YouSaid · the spoken record

John Maxfield

lines on the record: 119
first: 2023-04-04
most recent: 2023-04-04
sittings or episodes: 1
sources: podcast

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“Rising rates, large influx of liquidity in 2020, quantitative easing that caused banks to then increase deposits because they bought back the securities that the Fed bought. So M2 went up. That's the chart that everyone's talking about. And now M2 is negative. And the volatility, you know, this happened over six years maybe would be okay, but over two years, it's quite extreme. Am I close?”
2023-04-04 · Forward Guidance · The Bank Panic Is Already Over (Here’s Why) | John Maxfield · IDENTIFIED FROM THE TRANSCRIPT
“It depends if your asset sensitive or liability sensitive. If you're asset sensitive, then it's great. If your liability is sensitive, then it's horrible. And what I mean by that is that if it's asset sensitive, the yield on your assets is going to outpace in a rising rate environment, the yield on your assets is going to outpace the yield on your liabilities. It's the opposite of your liability sensitive. And so that's a bank can be positioned however a bank wants to be positioned. There's derivative instruments. I mean, whatever you want, you can do. The smart thing is to be neutral. The smart thing is to be neutral because there's one thing we know. It's that nobody can predict this stuff. And so you just stay neutral. You earn a healthy return on equity and just move on down the road. What is going on? What's the root cause of all of this? What is the root cause of all this? What would you say the root cause is of all this?”
2023-04-04 · Forward Guidance · The Bank Panic Is Already Over (Here’s Why) | John Maxfield · IDENTIFIED FROM THE TRANSCRIPT
“Like, let's buy a bunch of long bonds and bet that they're going to go down. So he loaded up their balance sheet with these long bonds. They didn't go down because then Paul Volcker came in and jacked him up to nearly 20%. That's it for Pennsylvania kind of into the arms of the FDIC. And then again, early in the 70s, same exact thing with the bank right outside of Detroit that did the same thing, but with municipal bonds. So again, you see these things over and over and over again in time.”
2023-04-04 · Forward Guidance · The Bank Panic Is Already Over (Here’s Why) | John Maxfield · IDENTIFIED FROM THE TRANSCRIPT
“So they go and they buy long term a whole bunch of $70 billion or something like that long term mortgage backed securities. Okay. And so and then it got caught because the interest rates go up and the value of those things go down and then you have people valuing those and saying that bank is insolvent. So let's run on it. Let's go get our money before everybody else does. So what you have there, you have a mismatch type of like you have a failure as a result of duration, right? because they're way too long interest rates go up. So you look in history and lo and behold there's a bunch of banks that have failed for this very same reason. The 23rd largest bank in the country in 1980 was the biggest bank in Philadelphia. It was called First Pennsylvania Bank. And it did the same thing in the late 70s. It was run by this guy named John Bunting. He was a real character. Like they were like the interest rates are going up because we had their energy crisis. And so John Bunting is like, let's, they can't go up much further.”
2023-04-04 · Forward Guidance · The Bank Panic Is Already Over (Here’s Why) | John Maxfield · IDENTIFIED FROM THE TRANSCRIPT
“That's right. So, a deposit is like a non interest bearing deposit is actually one of the longest term, the longest duration liabilities on the bank balance sheet. In fact, I may be the longest duration liability on the bank balance sheet. And so what do banks do? They match the duration of their liabilities with the duration of their assets. And so in Silicon Valley, they're sitting there thinking like, well, what are we going to do? Let's match the duration.”
2023-04-04 · Forward Guidance · The Bank Panic Is Already Over (Here’s Why) | John Maxfield · IDENTIFIED FROM THE TRANSCRIPT
“This. But if you're a publicly traded bank and you do not own a controlling interest in that bank, you're kind of at the whims of like other people telling you what they think you should or shouldn't do. You know what I mean? And so, you know, that's kind of an element of play. So what did it do? It went out and it bought. So deposits, a lot of people think that like deposits are an example of borrowing short and lending long. Borrowing short because you have a depositor can go get that money whenever they want it.”
