The Fed’s Secret, Ongoing Bank Bailout that Just Keeps Growing

I teach active investors how to get higher returns with less risk by learning how markets actually work. Join Heresy Financial University: https://bit.ly/hrsymbr 

See omnystudio.com/listener for privacy information.

Episode Transcript

Speaker 1 (00:00):
When you hear the words bank bailout, what exactly comes

(00:03):
to mind? Is it the Great Recession? The financial crisis?
Is it the movie The Big Short? Maybe it reminds
you of the time that a bunch of greedy, dumb
banks used customer deposits, loaded up on worthless assets, and
then when they all realized they were worthless, the Federal
Reserve comes in buys those assets from the banks at
full price, letting the banks off the hook without realizing

(00:27):
any of the losses. Well, you may not be surprised
to hear that what I just described, while it does
fit what happened during the financial crisis, is also the
description of what has been happening behind the scenes in
the banking system since March of twenty twenty three. And
not only has it been happening continuously since then, it
has only been growing. In two thousand and eight, the

(00:48):
worthless asset was mortgage backed securities. Today it's United States treasuries.
But while this bailout of the banking system continues to
grow to record highs on a weekly basis, it is
scheduled to end in just a few months in March
of twenty twenty four. So the question is what happens
to banks, to treasuries, to the bond market and everybody

(01:10):
else once this bailout finally ends. Well to find out,
we have to take a little bit of a trip
back in time to when the crazy money printing started
in twenty twenty. It's actually incredible how fast the time
has gone. But that was almost four years ago now,
and you probably remember the frenzy that is accompanied by
a loose money environment when the money printers turn on,

(01:31):
when the interest rates drop, everybody's trying to spend money
like crazy and make money like crazy. Massive frauds, massive bubbles,
the scammers come out of the woodworks, and everybody is
trying to get extraordinary returns. And as it turns out,
banks are obviously no different. During twenty twenty and twenty
twenty one, banks were sitting on this cash trying to

(01:54):
figure out what is it that we should do with
this cash. And if you remember, at that time, the
Federal Reserve, specifically Powell was saying things like, we're not
even thinking about thinking about raising interest rates. We're here
to try and stabilize the economy, make sure a crash
doesn't happen. We're gonna keep the money printers on and
keep interest rates low. So what did the banks do.

(02:15):
They believed the Fed who was telling the truth, and
so they loaded up on US treasuries. Because if you
think that interest rates are going to stay low, and
you're sitting on a bunch of newly printed cash, why
would you not put it in the safest place possible,
buy US treasuries and get that risk free return. And

(02:35):
that's exactly what banks did. They gorged on treasuries. So
here's why that's a problem. The price of a bond
and the interest rate, the yield on bonds is inversely correlated.
Consider the fact that if I borrow one hundred dollars
from you at five percent interest rate, then I'm gonna
have to pay you back one hundred five dollars. Let's

(02:58):
say a couple of months from now, interest rates everywhere
else go up, So now instead of the going interest
rate being five percent, the new going interest rate is
ten percent. Let's also say at the exact same time,
you need to get out of this arrangement. You can't
wait until a whole year passes for me to pay
you back the one hundred five dollars, so you need

(03:18):
to sell this debt to somebody else, well, you're not
going to be able to sell this debt, this contract
between us for one hundred dollars, because if you sell
it for one hundred dollars to somebody else, I'm going
to pay them back one hundred five dollars, which means
they're only going to get a five percent return. But
if they take that same one hundred dollars and loan
it out to somebody else, they'll get the going rate

(03:40):
of ten percent, which would give them one hundred ten dollars.
So the only way that you're going to convince anybody
to buy this debt from you is if you increase
the yield or in other words, decrease the price, because
no matter what happens at the end, I'm paying back
one hundred five dollars to whoever I owe it to you,
whether it's you or somebody else, which means if you
you want to sell this debt to somebody, you're probably

(04:02):
going to have to sell it for ninety five dollars
because then when somebody pays ninety five dollars to buy
that debt from you, they're going to get one hundred
five dollars back from me, which is roughly ten percent.
We're just rounding here to make the math easier. So
you loaned me one hundred dollars expecting to get a
five percent return, but because you had to exit the
debt before maturity, before I paid you back, you had

(04:25):
to sell it at a loss of five dollars for
a total of ninety five. So now you see where
the problem arises with banks loading up on US treasuries
during twenty twenty and twenty twenty one. During that time period,
interest rates were at rock bottom levels. The ten year
Treasury was trading under one percent until January of twenty
twenty one, and even into twenty twenty one, it barely

