Stocks plunged today due to significant bearish pressure from, what else, but the banking industry. The Dow, S&P, and Nasdaq Composite all fell significantly while Treasurys rallied. Regional banks endured the heaviest selling of the day as banking anxiety surged yet again.
Small banks PacWest, WesternAlliance, and Zions all collapsed, enduring double-digit losses through noon. Larger regional banks sunk lower, too, as did global banks, albeit not nearly as much.
Berkshire Hathaway vice chairman Charlie Munger may have been to blame for today’s bank rout after giving a very pessimistic interview last evening with the Financial Times.
Munger pulled no punches, saying that American banks are “full of bad loans” as a result of plummeting commercial property prices – something we covered several weeks ago as a major market hazard waiting to strike.
“Trouble happens to banking just like trouble happens everywhere else. In the good times you get into bad habits,” Munger explained.
“When bad times come they lose too much.”
On why this is happening, the billionaire offered the following:
“It’s not that damned easy to run a bank intelligently,” Munger said.
“There are a lot of temptations to do the wrong thing.”
In other words, Munger’s comments suggest that Silicon Valley Bank, Signature Bank, and First Republic Bank are by no means “unique” or “outliers.”
Three of the four largest bank failures in American history just happened over the last two months. Why couldn’t other regional banks face the same fate? Worse yet is that none of these banks were skewered by their bad commercial real estate loans, which Munger believes are going to be the catalyst for another crisis.
“A lot of real estate isn’t so good anymore,” he added.
“We have a lot of troubled office buildings, a lot of troubled shopping centers, a lot of troubled other properties. There’s a lot of agony out there.”
But it wasn’t just Munger who was worried; many top strategists echoed his message at yesterday’s Milken Conference, which is held every year to discuss economic and social issues.
“It’s a bad day to be an office owner in San Francisco and Chicago,” said Marc Rowan, co-founder and chief executive officer of Apollo.
“We are going to see losses. Every piece of real estate, everywhere in the world, that was purchased pre-the run-up in interest rates, as a result of the change in interest rates, is now worth less,” Rowan continued.
“It does not mean it won’t come back. It does not mean it won’t ultimately be a good investment, but in the short term, we have significant dislocation.”
Citi CEO Jane Fraser is worried about lower-rated commercial real estate being mixed into mortgage-backed securities.
“It’s the return-to-office phenomenon that’s driving it,” she said.
“We’re not talking about the local doctors’ office, we’re not talking about all of the office space either.”
In short, banks are at risk again due to bad commercial real estate loans, and a rate hike tomorrow will only make things worse for regional banks that are failing to compete with global ones.
Could this clear a path for a rate pause tomorrow, though? Possibly. The CME Groups’ FedWatch tool still sees an 88% chance of a 25 basis point rate increase, though. And, with inflation still far too high for the Fed’s liking, the odds favor a hike plus a slightly hawkish Powell press conference – both of which bulls should make bulls even more uncomfortable.
