Category: Socializing Losses

The Bridge Collapse Will Mean More Socialized Losses

The Daily Escape:

Ceanothus, Black Mountain Preserve, San Diego, CA – March 2024 photo by Michelle Duong

Everyone knows about the cargo ship MV Dali that struck the Francis Scott Key Bridge (FSK) in Baltimore, causing it to completely collapse into the frigid Patapsco River. Currently, we know that six people are presumed dead, while two people were recovered alive. Let’s talk about the ways capitalism figures into the FSK bridge collapse.

The BBC reports that:

“The America Pilot’s Association provided details on the ship that crashed into the Baltimore bridge. The association says the ship lost full power, with no lights, no electronics and no engine propulsion, making it essentially a “dead ship” within 20 to 30 seconds. The group says lights came back on in the ship thanks to an emergency generator, but that doesn’t give the engine power. Video shows lights flicker back on briefly before the vessel hits the bridge.”

There are backup generators on ships because power can fail at critical times. In the case of the MV Dali, it has one propeller driven by one engine. The fuel and steering systems of the ship require electricity to function.It is believed that the Dali had 3-4 backup generators, but did they function as designed?

Wrongo knows from his experience with backup generators in the commercial world that they don’t start up instantaneously. It might take them 30-60 seconds to start and longer to come up to full power to restore control of the ship. Without electric power, both the navigation and the steering systems would have been disabled in the critical minutes prior to the collision. No one on the ground in the Port of Baltimore performs testing to see if the MV Dali’s back-up generators are working properly. Why? Because it would be very costly to do.

There are several other factors unique to shipping that will make it difficult for Maryland or US taxpayers to collect enough to cover all of Maryland’s costs from the ownership of the MV Dali. From VOX:

“The Dali was a Singapore-flagged ship, with an all Indian-nationality crew, operated by the Danish company Maersk….”

This organization structure, dividing ownership and operations, is a classic method used in shipping to limit liability when bad things happen, like when your vessel knocks down a bridge in a foreign country.

Cargo ships have become exponentially bigger while US bridges have been aging. When the Francis Scott Key Bridge was being built between 1972 and 1977 the average container ship carried between 500-800 twenty-foot shipping containers (called TEUs). But they ballooned to an average of 4,000 TEUs by 1985. The MV Dali, manufactured in 2015, had a capacity of 10,000 TEUs. According to bridge experts, no bridge pylon could have survived being hit by a vessel of this size.

This continuous upsizing has pitted US ports against each other in order to attract bigger vessels. The 2016 expansion of the Panama Canal caused ports along the US East Coast to dredge their harbors and build higher bridges to accommodate the larger ships now traveling through the Canal.

Back in 2015, Wrongo wrote about the upsizing of US bridges:

“Consider NJ, where, at high tide, 151 feet of empty air lies between the waters of the Kill Van Kull and the deck of the Bayonne Bridge. The Kill, a narrow tidal strait between Staten Island, NY and Bayonne, NJ, is one of the busiest shipping channels in the country. When the Bayonne Bridge opened in 1931,151 feet easily accommodated the world’s largest vessels. But the new ships won’t fit, so, the roadway will be elevated…to 215 feet, more than enough to let these big ships pass underneath. The five-year Bayonne Bridge project costs $1.3 billion.”

This imposed costs on NJ taxpayers beyond what it should have, because then-Gov. Christie (R), signed a bill that ended the collection of any cargo facility charge by the Port Authority of New York and New Jersey. Christie was attempting to offer something to ship owners and operators that would make Bayonne more competitive vs other US ports.

So the taxpayers of NY & NJ not only paid for allowing the bigger Panamax ships under the Bayonne Bridge, but no ocean-going vessel had ANY stake in paying the costs of that bridge expansion. Instead, NJ turned to a “Public-Private Partnership” to finance this project.

The Port of Baltimore also expanded to accommodate supersized ships in 2013, but it didn’t need to raise the height of the FSK bridge. Since then, it has grown into the 9th-busiest port for receiving foreign cargo. The Port of Baltimore is the largest in the US for roll-on/roll-off (Ro-Ro) ships carrying trucks and trailers.

Meanwhile, the FSK bridge has remained largely unchanged since the 1970s. From 1960 to 2015, there were 35 major bridge collapses worldwide due to ship or barge collisions, 18 of which happened in the US.

There are now about thirty ships stranded in the Harbor. They will stay there until the damaged bridge remains are removed from the ship channel. That includes container ships, Ro-Ro ships, and bulk carriers. There are also three US Naval ships stranded there. The collapse is almost sure to create a logistical nightmare for months, if not years along the East Coast. The accident will also snarl cargo and commuter traffic.

And who will pay the costs to repair the bridge, or compensate the people who died, or cover the lost revenues for the many years it will take to rebuild the bridge? Or the tax receipts that Baltimore won’t be in a position to charge while the port is closed?

According to Business Insider, the majority of the financial fallout is likely to lay primarily with the insurance industry:

“Industry experts told the FT that insurers could pay out losses for bridge damage, port disruption, and any loss of life. The collapse could drive “one of the largest claims ever to hit the marine (re)insurance market…”

The Dali is covered by the Britannia Steam Ship Insurance Association Ltd., known as Britannia P&I Club, according to S&P Global Market Intelligence. Britannia is one of 12 mutual insurers included in the International Group of P&I Clubs, which maintains more than $3 billion of reinsurance cover. Although the ship’s owner and it’s operator have insurance, their policies will in no way cover the all-in costs of this event.

