I hesitated to 'like' this sobering look at our reality on the ground because it seems like an affirmation of the radical view that we're pretty much up shit creek, and have been for decades. Urk. Nonetheless, taking a hard look at the details is like drinking some foul-tasting medicine that ends up shrinking a tumor, giving you time to beat the cancer, if you have the will to live baked fully into your genes. So I read this whole damn article, pausing for breath now and again. I don't personally have a mortgage, as I was lucky enough to be able to buy a house outright, a matter largely of accidental timing, as well as buying a modest house sized only for my needs, not a bloated monstrosity you could erect a full size race track or ballroom inside, with separate bathrooms for each member of the family, including the pets. But I did have a HELOC when finessing the purchase of my current home while simultaneously putting my former home on the market. And Jesus H. Christ what a shock it was to look at the interest right up front like that. Egads and Gadzooks. And I have completed eight years of college (with not one finance class in all that time).Might I suggest that financial education worth the name be mandated for every student before graduation from high school? And also, that you compare how the mortgage fiasco looks in other countries, ones hopefully not largely beholden to the banking industry.
I would bet that 95% of Americans are unaware that if there is another banking crisis, the bank(s) will seize their deposits in what has been labeled, a bail-in. Following the 2008-2009 crisis changes were made to the Dodd-Frank banking law that allows banks to reclassify deposits as credit obligations. This turns account holders into unsecured creditors in a bankruptcy. As an unsecured creditor, a depositor would be well down the list of those receiving payouts in a bankruptcy settlement. Ahead of them would be such arcane things such as holders of derivatives. When crafting the new law, financial world insiders proposed that if a bail-in was contemplate, "those that needed to know" would be advised in advance. This means that ordinary folk would be left holding the bag as usual. FDIC would cover $250K per account as long as its money held out but then congress would have to appropriate more money. If you don't believe this, Google bail-in and read the bad news.
I get why people worry about that, but the U.S. framework isn’t set up the way a lot of “bail-in” posts make it sound.
Dodd-Frank didn’t reclassify deposits or make them fair game for seizure. Deposits have always been bank liabilities — that’s how fractional-reserve banking works — but they’re still protected by the FDIC up to $250,000 per depositor, per bank. When a bank fails, shareholders and bondholders get wiped first, then (if needed) uninsured deposits, and insured deposits are covered in full.
The “bail-in” authority in Dodd-Frank applies to unsecured creditors and investors, not to ordinary depositors. The FDIC and the Fed use the “Orderly Liquidation Authority” to unwind big institutions without taxpayer bailouts, not to raid checking accounts.
You’re right that Europe and Canada have written depositor bail-ins into their rules; the U.S. hasn’t. If another SVB-type failure happens, the government will almost certainly protect deposits again because the political and systemic cost of not doing so would be far worse.
So it’s good to be cautious, but the claim that banks can just seize deposits in a U.S. “bail-in” isn’t accurate in my opinion.
In an interview, trump talked about 40 year mortgages being the norm, and suggested that 50 years wasn't a big change. Nobody has a 40 year residential mortgage. He is just ill informed and shooting from the hip. Like when he "rediscovered" that old word, "groceries"...
As a non-American I found this to be an interesting and enlightening read.
El Cheeto surrendering finances to a 50-year IOU (easy for him to do as at this point he's unlikely to see another five) is at least entirely consistent though as he's basically already surrendering the century to China by dumping the technologies of the future for the sake of what has been pithily described as "industrial taxidermy"...
The time for correction was the 2008-2009 crisis, but Obama and his administration decided that the banks were too big to fail. The banks got a warning with a slap on the wrist (a stern talkin' to!) and now they are back to the same old schtick....only worse!
This is one of your very best pieces. Really well done and thank you. Could you explain more about how the hedging duration part works? Like if I’m a sovereign wealth fund or an insurance company holding a portfolio of long-dated MBS, how does holding long-dated Treasuries hedge my duration risk? It seems like each asset class offers similar exposures, with the difference being credit quality (?ha?) and refinancing risk.
