PacWest stock plunged 28% after Jamie Dimon issued a vote of confidence in the banking system. Be skeptical.
Many powerful forces are dampening the economy — but the Fed is likely to raise interest rates by 0.25 percentage points to a range between 5% and 5.25%. According to the CME's FedWatch Tool, there is an 88% probability that the Fed will raise rates this week., “tremors in the financial system” due to the failure of SVB, First Republic and others are making banks less likely to loan money.
Before the Fed started raising rates in March 2022, some banks took in deposits from venture-backed startups — many above the $250,000 FDIC insured limit — and lent out the money in fixed-rate mortgages or bought long-term bonds.As the Fed raised interest rates, regulators and ratings agencies warned banks their financial health was endangered because the higher rates cut into the value of those mortgages and bonds.
PacWest’s first quarter earnings report caused investors to cheer — sending its stock up 14% on April 25. According to MarketWatch, PacWest reported deposits increased $1.1 billion between March 20 and March 31 and the bank added about $700 million more in deposits as of April 24. Michael Milken sees more damage due to bad matching of bank borrowing and loan terms; Charlie Munger sees risk in banks that lend to office landlords; and a former Goldman Sachs managing director, Alla Gil, sees a need for comprehensive risk analysis and mitigation.A former Drexel Burnham junk bond king, Milken chastised bankers for violating Finance 101.
Moreover, Munger highlighted the dangers of commercial real estate exposure due to higher interest rates and lower demand for offices in the wake of the prevalence of working from home,Alla Gil — who currently is CEO of risk technology company Straterix and also a former managing director and global head of strategic advisory at Goldman Sachs — said financial executives must look systematically at their risks and protect against them.
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