Some are saying that this is a “black Swan” event. But this is almost certainly the result of operational pressure for more containers, faster turnaround, and more profit. The ship owners have traded reliability for economy. Unless we force the container trade to transition to more reliable and more costly vessels, we’ll continue to see events like this every few years.

That’s the price of cheap goods in our stores and of the profits it generates for ship owners.

Once again, the losses will be socialized, and the US taxpayer will be gouged again, all in service to our capitalist overlords who will laugh all the way to the bank. Wrongo certainly isn’t a Marxist, but Marx was absolutely right when he said that capitalism contained the seeds of its own destruction.

Why is it that no legislator is willing to consider the costs of externalities (a cost that is caused by one party but financially incurred by another) to its taxpayers when they approve partnering with big industry?

Are the tax revenues in Baltimore going to be enough to cover the costs to all US taxpayers when the US government rebuilds the FSK bridge? They will not. You know they’ll be minuscule compared to the real costs.

And the big shipping players will sail off towards the horizon with hardly a financial scratch.

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Can Biden’s Union Roots Help Him In 2024?

The Daily Escape:

Red Mountain, San Juan Mountains, CO – September 2023 photo by Daniel Forster Photography

The “the biggest auto strike in generations” got under way last week, with 150,000 US autoworkers, including employees at Ford, Stellantis and General Motors walking off the job after contract negotiations failed to reach a deal. This strike, coupled with the likely government shutdown at the end of the month, will precipitate a very dangerous moment for the Biden administration.

From The Guardian:

“The United Auto Workers (UAW) union says workers have never been fully compensated for the sacrifices they made after the 2008-09 financial crisis, when they agreed to a raft of cuts to save the industry. The carmakers received huge bailouts and soon returned to record profits.”

The WaPo had a good article asking workers why they are striking. Most cited inflation and fairness:

“We’re not making enough money” said Petrun Williams, a 58 year-old Ford repairman. “People should be able to buy their own houses, but right now it’s not possible.”

This is going to be a difficult problem to tackle, because GM, Ford, and Stellantis are wildly inefficient giant bureaucracies with cost structures optimized to make $75,000 trucks, and their move into Electric Vehicles will take a lot of money and time before it pays off.

But the Biden administration isn’t necessarily helping: (Brackets by Wrongo)

“…Biden…is in a tough spot with the United Auto Workers….Through its industrial policies,…[Biden]…is giving away billions to automakers through production tax credits and loans, while supporting the transition to electric vehicles through consumer rebates and funds for charging infrastructure. Biden has promised that those incentives will lead not only to carbon emissions reductions but also good-paying union jobs.”

But the UAW leadership isn’t buying it. As the UAW goes on strike, their members don’t necessarily support Biden, but that doesn’t necessarily mean they support Trump either. Politico asked striking members if Biden had done enough to prevent the strike. They talked to Garry Quirk, the president of the local UAW union in Kokomo, IA:

“I don’t know what he’s done…Ask him. I don’t think he knows what he’s done. Seriously. I’m not trying to be mean.”

Quirk wasn’t freelancing: Fain and the union haven’t yet endorsed Biden’s reelection, throwing into doubt Biden’s standing in autoworker-heavy communities. But Politico reported that Biden had spoken that day with UAW president Shawn Fain and auto company CEOs. The chair of Biden’s Council of Economic Advisers said this week that Biden had been very much engaged.

But his efforts didn’t resonate with union member Denny Butler:

“Historically, man, if you didn’t vote Democrat years ago, and you were in the union, sometimes you got your ass kicked…I’m telling you what, the Democratic Party is not what it was 20, 30 years ago.”

So this is another Politico story about Obama voters becoming Trump voters and not looking back.

What Biden is fighting is the sense that the Democratic Party has not been truly on the side of union workers for a long time. It is true that today the Democrats are more on the side of unions. Neoliberalism is not nearly as powerful in the Democratic Party as it was during Obama’s time, or earlier.

But perceptions can be sticky. Clinton, Carter, and Obama (especially in the first term) all promoted corporate policies over the unions. Workers got screwed as factories closed, and no one offered much to workers beyond retraining programs that they didn’t want, and for the most part, didn’t lead to better jobs.

If you said that Republicans (including Mitt Romney) were no better, you’re correct. But today’s Republican Party offers a way to channel anger and resentment. Union members can opt for the GOP path even if the GOP doesn’t have the union’s interests in mind.

Despite Obama (and Biden) saving autoworker jobs through the 2009 auto bailout, they did little to hold the auto companies accountable. They allowed the expansion of two-tiered wage rates that the union is still fighting during the current strike.

The perception is that the UAW shrank and sacrificed, while the auto industry leadership got richer.  Biden absolutely cares about unions, but he’s fighting against decades of belief that the Democrats aren’t what they used to be.