I hesitated to 'like' this sobering look at our reality on the ground because it seems like an affirmation of the radical view that we're pretty much up shit creek, and have been for decades. Urk. Nonetheless, taking a hard look at the details is like drinking some foul-tasting medicine that ends up shrinking a tumor, giving you time to beat the cancer, if you have the will to live baked fully into your genes. So I read this whole damn article, pausing for breath now and again. I don't personally have a mortgage, as I was lucky enough to be able to buy a house outright, a matter largely of accidental timing, as well as buying a modest house sized only for my needs, not a bloated monstrosity you could erect a full size race track or ballroom inside, with separate bathrooms for each member of the family, including the pets. But I did have a HELOC when finessing the purchase of my current home while simultaneously putting my former home on the market. And Jesus H. Christ what a shock it was to look at the interest right up front like that. Egads and Gadzooks. And I have completed eight years of college (with not one finance class in all that time).Might I suggest that financial education worth the name be mandated for every student before graduation from high school? And also, that you compare how the mortgage fiasco looks in other countries, ones hopefully not largely beholden to the banking industry.
I would bet that 95% of Americans are unaware that if there is another banking crisis, the bank(s) will seize their deposits in what has been labeled, a bail-in. Following the 2008-2009 crisis changes were made to the Dodd-Frank banking law that allows banks to reclassify deposits as credit obligations. This turns account holders into unsecured creditors in a bankruptcy. As an unsecured creditor, a depositor would be well down the list of those receiving payouts in a bankruptcy settlement. Ahead of them would be such arcane things such as holders of derivatives. When crafting the new law, financial world insiders proposed that if a bail-in was contemplate, "those that needed to know" would be advised in advance. This means that ordinary folk would be left holding the bag as usual. FDIC would cover $250K per account as long as its money held out but then congress would have to appropriate more money. If you don't believe this, Google bail-in and read the bad news.
I get why people worry about that, but the U.S. framework isn’t set up the way a lot of “bail-in” posts make it sound.
Dodd-Frank didn’t reclassify deposits or make them fair game for seizure. Deposits have always been bank liabilities — that’s how fractional-reserve banking works — but they’re still protected by the FDIC up to $250,000 per depositor, per bank. When a bank fails, shareholders and bondholders get wiped first, then (if needed) uninsured deposits, and insured deposits are covered in full.
The “bail-in” authority in Dodd-Frank applies to unsecured creditors and investors, not to ordinary depositors. The FDIC and the Fed use the “Orderly Liquidation Authority” to unwind big institutions without taxpayer bailouts, not to raid checking accounts.
You’re right that Europe and Canada have written depositor bail-ins into their rules; the U.S. hasn’t. If another SVB-type failure happens, the government will almost certainly protect deposits again because the political and systemic cost of not doing so would be far worse.
So it’s good to be cautious, but the claim that banks can just seize deposits in a U.S. “bail-in” isn’t accurate in my opinion.
https://ellenbrown.com/2023/02/25/what-will-happen-when-banks-go-bust-bank-runs-bail-ins-and-systemic-risk/
In an interview, trump talked about 40 year mortgages being the norm, and suggested that 50 years wasn't a big change. Nobody has a 40 year residential mortgage. He is just ill informed and shooting from the hip. Like when he "rediscovered" that old word, "groceries"...
https://youtube.com/shorts/KBzTaI1AHyM?si=rKdZHwb3kUHEWksi
As a non-American I found this to be an interesting and enlightening read.
El Cheeto surrendering finances to a 50-year IOU (easy for him to do as at this point he's unlikely to see another five) is at least entirely consistent though as he's basically already surrendering the century to China by dumping the technologies of the future for the sake of what has been pithily described as "industrial taxidermy"...
The time for correction was the 2008-2009 crisis, but Obama and his administration decided that the banks were too big to fail. The banks got a warning with a slap on the wrist (a stern talkin' to!) and now they are back to the same old schtick....only worse!
This is one of your very best pieces. Really well done and thank you. Could you explain more about how the hedging duration part works? Like if I’m a sovereign wealth fund or an insurance company holding a portfolio of long-dated MBS, how does holding long-dated Treasuries hedge my duration risk? It seems like each asset class offers similar exposures, with the difference being credit quality (?ha?) and refinancing risk.