YouSaid · the spoken record

Barry Knapp

lines on the record: 95
first: 2024-06-13
most recent: 2024-06-13
sittings or episodes: 1
sources: podcast

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“So it's published on Substack under Ironsciro.substack.com after all those years on the street, Fidelity while I did my MBA, Lehman Brothers and Berkeley's for 25 years, a couple of BlackRock and a couple of Guggenheim, I started Ironsides Macro. So in essence, it's an independent provider of macroeconomic research and strategy. And I decided to house it on Substack. And the network there has been growing. And so the features they've been offering are growing as well. And I decided not to build my own, but to use them. I'm also in charge of a joint venture division with macro risk advisors for those who are inclined to trade equity derivatives, equity options, ETFs and the like, and prefer to pay for research with the old-fashioned way with commissions and trading. You can access my work through macro. Advisors as well.”
2024-06-13 · Forward Guidance · Growth Scare Hits U.S. Economy | Barry Knapp on Fed’s “Quadrilemma,” Lehman Brothers, and Job Market · IDENTIFIED FROM THE TRANSCRIPT
“Of the rally we've had probably the only outcome that's good is a sub 100 number, right? And that sub 100 number would probably change the tone of the Fed's press conference and alter the dots a little bit. But if we don't get that, then you'd have to think that at least the forecasts are going to be fairly hawkish for a treasury market that I think is ahead of itself, right? I think we're at four half to five by the end of the year under most economic outcomes because I still think the back end of the treasury market's in the wrong place. In other words, Fed could start cutting and the back end could sell off”
2024-06-13 · Forward Guidance · Growth Scare Hits U.S. Economy | Barry Knapp on Fed’s “Quadrilemma,” Lehman Brothers, and Job Market · IDENTIFIED FROM THE TRANSCRIPT
“The two most interesting to listen to, well, Waller's far and away the most interesting to listen to. I think Williams is important as well. I attended the or listened to the economics club of New York, which I'm a member of event last week. And Sarah Eisen did a good job pinning him down on our start and the like. But you'd have to think that consensus is probably closer to consensus within the FOMC that is is closer to one than three, right? So we could even be at one dot. And given that ferocious rally we've had in the treasury market, that wouldn't set up particularly well. I mentioned a little bit earlier, a lot of it earlier about small caps and how they're set up for the numbers tomorrow. A weak number to a week a number is bad and too strong a number is bad. Well, for the treasury market, given the magnitude.”
2024-06-13 · Forward Guidance · Growth Scare Hits U.S. Economy | Barry Knapp on Fed’s “Quadrilemma,” Lehman Brothers, and Job Market · IDENTIFIED FROM THE TRANSCRIPT
“People who listen to every speech for the number of cuts, right? So people who listen to every Look at every speech. I don't read every speech. I read speeches of the officials that I think are important and influential. And I actually think.”
2024-06-13 · Forward Guidance · Growth Scare Hits U.S. Economy | Barry Knapp on Fed’s “Quadrilemma,” Lehman Brothers, and Job Market · IDENTIFIED FROM THE TRANSCRIPT
“Yes, I mean, they were barely at they were barely still at three in March, right? So likely to be closer to one and a half.”
2024-06-13 · Forward Guidance · Growth Scare Hits U.S. Economy | Barry Knapp on Fed’s “Quadrilemma,” Lehman Brothers, and Job Market · IDENTIFIED FROM THE TRANSCRIPT
“Waiting for Powell to say anything to that effect. And so, you know, unless we get a decidedly weak number tomorrow, it's likely to be a very unexciting press conference. July could be much more interesting. And I think Jackson Hole, given what the Kansas City Fed has announced and the view of the Kansas City Fed president, that could be a real deep discussion about the balance sheet and could be very interesting for people like me to think that the balance sheet is adding accommodation. I know this has been a Dave Zervo's position as well that that balance sheet is adding accommodation. But I don't think we'll hear much about that next Wednesday.”
