How This Financial Crisis is Different Than 2008

The Weekly Recap

Existing home sales rose 14.5% in February as prices drop nationwide for the first time since 2012. The Fed in their infinite wisdom raised rates again by another 25 bps and anticipates at least one more increase this year followed by no rate cuts at all following banking turmoil. UBS is acquiring Credit Suisse for $3.25B, that's almost 90% off the stocks high. A whole lot of former SVB clients moved over their business to JPMorgan. Janet Yellen ruled out a blanket insurance on bank deposits, investors are worried about a credit crisis and its been 1 2 3 4 5 6 7 8 days since the last bank went belly up.

How This Financial Crisis is Different Than 2008

Every aspect of life is cyclical and sometimes history likes to repeat itself. Its when the lazy comparisons begin to happen that fear gets created and we have a harder time drawing accurate parallels or in this case, a distinct differentiation between one of the worst economic periods in modern time being 2008 and what has transpired over the last two weeks. Much about the last few weeks has felt like the 2008 financial crisis but there are crucial differences that lower the risk of this episode than 15 years ago.

In a nutshell, the 2008 crisis was predicated on a series of institutions either failing or being bailed out because they owned all kinds of complex securities, particularly backed by home mortgages, that turned out to be far less valuable than advertised.

This time around, the core issue is not bad loans. It is the Federal Reserves rapid tightening that created paper losses for banks that made loans or bought long-term bonds when rates were much lower, which prompted depositors to pull money out, causing forced selling that turns paper losses into real ones.

The big three differences are that:

Firstly- what made the 2008 crisis so tough was that many losses took place in the unregulated or lightly regulated corners of the banking system. By contrast, this time round, traditional banks have an infrastructure of deposit insurance, access to emergency Fed lending and oversight.

Secondly- the post crisis reforms contained in the Dodd-Frank Act really did change major aspects on banking, most importantly that capital ratios are way higher now than in 2008 which gives the largest banks greater financial cushion. Regulators also have more latitude to resolve even a large failed bank to prevent chaotic situation like Lehman. This makes it even more outstanding that the Frank of Dodd-Frank sat on the board at Signature Bank.

Thirdly- and most importantly, problems now should have less risk of feeding on themselves. If the economy starts to falter due to a credit crunch, the Fed would likely start to cut rates which would ease pressure on bank balance sheets. In 2008, we experienced a self-accelerating cycle rather than a self-correcting one because bad mortgages soured and slowed the economy and then weakened economic growth caused more mortgage defaults.

Candidly, the Fed and the Treasury are completely full of it when they say that the rescue of depositors money at SVB, Signature Bank and increasingly looking more like First Republic as well, is not a bailout. It absolutely is. Throwing money at institutions is a form of QE or quantitative easing, which has been the major reason behind why the Fed has been fighting tooth and nail in convincing us that raising rates, also known as quantitative tightening, occurring at record levels is the only way to fight inflation. It is frustrating to watch the federal government take 2 steps back in the fight against increasing inflation. With news coming out of the latest Fed meeting that the rate at which rates are increasing is over and that we may be due one more rate hike is welcome news, although the rate hikes are what got us here, alongside a failure to manage risk properly.

Market Performance

Here are how some other asset classes performed this week as of this mornings opening bell.

NYC Market Update

Here is a week over week view of new inventory that has come onto the NYC market as well as newly signed contracts that have taken place as of 3/23/23.

Mortgage Rate Update

Mortgage rates continued to slide down as financial market concerns came to the fore over the last to weeks. However, on the homebuyer front, the news is more positive with improved purchase demand and stabilizing home prices. If mortgage rates continue to slide over the next few weeks, look for a continued rebound during the weeks of the spring home-buying season.

News You Can Use

• Home Sales Spike 14.5% in February and Median Price Drops for First Time in a Decade CNBC

• Credit Crisis Surges to Top of Investor List of Worries Financial Times

• Banks Still Drawing on the Fed For Emergency Cash Bloomberg

• Fed Hikes Rates By a Quarter Point, Indicates Increases Are Near an End CNBC

• Fed Raises Rates But Nods to Greater Uncertainty After Banking Stress WSJ

• Yellen Says US Prepared to Take More Action to Keep Deposits Safe Reuters

• First Republic Bank Rescue May Rely on US Backing to Reach a Deal Bloomberg

• UBS Got Credit Suisse For Almost Nothing Bloomberg

• JPMorgan Scooped Up Most of Silicon Valley Bank's Fleeing Customers NY Post

• How Bitcoin Is Benefiting from the Banking Crisis Fox Business

• Apollo's Slok Says Bank Crisis Will Tip Into a Hard Landing Bloomberg

• Here's What Changed In the New Fed Statement CNBC

• Financial Psychology and Bank Runs CNBC

• UBS to Take Over Credit Suisse, Assume Up to 5 Billion Swiss Francs in Losses Reuters

• Why More Deals Are Likely After the Fall of Credit Suisse NYT

• Bank of England Weighs Up Ending its Rate Hike Run Reuters

• Fed Raised Concerns About SVB's Risk Management in 2019 WSJ

• Small Bank Struggles Could Hit the Real Estate Market Hard Axios

• Switzerland Puts Up 260 Billion Francs for Credit Suisse Rescue Reuters

• Spring Break Travel Expected to Top Pre-Pandemic Levels Axios

The Deep Insight

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