2023-04-04 · Forward Guidance · The Bank Panic Is Already Over (Here’s Why) | John Maxfield · IDENTIFIED FROM THE TRANSCRIPT
“Had a company that goes out and gets a ton of money, gets a ton of money that's floods in. And they say, what are we going to do with this money? What are we going to do with this money? Because they have to do presumably they have to do something with it because they are 60 billion in deposits going into 2020. Then they got, they grew 130 billion just inflow of deposits. So they tripled in size as a result of that. So if you just leave that money and do nothing with it, you leave it in cash. Well, you still have to service that money. You still have to service those customers. So you're still absorbing the cost of servicing them, but you're foregoing the revenue, right? So what does that do? That causes your return on assets to drop precipitously, right? And like, look, if you're a bank and you're a private bank and it's the John and Jack bank, we own 100% of the bank, that doesn't matter. We'll just let it drop. We'll still make money, which is not as much. And like, we just got to get through.”
2023-04-04 · Forward Guidance · The Bank Panic Is Already Over (Here’s Why) | John Maxfield · IDENTIFIED FROM THE TRANSCRIPT
“Maybe thousands of banks that have failed for the same damn reason in the past, okay? And so you think about the buckets, you put all the all these different buckets. And like the biggest bucket that causes bank failure is commercial real estate. Commercial real estate, I'm just like, it gets, I mean, I don't know if it's 70% or 75%, but we're talking like a healthy majority of bank failures are caused by commercial real estate. In fact, the first failures in the country were caused in 1809 were caused by commercial real estate. That's not what this was, right? What this was was.”
2023-04-04 · Forward Guidance · The Bank Panic Is Already Over (Here’s Why) | John Maxfield · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, and so okay, keep this in mind. Remember, there's 18,000 failures that we know of confirmed failures on the records. And there's like a dozen reasons banks fail. So what does that mean? It means that like for every bank that fails today, there's probably hundreds.”
2023-04-04 · Forward Guidance · The Bank Panic Is Already Over (Here’s Why) | John Maxfield · IDENTIFIED FROM THE TRANSCRIPT
“See, now you see now that's the New York in you. See, that's good. So that just for everybody knows. So the Bank United States, its failure is the thing that caused the Great Depression that transformed a large recession into the Great Depression because that's the thing that triggered all the bank or a lot of the bank, the major, major, major bank runs when it failed in December of 1930.”
2023-04-04 · Forward Guidance · The Bank Panic Is Already Over (Here’s Why) | John Maxfield · IDENTIFIED FROM THE TRANSCRIPT
“Think it's easy to look at Silicon Valley Bank and be like, that is an anomaly. Because off the top of your head, Jack, do you know of any other banks that have failed like that?”
2023-04-04 · Forward Guidance · The Bank Panic Is Already Over (Here’s Why) | John Maxfield · IDENTIFIED FROM THE TRANSCRIPT
“But then they're not. And so it's like a red herring almost, it causes that. So that vulnerability to the mistakes, to the consequences of mistakes. And then the other major point or part of this is that you're also very prone to make the mistakes in the first place. And that's because you can grow a bank as fast as you want because there is literally an infinite demand for credit. And if there's something that we know about humans is that they want the rewards in the short term, not in the long term.”
2023-04-04 · Forward Guidance · The Bank Panic Is Already Over (Here’s Why) | John Maxfield · IDENTIFIED FROM THE TRANSCRIPT
“That's the second reason. The third reason is that when a bank, so when you look at a bank's balance sheet, like, you know, whatever, 60, 70% of it is made up of loans, right? Well, a loan is you make the loan this period this time, and then it goes, goes, goes, goes, goes. And then there's hopefully a payoff. Well, during this whole period of time, you have very little sense. I mean, you can have sense, but like you don't know if the loan is good until it's paid off. And so yeah, there's this opacity in your cost of good sold. And so you can like make a whole bunch of loans and you see this all the time. Make a whole bunch of loans. They're all going just fine. And people are like, oh, our loans are great.”