2024-06-13 · Forward Guidance · Growth Scare Hits U.S. Economy | Barry Knapp on Fed’s “Quadrilemma,” Lehman Brothers, and Job Market · IDENTIFIED FROM THE TRANSCRIPT
“Weak employment report if we get a you know something tomorrow that's closer to the april number than January, February or March 260,000 per month trend if that would be sufficient to get them to consider a September cut so I don't think it's going to be a particularly interesting meeting You know, we got a little bit of a surprise last go around with a bigger than expected reduction in QT I know they said they did that because they're worried about another CEP 19 repo spike. I think they did it along with the Treasury buyback program to try and stabilize the back end of the Treasury market as Bill Martin the Fed chair from 51 to 77 the Fed is independent within not of the government so I think that's the true motivation but we'll never hear that from the Fed so forget about”
2024-06-13 · Forward Guidance · Growth Scare Hits U.S. Economy | Barry Knapp on Fed’s “Quadrilemma,” Lehman Brothers, and Job Market · IDENTIFIED FROM THE TRANSCRIPT
“I would say that the last important, I mean, there's two more important data points before that Fed meeting tomorrow's employment report and then the CPI report on the morning of the meeting, assuming that they are inline numbers, you'd have to guess that the infamous dot plot would be would move incrementally from the last meeting. So that would be something of a hawkish event. I doubt very much that despite a growing constituency within the Fed that is sympathetic to my bill's only policy, that given that they just started the reduction in QT, they're not going to be actively discussing this. If they're discussing it, it'll come out in the minutes. It probably won't come out in the press conference. So I think we're just left looking at the dot plot, looking at forecasts. If another”
2024-06-13 · Forward Guidance · Growth Scare Hits U.S. Economy | Barry Knapp on Fed’s “Quadrilemma,” Lehman Brothers, and Job Market · IDENTIFIED FROM THE TRANSCRIPT
“unwind of Lehman's story for sure. My argument would be they went too far, the Fed, but there's obviously others that would disagree.”
2024-06-13 · Forward Guidance · Growth Scare Hits U.S. Economy | Barry Knapp on Fed’s “Quadrilemma,” Lehman Brothers, and Job Market · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, no, that's absolutely true. I mean, the final straw for us was JP Morgan increasing the margin requirement on overnight sponsored repo, five billion of it or something. That was the end of it. So, yeah, I mean, it was a lot of financing that was done in overnight markets. And of course, that started to run on money funds when the prime fund owned $70 million or something of Lehman Brothers commercial paper. And yeah, that was part of the problem. But that's basic banking, right? I mean, borrow short and lend long, and this was the ultimate borrow short Len Long and have too much leverage and not be able to fund yourself. And that's what has led to the Fed's Apple Reserve regime system. So every action gets a reaction, right? And the feds decided, well, if we sit in the middle of all transactions, then we won't have a run on repo. And lots of good papers written on that. And again, that was part of the final.”
2024-06-13 · Forward Guidance · Growth Scare Hits U.S. Economy | Barry Knapp on Fed’s “Quadrilemma,” Lehman Brothers, and Job Market · IDENTIFIED FROM THE TRANSCRIPT
“I know from Lehman Brothers, extremely levered, they were funding themselves in the repo market and in the asset-backed commercial paper market. At what point, if you can remember, and you probably do is my guess, did you start to realize that, okay, Lehman Brothers doesn't just have an asset problem, but it has a funding problem.”
2024-06-13 · Forward Guidance · Growth Scare Hits U.S. Economy | Barry Knapp on Fed’s “Quadrilemma,” Lehman Brothers, and Job Market · IDENTIFIED FROM THE TRANSCRIPT
“And that was the story, part of the story of the financial crisis for Lehman Brothers. Commercial real estate assets. at the wrong price.”
2024-06-13 · Forward Guidance · Growth Scare Hits U.S. Economy | Barry Knapp on Fed’s “Quadrilemma,” Lehman Brothers, and Job Market · IDENTIFIED FROM THE TRANSCRIPT
“Just like that story I told earlier about thrifts. Those mortgages were not bad assets. They just couldn't be financed at the right level. And I think that's why people, how people misinterpret what's going on in the banking system today. There's no, I don't believe there's any big assets are bad crisis coming along. It's just that as long as this curve is, the curve is this deeply inverted, how are they financing, you know, taking in new deposits and funding mortgage loans that they made at 3%, right? That was the first Republic story. Or how are they going to help finance the government right now? This is why I focus on the auctions in the belly of the curve, where traditionally the banks would buy five-year treasuries, but you can't buy five-year treasuries at 430 when your deposit cost is five and a half.”
2024-06-13 · Forward Guidance · Growth Scare Hits U.S. Economy | Barry Knapp on Fed’s “Quadrilemma,” Lehman Brothers, and Job Market · IDENTIFIED FROM THE TRANSCRIPT
“It was done at a 3.2% cap rate when the policy rate was five and a quarter percent. And so that to me was the breaking point. We all knew it at the time. We said in the capital markets division, we were all saying, why are we doing this deal? It carries by negative 200 basis points. These properties all have to grow up in value to make this make any sense. It just looks like a dumb deal. I mean, capital markets people, you know, fund something at five that carries at two or three, excuse me. That was sort of the end. So again, the assets turned out to be good.”
