Incompetent Fed Tries to Bury Their Mistake with First Republic Bank Sale

April 30, 2023 - Avoid Crisis hosts Reynaldo Arellano and Allen Plyler interrupt their weekend to plead for the Biden Administration to  recognize the incompetence of the Federal Reserve and to try to stop the direct path to severe recession with an effort to save First Republic  Bank. They predict a sale to a large bank will not stop the crisis.

Key Points from Rey:
  • The war room is set up here. In real time they are working on it now.
  • Was the Big Bank $30 Billion injection done when they knew how deep the deposit run was?
  • The fair market value of the assets has to be determined.
  • First Republic bank had 30 year loans for around 3% rates and invested in Treasuries that thefair value, they are in trouble.
  • Regional banks are GameStop in reverse. There is not a single bank in the US that can survive a bank run. Every bank in the system is vulnerable.
  • Banks are important pillar of our economy and society. The accounting rules and the steep rise of interest rates created this situation. It needs exceptional and unusual action to resolve.
  • First Republic Bank lost more than half of their deposits in a very short time.
  • Small banks are not lending as they have in the past. The credit issue in our system will limit the economy. Jobs and investments are impacted. Lending terms are going to choke out growth in the economy.
  • Does it mean every bank should be putting in a “going concern” disclosure to their financial statement?
  • Every single bank has these issues, and all could have a bank run.
  • There are enough banks around maybe the shock in real estate won’t be that big. But people can react emotionally.
  • Wall Street sharks are circling.
  • What if China is shorting the bank stocks? This pillar of our economy is vulnerable.
  • The dominos here are not good. SVB and Signature had different risk issues, but the regulators didn’t do what they needed to do.
  • Labor shortages are causing issues.
  • Things are happening faster now. We can’t take time to fix this as more things will break.

Key Points from Allen:
  • Auction for First Republic bank is going on. Who are they protecting here?
  • We saw SVB fail, Signature Bank fail, and now they are asking for Big Banks to help take over the banks in trouble.
  • The friendly bankers, with here to help message, was a way to make the bank die and then be here to pick up the pieces.
  • Too big to fail is a misnomer. All banks have a balance sheet that is a derivative.
  • Why are these banks even publicly traded? Where is the SEC on this?
  • The accounting rules need changed for the banks.
  • There is a regulatory failure here. SVB should have been taken over long ago based on the MRAs and MRIAs issued.
  • This is going to go from a banking crisis to a political crisis.
  • Janet Yellen and Jerome Powell are the ones to blame. There should have had meetings with the banks and worked to make the capital secure.
  • There are enough banks around maybe the shock in real estate won’t be that big. But people can react emotionally.
  • The next regional to fall is ‘X’ and let’s go attack it. Investors can make money now in the
  • regional with the strategy, short, short, short, the regional bank and they will fail. Hedge funds across the world know this.
  • Imagine if the SEC determined to stop the shorting in the regional banks. It would reinflate the Regional Banks stock prices.
  • Covid money flooding in is a part of the cause of the issues today. The banks didn’t know what to do. It was ok to save America, but now it is not ok to save the lenders to America?
  • Every small town has its wealthy people in the local community banks. They will take their money out of the banks when they see bank failures.
  • Maybe the Treasury only wants big banks. But the fight on inflation is not right because we are not going to have inflation, and instead we are going to have a severe recession. There are high risk loans that are not going to be paid back. This is consistent with prior lending periods where excess risk was taken.
  • The Fed needs to provide guarantees to make a deal with First Republic Bank to happen.
  • Joe Biden is missing how critical this is. If he doesn’t do the right thing, this banking crisis is going to turn into turmoil and severe recession.
  • When you see panic, it is real. When you see fear, it’s real. When you see the crowd react, it’s real.
  • Even the big banks are vulnerable here.
  • There is risk in the commercial real estate market, and in home prices if there are not jobs being created. The Bay Area has more risk now with losing SVB and First Republic Bank.
  • Credit Suisse action was related to SVB failing. Are banking issues in Europe contained? Do we feel safe?
  • The government should use the weekend to stop the shorting, guarantee the deposits, and change the accounting rules. Otherwise, it is a $30 billion flea bag.
  • Fear and contagion is still out there. Action needs to be taken in a thoughtful way. There isn’tmuch time left to fix this.
  • This is a real show for real people in real time.

Creators and Guests

Allen Plyler, CPA, MPM
Allen Plyler, CPA, MPM
Allen Plyler, CPA, MPM is an experienced CFO in Technology, Start-ups and Financial Services with focus on large scale accounting implementations, evaluating emerging accounting Standards and SEC external reporting for publicly held companies. He is experienced in structuring capital markets and equity deals while also providing consulting to CEO and CFOs for business strategy.
Reynaldo E. Arellano, CPA PFS CGMA
Reynaldo E. Arellano, CPA PFS CGMA
Reynaldo E. Arellano, CPA PFS CGMA is a Certified Public Accountant (CPA) with professional designations as a Personal Financial Specialist (PFS) and Certified Global Management Accounant (CGMA). In addition to providing traditional CPA services such as bookkeeping, accounting, and taxes (planning, compliance, and representation) his Firm also offers tactical CFO services and strategic business advisory services. Mr. Arellano started in the financial profession as a Big 8 auditor, then an accounting software consultant, then a Controller eventually becoming a CFO, and held NASD and life insurance licenses (presently inactive). Mr. Arellano has consistently proven to have the highest levels of integrity, intelligence and innovation. He has held numerous managerial (C-suite) and leadership (board of directors) positions within corporations and non-profit organizations.
Incompetent Fed Tries to Bury Their Mistake with First Republic Bank Sale
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