Weekly Kabezo Newsletter

In a Bind

After a whirlwind week it's time to crunch the numbers, reflect on the developing narratives and consider the broader macroeconomic landscape.

Macro Anyone?

It was a big week for macroeconomic data.  Or was it?  The all-important release of inflation readings in the U.S and Europe, as well as the rate decision by the European Central Bank (ECB), appeared to be overtaken by short-term liquidity issues. 

The week started out with an anodyne statement by U.S. President Joe Biden that, “thanks to the quick action of my administration over the past few days”, the U.S. banking system is in fine shape and there is nothing to worry about. 

The comment probably divided listeners into two groups.  Those that had bank balances less than the FDIC insured threshold of $250k probably nodded unconcerned and turned their attention to more important things.  Those that had bank balances over $250k likely thought that if the U.S. President needs to go on TV to assure the nation that everything is fine with the banks, then everything is certainly not fine with the banks. 

The comments did little to abate the continued rush for liquidity that began on March 9th with the Canary in the Coal Mine formerly known as Silvergate Bank.  The San Diego, CA-based crypto-focused bank’s decent into voluntary liquidation was the first of three banks to disappear within a week.

2-Year Treasury Yield

Inflation data in the U.S. and in Europe did not disappoint, coming in at or slightly lower than consensus forecasts.  But the European Central Bank (ECB) governing council followed through on their guidance by raising policy rates by 0.5% on Wednesday. 

In her press conference following the decision, ECB President Christine Lagarde began by saying “Inflation is projected to remain too high for too long” and they were acting “In line with our determination to ensure the timely return of inflation to our 2% medium-term target.”

In a nod to the waves of concern rippling through the U.S. banking system, she parroted President Biden by saying “The euro area banking sector is resilient, with strong capital and liquidity positions.  In any case, our policy toolkit is fully equipped to provide liquidity support to the Euro Area financial system if needed.”

Banks are fine.  And if they aren’t we can fix them. 

What a relief!

Down 40% Lending to the U.S. Government?

Central bankers always say they have all the tools they need. But when things start to wobble, they come up with new acronyms like BTFP – the Fed’s new Bank Term Funding Program.  Under this program, the Fed will lend to banks against any Treasury security in their portfolio at par value for up to one year.  For example, banks that were foolish enough to buy the May 15th, 2050 1.25% bond that was priced at 59.026 on Friday, and are sitting on mark-to-market losses of over 40%, can borrow as if that bond were priced at 100.  The Treasury Department is making $25 billion from the Exchange Stabilization Fund available to protect the Fed from any losses that may arise.

I hope that works.  $25 billion is a lot of money.  But as noted last week, the FDIC sees losses of $620 billion on bank balance sheets.  And in a recently released study, academics from USC, Northwestern, Columbia, and Stanford calculates losses to be upwards of $2 trillion.

$2t in losses are difficult to hide.

In any case, the BTFP was too late to save Silvergate, Silicon Valley Bank, and Signature Bank NY.  Let’s see if it can save First Republic. The San Francisco CA-based bank has become the latest target for nervous investors.  A chunk of the 68% of its deposits that are above the FDIC insured limit have been withdrawn, leaving it vulnerable to the same dynamics that snuffed out three banks last week.  Is everyone confident that the new Fed acronym will save it?  The fact that 11 of its largest competitors were coaxed by the Fed, Treasury Department, and FDIC to make uninsured deposits of $30 billion to help stabilize it speaks volumes.  Big banks are nervous.

What Happened on Wednesday?

Despite central bankers’ professed concerns about inflation, there were abundant signs of monetary tightness this week.  Wednesday saw a disorderly scramble for U.S. dollar liquidity that appeared to be from overseas.


Shortly before the New York market open, a dash for collateral was evident in FX and Treasury markets with the dollar strengthening and yields falling.  December 2023 Fed Funds futures, one week after finally giving in to Fed Chair Jerome Powell’s guidance about rate hikes going above 5.5%, reversed course and are now pricing in at least 0.50% rate cuts by year-end.

Risk managers at Silvergate, SVB and Signature were taking live fire in the media this week, and understandably so.  Were there any other “idiots” out there?  It looks like you can put Goldman Sachs on that list.  According to the FT, Goldman took a $200 million hit on this week’s rates whipsaw.  And there are multiple reports that rates desks at super-duper-smart hedge funds like Balyasny (AUM $15b), Brevan Howard (AUM $20b), and Citadel (AUM $62b) have suffered massive losses.  


Central bankers’ concerns over inflation and guidance about coming rate rises faded to insignificance for Friday’s $60 billion 4-week T-bill auction.  As pointed out by Jeff Snider, the Yoda of Eurodollars, collateral shortage in deposit markets is such that some auction participants were so desperate for T-bills that they bid par for the issue, earning a 0.000% yield. 

It is against this backdrop that the Federal Open Market Committee (FOMC) convenes its two-day meeting this week.  A couple of weeks ago, Powell’s Humphrey-Hawkins testimony to Congress gave the impression that a rate hike of 0.5% was imminent.  Now just a few bank failures later, Fed Funds futures are pricing in a 0.25% rise, and Goldman Sachs Chief Economist Jan Hatzius says he expects no rate change at all. 

This is one of those weeks where it is much better to be a pundit taking potshots from the sidelines than a Fed Chief with a decision to make.  There are no good options.  Obviously enormous stresses in the financial system are breaking things.  Powell can ignore that and make it much worse by following through on guidance and raising rates 0.5%.  Or he can raise 0.25% and keep observing the not-so-slow-motion train wreck.  Or he can pause (or ease!) and signal to everybody just how bad things are out there.  Good luck Mr. Chairman! 

