this point, but a lot of discussion around pause. That as a frame, take that wherever you want to go with it.
Aaron Klein: Yeah, so Mark, let me take that in a couple different ways. One is the week before Silicon Valley Bank failed, Chairman Powell went around the Hill. Republicans pressured him to lower bank capital standards and to not be a tougher regulator. Nobody asked him about problems with Silicon Valley Bank. Nobody asked him about financial stability that I can see, and he projected... He didn't raise the issue at all to Congress. That Monday before he spoke, the Chair of the FDIC went out and gave a public presentation to The Institution of International Bankers and said, "There are a lot of unrealized losses on these mortgage-backed securities."
The Chairman of the FDIC is waving the flag on Monday. Powell's not saying a word [inaudible 01:09:32] going around the Hill. Nobody's asking him about it, either. In fact, the questions look pretty bad in retrospect. Now, boo, right? We were talking about the central bank as later and as monetary policy center. There's a thing about institutional management and organizational philosophy that I've been reading which says that all organizations only have one telos, one guiding principle, core, most important thing to the institution.
Mark Zandi: What word did you use? Kilos?
Aaron Klein: Telos. It's Greek.
Mark Zandi: Oh, telos, telos. Telos, yeah.
Aaron Klein: My Greek pronunciation may be poor, but-
Mark Zandi: Yep. Got it.
Aaron Klein: ... my boss and mentor, the late Senator Paul Sarbanes, a proud Greek American who frequently spoke in Greek among some folk and would use Greek words and concepts in the Ancient Greeks. Brilliant, brilliant man, Rhodes Scholar. Just a wonderful, wonderful senator, and I often think, what would he do in this situation? He says an... Telos is the guiding core principle. The Federal Reserve's telos is monetary policy, as well it should be. It can only be... main principle can only be monetary policy and you can only have one.
Now, bank regulation, should that be married in with the central bank? Or are we going to constantly see these problems? We're number one. There's a good Frontline special where Sarah Bloom Raskin, who is a Fed Governor and a Deputy Secretary of the Treasury and a Maryland State Banking Commissioner, said the same thing. Said the number one thing of the Fed is always going to be monetary policy. Bank regulation is this thing hunted aside, and so here we've entered a bizarre situation. Fed Chairman Powell has been trying to prep the markets for an even greater interest rate hike, 50 basis points. You look at the... Was March going to be 25 or 50? If we'd taped this podcast 10 days earlier, that would have been the dominant question, right?
Mark Zandi: Yep. Mm-hmm.
Aaron Klein: Now, you have a system situation where bank instability driven by the failure of the Fed as the supervisor of Silicon Valley Bank to have done the right thing to it a couple years ago as a supervisor and head this thing off, has now interfered with their monetary policy. You can pause rates and be dove-ish. Stock market will go up presumably. There'll be more confidence in banks. The value of the losses of these banks hold on these types of securities will diminish. Is that going to then... What does that mean for inflation? I haven't followed this... Was it the PPI that was due this morning?
Mark Zandi: No, that was yesterday.
Aaron Klein: That was yesterday-
Marisa DiNatale: [inaudible 01:12:33].
Mark Zandi: It was good. Yeah.
Aaron Klein: It was a good number? The number-
Mark Zandi: Was it yesterday or the day before? It might have been the day before. It was [inaudible 01:12:38]-
Marisa DiNatale: Two days ago.
Mark Zandi: Two days ago, yeah.
Aaron Klein: The days during SVB like blur into months.
Mark Zandi: I know, I know.
Aaron Klein: The prior number was bad.
Mark Zandi: Well, the CPI was bad, but within expectations, so really markets didn't react. Now, of course, they-
Aaron Klein: Mark-
Mark Zandi: ... were all focused on-
Aaron Klein: ... but if I'm asking the question, hold aside market, I'm asking the question, is inflation coming down? Is inflation getting under?
Mark Zandi: It's coming down? The question is-
Aaron Klein: Well, but it's-
Mark Zandi: ... is it coming down fast enough?
Aaron Klein: ... statistically coming... Right, it's coming down because of what the numbers that are rolling off 12 months ago, Danny Blanchflower [inaudible 01:13:12].
Mark Zandi: No. Well, that's a whole nother discussion debate, but-
Aaron Klein: The CPI number was not great. Right?
Mark Zandi: Well, let's put it this way. If not for SFB and SVB in the last week, the Fed would have raised at least a quarter point, probably maybe 50, but now the question is given... There's real economic consequence to what's going on now. I mean, look, the financial conditions here are going to tighten. The banking system is going to become more cautious. Yes, you have some benefit from the lower interest rates, but they're not down that much for... They're down for treasuries, but they're not down for mortgages. They're not down for corporates. The actual borrowing rates haven't really come down that much.
The net of all of that is probably a meaningful drag on economic growth, which would be disinflationary. In that... Of course, there's a lot of uncertainty. Who the hell knows what's going to happen next? How much financial stability there will remain? What's the fallout of that going to be? Those things would argue, "Hey, Fed, just why don't you take a break? Pause, take a look around. If the system stabilizes and you get another strong job number and CPI number, you always got the May meeting six weeks from now. Start raising rates again and fight inflation." That would be my argument, but-
Aaron Klein: Mark, you're saying that, and I've been very critical of the Fed. I'm not a conspiratist, but I've been critical of their job as a bank supervisor. We haven't even talked about their holding company regulation and what was going on with the venture capital fund of Silicon Valley Bank. Something to a different podcast, but I think could be the next shoe to drop-
Mark Zandi: Oh-
Aaron Klein: ... in this [inaudible 01:14:50].
