With US Treasuries at 5%, Bank of America is close to 45x levered, at 6-7% infinitely levered.
For all of 2008, as Lehman was failing, the value of their core (safety) capital (US Treasuries) was moving higher, NOT lower.
*As interest rates move down, bond prices move up.
After the banks failed in 2008, they were forced to hold far more "quantity" and "quality" of capital. This - ladies and gentlemen - is sowing the seeds of the next crisis. This high-quality capital (US Treasuries) is in flames, dramatically lower in price.
(3)
*Boston Fed.
Banks own US Treasuries, especially on the front end of the curve, high-quality bonds off 10-20%. Again, this is the banking system's core capital. Then assets -- like commercial real estate -- on a bank's balance sheets -- become even more problematic and increase leverage.
(4)
Bottom line - for all of 2008, as Lehman was failing, the value of their core (safety) capital (US Treasuries) was moving higher, NOT lower. Thus, with core capital under stress, the leverage backdrop is accelerating across the banking system today. A small move lower in problem assets means a lot if your core - "high quality" - capital is stressed.
Drawdowns
Bank of America -45%
Citi C -45%
vs.
JP Morgan -9%
HSBC -7%
*Divergence of this magnitude, speaks to meaningful issues at hand.
The question no one is asking the Fed, why did you stress test the banks on credit quality, NOT duration?
*GERMAN 10-YEAR YIELD RISES TO 3% FOR FIRST TIME SINCE 2011 - Bloomberg
**TREASURY 30-YEAR BOND YIELD HIT 5% FOR FIRST TIME SINCE 2007 - Bloomberg
State of Play
The Fed is blowing up the banks while Core PCE inflation is light years from their target - still up near 4%. Complete with labor strikes all over the USA juicing inflation. Do you impair the banks at the price of reaching your inflation target?
(2)
What’s under the surface forcing a shift in Fed policy? I’ll say in again, higher for longer” is absurd baloney, a 6% + Fed funds and Bank of America is near insolvency.
*See @WilliamCohan ‘s really important take here. “
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