Bitcoin to the Rescue!

Crypto reacted to the continuing turmoil with a continuing rally.  Bitcoin led the pack, steadily increasing its share of aggregate market capitalization to 45.4%.  Bitcoin at $27,000 is now 40% off the lows marked in the wake of Silvergate’s liquidation and up 65% on the year. 

What is bringing in the buyers?  Nobody knows.  But the prospect of lower interest rates seems to be floating other risk assets as well, with the NASDAQ 100 Index gaining 6.5% on the week.  As previously mentioned, bank failures are not something that should repel investors from crypto.  It bears repeating that whoever created Bitcoin included in the Coinbase parameter of block zero or the Genesis block an extract from the cover of The Times:

“The Times 03/Jan/2009 Chancellor on brink of second bailout for banks”

It could be that investors are taking to heart the attribute of Bitcoin that bankers or any other intermediaries are unnecessary.

Exa-brain intellectual Balaji Srinivasan took it a step further (as he normally does) by suggesting a bet that Bitcoin hits $1 million within 90 days.  

I understand being bullish crypto.  But that sounds more like Armageddon to me.

The Law

It could also be that, despite a sense of siege in the industry, there are signs that good news is coming down the pike for crypto.  Although many bemoan the impulse of the SEC to “regulate by enforcement”, there are still laws that need to be followed and there are players that can afford litigation.

Recent developments include the suit brought by Grayscale against the SEC for the latter’s refusal to grant conversion of the Grayscale Bitcoin Trust (GBTC) into an ETF.  Under the trusts current regulation D 506(c) exemption, it is unable to redeem the Bitcoin held in the trust to shareholders.  Without a redemption mechanism, the trust can deviate substantially from net asset value and currently trades at a substantial discount to the spot price of Bitcoin.  Following opening oral arguments that were well reviewed by legal observers, the discount narrowed substantially on prospects of ruling favorable to Grayscale.

Lawyers for Ripple Labs are cautiously optimistic that the 2020 suit brought against them by the SEC charging them with an illegal unregistered securities offering, will find that XRP is not in fact a security.     

And court documents in the Voyager Digital bankruptcy regarding the sale of assets to Binance.US revealed a weak showing by SEC lawyers in their effort to block the sale, as well as some humorous interludes by Judge Michael E. Wiles.  In a decision on the matter released last week, Judge Wiles was scathing in his appraisal of the SEC’s objections. 

Highlights include:

Page 7: 

“Despite the questions that have been raised, however, I must note that I have been offered absolutely no actual, admissible evidence – I mean literally zero admissible evidence – that would support an accusation that Binance.US is misusing customer assets or is engaged in misbehavior of any kind at all. Instead, I am in the unenviable position of having to make a ruling about the proposed transaction in the face of hearsay accusations of potential wrongdoing, in an industry where other firms have apparently engaged in real wrongdoing, while having absolutely no evidence indicating that there is any good basis for the questions about Binance.US that have been raised.”

Page 10: 

“To the extent that the SEC contends that these issues are bars to the confirmation of the Debtors’ plan, I must disagree. In the first place, I reject the contention that the Court, and the Debtors, somehow were supposed to figure out for themselves just what “aspects” of the VGX token might be considered to be aspects of a “security,” or just what particular activities of Binance.US allegedly could raise registration issues, and then somehow to offer evidence and legal argument on those points.

This bankruptcy case has been pending since July 2022. Customers and creditors have been denied access to their assets for many months, and they deserve to have a resolution of the case. Bankruptcy cases are very expensive, and each and every delay means that administrative expenses eat away at the recoveries that creditors may receive. I have a proposed plan of reorganization before me, and I have an obligation to make a ruling – now – as to whether it can be confirmed. I cannot simply put the entire case into an indeterminate and expensive deep freeze while regulators figure out whether they do or do not think there is any problem with the transactions that are being proposed.”

Page 16 regarding due diligence on Binance:

“It is simply wrong for various parties to suggest that the January 2023 Disclosure Statement was somehow inadequate just because it did not describe follow-up conversations that had not yet taken place and follow-up assurances that had not yet been received”

Page 34:

“In short, what the Government is requesting is that I enter a confirmation order that will have the effect… of compelling employees, officers, professionals and entities to do the rebalancing transactions that the Plan contemplates and to make the distributions of cryptocurrencies that the Plan requires, while in the view of the Government those same people and entities might then be liable for fines, sanctions, damages or other liabilities just for doing what my confirmation order affirmatively obligates them to do. And the Government contends that this daunting prospect of future liability should hang over the heads of the parties and their personnel even though the Government itself has had every opportunity to identify any legal issues that are posed by the transactions and is not prepared to say today that there is anything wrongful about what we are currently contemplating.

I think the Government’s position is absurd.”

Maybe scathing is too soft of a description. 

Court documents are supposed to be dense, dry, humorless heaps of legal logic.  But from these and others, it looks like everything in crypto different.  Judger Wiles was unsparing in his description of what he saw as a vague, weak, and badgering case.

The SEC is contemplating bringing an enforcement action against Paxos for its administration of the BUSD stable coin contending that it is an unregistered security.  Another well-funded opponent for the SEC, Paxos strongly disagrees and vows “to vigorously litigate if necessary.”

Going 0 for 3 on Ripple, Grayscale, and Voyager might give the SEC pause.  It would not hurt crypto prices either.

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