Clueless Yellen fails to stave off bank crisis as First Republic sinks

There are leaders who rise to the moment. Think Churchill and Roosevelt facing down the Nazi threat. Ronald Reagan‘s famously accurate assessment of the former Soviet Union as an “evil empire.”

The moment now is also in need of leadership. Does Joe Biden have the chops to face down multiple global threats and secure our borders? And does his economic team, led by Treasury Secretary Janet Yellen, understand what could be in store for the economy as yet another bank heads for failure?

Sleepy Joe, of course, has been such an obvious disaster, it’s hard for even the mostly coddling White House press corps to ignore his incessant bungling.

Yellen, meanwhile, has been given a total pass even though her stewardship has been equally inept. No greater example of Yellen’s cluelessness can be found than her stuttering attempts to adequately deal with the still-smoldering banking crisis.

As I write this, another bank, First Republic, is heading for government receivership. As I reported earlier this week on Fox Business, execs at all the big banks say First Republic is a goner, if not now, someday soon, because its business is beyond repair.

Yet Yellen’s leading a last-ditch, futile effort to save it for no other reason than to save face. She wants to fool the American people into believing the banking system and even the entire economy is fine, when it’s not.

Consider that for weeks now, Yellen’s message has been one of optimism. Fed rate hikes caused some financial indigestion (aka two mid-size bank failures), but the worst was over. The US economy was poised for a soft landing; slower growth to squeeze out inflation but no steep recession. This rosy scenario was predicated in part on her belief that a significant banking crisis had been averted, and bank lending would soon return to prior levels.

The collapse of Silicon Valley and Signature banks weeks ago were one-offs because she and her team swooped in and threw money at the problem, insuring all deposits, even those above the government limit of $250,000. It didn’t matter that it was a bailout for rich, tech-company types with ties to the Democratic Party. Systemic risk was averted.

First Republic Bank branch
First Republic is heading for government receivership.

That is until we heard the recent news coming from First Republic — a large regional bank with a once-stellar rep also dealing with rich people and high-end businesses. It announced last week that despite an initial Yellen-inspired private-sector bailout, it too is on the brink once again.

Its clients saw through Yellen’s happy talk, yanked their money out, and deposited it all in the nearest JPMorgan branch. More money is likely heading for the exits, which means First Republic is on the verge of collapse.

As this column goes to press, all my sources with direct knowledge of the situation describe First Republic as a “zombie bank.” It has enough cash maybe to hang around for a while, but that’s about it. Because of its underwater assets depressed by rising rates and underperforming loans, it’s too weak to compete. If its stock continues to drop, insolvency isn’t far away.

These bank executives also say the right thing for Yellen & Co. to do is put First Republic out of its misery and into government receivership, where depositors are paid off at the $250K insurance limit and no more. Shareholders are wiped out, its assets are sold at a discount. But that’s what is supposed to happen when you take too much risk.

Meanwhile, Yellen should turn her attention to the broader implications of the bank contagion, what it means for lending, and the health of the US economy, which isn’t good if mid-size banks keep failing and business lending is sharply curtailed.

As of today, Yellen seems to be doing the opposite. She’s still drooling happy talk about the banking system. She’s also doubling down on her mistakes that caused this banking crisis in the first place, making it more difficult to escape.

Treasury Secretary Yellen should turn her attention to the broader implications of the bank contagion.
Treasury Secretary Yellen should turn her attention to the broader implications of the bank contagion.

Recall: Yellen and her team approved and devised all the Biden spending blowouts that sparked inflation. She prodded the Fed to keep printing money well into the COVID recovery, igniting more inflation that she didn’t see coming until too late.

When the Fed needed to stamp out inflation through higher rates, Yellen didn’t have even a rudimentary idea of how the financial system’s plumbing was so damaged through easy-money risk-taking until banks began to fail.

First Republic almost became one of those failures along with Silicon Valley and Signature banks in the early stages of the bank tumult. At Yellen’s request, execs at JPM, BofA, etc. extended the lender a lifeline, $30 billion in deposits on a temporary basis to prop up its finances.

Now Yellen wants a do-over for First Republic, I am told, aka another private-sector bailout. The bankers are balking because, unlike Yellen, they can read a balance sheet and First Republic’s is a zombie, they say, that is nearly impossible to save.

Rather it needs to be put into receivership so Yellen and her team can start coming up with ways to prop up the US economy.

And by all means, the bankers concede, don’t cover all deposits over $250,000 — it will just encourage more risky behavior.

If we have learned anything from all our financial crises over the years, it is that allowing the consequences of excessive risk-taking (losing money and worse) makes for the best type of financial regulation. The bailout-friendly Yellen may not be able to grasp this, but they’re harsh, teachable moments.

In the meantime, it would be nice if someone also taught Yellen to read a bank balance sheet.

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