On April 13, CNN’s business site blasted out the headline “banking is sound.” Who uttered those words? No less than Lael Brainard, former Vice Chair of the Federal Reserve and presently director of President Biden’s National Economic Council. CNN flattered Brainard. Really, what else was she going to say?
The above question isn’t a trick one, and it’s not meant to be. By definition banking is always “sound” to Brainard, Speaker of the House Kevin McCarthy, Senate Majority Leader Chuck Schumer, President Biden, and just about anyone else in power. The previous truth isn’t evidence of a political conspiracy or trouble with the truth or anything else sinister sounding. Instead, it’s just a statement of reality.
Banking is always sound firstly because banks by their name don’t take big risks. Much more important, however, is that even the world’s greatest investors are more often than not only aware of an unsound bank or banks after the fact. If anyone doubts this, notice how at least as of now no major fortunes were made shorting formerly sound financial institutions like Silicon Valley Bank and First Republic.
It’s a reminder that “banking is sound” per Brainard six weeks ago simply because if it weren’t, or it hadn’t been, Brainard wouldn’t be a former Fed official or NEC head. That is so because those who can see what’s unsound ahead of time are billionaires, or soon will be.
The greatest modern example of this truth is John Paulson. While he was already extraordinarily rich by most any measure by 2008, what placed him firmly in the billionaire’s club was a well-timed bet against mortgages. Paulson purchased mortgage insurance on the incredibly cheap, and did so while his coverage at investment banks like Goldman Sachs were saying behind his back that he didn’t know what he was talking about. “Incredibly cheap” is italicized in the previous sentence as a reminder that Paulson was very much alone in his view that mortgages were sound. Markets are information personified, but as evidenced by how cheaply Paulson was able to purchase mortgage insurance, there was a powerful consensus that all was well.
Please keep this in mind with the need of pundit types to routinely roll out Ben Bernanke quotes of old about how the mortgage market was fine, banking was sound, etc. Those are used to besmirch Bernanke, but the joke is on those who think they’re scoring a direct hit. To be clear, what’s just been written is not a defense of Bernanke. If there are individuals who have mocked his obnoxious conceit more over the years than yours truly, they would be very few in number. Certainly less than one hand. That Bernanke didn’t have a faint clue about the health of the mortgage market is and was a statement of the obvious, and we know this to be true based on the immense fortune earned by Paulson.
The simple truth is that if the markets had been at all aware of trouble ahead in the earlier parts of 2008, we never would have heard of Paulson. That’s not a knock on him and the risky bet he made in the face of major ridicule as much as it too is a statement of the obvious.
Bringing it all back to the present, prominent centers of editorial opinion who should know better are scoring cheap points by blaming the Fed for not seeing the problems within Silicon Valley Bank and First Republic ahead of time. What a waste of ink. As evidenced yet again by the seeming lack of fortunes made in the demise of both, few if anyone knew. It’s a reminder that “banking is sound” from government officials is less informative than the sky is blue.