2024-06-13 · Forward Guidance · Growth Scare Hits U.S. Economy | Barry Knapp on Fed’s “Quadrilemma,” Lehman Brothers, and Job Market · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, they were just buying all sorts of commercial real estate and it looked like a great deal. But the problem is, and again, here's another little piece of history. The final deal that was the straw that broke the camel's neck in that piece was the Archstone Smith deal. So Archstone Smith was super high quality apartment buildings. And we participated in a deal to buy out that GEET. We put 500 billion of equity into it. We had a chance actually to break the deal when it was clear that the market was coming unglued in 2007 after that little mini crisis in August, civ crisis and then the quant meltdown. And we had a chance to get out of that deal and we didn't. And the problem with that deal was not that the assets were bad. They were good. I mean, those are high quality apartment building assets”
2024-06-13 · Forward Guidance · Growth Scare Hits U.S. Economy | Barry Knapp on Fed’s “Quadrilemma,” Lehman Brothers, and Job Market · IDENTIFIED FROM THE TRANSCRIPT
“Open the CMBS market. We've been taking reserves against it. We were in good shape. We reopened that market with the first CMBS deal after the Fed emergency rate cuts and all and the LTCM package. So that emboldened folds and Gregory and the head of the CMBS or CRE division, and they just kept growing that business throughout the 2010s. It's pretty well known that there were some dissent on that front and the now head of Exodus Point was one of the dissenters who ran fixed income at the time. But they probably the most, the poster child for the illiquidity of the assets was we owned raw land in the inland empire, which is out by San Bernardino and all in California. I'm not a California.”
2024-06-13 · Forward Guidance · Growth Scare Hits U.S. Economy | Barry Knapp on Fed’s “Quadrilemma,” Lehman Brothers, and Job Market · IDENTIFIED FROM THE TRANSCRIPT
“The commercial real estate assets that they own, and the sort of the history of this is kind of interesting too, because in 1998 when long-term capital went down, one of the big concerns during that crisis was commercial real estate assets. There were three big players in commercial real estate in the CMBS market. Nomura, first Boston, and Lehman Brothers. Nomura and First Boston had been paying the head of their division a fantastic amount of money. They'd been making these loans, taking the present value of those assets and then paying themselves tremendous amounts of money. We hadn't been doing that. We'd been reserving against those assets. So Lehman Brothers Stock got crushed during the long-term capital crisis because everyone assumed we were losing money on our commercial real estate assets. We weren't.”
2024-06-13 · Forward Guidance · Growth Scare Hits U.S. Economy | Barry Knapp on Fed’s “Quadrilemma,” Lehman Brothers, and Job Market · IDENTIFIED FROM THE TRANSCRIPT
“Was the illiquid assets that was equivalent to our equity capital, right? So was it residential? In fact, I mean, it's well documented too that the US broker dealer that was sold to Berkeley's 82 billion aside in positions made Barclays a tremendous amount of money in the fourth quarter of 2008. We were basically short everything equities, credit, mortgages, rates people, those businesses, the core capital markets businesses over on 7th Avenue were in great shape. It was this illiquid asset, commercial real estate asset that was a problem. And ultimately those assets turned out to be fine. They just couldn't be sold in a fire sale, right? I mean, that's the story with commercial real estate today.”
2024-06-13 · Forward Guidance · Growth Scare Hits U.S. Economy | Barry Knapp on Fed’s “Quadrilemma,” Lehman Brothers, and Job Market · IDENTIFIED FROM THE TRANSCRIPT
“Bank America was very interested in buying us on the Thursday before that fateful weekend. They came in to visit and went through the books and looked at it and essentially told the Fed, if you give us the Jamie Diamond deal where you take, you know, in that case, they took Bayer Stearns, $30 billion of Bear Stearns assets. They put it in what was called a maiden lane portfolio. BlackRock managed the unwind of it. And they took the rest of the bank. Bank America wanted the same deal with Lehman and said, take the $36 billion, Fed back stops it, we'll take the rest of the bank, everything, international peace, the whole rest of it. And it was Paulson and I think it was Paulson ultimately made the decision, but the decision was no more deals. And that was the piece that”
2024-06-13 · Forward Guidance · Growth Scare Hits U.S. Economy | Barry Knapp on Fed’s “Quadrilemma,” Lehman Brothers, and Job Market · IDENTIFIED FROM THE TRANSCRIPT
“Commercial real estate. So we had a commercial real estate division that sat over on Park Avenue, not on 7th Avenue where we moved after 9-11. And that commercial real estate division owned $36 billion of real estate. Across 2700 positions.”
