YouSaid · the spoken record

Mustafa Chowdhury

lines on the record: 93
first: 2023-03-19
most recent: 2023-03-19
sittings or episodes: 1
sources: podcast

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“Over a long period of time. So that's what I am recommending my clients. In terms of it's not a trade recommendation, but just an idea suggestion. That tips curve is good because Fed could actually put up with a higher target than they are saying that their target is.”
2023-03-19 · Forward Guidance · The Banks Didn’t Hedge Enough | Mustafa Chowdhury · IDENTIFIED FROM THE TRANSCRIPT
“but they could also the chance of not hiking chance of a hike is still not zero there is a possibility that they could still hike and that would defy the market that would just be bad for the market because market has pretty much priced out any hike market's priced at 100 basis point ease by the end of the year even all the way down to fives and tens markets price if you look at the tips curve two-year tips it's gone down to you got it's gone down a lot so market is positioned for expectation of a permanent high Inflation so There is a scenario that's possible where Fed just gives up hiking even at this high inflation rate and your tips portfolio and then we could have inflation for a several years at a higher than a target current 2% level so tips portfolio could do very well”
2023-03-19 · Forward Guidance · The Banks Didn’t Hedge Enough | Mustafa Chowdhury · IDENTIFIED FROM THE TRANSCRIPT
“If we take at face value, Feds speak for the last few weeks after the January payroll number, I would say that they could charge ahead with another 25, even if the forwards are not saying another 25. That's not zero chance. But my common sense tells me that they will not hike in the next week's meeting because it will be some turmoil if they don't hike and they could just wait for a few months and see where things go and then restart hiking if inflation kicks in again already very high.”
2023-03-19 · Forward Guidance · The Banks Didn’t Hedge Enough | Mustafa Chowdhury · IDENTIFIED FROM THE TRANSCRIPT
“Interest rate even higher is going to be deadly, I think, for banks. I think if the Fed cuts, that's the best thing that can happen to the banking system. They don't have to cut it back to zero. Maybe 100, maybe 100, maybe 200 cut will be stabilize the Mark II market. Mark II market loss situation. No matter how we're sitting on HTM or whole loans reported, not reported. If I buy a bank stock, I'm going to check the mark-to-market situation of their balance sheet. Most informed investor will do that. So it cannot be avoided unless it by lowering interest rates. The best thing that can happen to them.”
2023-03-19 · Forward Guidance · The Banks Didn’t Hedge Enough | Mustafa Chowdhury · IDENTIFIED FROM THE TRANSCRIPT
“Yes, I have a Twitter account, but I don't tweet as often as I should. But I will start tweeting going forward. And it's easy to search Chaudhry M-U-S-T at Chowdhury MUST. But I will start tweeting more in the future. So I do have a Twitter account and plan to get more involved with tweeting. So easy to reach me there. I can also be reached at macrohive.com Mustafa.chowdhuri at macrohive.com. I am in other social media linkedin, all of the social media so you can search my name anywhere and you can get that. I basically focus at macro hive, not necessarily on the banks. It's just a part of the bigger task which I basically Advice clients on interest rate curb positioning, volve positioning, rate views, etc, FX views, et cetera.”
2023-03-19 · Forward Guidance · The Banks Didn’t Hedge Enough | Mustafa Chowdhury · IDENTIFIED FROM THE TRANSCRIPT
“Right. And one thing I think that just highlights how the problem here is interest rate risk, not credit risk. A lot of the banks that are having issues have credit quality that is off the charts good. I mean, Silicon Valley Bank, over half of their loans were in capital call loans, which has had one default in the history of the entire bank. So this is about interest rate risk. And I'm glad we're talking about rate risk and not credit risk. Mustafa, I've got a final question for you, but before I do, how can people get in touch with you? Tell us about the work that you do at macro hive. And do you have a Twitter account? After my interview, Dominique created her Twitter account. Anyway, we can get you on Twitter.”
2023-03-19 · Forward Guidance · The Banks Didn’t Hedge Enough | Mustafa Chowdhury · IDENTIFIED FROM THE TRANSCRIPT
“I have a feeling that there would be a lot of mergers coming up, small ones taken over by the large. Adds a little bit more complexity. Mergers are a little easier if banks don't have a lot of HTM securities in their balance sheet because otherwise they'll have to mark all the HTM securities during the merger process when you tube. So that's why when banks are ready to have a lot of mergers and takeovers, they tend to have more AFS securities so that it's mechanically easier to merge. But that's a detail. But yes, there will be a lot of consolidation coming up.”
