Of Course It’s Rigged

A few days ago the Fed announced a new treasury buy back program. All of the early 2023 bank failures had to do with holding low coupon treasuries in a fast moving higher yield environ. Losses were and still are astronomical.

Most estimates place bank losses at around $2t. But are they really losses? No. If they hold until duration the government will make them whole. But they’ll need to wait a long fucking time for that to happen. In the meantime, capital will be constrained because their balance sheets are shredded.

The solution, naturally, is for the Fed to buy back low coupon bonds and issue higher yielding ones. This way, the Fed gets to eat their losses, pay the banks a much higher rate of return, and enjoy their post Fed jobs at one of those illustrious institutions.

If you’re waiting for a bank collapse based off those treasury holdings, forget it. We might get some small bankruptcies and minor fracas, but on the whole the only way banks will face severe dislocation is via the customer. If unemployment spikes and delinquencies rise, then we might see a real banking collapse.

The game is rigged in favor of status quo. Those in a position to profit from this may do so. Others who are not afforded the luxury of liquidity watch in horror as scam after scam occur making the worst people richer.

I closed -14bps in a hedged book, heavy shorts on the banks and some long VIX exposure.