2024-06-13 · Forward Guidance · Growth Scare Hits U.S. Economy | Barry Knapp on Fed’s “Quadrilemma,” Lehman Brothers, and Job Market · IDENTIFIED FROM THE TRANSCRIPT
“I think that the stereotype of Washington, D.C. Congress bailing out the bankers and then paying their bonuses, I think that that really was not true for Lehman because Lehman did not get a bail. Lehman failed. And people who had a lot of money in stock, it was basically worthless. So I feel for you and all the other employees of Lehman Brothers. I think that that characterization is probably more apt for a bank like Citigroup, which really took a bunch of undue risks was one of the world's leaders and CDOs, but it got bailed out and then did pay their executives and staff very richly. I want to ask you, earlier you said it wasn't subprime that got Lehman into trouble. It was commercial real estate exposure. Tell us about that and what were the other assets of Lehman Brothers that got it into trouble.”
2024-06-13 · Forward Guidance · Growth Scare Hits U.S. Economy | Barry Knapp on Fed’s “Quadrilemma,” Lehman Brothers, and Job Market · IDENTIFIED FROM THE TRANSCRIPT
“Fell in love with it. I'm in love with it this day. I have no plans to ever retire. This is the most exciting, cool thing I could ever imagine doing. Every day I wake up. Can't wait to get to turn on my Bloomberg and see what's happening. This is awesome. And I knew there was risk involved in this. I was never doing it because I want to be a wealthy man or otherwise. But there was a little bit of pain there for most of us who were at Lehman Brothers. I went to watch the Lehman trilogy down at the Denver Performing Arts Center last Saturday and fortunately they didn't dwell too much on the financial crisis because I would have said they probably got it wrong. But, you know, that's the history of this business, right? I mean, you're going to have these booms and busts. And I don't think the Fed can regulate them away. And I think if they do regulate them, they're going to make the economy work less efficiently. That's sort of my broad point, I suppose.”
2024-06-13 · Forward Guidance · Growth Scare Hits U.S. Economy | Barry Knapp on Fed’s “Quadrilemma,” Lehman Brothers, and Job Market · IDENTIFIED FROM THE TRANSCRIPT
“Personally, 40% of my net worth went up in smoke. We got paid 35, 40% in stock as a managing director at Lehman at Bear. And we had a five-year cliff vesting payment period. So not a share was sold. So if you think about what happened through that whole decade, 2000 was a great year, peak of the tech bubble. We all got paid well. After 9-11, our compensation got chopped 40%. It didn't go back up in 02. And by the time the 03 stock vested, Bear Stearns was going down. So basically your whole pay for that period from that 2000 peak through 2008 got wiped out. We paid for it. We all paid for it. Now, nobody's crying for us. You know, I knew son of a college professor who went to college thinking he was going to play pro soccer. I went to Wall Street.”
2024-06-13 · Forward Guidance · Growth Scare Hits U.S. Economy | Barry Knapp on Fed’s “Quadrilemma,” Lehman Brothers, and Job Market · IDENTIFIED FROM THE TRANSCRIPT
“Things I would say in response to that one is Jamie Diamond has become a bit of a legend because he missed out on the financial crisis. But as I pointed out earlier, part of that was just happenstance. They just weren't in the business. I mean, they were not a competitor for all these business. They wanted to get in the business. They were just behind. And so he was a little bit of an accidental tourist in that sense. I mean, great CEO.”
2024-06-13 · Forward Guidance · Growth Scare Hits U.S. Economy | Barry Knapp on Fed’s “Quadrilemma,” Lehman Brothers, and Job Market · IDENTIFIED FROM THE TRANSCRIPT
“Make a bunch of money and pay ourselves large bonuses. And then when it all goes bust because it's too big to fail, there will have to be bailouts. Like if every CEO was as responsible, a steward as Jamie Diamond, I think that would work. But I think isn't a lesson from before the financial crisis that there needs to be some sheriffs in the town.”