2023-03-19 · Forward Guidance · The Banks Didn’t Hedge Enough | Mustafa Chowdhury · IDENTIFIED FROM THE TRANSCRIPT
“Will be less clearly fewer bank runs as we expect the uninsured deposits will be all deposits will be guaranteed by the government. So there will be probably less likely to have bank runs. But there could be a problem with insolvency the and then the deposits still moving from smaller banks to larger banks there will be still some turmoil in the banking system not in the form of bank runs but the backstop that has been offered in the last weekend's package seems very generous right now may actually be easily tapped At some if especially if fed hikes. If Fed goes to six percent Fed funds, seven percent fed funds, eight percent fed funds, as my colleague Dominic is calling for, then yeah, we will have more banks taken over. We'll have tapping more into the fund, the backstop funds.”
2023-03-19 · Forward Guidance · The Banks Didn’t Hedge Enough | Mustafa Chowdhury · IDENTIFIED FROM THE TRANSCRIPT
“Long period of time and as in the past interest rate hike scenarios may not realize. Just use your app to move money. You don't have to go to the branch. You know what the banks are bombarding you with money market funds bombarding you with you with new high interest rates it's harder to that would also be an assumption. None of this create a banking panic chaos deposit flight is the wrong word to use but repricing of net interest margin tighter Is much more than assumed, and”
2023-03-19 · Forward Guidance · The Banks Didn’t Hedge Enough | Mustafa Chowdhury · IDENTIFIED FROM THE TRANSCRIPT
“It's just the compression of margin is very fast. And the margin of net interest margin would be faster than expected. And the other is this technology that take into account that deposits will reprice so quickly to the new higher interest rate. If they assumed it in their capital calculation properly, then they would have more capital. But again, that was very hard to figure out. The technology has a big effect on how quickly people have more information. There is social media, more people are sharing information. So hoping that a lot of depositors will keep their deposit at a very low interest rate for”
2023-03-19 · Forward Guidance · The Banks Didn’t Hedge Enough | Mustafa Chowdhury · IDENTIFIED FROM THE TRANSCRIPT
“Agree that it's very well capitalized. That's probably why it allowed the banks not get into a hiking cycle, not hedging as much because it may not have been needed given their capital situation But when the interest rate goes up to a level that's way beyond the The level that you assumed or used as an input in figuring out your capital Then you start to think that maybe you start to be more exposed and less capitalized than you had assumed. Maybe also for credit risks, they are very well capitalized. And credit risk is not a problem in the United States just because the households are balance sheet is so solid.”
2023-03-19 · Forward Guidance · The Banks Didn’t Hedge Enough | Mustafa Chowdhury · IDENTIFIED FROM THE TRANSCRIPT
“But so now let's go to the positives, which is deposits can be sticky. People, there will be some percentage of people who keep their money as a checking count at 0% interest. Banks can lend money at higher rates, right? So that's why people say rising rates were good for banks, even though we now have this huge issue. The banking system is much better capitalized after the great financial crisis than it was before. In fact, Steve Eisman from the big short, I saw Peter did another interview where he said it was, I think the best capitalized I've seen in my lifetime. So there are many positives on the banking system. I'm sure there are many which I did not mention. But so how do you weigh the risk and reward, the good and the bad of the banking system, given that there are many positives, but there's also this issue, which you seem to believe is quite huge and it's unhedged.”
2023-03-19 · Forward Guidance · The Banks Didn’t Hedge Enough | Mustafa Chowdhury · IDENTIFIED FROM THE TRANSCRIPT
“I wouldn't think more than 20% hedge to this kind of scenario. Because 5% Fed funds rate or 4.75% funds rate is many standard deviation increase was not in the radar of anyone to hatch this kind of scenario. I have instruments that will protect them for this kind of scenario. When the interest rate was up maybe first few hikes, it was hedged better for this, but now I think the exposure is really high. Again, I don't have this one the accuracy. I'm just talking, thinking out loud rather than actually giving you an accurate number.”