2023-04-04 · Forward Guidance · The Bank Panic Is Already Over (Here’s Why) | John Maxfield · IDENTIFIED FROM THE TRANSCRIPT
“3.6% of its loans were on non performing. So it's got like a 96 and something on its test and it still failed, right? So you have the leverage. You have the fractional reserve banking. And so that means that you're borrowing deposits, right? Your deposits, you're borrowing those, but those can be taken at any point in time, right? And so if you're like, you never have all the cash on hand that you need to satisfy all your depositors. So if there's a run, I mean, it just, there's a liquidity crisis. It just happens really quickly.”
2023-04-04 · Forward Guidance · The Bank Panic Is Already Over (Here’s Why) | John Maxfield · IDENTIFIED FROM THE TRANSCRIPT
“So that means that a bank is five times more likely to fail than it is to succeed. So that's an important thing to keep in mind. So yes, you should always anticipate that there will be more bank failures. And the question is why? Why are there bank failures? Why are banks so prone to failure? Well, first I guess we should lay this out. Like they are more prone to failure. They're about, I think it's like 30 to 40 percent more prone to failure than your typical business if you take an average through a full cycle. And the reason they are, well, there's two kind of broad reasons. One is that they are very, very vulnerable to errors that they commit, to unforced errors, really, really vulnerable. And they're vulnerable because one, they use a lot of leverage. So 10x leverage, like in Washington Mutual failed, only 3.4% of it, I think.”
2023-04-04 · Forward Guidance · The Bank Panic Is Already Over (Here’s Why) | John Maxfield · IDENTIFIED FROM THE TRANSCRIPT
“So, the thing to know about banking is that failure is the rule, not the exception. So I've kind of collected as much data as on this as I can. I've kind of built out a data set going all the way back to the beginning of the country. And what I found is that there's roughly like 18,000 banks that have failed. And that's super conservative because there's like voids in the data, like in between the revolution and the civil war, like there are certain states that didn't collect very good data and all that kind of stuff. So we know it's really conservative. Let's just call it 18,000. And then let's maybe, I don't know, another 57,000 because then there's 22,000 mergers. Let's call say 7,000 of those are potentially mergers in lieu of failure. So let's call it 25,000 failures in the past, right? There's less than 5,000 banks today.”
2023-04-04 · Forward Guidance · The Bank Panic Is Already Over (Here’s Why) | John Maxfield · IDENTIFIED FROM THE TRANSCRIPT
“In this firm. And so, but again, then the government came in with a whole bunch of stimulus, took care of it, and then that kind of like dissipated the panic. And so, you know, where this will fall in the history of kind of panics and stuff like that is on that side, like the 1884 one or the 1907 one, where it's like, you know, the government was able to come in and take care of it before it caused. It seems to be the case at least before it caused any significant economic damage.”
2023-04-04 · Forward Guidance · The Bank Panic Is Already Over (Here’s Why) | John Maxfield · IDENTIFIED FROM THE TRANSCRIPT
“And then that took care of that, so like there's issues for a few days, then that dissipated the issues. And then there was one in 1884. And that one was predicated by the failure of a company called Grant& Ward. Grant Ward was like a brokerage company, like a Wall Street kind of like investment bank brokerage company, but it was named after President Grant. Like he was literally a partner in this.”
2023-04-04 · Forward Guidance · The Bank Panic Is Already Over (Here’s Why) | John Maxfield · IDENTIFIED FROM THE TRANSCRIPT
“It's a big deal, right? But for the people who are involved, anybody impacted would be obviously a really big deal. But like stepping up, you know, a million miles from the perspective of the banking industry and what this all means and all of that, I would say that we've had nine major banking panics in the history of the United States. So 1819, 37, 57 civil wars, a big panic, 73, 90, 1893, the Great Depression, the 80s, and then the financial crisis. Okay, so those are the big ones. And so what happens there is those are followed by long periods of time where the economy is depressed. There have been probably 20 smaller panics since the beginning of the country. And the ones that are best known are the panic of 1907, when JP Morgan locked a whole bunch of people in his library until all these bankers decided to help. Other banks in town”
2023-04-04 · Forward Guidance · The Bank Panic Is Already Over (Here’s Why) | John Maxfield · IDENTIFIED FROM THE TRANSCRIPT