2024-06-13 · Forward Guidance · Growth Scare Hits U.S. Economy | Barry Knapp on Fed’s “Quadrilemma,” Lehman Brothers, and Job Market · IDENTIFIED FROM THE TRANSCRIPT
“Reserve increase gone through and it looks at this point like it's likely dead although if Biden's re-elected it may get revived that would really push that ROE ROA numbers even lower and make it very difficult on the banking system to provide credit for the borrowers from the banking system right we know that there's more sources of credit now, private credit you know invest with great credit market if you're a large non-financial corporate but if you're a small business going to be tough to get money from your bank right small developer there's another example my former colleague Steve Kim the housing analyst at ISI would tell you that 70 of single family housing starts are mom and pop builders the other 30% of the big public retreated builders huge advantage right now for you know Dr. Horton”
2024-06-13 · Forward Guidance · Growth Scare Hits U.S. Economy | Barry Knapp on Fed’s “Quadrilemma,” Lehman Brothers, and Job Market · IDENTIFIED FROM THE TRANSCRIPT
“10% is the level where they are not earning out their equity cost of capital. So they start destroying capital instead of building capital and then it gets difficult for them to create credit. So we are now in an environment where ROA has slipped because of this deeply inverted yield curve below 10 until it disinverts. We're going to struggle to create credit for small businesses as I was discussing earlier. Had that capital”
2024-06-13 · Forward Guidance · Growth Scare Hits U.S. Economy | Barry Knapp on Fed’s “Quadrilemma,” Lehman Brothers, and Job Market · IDENTIFIED FROM THE TRANSCRIPT
“Took 30 years to wind that down to 20%. So bank ROE never got above 10%. Special thanks to my former colleague Jason Goldberg, a crack bank analyst over at Barclays for having compiled all this FDIC data through that time period. What bank ROE stayed below 10 for that entire decade. It was the worst performing of the major sectors and bank credit creation was very uneven, very weak on average, and we had a series of recessions from the end of World War II through 1960, five of them. The same ROE conditions were created by Dodd-Frank and Basel from 2014 until 2018 until the minutian treasury came up with a treasury reform proposal loosened the regulatory regime on banks. ROE went back above 10. Bank stocks performed better because essentially”
2024-06-13 · Forward Guidance · Growth Scare Hits U.S. Economy | Barry Knapp on Fed’s “Quadrilemma,” Lehman Brothers, and Job Market · IDENTIFIED FROM THE TRANSCRIPT
“Just by edict, and there was a lot of pushback on it. But what that would have done would have that increase in capital would have pushed return on equity in the banking system well below 10%. And that 10% level is a key threshold. By the way, we have fallen. Bank return on equity as deposit rates which lag the returns that they get from things like RRP and overnight radar reserves. ROE on the banks, S&P 500 banks index has fallen from 12.1% to 9.7% over the last couple of quarters. If you go back and look in history at what a less than 10% ROE means for the banks, this was true for the entire 1950s when we had a similarly tight regulatory environment and banks because of those explicit rate caps at the end of World War II, banks had 70% of their assets held in government securities.”
2024-06-13 · Forward Guidance · Growth Scare Hits U.S. Economy | Barry Knapp on Fed’s “Quadrilemma,” Lehman Brothers, and Job Market · IDENTIFIED FROM THE TRANSCRIPT
“A change in the community reinvestment act that Michelle Bowman thought required an act of Congress, but that Michael Barr, you know, the vice chair for supervision, Grunberg, the head of the FDIC, all thought they could do.”
2024-06-13 · Forward Guidance · Growth Scare Hits U.S. Economy | Barry Knapp on Fed’s “Quadrilemma,” Lehman Brothers, and Job Market · IDENTIFIED FROM THE TRANSCRIPT
“And personally, I think we lost a lot when we lost the investment banking industry because that's where the innovation came from. I mean, my own role in all this, innovation in the 90s was before there were ETF transactions, we were doing those trades for macro hedge funds. People were calling me up and saying, I want to get short to transports. We would do a program trade and get them short to transports before they were ETFs. You know, lots of different cool transactions like that. So it was a real dynamic industry. Now, one thing I would point out from a broad leverage perspective on the banking industry, and this is kind of key because, you know, there was the administration's proposal to increase the capital in the banking system by roughly 20%. You know, it was going to be a higher SIFI surcharge on the megabanks. It was going to be unsecured debt on larger regional banks.”
2024-06-13 · Forward Guidance · Growth Scare Hits U.S. Economy | Barry Knapp on Fed’s “Quadrilemma,” Lehman Brothers, and Job Market · IDENTIFIED FROM THE TRANSCRIPT
“capital regime which put zero risk weighting on it because it was AAA so it's a really it's a really complicated story this is you know you asked me early on about understanding the plumbing and all I'll just never forget sitting down in 2006 with all the money fun guys in our repo desk and learning about sieves right special investment vehicles that were funding all these transactions like drawing arrows and like holy cow this is amazing like didn't even realize how big an industry is to become so yeah it was it was complicated it was arcane and uh you know ultimately a very difficult thing to untangle because of the leverage right i mean the fact that there was just too much leverage is the real answer to the you know why the investment banking industry is no more”
2024-06-13 · Forward Guidance · Growth Scare Hits U.S. Economy | Barry Knapp on Fed’s “Quadrilemma,” Lehman Brothers, and Job Market · IDENTIFIED FROM THE TRANSCRIPT
“And long the AAA tranche, but then the AAA tranche just went down because Fanny and Freddie stopped buying it, liquidity problems. That's the piece that they never thought would default. And ultimately, it didn't. Like all that paper that Fanny and Freddie held, that they sued the banking system for in 2011. It never really pierced the thresholds and they never actually lost money on it. It just traded a 50 cents on the dollar for liquidity.”