And no matter what Biden does, it’s going to be hard to get by that perception. There’s a mixture of anger and nostalgia that sticks in the minds of people who don’t really pay attention to the details of politics. Let’s take a look at the price of cars over the last ten years:

The Big Three automakers reported $21 billion in profits in just the first six months of 2023. Despite these enormous gains, the companies have cried poverty in response to union demands for wage increases that would make up for decades of pay stagnation. Worse, during the last year, the Big Three automakers have authorized $5 billion in stock buybacks, effectively giving those dollars to shareholders instead of to autoworkers.

The Economist had an excellent observation (paywalled):

“Late last year I took a trip…in a shiny new vehicle, Ford’s electric F-150. The car is in some ways an avatar for today’s Democratic Party. Joe Biden’s administration likes things that are made in America by union labor. It also wants to speed up the transition away from fossil fuels. The F-150 car ticks both boxes. It is also a high-end item that markets itself as a vehicle for working Americans.”

More:

“That’s a bit like the Democratic Party too…with each passing election Democrats lose votes among actual working-class Americans and gain them with college-educated ones (some of whom can actually afford a $75,000 truck).”

More:

“When we talked to a…UAW…representative near Detroit, it became clear the unionized workers are lukewarm on the green transition. Electric vehicles are less labor-intensive than cars powered by internal combustion, which is bad for the UAW members. In fact that is one reason why the union went on strike today. College-educated liberals, on the other hand, like electric vehicles a lot.”

Apparently union members see the problem much more clearly than the Biden Administration.

There could be a settlement reached between the unions and the companies at any moment, but it feels like this will be a protracted situation: If the UAW workers get the 40% pay increase they are asking for, they probably would learn to accept electric vehicles. Don’t hold your breath.

Biden’s relationship with America’s unions is deep and personal, but the next few months are really about his political strategy. And they’re an example of how the Democrats are always trying to balance competing aims.

Time to wake up America! Will Biden continue pursuing his environmental policies and risk losing even more support among working-class Americans? Or will he pump the brakes on environmentalism and alienate upscale Democrats? Biden won only 33% of white, non-college voters in 2020, so maybe that’s where his opportunity to expand his base in 2024 lies. But does Biden really have a path to take back more non-college voters?

To help you wake up, watch and listen to a recent version of the union anthem “Solidarity Forever”, written by Ralph Chaplin in 1915. Although it was written for the Industrial Workers of the World (IWW), the AFL–CIO have adopted the song as their own. Here it is sung in the Wisconsin capitol building in September 2011, by demonstrators who opposed then Governor Scott Walker’s “Wisconsin Budget Repair bill.”

The bill proposed to alleviate the state’s budget shortfall by taking away the ability of public sector unions to bargain collectively over pensions and health care, as well as ending automatic union dues collection by the state. Walker stated that without the cuts, thousands of state workers would have to be laid off.  After two days of arrests for “holding signs” on the first floor of the Wisconsin State Capitol, the Solidarity Sing Along took to the rotunda in joyful defiance:

The law passed and remains in effect today.

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Monday Wake Up Call – July 17, 2023

The Daily Escape:

Comb Ridge, UT & AZ – July 2023 photo by RC Bullough Photography

Wrongo and Ms. Right were urban pioneers in NYC in the early 1980s. We rented a loft on Maiden Lane in the financial district. Back then, we had to go uptown or to Hoboken, NJ for groceries because there were so few people living amongst the downtown forest of office towers.

But by the 2020 census, lower Manhattan was the fourth fastest-growing residential neighborhood in NYC. Since the pandemic, downtowns have looked more like the ghost towns of the 1980s with so many workers adapting to remote work. And they seem to be staying away.

Things are going to get interesting. We may be at the beginning of a massive structural change, not just a temporary blip impacting office towers: It seems that companies have figured out they won’t ever need this vast amount of vacant office space. Brookings says that office utilization averages less than 50% across major US downtowns. While The Gothamist reports that national office vacancies are at a high of 19.2% (compared to 12.6% in early 2020). They also report that McKinsey predicts that remote work will erase $800 billion from urban office real estate values.

This has many cities thinking about conversion of office space into residential space. In NYC, 25 Water Street, which was once home to the Daily News and JPMorgan Chase, has a plan to gut the offices, carve out courtyards and add 10 floors to the 22-story structure. GFP Real Estate and Metro Loft bought the building, formerly known as 4 New York Plaza, in December for about $250 million.

One loophole is that the Financial District doesn’t require that the conversions include any affordable housing. So this project will not have any apartments with capped rents for low-income units. That isn’t true in other parts of the City, like Midtown, Queens or the Bronx.

Boston is testing an incentive program for developers to convert empty downtown offices into housing. Mayor Michelle Wu announced that the owners of repurposed buildings could get up to 75% off on their property taxes. Boston’s office market vacancy rate climbed to 14.2% in the second quarter, the highest level in 20 years, according to data from CBRE Group Inc. And median monthly rent for a one-bedroom apartment has jumped 8% in the past year to $2,800.

Boston’s downtown has about half of the city’s office space. An October 2022 report commissioned by the city found that economic activity downtown remained 20% to 40% below pre-pandemic levels for industries like retail.

Back in NYC, Mayor Eric Adams is also proposing incentives to designate 136 million square feet of office space for conversion to residential development. It’s worked before: A 1995 tax break for conversions helped create 13,000 new apartment units in Lower Manhattan.