2023-03-19 · Forward Guidance · The Banks Didn’t Hedge Enough | Mustafa Chowdhury · IDENTIFIED FROM THE TRANSCRIPT
“And what degree do you think they were hedged? If a 100% hedge, they made as much money with their hedges as the book value declined because of the interest rate. That was never going to happen because banks would never, it was a tail risk scenario the Fed would raise to 4.75%. But what percentage are we talking? 60% hedged, 40% hedge, rough number, of course.”
2023-03-19 · Forward Guidance · The Banks Didn’t Hedge Enough | Mustafa Chowdhury · IDENTIFIED FROM THE TRANSCRIPT
“the speed with which they have to reprice the deposit interest rate both directions it was there was no way they could hedge and they didn't hedge there may be some the big guys big boys did some hedging you can see in the balance sheet and off balance sheet derivatives report some idea about this extent of hedging but no banking system is not hedged It will make clear distinction now between the hedged and the unhedged and the big and the small going forward.”
2023-03-19 · Forward Guidance · The Banks Didn’t Hedge Enough | Mustafa Chowdhury · IDENTIFIED FROM THE TRANSCRIPT
“The book value of the health to maturity account is reported. The Marto market is, there is a mark to market balance sheet for the HTM book in the FDIC report. And I think in some financial report there is also some probably approximate mark-to-market of the loan book as well. So if someone takes a fine comb and they could figure this out, the total loss, there is no way the banking system is hedged in anywhere close to what is necessary because they never predicted that the Fed hike would be this large and they never predicted the effect of technology on repricing of deposit.”
2023-03-19 · Forward Guidance · The Banks Didn’t Hedge Enough | Mustafa Chowdhury · IDENTIFIED FROM THE TRANSCRIPT
“If there were hatched as an industry, then they wouldn't be underwater, the Median would not be underwater ten percent or more. So that's of their balance sheet. That's two plus trillion. Two and a half, probably trillion dollars underwater loss if they had hedged. What you see is some banks, if you look at their off-balance sheet reports on the, if you can go to FDIC's website and you can see those schedules, you will see some banks have swaps in place to hedge duration of their balance sheet. And you can get some idea about the size. Of course, the best way to see it, what is the mark-to-market value of the balance sheet? Some of that also reported in the FDIC.”
2023-03-19 · Forward Guidance · The Banks Didn’t Hedge Enough | Mustafa Chowdhury · IDENTIFIED FROM THE TRANSCRIPT
“On many of them hold to maturity securities, but what we're talking about, they said, Jack, they're hedged. Come on, it's irresponsible for you to say that without saying that they're hedged. And I looked into the hedging and I'm not an expert on it. So it's hard for me to read. What is this? It's a positive or negative. I'm a little confused at income or interest expense, whatever. But it didn't seem like the numbers on the hedging were anywhere comparable to the $113 billion. That's just one example of Bank of America. To what degree is it true that banks have hedged their interest rate exposure? And to what degree is it true that they've hedged enough?”
2023-03-19 · Forward Guidance · The Banks Didn’t Hedge Enough | Mustafa Chowdhury · IDENTIFIED FROM THE TRANSCRIPT
“Even that doesn't save the equity holders. So it's negative for equity holders no matter how you look at it, unless the Fed starts cutting again.”
2023-03-19 · Forward Guidance · The Banks Didn’t Hedge Enough | Mustafa Chowdhury · IDENTIFIED FROM THE TRANSCRIPT
“The bank deposits are safe because the government just guaranteed it, or it will extend the guarantee that they have given to the first two banks. So deposits are safe. Depositors are protected, and that's the intent of the government to protect the depositors, but they are not going to protect this equity holders or unsecured debt holders. The profitability, the margin compression is going to be happening going forward and faster compression if Fed hikes more. So you protect one part of the banking system which is deposits and you make other parts more risky. Can't do all three safe, then you'll have to fully nationalize the banking system.”
2023-03-19 · Forward Guidance · The Banks Didn’t Hedge Enough | Mustafa Chowdhury · IDENTIFIED FROM THE TRANSCRIPT
“When inflation is 6%. So there is no good choices right now for the Federal Reserve. And bank profitability will have to decline. And we saw that in the regional bank share prices. If you look at the KRE and all the ETFs, how they behave in the last few days, I wouldn't shop for low price cheap regional bank stock yet, not knowing what Fed will do first.”