2024-06-13 · Forward Guidance · Growth Scare Hits U.S. Economy | Barry Knapp on Fed’s “Quadrilemma,” Lehman Brothers, and Job Market · IDENTIFIED FROM THE TRANSCRIPT
“Well, yeah, yes and no. I mean, I think the real big losses on mortgages from people that looked at that and said, you know, we could never have a national house price decline. Those were entities like the German Landisbanks, ABN Amro had a giant position. Citibanks $40 billion of CDOs was regulatory arbitrage because the capital requirement on that was effectively zero because it was AAA rated, right? So that was a monstrous mistake on their part. Lehman Brothers never lost money on it. You saw at the conference the guy that headed mortgages at Lehman, Dave Shear. His number two went to work at DE Shaw, Rich McKiddie. Bear Stearns, who had a problem with it, they actually had the trade, the right trade on. They were short to triple B.”
2024-06-13 · Forward Guidance · Growth Scare Hits U.S. Economy | Barry Knapp on Fed’s “Quadrilemma,” Lehman Brothers, and Job Market · IDENTIFIED FROM THE TRANSCRIPT
“Right, so yeah, banks had far less capital, and now they have more capital, in large part due to regulatory reasons. I also think that people say, oh my God, credit card delinquencies are going up. That could, you know, implying that could cause some sort of financial crisis. I would strongly disagree with that. I mean, if there's a recession, obviously could spike up. Banks would lose money, but banks know that credit cards are risky. They know that people it's an unsecured loan. But they know that. So they provision for that accordingly. Whereas I think, and obviously I wasn't there, but banks thought that mortgages were safe. And so that they could have super high leverage about it against it because housing had never gone down nationally. And, oh, I'm diversified. I own mortgages in LA and New York, even though we had a downturn everywhere.”
2024-06-13 · Forward Guidance · Growth Scare Hits U.S. Economy | Barry Knapp on Fed’s “Quadrilemma,” Lehman Brothers, and Job Market · IDENTIFIED FROM THE TRANSCRIPT
“Process out and said, Banks, you have to hold this much cash, and we're going to stand in the middle of every transaction. Not even comparable events, right?”
2024-06-13 · Forward Guidance · Growth Scare Hits U.S. Economy | Barry Knapp on Fed’s “Quadrilemma,” Lehman Brothers, and Job Market · IDENTIFIED FROM THE TRANSCRIPT
“Requirements, right? Bartie Frank and Chris Dodd calling him every week saying, hey, to meet these requirements, Fanny Freddie said, yeah, we bought this super senior piece of a subprime deal, even though the subprime stuff wasn't in disadvantaged regions, it was everywhere, right? 65% of all zip codes, according to Lehman Mortgage Research back in the day. You know, it's a tangled story. And one I'll eventually write a book about my perspective on because I was part of this broad risk meeting at Lehman and was trading Lehman's Capital at the time. It was before I became the equity strategist. Anyway, after the crisis, yeah, I think anyone who lived through that was always going to act differently and realize they had too much leverage at the time. But the regulatory regime just basically took the disciplining”
2024-06-13 · Forward Guidance · Growth Scare Hits U.S. Economy | Barry Knapp on Fed’s “Quadrilemma,” Lehman Brothers, and Job Market · IDENTIFIED FROM THE TRANSCRIPT
“Stearns, and that's who we competed against in the market. So anyway, they almost had no choice afterwards because of the capital requirements, liquidity coverage ratio, all of that sort of thing, where banks acting responsibly, you know, I mean, it's a real tangled up, complex story. Fanny and Freddie's role in facilitating the growth of the subprime market is an untold story. They bought essentially 40% of every subprime deal that got done from 2003 through 2008. They bought the super senior piece that no one else could possibly buy because it started out at LIBOR plus 10, went to LIBOR plus 30, maybe at the very end it was LIBOR plus 40. Those rates were uneconomic for anyone who couldn't run 60 turns of leverage like Fanny and Freddie did. They also helped them meet their community reinvestment act.”