Mark Zandi: ... then, we're definitely having another podcast [inaudible 01:14:52] that with the Federal Home Loan Banks, we got to have you back number four. Yeah.
Aaron Klein: Yeah, you should have Kate Judge and Con Hurley join that one because-
Mark Zandi: Oh-
Aaron Klein: ... they're really [inaudible 01:15:02]-
Mark Zandi: ... yeah, yeah, yeah, yeah. That would make for a real interesting podcast.
Aaron Klein: Yeah, yeah. Kate, they're really good. Or Mark Calabria, they're former [inaudible 01:15:08].
Mark Zandi: Yeah. Karen Petro.
Aaron Klein: Yeah. Oh, Karen's great. The point here you're saying is this banking earthquake, it's not a tremor, it's a quake.
Mark Zandi: It's a quake. Yeah.
Aaron Klein: Yeah. This quake is going to be disinflationary.
Mark Zandi: All else being equal, yeah.
Aaron Klein: Even though interest rates have fallen for treasuries, the drag on economic growth as a result because there is a macroeconomic point and you made the point about working people and I think laser-like on working people. I made a comment, I didn't finish it, that the payroll disruptions, we got sidetracked on how big that was. Somebody missed their paycheck on Friday because of this. It was reported. A coffee shop that I go to in D.C., Compass Coffee, not as good as Bump 'n Grind in Silver Spring, but still when you're in D.C., you got to get-
Mark Zandi: Or Wawa. Wawa, my friend.
Aaron Klein: Wawa's strong. I love the Wa, but the point here is they said they had problems making paycheck. Did one of their employees get an overdraft over the weekend because their paycheck didn't come through on Friday? Overdraft is a huge business, a huge punitive cost. It doesn't cost a bank 35 bucks to give you money to cover your overdraft when your bank, when you're payer doesn't come through. They didn't suspend overdrafts over the weekend. Peter Thiel got all 50 million of his dollars guaranteed, but somebody is eating an overdraft because their company didn't make payment because of SVB and the regulators, right?
Mark Zandi: Yeah.
Aaron Klein: We've had a failure to focus on working people and protecting working people while we're running around making sure that Peter Thiel has access to all 50 million bucks immediately, not two-thirds of his 50 million bucks, with a potential-
Mark Zandi: Well-
Aaron Klein: ... small haircut for having an uninsured deposit. By the way, rumors also that Thiel encouraged his-
Mark Zandi: Yep.
Aaron Klein: ... company to yank their money causing the run. I'm not blaming the companies that yanked it. I'm just simply pointing out that if you're [inaudible 01:17:12]-
Mark Zandi: Back to monetary policy, I mean, I hear you. Yeah, but back to monetary policy.
Aaron Klein: Back to monetary policy, I have no problem with the pause.
Mark Zandi: Pause.
Aaron Klein: I've often thought that is raising... Are raising rates attacking the root cause of inflation? Or is the root cause of inflation a supply shock as it relates to COVID, as it relates to energy? Right? Monetary policy works to curb inflation far better on demand shocks than supply shocks.
Mark Zandi: Yep.
Aaron Klein: If you believe as I prior to SVB, that supply shocks were more at the root cause of inflation than demand, then the impact of rising rates is less influential on... I'm trying to be intellectually-
Mark Zandi: [inaudible 01:18:06].
Aaron Klein: ... consistent and stick with [inaudible 01:18:07]-
Mark Zandi: No, no, I'm with you.
Aaron Klein: ... my priors from March 1. That would be where you... Coming on your podcast is tough, man. You really get you down to, you know [inaudible 01:18:15]-
Mark Zandi: Well, you know why, Aaron? It's just in our DNA because we have to actually put pen to paper, create numbers, put it in a database. Clients use it and then they come back and say, "Well, why was it 3.45678, not 3.54678?" We're down to brass tacks here, but this was fantastic. We're going to have to call it quits because I know you're incredibly busy and you've spent well over an hour with us. Thank you, and we didn't even get to a bunch of the other debates, but we will definitely have you back, and-
Aaron Klein: [inaudible 01:18:52].
Mark Zandi: ... I do want to have you back for that Federal Home Loan Bank discussion and any other risk you see out there. Well, that was a great podcast. I want to thank everyone for listening in.
I do want to mention that it was obviously a busy week and I was on two other podcasts you might want to tune into. The first is The Big Picture. That's another Moody's Talks Podcast that we went into depth with Bill Foster on the debt limit issue. Bill is the analyst in the rating agency that rates the U.S. government debt and I think you'll find that very interesting. In the Bubble Podcast with Andy Slavitt, I was on with Justin Wolfers and Ben Eisen of The Wall Street Journal, and we were obviously talking about recent events in the banking system. Those are two other podcasts that you might find of some value. With that, dear listener, we're going to call this a podcast. Talk to you next week.