Brookings raises the question of what the taxpayers’ interest should be in these conversions:

“To what extent are current high office vacancies a market problem whose burden falls on the private sector (property owners and investors) and to what extent do they represent a market failure and policy problem to which government must respond with financial support from the public?”

The advocates of tax breaks and other financial incentives say it will:

  • Help drive foot traffic to downtown businesses struggling from a lack of commuters.
  • Bolster municipal coffers, as cities often rely on property taxes from office buildings.
  • Supply much-needed housing amid a shortage that has many paying exorbitant rents.

It seems that office-to-home conversions are no more a comprehensive remedy for housing than e-bikes are for transit issues. Few office buildings are truly suited for conversion. It’s often more straightforward for developers to knock down the existing structure and build condos from scratch.

Moreover, the best thing that cities can do to encourage more housing is to loosen zoning restrictions, allowing multi-use and apartment buildings to be developed rather than just supply tax breaks.

The battle lines are drawn. The 25 Water St. developer said state and city lawmakers will have to pay up if they actually want to turn vacant offices into homes:

“The politicians, if they want to create housing in New York City out of these buildings, they will need to provide significant incentives….And if they want to provide affordable housing, those incentives would have to be even higher.”

Time to wake up America! We can’t let our mayors give away more tax revenues to developers! We’re unsure if the current rate of office utilization will improve or not, so cities need to be smart about what they do next. To help you wake up, we dust off an oldie. Here are the Rolling Stones with “Salt of the Earth” from their album “Beggars Banquet”. Performed live at the Rolling Stones Rock and Roll Circus in 1968. This was the first tune where Keith Richards had the lead vocal:

Sample Lyric:

Raise your glass to the hard-working people
Let’s drink to the uncounted heads
Let’s think of the wavering millions
who need leaders but get gamblers instead

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Saturday Soother – May 20, 2023

The Daily Escape:

Daffodils, Laurel Ridge, Litchfield CT – May 2023 photo by Dave King

The oil industry enjoys special economic status in the US. That is demonstrated by the tax breaks and outright subsidies we give them. Hannah Dunlevy notes that:

“In 2020, the explicit and implicit fossil fuel subsidies cost the United States $662 billion, around $2,006 per capita. Cutting just two tax breaks for the fossil fuel industry — the intangible drilling costs subsidy and the percentage depletion tax break — could generate $17.9 billion in government revenue over ten years, according to Congress’s non-partisan Joint Committee on Taxation.”

Biden’s fiscal year 2024 budget proposed cutting some of tax subsidies for oil and gas companies, which would save the US $31 billion over ten years. It will probably not survive the current Debt Ceiling and budget discussions.

One hidden subsidy that the oil industry enjoys is when wells are no longer productive – they are idled. If it’s no longer profitable to return idled wells to production, they need to be plugged. And the cost of plugging a well can be $100,000 or more.

The problem is that when wells start to decline, they are sold by Big Oil to smaller producers. When the well is sold, the plugging and cleanup liability passes to the new buyer. And often, the new buyer simply walks away from the uneconomic well, creating what the industry calls “orphaned wells”. But if a company doesn’t plug its wells before walking away, the cleanup costs will ultimately fall to taxpayers and current operators.

This has already happened with thousands of wells in California and may happen to millions more across the country. Pro Publica reports that there are more than two million unplugged oil wells scattered across the US. California is just the tip of the iceberg.

Petroleum reservoir engineer Dwayne Purvis laid out the reality at a recent conference. His research shows that more than 90% of the country’s unplugged wells are either idle or minimally producing and unlikely to make a comeback.

California is the canary in a coal mine. Shell and ExxonMobil recently agreed to sell more than 23,000 California wells which they owned through a joint venture, to a German asset management group IKAV for an estimated $4 billion. This means that a subsidiary of IKAV now owns about a quarter of California’s oil and gas production, largely in Kern and Ventura counties.

This ownership shift moves the subsequent environmental liability from Big Oil powerhouses to firms with smaller capitalization, increasing the risk that aging wells will be left orphaned, unplugged and leaking oil, brine and methane. For California and other states, this could repeat what was seen in coal mining, which led to taxpayers bearing all of the cleanup costs.

The oil industry has created layers of LLCs that are used to screen Big Oil from the dirty end of the oil business, like responsibility for cleaning up the messes that they make. And these firms can easily declare bankruptcy rather than pay for cleaning up orphan or idle wells.

ProPublica reports on an analysis by Carbon Tracker Initiative, a financial think tank that used the California regulators’ draft methodology for calculating the costs associated with plugging oil and gas wells and decommissioning them along with their related infrastructure.

The cost categories included plugging wells, dismantling surface infrastructure and decontaminating polluted drilling sites. That would cost California about $13.2 billion. Adding inflation and the price of decommissioning miles of pipeline could bring the total cleanup bill to $21.5 billion.

Meanwhile, Purvis estimates that California oil and gas production will earn only about $6.3 billion in future profits over the remaining course of operations; nowhere near sufficient to pay for the cleanup, even if those profits could be captured by the state.