2024-06-13 · Forward Guidance · Growth Scare Hits U.S. Economy | Barry Knapp on Fed’s “Quadrilemma,” Lehman Brothers, and Job Market · IDENTIFIED FROM THE TRANSCRIPT
“It's hard to say that they're acting more prudently after because, well, first of all, that the global financial crisis was a disciplining event, right? I mean, anyone who went through it, like Jamie Diamond, for example, is never going to forget it. So there's no chance that Jamie Diamond was going to take the risk. And by the way, for those who don't know this part of the story, he had hired, they had hired a big CDO team that wasn't quite up and running when the financial crisis hit, which is why they didn't have CDL exposure like Citibank did or otherwise. They just weren't in the business at the time. So thinking that these big universal banks have been around forever, they haven't been, right? It just started in the late 90s. So it was investment banks. And in those days, we didn't even consider JP Morgan or Bank America a competitor, right? Our competitors were Morgan Stanley, Goldman Sachs, Bear.”
2024-06-13 · Forward Guidance · Growth Scare Hits U.S. Economy | Barry Knapp on Fed’s “Quadrilemma,” Lehman Brothers, and Job Market · IDENTIFIED FROM THE TRANSCRIPT
“With checks and balances. So, anyway, we're kind of deep down in the weeds in this abundant reserve regime, but it essentially comes down to whether you believe that markets can ultimately allocate capital better than what Schumpeter thought would be some elite technocrats that could do, you know. could create innovation and do a better job, right? And I'll never believe that. 40 years in the business, I've been watching governments make mistake after mistakes. Markets swing, but that's how that's part of the disciplining process. And so in some ways, what happened to Lehman Brothers and the financial crisis was inevitable because of the amount of leverage.”
2024-06-13 · Forward Guidance · Growth Scare Hits U.S. Economy | Barry Knapp on Fed’s “Quadrilemma,” Lehman Brothers, and Job Market · IDENTIFIED FROM THE TRANSCRIPT
“You're subject to the whims of policymakers. And that's ultimately a part of the global financial crisis story that's not really told was when Paulson decided Lehman doesn't get a bankruptcy, but two days later AIG does and Fannie and Freddie do. And then when we got to the auto bailout, which basically gave the union health benefits a bigger payout than the creditors, right? This is not the way it would have been settled in the courts. So, you know, ultimately it took the government backstopping the 19 biggest banks to stop the run in March of 2009. And that's the problem, right? That's Hayak's rule of law is when the government has ultimate control over who wins and who loses, not the courts.”
2024-06-13 · Forward Guidance · Growth Scare Hits U.S. Economy | Barry Knapp on Fed’s “Quadrilemma,” Lehman Brothers, and Job Market · IDENTIFIED FROM THE TRANSCRIPT
“In the sense that if a Fed official wakes up one day and decides we don't want to bail out that bank, which is what happened to Lehman Brothers, right? We had sufficient capital or sufficient liquidity. You can read the book The Fed and Lehman Brothers by that Hopkins professor Lawrence Ball, but Paulson just decided, no, no, Lehman doesn't get a deal. I need a political sacrificial lamb here. And it's going to be Lehman Brothers, right?”
2024-06-13 · Forward Guidance · Growth Scare Hits U.S. Economy | Barry Knapp on Fed’s “Quadrilemma,” Lehman Brothers, and Job Market · IDENTIFIED FROM THE TRANSCRIPT
“All of us had too much leverage, right? I got asked about this on CNBC in something like 2010 or so. And it's probably Joe Kernan who asked me, when did you know you were in trouble? And I said, well, we were shorting mortgage reits in May of 2008 with 25 turns of leverage. With assets we knew the government would ultimately backstop because we thought that was too much leverage. We had 30 turns of leverage and we had a much less liquid asset base. The bid ask spread on your assets are as big as your capital base and then there's a run, you can't possibly sell those assets and cover the capital hole, right? So interbank lending was part of that disciplinary disciplining process and to just eliminate it and have the fed sit in the middle of all transactions to me just makes the system ultimately risk.”