2023-03-19 · Forward Guidance · The Banks Didn’t Hedge Enough | Mustafa Chowdhury · IDENTIFIED FROM THE TRANSCRIPT
“Feds got a two point almost two and a half trillion dollar reverse repo program which gives you full fair short term interest rate to a depositor so I can just go take my money out put in a money market fund that invests in feds river overnight river and risk free I fully reprise the new Fed fund new interest rates in the Fed so it's Fed itself put a program that will compete for deposits with the banking system so on the one side it will guarantee the deposit and on another side they are going to compete with the banking system so it's not necessarily just from one bank to the other or within one bank from And if talking about catch twenty two, if feds to shut it down the RRP program, then they'll have to pump another to one and a half trillion dollars into the banking system as reserves. That sounds like not QT but Q”
2023-03-19 · Forward Guidance · The Banks Didn’t Hedge Enough | Mustafa Chowdhury · IDENTIFIED FROM THE TRANSCRIPT
“Yeah. Yes, people, there may not be deposits going out of the bank, but bank have to pay a significantly higher interest rate on the deposits that they have now as they reprice it. So compression in net interest margin is going to be hard and fast and large. Completely opposite of what analysts were expecting last year that banks will actually make more by interest rate increase. So that's a profitability issue. But there is another piece to it, which is there is an attractive outlet for depositors that wasn't there before. That money can leave the banking system altogether and go to the Fed.”
2023-03-19 · Forward Guidance · The Banks Didn’t Hedge Enough | Mustafa Chowdhury · IDENTIFIED FROM THE TRANSCRIPT
“Right. And so on the banking system, you said deposit flight, a word that sounds scary and it can be scary for some of the regional banks, but many times it's you're withdrawing money from a deposit account that bears zero interest, a checking account, and you're putting it into a CD or a savings account. And so it's the bank. The money stays there. It just has to pay more for it. So it's a bank profitability issue, not a bank liquidity issue.”
2023-03-19 · Forward Guidance · The Banks Didn’t Hedge Enough | Mustafa Chowdhury · IDENTIFIED FROM THE TRANSCRIPT
“So that's risk number one, that if Fed does hike, it will be worse, the next hundred will be worse than last hundred. If it doesn't hike, then we got in a serious inflation problem in the economy. And which one is uglier? That's called the decision, a big decision quagmire I see for the Fed. You choose between two bad ones. There is no good ones in terms of choices for them for the next hype. Markets clearly pricing that they are not going to hike anymore. They're going to ease. And if the ease in the face of 6% inflation, that looks very ugly to me for the economy as a whole. So that's number one, that next hundred is not going to be pretty. Or not doing next or easing also not going to be pretty”
2023-03-19 · Forward Guidance · The Banks Didn’t Hedge Enough | Mustafa Chowdhury · IDENTIFIED FROM THE TRANSCRIPT
“And the agency whole loan book, the whole loan book may be Chunky Loss in their commercial mortgage losses as well, because a lot of the commercial loans are also real estate related. So you got a bunch of real estate related exposures that the next hundred basis point would be uglier than the last one in terms of what has happened so far. That might trigger a faster deposit flight because it will be much more prominent that depositors were sitting on low interest deposits in the banks would then be incented to move money out from regionals and small guys to the big ones at a much faster speed, making a clear distinction between types of banks, the size, etc.”
2023-03-19 · Forward Guidance · The Banks Didn’t Hedge Enough | Mustafa Chowdhury · IDENTIFIED FROM THE TRANSCRIPT
“Let's say path number one, they say inflation is more important than banks, and we are already protecting, we will extend what we give in to these two banks that will protect the depositors just decides to hike another hundred So the next hundred hike is going to be not the same as the last hundred hike because there's a third point that I would also talk about. That's the Fed's reverse repo, which is smaller, but it has an effect in actual mechanism. But the next 100 hike is going to be, in my opinion, pretty bad because banking system is starting now at a very, very high duration for like a big chunk of their mortgages or at least seven year duration, maybe seven and a half. And at that duration, 100 basis point could mean Every hundred base point means 7% loss on their mortgage book.”