That’s just California. These costs are what economists call “Externalities”. An externality is an indirect cost (or benefit) to a party (taxpayers) that arises as an effect of another party’s (Oil Companies) economic activity. The problem is that the price of their product doesn’t include the externalities. That means there is a gap between the profit of these corporations and the aggregate loss to society as a whole.

Republicans have a tried and true solution for this problem. Taxpayers pay the bills. We’re back to the “privatize profit, socialize the losses” game that corporations have played forever. Maybe the correct terminology should be socialism for the rich.

They prefer to call it keeping government off the backs of job creators.

Time to let go of California’s messy problem and find a few minutes to center ourselves before next week which will bring either financial Armageddon, or a diminished Biden. At the Fields of Wrong, we had a freeze last Wednesday that caused us to cover the newly planted vegetables and bring the Meyer Lemon tree indoors. Spring in Connecticut can always show up with a backtracking nod towards winter.

But on this rainy Saturday, grab a chair by a big window and listen to Debussy’s “Nuages” (‘Clouds’) from his “Trois Nocturnes”. Leopold Stokowski and the Philadelphia Orchestra made the first American recording of Debussy’s “Three Nocturnes” for a 1950 LP.

Here is the first “Nocturne”, a musical impression of slow-moving clouds:

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Sunday Cartoon Blogging – March 26, 2023

TikTok’s CEO testified before the House Energy and Commerce Committee last week. He wasn’t well received. The main focus of your Congress critters was how TikTok could be weaponized against Americans through data surveillance and/or algorithm manipulation.

TikTok is used by about 150 million Americans. It may (or may not) be owned or controlled by the Chinese government. Given what we know about how American Big Tech abuses your data, and how China embraces surveillance as a tool of social control, it’s common sense to ask questions about how best to guard against TikTok’s misuse.

TikTok could be used to collect information on American citizens. But if TikTok was banned, that wouldn’t protect the privacy of American citizens. Many other companies are already collecting that information and are willing to sell it to any buyer.

The only thing that could protect the privacy of American citizens is a law preventing anyone from collecting that information: A law that would restrict all companies’ capacity to collect data on Americans, not simply TikTok’s.

A final argument made in Congress is that TikTok could be used to promote Chinese propaganda. It could; but is our government in the business of protecting us from a free flow of ideas? If America is still a democracy, people should be free to promote or listen to any kind of speech. That is the very essence of free speech. On to cartoons.

Why hammer only the Chinese?

The hypocrisy by Silicon Valley entrepreneurs after the bank failure was breathtaking:

Tranny vs. tyranny. GOP knows what it hates:

Stormy weather ahead:

More hypocrisy by Republicans:

Woke or witch, it’s all the same:

Vlady isn’t into upsets:

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Final Thoughts On The SVB Situation

The Daily Escape:

Spring wildflowers, Four Peaks Wilderness, AZ – March 2023 photo by Chris Flores

(This will be the final column for this week as Wrongo and Ms. Right are heading to CA for the Napa Valley wedding of granddaughter Nicole. Columns will resume on 3/23)

Several readers commented on how Silicon Valley Bank’s (SVB) major problem went beyond Wrongo’s discussion of asset management. They’re all former bankers and former colleagues of Wrongo, and they rightly brought up liability management as a key contributor to SVB’s problem.

For banks, the deposits that people make are the bank’s liabilities. The essence of banking is borrowing short term (deposits, overnight borrowings and medium term borrowings) in order to lend that money out for a longer term (mortgages, long term loans or, investments in bonds and long dated US treasuries). The difference between what they pay on their liabilities and what they earn on their loans and investments (the spread) is how banks make their profits.

SVB had little risk that their loans wouldn’t be eventually paid back (credit risk), but they did have substantial interest rate risk if rates went up. That included the risk that the face value of the bonds they invested in would decline in value in higher interest rate scenarios.

This is a well-known challenge for all banks. They try to maintain enough of their assets in easily sold investments so if there’s an unforeseen need to pay out cash to depositors, they can meet that need. The bigger the expected (or unexpected) cash need, the more assets the bank must hold that are easily converted to cash.

It wasn’t a surprise to the banking industry that the Federal Reserve (Fed) was raising rates; Chair Powell clearly said they were going to do that until inflation was under control. Basic liability management principles should have told SVB to move to hedge the risks in a rising rate environment by investing more in very short term (near cash) assets. But SVB didn’t. Maybe they thought they knew better.

SVB isn’t alone. The Fed raised interest rates quickly and sharply during 2022, so the face value of bonds fell. According to the FDIC, US banks were sitting on $620 billion in unrealized losses (assets that had decreased in market value but were still on their books at purchase price) at the end of 2022.

Of that amount, Bank of America alone had unrealized losses of around $114 billion, or 18% of the total.

A major risk that the banks didn’t correctly anticipate was the effect of huge cash injections into the economy during the pandemic, along with a prolonged period of historically low interest rates that predated the pandemic. That had ripple effects on all banks. According to Marc Rubinstein:

“Between the end of 2019 and the first quarter of 2022, deposits at US banks rose by $5.4 trillion. With loan demand weak, only around 15% of that volume was channeled towards loans; the rest was invested in securities portfolios or kept as cash.”