2024-06-13 · Forward Guidance · Growth Scare Hits U.S. Economy | Barry Knapp on Fed’s “Quadrilemma,” Lehman Brothers, and Job Market · IDENTIFIED FROM THE TRANSCRIPT
“Was a market disciplining dynamic, right? Was the interbank lending markets, the commercial paper markets, you know, if somebody wasn't managing their finances right, then other banks would be less likely to lend to them as much as I suffered with the Lehman Brothers bankruptcy having been promoted to managing director in 2000 and having a big slug of stock that was untradable. You couldn't sell it for five years. I hate the idea that that happened, but”
2024-06-13 · Forward Guidance · Growth Scare Hits U.S. Economy | Barry Knapp on Fed’s “Quadrilemma,” Lehman Brothers, and Job Market · IDENTIFIED FROM THE TRANSCRIPT
“Right. And maybe just a consequence of if you want to do quantitative easing, you're going to cause the amount of reserves in the system to explode. And the only reason that banks would borrow and lend to each other is because they don't have enough reserves and they're bidding them up”
2024-06-13 · Forward Guidance · Growth Scare Hits U.S. Economy | Barry Knapp on Fed’s “Quadrilemma,” Lehman Brothers, and Job Market · IDENTIFIED FROM THE TRANSCRIPT
“I don't understand why they thought that was necessary. But, well, I do. It was the run on repo in 2008. I don't think that was the right solution.”
2024-06-13 · Forward Guidance · Growth Scare Hits U.S. Economy | Barry Knapp on Fed’s “Quadrilemma,” Lehman Brothers, and Job Market · IDENTIFIED FROM THE TRANSCRIPT
“City home composite home price index, which is retraced the small amount. Now we're higher still. I think it's 49 is the number. So now, and we drew in REIT money to buy residential real estate to turn them into rentals, crowding out millennials who were forming households at the fastest rate since boomers in the 70s. If that's not capital misallocation or what the Austrians would call malinvestment, I don't know what is, right? So again, I think the Fed first order business is shrinking that influence on the long end and getting out of that business of influencing those long-term rates. Again, that Kansas City Fed president Schmidt paper articulates these points quite well. And later on we can talk about the fact that they basically shut down the interbank lending market. They just stand in the middle of all transactions.”
2024-06-13 · Forward Guidance · Growth Scare Hits U.S. Economy | Barry Knapp on Fed’s “Quadrilemma,” Lehman Brothers, and Job Market · IDENTIFIED FROM THE TRANSCRIPT
“Is going to be the biggest item in the budget. There's a cost to that, right? But the ultimate benefit for that is economic efficiency and more efficient allocation. I'll cite an example. When the Fed was buying $40 billion of mortgage-backed securities per month and reinvesting something like 55 or 60 billion during 2021, when we had an absolute refi boom, the spread of mortgages to treasuries went to all-time lows. So it wasn't just that individuals got to refinance their mortgages. This was an absolute panacea for Blackstone, for any of the big REITs, right? Mortgage Reits, untraded Reits or otherwise. And they could raise money cheaply, go ahead and buy residential real estate. We had a 46% spike in that Killer home.”
2024-06-13 · Forward Guidance · Growth Scare Hits U.S. Economy | Barry Knapp on Fed’s “Quadrilemma,” Lehman Brothers, and Job Market · IDENTIFIED FROM THE TRANSCRIPT
“Ago talked about how percentage of bills that they hold in their portfolio is only something like three percent. So they've got a longer than index duration in their SOMA portfolio. They could simply any securities that roll off reinvest in the front end. Maybe it's not just bills. I think it should be bills, but start shortening that duration and lessening their influence on their average duration is probably six, six and a half. I haven't checked it recently, but that's where it was going in. And they've been holding it constant. So, you know, six-ish. They should just let security, any securities that come due reinvest into the front end. And that would lessen the impact on the longer-term part of the curve. Now, in an environment where we're running 7% budget deficits and interest rates.”
2024-06-13 · Forward Guidance · Growth Scare Hits U.S. Economy | Barry Knapp on Fed’s “Quadrilemma,” Lehman Brothers, and Job Market · IDENTIFIED FROM THE TRANSCRIPT
“Before we get to a real discussion of the ample reserve regime and go back to a scarce reserve regime, which I'm not sure there's any way back from. But one thing they could do for sure and lessen their influence on the back end of the market was would be to shorten the duration of their portfolio, something of a reverse operation twist. So we know that they're going to keep the mortgage pay down cap at $55 billion per month. And they're unlikely to get anywhere close to that unless we have a recession. And then they'll probably get weak knees on it anyway. But what they could do with their treasury portfolio is stop reinvesting in longer duration treasury. So after the last 10 year auction, almost a month ago now, they bought $5 billion of tens, you know, 15 minutes after the auction so as to hold their portfolio duration stable. Waller, a couple of speakers.”
2024-06-13 · Forward Guidance · Growth Scare Hits U.S. Economy | Barry Knapp on Fed’s “Quadrilemma,” Lehman Brothers, and Job Market · IDENTIFIED FROM THE TRANSCRIPT