Layoffs, bank failures - why is it all happening?
Layoffs, bank failures - why is it all happening?
It’s March 29, 2023, and I was busy last week, so I missed you. Today, we’re going to talk about why everything feels so screwed up.
Layoffs, bank failures - why is it all happening?
Mortgage-backed securities are…back
Numbers and links
Layoffs, bank failures - why is it all happening?
We built a post-2008 economic foundation, and now the ground is shifting.
What was the last time it didn’t feel like we were in a state of perpetual crisis? Maybe 2015? Of course, that year had its own problems, but since then, it seems like it’s one thing after another, reaching a crescendo with the pandemic. But now that we’re mostly through that, other problems are arising: Banks are failing, mass layoffs — what the hell is going on?
For some reason, we seem like we’re trying to will a recession into existence. I don’t know how else to square the circle when companies are posting record profits and then firing thousands of people because…they think that economic conditions don’t look great. Or something.
And then we have a couple of big bank failures to contend with. Silicon Valley Bank was the big one (the second-largest bank failure in U.S. history), and the one that caught the most attention. But it seems like it may have just been severely mismanaged — the company’s leadership failed to see what was coming, and made some wrong decisions.
So, again, what is going on, exactly? For a while, it seemed like the economy was doing okay, but now, we’re right back into worry mode. It’s a sort of whiplash effect that’s left me, and many others, trying to figure out where we stand.
After speaking with several people about this, it’s actually pretty simple. Essentially, we rebuilt the economy in a certain economic environment. One that saw the stock market go up and up and up for 12 years or so, venture capitalists were handing out lots of cash, and interest rates were very, very low. But things have changed. It’s no longer cheap to borrow money, workers are harder to find, and the stock market isn’t going up and up and up like it was before.
So, over the past decade-plus, we had new companies form and older companies evolve for a given environment. That environment has changed and changed fast. That change is disrupting everything, and forcing everyone to re-adapt. Hence all the layoffs in the tech sector, the housing market slowing way down, labor shortages, and the whole nine yards.
This is normal. It happens all the time. But the difference, in this case, was the speed at which it happened. Take a look at the chart above. The interest rate increases — which were necessary, given the overall state of things and rising prices — have come fast and furious. At the fastest rate in history, in fact. That, in short, is what’s destabilized a large part of the economy. There hasn’t been much time to adapt and change up strategies.
The world is throwing fastballs after a round of curve balls and sliders.
This is, as I’ve written about before, merely the latest chapter in an ongoing saga of post-2008 moves by the Federal Reserve. It’s long and complicated, but with the full context of things over the past decade and a half, what’s going on makes some sense. If you have a couple of hours, I’d recommend watching this latest episode of Frontline, “The Age of Easy Money” (from PBS), which traces it all back. Again, it’s long and dense, but if you want a deeper understanding of what’s going on and why, it’ll do wonders.
Mortgage-backed securities are…back
Wall Street is playing its greatest hits.
Surely we all learned a lesson during 2008 and 2009, and that lesson was that perhaps mortgage-backed securities aren’t such a great idea, right? Right?
Well, some of us did. But mortgage-backed securities are, well, back. But in a slightly different form. And they’re yet another ticking time bomb waiting to go off.
If you recall, the 2008-2009 crisis was spurred by a whole bunch of people who couldn’t or otherwise wouldn’t pay their mortgages — the super-simplified version is that banks gave mortgages to anyone and everyone, and it eventually blew up in all of our faces.
This time, though, the problem has to do with commercial real estate. Since a lot of offices have been downsized or shut down (demand has fallen, in other words), commercial real estate has lost a lot of value. That loss in value has created problems, and rating agencies like Moody’s — which played its own role in the previous mortgage-backed securities crisis — are raising concerns that a lot of those securities could default, or become worthless.
This is important because a lot of banks are holding onto these securities, and if they default, it could mean big losses. Given that we’re already seeing banks fail? It could exacerbate whatever banking sector crisis is brewing. What needs to happen to avert another crisis is, per some people who are smarter than me, more government intervention — but done smartly (not just big old bailouts for more banks and the wealthy), it could help get things stabilized and avoid a domino effect.
While we wait to see how this whole thing shakes out, one thing that I think is important to know is that certain Dodd-Frank rules passed after the 2008-2009 crisis, and designed to prevent another one, don’t apply to commercial loans, only residential loans. So there’s that.
And the potential of another mortgage-backed security crisis, and one specifically involving commercial real estate, has been known for some time. Like last time, too, it looks like there’s some potential fraud and manipulation at play, too. A whistleblower actually brought this issue to the SEC at some point in 2019, as ProPublica reported in 2020, and there seems to be something to it:
“ProPublica closely examined six loans that were part of CMBS in recent years to see if their data resembles the pattern described by the whistleblower. What we found matched the allegations: The historical profits reported for some buildings were listed as much as 30% higher than the profits previously reported for the same buildings and same years when the property was part of an earlier CMBS. As a rough analogy, imagine a homeowner having stated in a mortgage application that his 2017 income was $100,000 only to claim during a later refinancing that his 2017 income was $130,000 — without acknowledging or explaining the change.”
A little jiggery-pokery here and there never hurt anyone, right? Until you’re staring at a future in which commercial real estate probably never recovers to its pre-pandemic state. Then someone is left holding the bag. Again.
The question: Will we, the taxpayers who don’t get to treat the economy like a goddamned roulette table, be on the hook for the inevitable fallout in this case, too?
Numbers and links
Pay transparency: It looks like pay transparency can increase productivity as long as things are fair — which should be welcome news to employers. (The Wall Street Journal)
Wagons east?: Home prices are booming in the eastern U.S. and falling in the west. (The Wall Street Journal)
“Don’t release the hostages before the election. Mr. Reagan will win and give you a better deal.”: This guy sabotaged Jimmy Carter’s reelection campaign in 1980 and is now talking about it. (The New York Times)
China finds an unlikely ally: Utah. (Associated Press)
The world is throwing fastballs after a round of curve balls and sliders. I love this line. I mean the writing not the fact...
Yes, the question is once again who will be left holding the bag. And, for bankers, tech bros and other Wall Street types it’s not even a question. “Why you the taxpayer will foot the foot the entire bill for our high risk failures.”