2023-03-19 · Forward Guidance · The Banks Didn’t Hedge Enough | Mustafa Chowdhury · IDENTIFIED FROM THE TRANSCRIPT
“And so then it has never been sort of poked and checked whether how vulnerable that business is. But the size is that, again, there is no clear-cut numbers on it, but sizes that you hear is like at least 10 trillion and maybe significant higher than 10 trillion. so that we may be able to see what kind of risk the PE business has whether it's systemic or not because no one really knows how that what's the size of it what are the exposures of that business is any of that and as we are stressing we'll know more so i'll come to that later the first one this fed being torn with very high inflation and banks start To crack.”
2023-03-19 · Forward Guidance · The Banks Didn’t Hedge Enough | Mustafa Chowdhury · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, the problem number one is inflation that we are starting to break the system and haven't really done much in reducing inflation. So it leaves and then, so that's one, and I'll go to each one of them. Problem number two, no one knows much about the PE business in the global financial system because there's no market, there's no, who knows what the risk of that is.”
2023-03-19 · Forward Guidance · The Banks Didn’t Hedge Enough | Mustafa Chowdhury · IDENTIFIED FROM THE TRANSCRIPT
“Just for the two banks that failed, Signature Bank and Silicon Valley Bank, but perhaps they would do it for the future. And the money has to go somewhere. It goes, if it withdraws out from Silicon Valley Bank, it will go to JPMorgan, Bank of America. If it goes out from Bank of America, where is it going to go? So there's a lot of positive news on the banking sector that we haven't talked about. But just tell me about just how big of a problem you think this is again going back to your quotes of this happens every 10 years and it will get worse before it gets better.”
2023-03-19 · Forward Guidance · The Banks Didn’t Hedge Enough | Mustafa Chowdhury · IDENTIFIED FROM THE TRANSCRIPT
“There's a lot of positive news that we haven't discussed about, which is that it's also about the liabilities and the deposit base. So, for example, Bank of America, just by my own research, has about 113 billion dollars worth of unrealized losses on its security book. However, its deposit base is one of the most solid in the entire world. It's 30% of it, only 30% is uninsured, 70% of it isn't insured under the $250,000 limit. And as you said,”
2023-03-19 · Forward Guidance · The Banks Didn’t Hedge Enough | Mustafa Chowdhury · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, and I'll remember the loss on the mortgage hold on mortgages too, because those are in theory, even if they never have to be, they may not have to be sold. In theory, there is a value to them. I've seen other research that showed close to half the security loss is higher than the capital because it's a 10% on average loss. The capital is way smaller than the 10% on average, but there's a two tails. There are very safe banks on the one side of the tail, there are less safe banks on the other. If the feds guaranteed the The deposits, insured and uninsured, What it does, it protects us from a systemic bank run. So that's probably not going to happen.”
2023-03-19 · Forward Guidance · The Banks Didn’t Hedge Enough | Mustafa Chowdhury · IDENTIFIED FROM THE TRANSCRIPT
“You're saying half of the banking system could have negative equity in terms of the losses on these securities could be greater than the current equity or market cap or book value of the entire company.”
2023-03-19 · Forward Guidance · The Banks Didn’t Hedge Enough | Mustafa Chowdhury · IDENTIFIED FROM THE TRANSCRIPT
“One analysis that I have seen is the mark-to-market losses are below or more than the amount of equity they have for almost half the banking system.”
2023-03-19 · Forward Guidance · The Banks Didn’t Hedge Enough | Mustafa Chowdhury · IDENTIFIED FROM THE TRANSCRIPT
“Taking homeowners risk and putting on their balance sheet. And so they extended their duration. They took losses probably equivalent to just for the mortgage portfolio to the Fed and probably double with the rest of the non-securitized mortgage portfolio. So the research that I've seen that on average 10 to 11% of already mark-to-market losses in the banking system balance sheet.”
2023-03-19 · Forward Guidance · The Banks Didn’t Hedge Enough | Mustafa Chowdhury · IDENTIFIED FROM THE TRANSCRIPT
“They are subject to shareholders discipline, they are subject to bondholders discipline until last weekend they were also subject to depositors' discipline, but now government has backstopped the depositors. But they're not of the hook because shareholders will still want to know how much underwater the bank is given that they own some of the shares and how much the bondholders would like to know how much underwater the bank is in terms of the mark-to-market value. And that's where the banking system's mark-to-market value happen. Just like the Fed, where Fed took down a significant part of the homeowner's balance sheet from homeowners to its own book and actually doing duration QE, banking system is doing at something parallel.”