Then came the Fed’s rapid rise in interest rates. From FDIC Chairman Martin Gruenberg:

“The current interest rate environment has had dramatic effects on the profitability and risk profile of banks’ funding and investment strategies….Unrealized losses weaken a bank’s future ability to meet unexpected liquidity needs,”

Banks do not continually adjust the value of their bond portfolio to market. So their unrealized losses can be difficult for an outsider to see. It also means banks find that selling parts of the portfolio will bring in less cash than they may need, because the securities are worth less in the market than they originally paid for them. That happened to SVB.

From Michael Batnick at Irrelevant Investor:

“Without the pandemic, rates are not at zero for two years. Without the pandemic, $638 billion does not go into venture capital. Without the pandemic, rates don’t go from 0% to 4.5% in a year. And without the pandemic, we wouldn’t be talking about a run on the bank.”

So there’s plenty of blame to go around. The SVB management surely failed: More Treasury bills and fewer bonds would have helped, that’s for sure. They had to know that their customer base, which was concentrated in start-ups, were hemorrhaging cash. They knew that they had unrealized losses in their bond portfolio. Shouldn’t they have shortened their asset mix?

Should we blame the regulators or SVB’s auditors? KPMG gave them a clean bill of health just a few weeks before they went belly up. You would think KPMG should have seen what was coming. And the Fed just announced that they are leading a review of “the supervision and regulation of Silicon Valley Bank in light of its failure.”

For SVB, the government drastically changed its policy about insured deposits. Had SVB been “The Bank of Depositors With No Political Clout”, you can bet that the $250,000 insured deposit limit would have been enforced. And depositors with larger deposits would have had to wait for their money.

But, the exception was made, and now, it will certainly happen again. Ben Carlson says it best:

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Another Bank Bailout!

The Daily Escape:

Pronghorn in Las Cienegas National Conservation Area, AZ  – March 2023 photo by Alan Nyiri Photography

More about the Silicon Valley Bank (SVB). A joint announcement by Treasury Secretary Yellen, Fed Chair Powell, and FDIC Chairman Gruenberg said:

“After receiving a recommendation from the boards of the FDIC and the Federal Reserve, and consulting with the President, Secretary Yellen approved actions enabling the FDIC to complete its resolution of Silicon Valley Bank, Santa Clara, California, in a manner that fully protects all depositors. Depositors will have access to all of their money starting Monday, March 13…”

This appears to be the mechanics of the bailout:

  1. The Fed gives money to the FDIC as needed.
    2. The FDIC makes all deposits available on Monday. Not just those that are FDIC-insured.
    3. The FDIC then sells the assets of the banks, which will take time.
    4. The difference between the cost of bailouts and the net proceeds from the asset sales is the actual amount the FDIC will have lost.
    5. The FDIC will charge all other banks a “special assessment” to cover the losses.
    6. The FDIC will then pay the Fed back with the special assessment funds it collects.

Much about this makes Wrongo’s blood boil. We have a well-defined regulatory system for the US banking industry. But, as with our lax regulation of train traffic that resulted in the Norfolk Southern accident in East Palestine, these pesky banking regulations were considered a major impediment to Mr. Market.

Regional banks argued that they shouldn’t be held to the same standards as the biggest banks because if they failed, they wouldn’t pose systemic risks to the banking industry or the nation.

So in 2018, Dodd-Frank was amended by the Trump administration to raise the asset threshold at which a bank would be considered “too big to fail” from $50 million to $250 billion. The 2010 original law required that banks considered systemically important keep more capital on hand, undergo stress tests and produce a “living will” that would provide for their orderly dissolution.

But now five years later, the FDIC says that SVB and Signature Bank in NY really do pose a systemic risk to the banking system! The regulators are saying that the threat of a systemic risk gives them the authority to hold all SVB depositors harmless, even if their deposits exceed the current FDIC maximum of $250,000.

Few if any average Americans have $250,000 in a single bank account. Who has bank accounts above $250,000? Corporations.

The FDIC insurance on deposits is meant to assure retail customers, not companies that hold very large balances. Why? Because companies have the ability to perform their own risk analysis. This risk analysis should force them to ask questions about the business practices of the bank, to make sure the bank will properly manage their assets.

The US is going to protect the deposits of corporations in this bailout despite the fact that there’s a product called “Insured Cash Sweep” that cuts your large deposits into pieces that are FDIC insured (i.e. $250k each). In the event of a bank run, those deposits would not be over the limit, so they would be safe.

But, for reasons unknown, the Silicon Valley Venture Capital masters of the financial universe didn’t deign to use it.

American capitalism remains a system that privatizes profits until shit happens. And then? We socialize the losses, meaning it’s up to the federal government and taxpayers to handle the problem. When Biden says the banking system will pay fees via a special assessment, that means the cost will ultimately be paid by depositors and borrowers through higher fees and interest costs.

This is why people have so little faith in our government.

The very serious people in finance and politics were worried that the 2023 version of the US banking system might be close to another 2008-style collapse. So the Treasury, Fed and FDIC had to step in.

The basic problem relates to what’s called “asset management” in the banking biz. The goal of asset management is to maximize the return of the bank’s investment portfolio while maintaining an acceptable level of both liquidity and risk.

For banks, that means keeping a certain amount of cash available to meet the needs of depositors and investing the rest in loans or bonds. SVB invested in long-term bonds in order to realize better returns on their investment portfolio, because short-term interest rates were very low. They, like others, felt it was necessary to maintain a portfolio of higher yielding assets to offset the low market rates generally available to them.

But when mass withdrawals from depositors started to happen, they had to sell bonds at a loss, ultimately leading to default and FDIC takeover. Wasn’t it the job of the SVB executives to foresee this? And adjust their asset management accordingly?

This seems to mean that the $250,000 FDIC limit has effectively gone away. If true, there’s systemic risk that taxpayers will have to bail out bank deposits with uninsured deposits at any bank. Most of those depositors will be corporations. So, new rules must be written. And until then, we’re in trouble.

The big picture is that very few people of means in America ever pay a price for bad management.

And none go to jail.

Average Americans who get caught cheating on their taxes might go to jail if you were represented by an overworked public defender. But if you had the means to hire a high-priced lawyer, most likely, you will get community service, or probation.

It’s never been a fair system. Back in the 2008 Great Financial Crisis, then-Treasury Secretary Timothy Geithner worked to save his banker cronies; they didn’t lose money. They didn’t go to jail. The economy was saved, but no one who profited from blowing it up paid a price.

The bottom line: If I’m bad at my job, I’ll get fired. If these bankers are bad, they may get rescued by the government.

And one way or another, we’ll be paying for it.

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Sunday Cartoon Blogging – March 12, 2023

Let’s talk about Silicon Valley Bank (SVB). The tech industry’s go-to lender just became the second-largest bank failure in US history. The bank’s customers withdrew $42 billion from their accounts on Thursday. That’s $4.2 billion an hour, or more than $1 million per second for ten hours straight.

We ancient, moss-covered former bankers call this a bank run. That occurs when a large number of customers of a bank withdraw their deposits simultaneously over concerns about the bank’s solvency.

Nearly half of all venture-backed US companies were SVB customers. We’re unsure why the run started, but on Thursday, several Venture Capital firms started telling their client companies that pulling cash from SVB was prudent, and the run began.

While bank deposits are insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000, few of SVB’s deposits, by value, were FDIC insured, since its customers were overwhelmingly corporations with much more than $250,000 in the bank. By Friday, there was no cash left in SVB’s coffers. In fact, the cash on hand was negative, to the tune of $958 million.

Do you remember when Trump and Republicans rolled back some of the regulations Dodd-Frank placed on regional banks?:

“Some banking experts on Friday pointed out that a bank as large as Silicon Valley Bank might have managed its interest rate risks better had parts of the Dodd-Frank financial-regulatory package, put in place after the 2008 crisis, not been rolled back under President Trump.”

Trump signed the bill despite a report from Democrats on Congress’s joint economic committee warning that under the new law, SVB and other banks of its size:

“…would no longer be subject to nearly any enhanced regulations”.

This also affects ordinary people. Wrongo has a California friend who banks with SVB. Here’s a quote from her:

“While I’ve been waiting to sign the purchase contract on a condo, I woke to the news that my lender Silicon Valley Bank has been closed and taken over by regulators. That concludes literally 8 months of working on this….and the end of my effort to buy a home.”

So don’t listen to the pleas for another bank bailout. Wrongo would be okay with bailouts if they were accompanied by personal accountability by management. Like, we’ll rescue your institution, but none of the bank senior management can ever work in finance again. On to cartoons.

Tucker’s mendacity:

It takes two teams to play:

Walmart’s OK with pills for boners, but not for pregnancy:

GOP wants to regulate Trans not Trains:

GOP loves doormats:

Most appropriately named movie of this or any year:

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Deferred Maintenance is America’s Exceptionalism

The Daily Escape:

West Cornwall Covered Bridge, West Cornwall, CT – photo by Juergen Roth Photography. The 172’ bridge spans the Housatonic River.

America runs on deferred maintenance. We won’t do a thing today that can be put off for another day, another year, or several years. The ongoing disaster of the collapsed condo at Champlain Towers South in Florida is a perfect metaphor for America. A quick look at some details is instructive.

The NYT had a story about the conflicts among residents and the Champlain Towers South condo board. A report indicated that major repairs were needed to maintain the structural integrity of the building. But the repairs weren’t popular with the residents: (brackets by Wrongo)

“Steve Rosenthal, 72, a restaurant advertising executive, went to the gym in the building nearly every day. Afterward, he would stop at the pool, where he could see a crack on a third-floor balcony that he described as ‘atrocious.’ But he called the $135,000 assessment [to fix the problems] on his condo, a corner unit with double balconies, a ‘second mortgage’.

‘It’s an upscale building, but it’s not the Ritz or the Four Seasons….The people that live [here]…aren’t Rockefellers or Rothschilds. We’re upper middle class, I guess, and a lot of us are retired’….When a neighbor knocked on his door, 705, with a petition against the assessment, Mr. Rosenthal signed it. The first payment was due on July 1.”

BTW, Rosenthal survived the condo collapse. He was rescued from the intact part of the collapsed building, and he’s staying in a Residence Inn a few blocks away. Worse, Rosenthal has filed a lawsuit against the condo board for negligence and against the property for shoddy construction!