2023-03-19 · Forward Guidance · The Banks Didn’t Hedge Enough | Mustafa Chowdhury · IDENTIFIED FROM THE TRANSCRIPT
“And since its government, probably nothing will happen because of that. But they are actually, by doing that, they are doing QE, but what I call a duration QE, that they're doing QT on cache. They are doing QE on duration. They're pumping stimulus back by allowing homeowners to have less risk and appetite to take more risk. And that, in my mind, explains why risk premium has been fairly low at this point of the hiking cycle. So everything that I say about Fed also applies to the banking system. But the banking system is not fed.”
2023-03-19 · Forward Guidance · The Banks Didn’t Hedge Enough | Mustafa Chowdhury · IDENTIFIED FROM THE TRANSCRIPT
“Just a cash amount, and that's causing the reserves in the banking system mostly reducing the reserves on the liability side. But balance sheets are not just cash. Balance sheets are also the risk balance sheet, which is the duration on the asset side, duration on the liability side, and then other risks like convexity on the asset side and convexity on the bilability side. Fed is by extending the extension of the mortgage portfolio by the Fed, Fed is taking risk from homeowners balance sheets to their own balance sheet.”
2023-03-19 · Forward Guidance · The Banks Didn’t Hedge Enough | Mustafa Chowdhury · IDENTIFIED FROM THE TRANSCRIPT
“Precisely. So you have to look at a balance sheet just as the cash liabilities and you have assets on the liability size Fed have reserves and reverse repos, et cetera. On the asset side, they have treasuries, mortgages, and some other things. There is a dollar amount. So that's the cash balance sheet. And the QT that they're doing is basically reducing the cash balance sheet.”
2023-03-19 · Forward Guidance · The Banks Didn’t Hedge Enough | Mustafa Chowdhury · IDENTIFIED FROM THE TRANSCRIPT
“900 billion dollars of additional basis point risk on the Fed has been added just because the Fed raises rates. Is it too dramatic of an interpretation to say that in some way that is kind of like the Federal Reserve is doing QE not on securities but on convexity and duration?”
2023-03-19 · Forward Guidance · The Banks Didn’t Hedge Enough | Mustafa Chowdhury · IDENTIFIED FROM THE TRANSCRIPT
“The Fed has lost a lot of money on the mortgage-backed securities or lost money if they were to sell those, they would be at severely lower prices than at the price at which they bought them. And the rate at which those securities are declining in value, that has increased because they are negatively convex. So if I, you said $900 billion of 10-year treasury equivalent of convex. A basis point risk.”
2023-03-19 · Forward Guidance · The Banks Didn’t Hedge Enough | Mustafa Chowdhury · IDENTIFIED FROM THE TRANSCRIPT
“So I don't want to even attempt to estimate the losses, but I can estimate how much more riskier it has become. And Fed's not an exception. Banks accumulated mortgages at the same speed as they were originated as Fed did. So Bank's mortgage portfolio is probably somewhat similar in terms of how many 2% coupon, how many 2.5% coupon, how many 3% coupon in their book. So they may have extended in a similar way for their mortgage portfolio. So a Fed does another hundred basis point hike. They will lose what they lost in the past hundred base point hike. Because they have now more sensitivity to interest rate because of the negative convexity.”
2023-03-19 · Forward Guidance · The Banks Didn’t Hedge Enough | Mustafa Chowdhury · IDENTIFIED FROM THE TRANSCRIPT
“Mortgage rate increase. So you lose, I did an estimate just as simple Bloomberg model estimate of the duration at the beginning of the Fed, at the early 2022 versus duration of Fed's balance sheet, given that we know the coupons that Fed holds. So we can have some idea about each coupon how much more duration, how much more sensitive Feds mortgages are than they were at the beginning of the hiking cycle. And it will boggle your mind. And again, these are all approximate using Bloomberg duration estimates, not my own. It's almost similar to Fed adding 900 billion tenure treasuries into their balance sheet. Just from the extension of the mortgages they already have in their book given the duration change that has happened because Fed's portfolio is mostly 2% and 2.5% mortgages.”