America is filled with assholes like Rosenthal. They’ve taken over – they dominate our politics (I’m talking to you Mitch). They dole out promotions to other assholes. They punish anyone who tries to do the right thing. They tell us how to vote, and who to love. (Hat tip: Jessica Wildfire)

Their attitude that “This seems bad, but if I have to pay to fix it, count me out” is the position of many, many Americans, regardless of what kind of deferred maintenance is being considered. Fixing our roads? Sorry, no gas tax increases. Better school buildings? Property taxes are too damn high. Better Internet? Why? Better health insurance? Socialism!

DC politics is infested with a “we can’t afford this” knee-jerk reaction whenever the subject of dealing with America’s deferred maintenance is on the table. And of course, that’s the thinking that deferred the maintenance in the first place.

It’s particularly bad when the subject is how to deal with climate change. What incentives are there to alter behavior to prevent change that will have most of its effects after 2050? The answer is none, except for an intangible feeling that you’ve done the right thing for posterity.

Current stakeholders (regardless of whether they have a stake in a property, a city, or the entire country), willingly defer maintenance to the next generation of stakeholders, when it will be much, much more expensive. Eventually, the problem can’t be remedied. Like In the Florida condo, that’s when things start collapsing, and people start dying.

Perhaps someone should have said to the condo residents: “You can probably play Russian roulette without dying, but do you really like your odds?”

There was a 1981 ad by Fram Oil Filters  that had the tag line: “pay me now or, pay me later.” Imagine, accountability and wisdom brought to you by Madison Avenue! When we move from car maintenance to the country, the answer is you’ll pay WAY more later. We’ve been blowing off serious repair and replacement of our infrastructure for decades.

We’ve blown off making sure that all Americans have safe bridges and roads.

We’ve blown off making sure that all Americans have basic health insurance.

We’ve blown off immigration reform.

We’ve blown off gun sanity.

We’re blowing off moving from fossil fuels to renewables.

Do you see the parallel in how we respond to these issues? First, there’s a warning, then there’s evidence, followed by denial, delay, and ultimately, disaster. There’s no problem, if there is a problem, it’s too expensive to fix. Maybe we can fix it in a few years, eventually followed by incalculable cost and misery.

We’re the only rich country that kicks the can down the road on anything that’s politically difficult. You know that’s true if you’ve been to an airport in China or Europe. If you’ve taken public transit in Europe or Hong Kong. If you’ve seen the ports in Rotterdam or in Asia.

Time to kill all the assholes.

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Stimulus Money is Going to Churches

The Daily Escape:

View of Mt. Rainer from Reflection Lake WA – 2018 photo by NathanielMerz

Here is the 7-day look at the national numbers for COVID-19:

The rate of growth in deaths as a percentage of cases continues to rise, while the rate of increase in cases picked up slightly on 4/6, although overall, it is slowing vs. 7 days ago. Testing is still growing, although the rate of growth in tests is now about equal to the growth in cases.

A little-noticed part of the $2 trillion stimulus package allows the federal government to provide money directly to US churches to help them pay pastor salaries and utility bills. From NPR: (emphasis by Wrongo)

“…the $2 trillion economic relief legislation…includes about $350 billion for the Small Business Administration (SBA) to extend loans to small businesses facing financial difficulties as a result of the coronavirus shutdown orders. Churches and other faith-based organizations are among the businesses that qualify for aid under the program, even if they have an exclusively religious orientation.

So, we’re not simply speaking of not-for-profit subsidiaries of churches such as charities. The Trump administration is saying churches themselves will qualify for direct loans. Apparently, the program is based on the average monthly payroll of a church school or the parish, which is extrapolated to eight weeks. The cost of maintaining staff for that period becomes the loan amount.

From the SBA’s statement:

“Faith-based organizations are eligible to receive SBA loans regardless of whether they provide secular social services….No otherwise eligible organization will be disqualified from receiving a loan because of the religious nature, religious identity, or religious speech of the organization.”…

The SBA’s regulations currently exclude some religious entities. Because those regulations bar the participation of a class of potential recipients based solely on their religious status, SBA said it will decline to enforce those subsections and will propose amendments to conform those regulations to the Constitution.

The SBA is quoting a 2017 Supreme Court decision, Trinity Lutheran v. Comer, which was the first time the Court said the government is required to provide public funding directly to a religious organization. Chief Justice Roberts wrote for the majority in the 7-2 decision. The key argument was that Trinity Lutheran faced discrimination solely because of its identity as a church. That, the Court decided, was discrimination. From the opinion:

“There is no question that Trinity Lutheran was denied a grant simply because of what it is….A church.”

The grant was for refurbishing the church’s playground.

But in this case, the SBA is offering direct funding of religious entities with money provided by tax dollars from the rest of us. We’re likely to see this in the courts soon.

This isn’t the first time that the Trump administration provided funds directly to churches, synagogues, mosques and other religious organizations. In 2018, the Federal Emergency Management Agency (FEMA) changed its rules to make houses of worship eligible for disaster aid.

First Amendment watchers have reacted. Alison Gill, legal and policy vice president of American Atheists said:

“The government cannot directly fund inherently religious activities….It can’t spend government tax dollars on prayer, on promoting religion [or] proselytization. That directly contradicts the Establishment Clause of the First Amendment.”

If they want Federal funds, shouldn’t they pay Federal taxes?

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