2023-03-19 · Forward Guidance · The Banks Didn’t Hedge Enough | Mustafa Chowdhury · IDENTIFIED FROM THE TRANSCRIPT
“The consumers are super happy, and that's why it's so consumer balance sheet is so solid. I mean, I got it 2.9% mortgage. I'm not never going to sell my house or move anywhere. I'm going to hang on to it. So that's the happy side of it. That's probably why we see consumers so robust in the middle of all these hikes and all that, that their balance sheet not only feel wealthier, they also have a very low duration. And that's what I was getting to. So Fed loss, I don't know how much they don't report their loss. The Fed, I'm using the Fed's balance sheet to give an idea about the rest of the banking systems, how much they could have lost and how much their exposure. So on a 2.6 trillion mortgage portfolio, you had about 3.5%, at least in the primary mortgage.”
2023-03-19 · Forward Guidance · The Banks Didn’t Hedge Enough | Mustafa Chowdhury · IDENTIFIED FROM THE TRANSCRIPT
“Sorry, Mustafa, the new mortgage people, if they want to get a new mortgage, are paying 7%. If you got a 2.9% mortgage, you still are paying 2.9%, even though it's at 7%. And that's the gain in the American consumer that the Fed is bearing and that banks are bearing.”
2023-03-19 · Forward Guidance · The Banks Didn’t Hedge Enough | Mustafa Chowdhury · IDENTIFIED FROM THE TRANSCRIPT
“Unsecuritized mortgage cover. But to give you an idea of not just the loss that already happened, what might happen if you have a Fed does another hundred or two hundred or three hundred, every successive hundred is you lose more than the last hundred. Take the Fed's mortgage portfolio. So that's 2.6 trillion and they haven't been able to reduce it much while they are doing QE. Maybe it went down by 100 billion, but it's very minuscule. American homeowners, they were paying somewhere in the mid 3%. And now they're paying about 7%.”
2023-03-19 · Forward Guidance · The Banks Didn’t Hedge Enough | Mustafa Chowdhury · IDENTIFIED FROM THE TRANSCRIPT
“Remember, there's a second order, which is the convexity loss. So to give you an idea of how much the losses could be, because there's no full estimate, some people, researchers have said overall it's somewhere around the whole banking system is underwater by about 11%, and there's a distribution around it, some all the way to 30, some less than some like 5, 6%, but average. I saw one research that says about 10, 11%. That seems reasonable. So that's 11% of 23 trillion, still more than $2 trillion underwater for the banking system. And it's somehow under hidden under the health to maturity cover or”
2023-03-19 · Forward Guidance · The Banks Didn’t Hedge Enough | Mustafa Chowdhury · IDENTIFIED FROM THE TRANSCRIPT
“That's like size and speed, both I don't think the banking system was prepared for. 75 basis point clips in each hike there was significant losses in the banking system and it's mostly in the, you can see that in the AFS book how much they have lost. But even in the health to maturity and the whole loans, there are comparable losses. And that's the first order loss.”
2023-03-19 · Forward Guidance · The Banks Didn’t Hedge Enough | Mustafa Chowdhury · IDENTIFIED FROM THE TRANSCRIPT
“Especially in a year, you know, the hike that started with Jennet Yellen's, oh, 25 basis points, then a year later, okay, 25 every very, very gentle up to the 2018, which led to the Powell Pivot, this time extremely violent surge upward. So it was the speed with which it did it.”
2023-03-19 · Forward Guidance · The Banks Didn’t Hedge Enough | Mustafa Chowdhury · IDENTIFIED FROM THE TRANSCRIPT
“So they went unhatched. I think they were betting that the Fed, its reasonable bet in the sense that the Fed was not hiking. Fed left interest rate at zero for how many years, almost 13 years. So if you are in a zero interest rate scenario for 13 years, it's hard for you to imagine 5% Fed funds. Your incremental thinking is 100 basis point FET funds or maybe eight hikes, maybe 200 basis point FET funds, at the worst maybe 300 basis point FET funds. 500 is not in there was not in their radar.”
2023-03-19 · Forward Guidance · The Banks Didn’t Hedge Enough | Mustafa Chowdhury · IDENTIFIED FROM THE TRANSCRIPT