(04:47):
got above one and a half percent. And as long
as these banks can hold that debt until maturity, there's
no problem. They're gonna collect back the principle plus the interest.
That's the problem because in fl stuck around far longer
and far higher than anyone at the FED or anybody
in charge of monetary or fiscal policy you could have

(05:08):
ever imagined, because apparently they don't know how these things work.
And so the FED panicked and they embarked on one
of the fastest and most aggressive cycles of rate hikes
in history. And we saw the yield on the ten
year Treasury go from a bottom of a half percent
in August of twenty twenty and it climbed and climbed
and climbed as the Federal Reserve raised interest rates until

(05:31):
it peaked at five percent in October of twenty twenty three.
Going from a half percent to five percent is a
ten x increase in the interest rate, which means at
the same time, you have catastrophic destruction of the values
the prices of those bonds, those previously existing bonds that
were issued at half a percent, one percent, or one

(05:52):
and a half percent, they're worth far less than they
were worth when those loans were made because the going
interest rates now are much higher. So if you need
to get out of those old bonds, you must sell
them at a much lower price, otherwise nobody will buy
them now. Again, this is no issue. If you just
hold on to the bonds until maturity, the borrower will

(06:13):
simply pay back the principle plus interest, and this is
what the banks were hoping for. But obviously in March
of twenty twenty three, this all blew up in banks'
faces and The new banking crisis erupted in March of
twenty twenty three, starting with Silicon Valley banks collapse. What
banks were not anticipating was a bank run, where individuals decide,

(06:33):
we're going to pull all of our cash out, and
the reason why banks were not banking on this is
because bank runs rarely happen. The reason why bank runs
rarely happen, though, is because bank runs themselves are in
many cases not possible. If all the people go to
withdraw their funds from the bank, the bank will be
able to meet those withdrawal requests, which means those people

(06:56):
don't have to worry about taking their money out now
because they know they can get it out. Ironically, the
only times that bank runs happen is when people can't
get their money out because somebody on the inside gets
wind to the fact that the banks don't have enough
to meet those withdrawal requests, which means that that first
person takes their money out, then they call up the
people they're closest to and say you should go get

(07:18):
your money out, and the bank run erupts. The problem
with this is that it wasn't just Silicon Valley Bank.
Every single bank was in the exact same situation. There
was no bank in America that was not underwater on
its portfolio of assets, which means if a bank run
happened anywhere else, the exact same thing would happen, the
bank would fold. As a result, the Federal Reserve stepped

(07:39):
in and created a new bailout facility called the Bank
Term Funding Program. This is the chart that I showed
you earlier of the Bank Term Funding Program. You can
see it was never in use as far back as
this chart goes, because when it was created in March
of twenty twenty three, that was the first time it
was able to be used, and the usage of this

(08:02):
facility skyrocketed within one month to eighty billion dollars. So
what exactly is the Bank Term Funding Program? Why is
it a bailout of the banks, and even farther, why
is it a bailout of the treasury market and the
entire bond market? Real quick, I am running a fifty
percent off sale for Herese Financial University, But there are

(08:22):
only ten slots available for this sale. First come, first serve.
It is only open to the first ten people who
sign up. If you're interested, I'll explain more at the
end of this video, so stick around if you want
the details. So what exactly is the BTFP the Bank
Term Funding Program. Well, according to the Federal Reserve, this
facility was created to support American businesses and households by

(08:43):
making additional funding available to eligible depository institutions. Oh how
nice they're doing this to support American households and businesses.
This facility offers loans of up to one year in
length to banks or other eligible depository institutions. Institutions can
pledge collateral like US treasuries, mortgage backed securities, or other

(09:04):
forms of debt, and most importantly, these assets will be
valued at par. If you don't know what that is,
that is the biggest deal of the BTFP. So I'm
going to explain. Imagine we rewind the clock and the
year is two thousand and nine. You bought your house
for five hundred thousand dollars, but if you were to
sell it on the market today, you could only get
two hundred and fifty thousand for it. So you're sitting
on a fifty percent loss, which is the same position

(09:26):
that banks were in with most of their US Treasury portfolios.
The Bank Term Funding Program at the FED would be
like the FED going to you in two thousand and
nine and saying, hey, I know you bought your house
for five hundred grand, and I know if you sold
it to anybody else on the open market right now,
you'd get two hundred and fifty grand. But if you
sell it to us, we will pay you the full
five hundred grand, because that's what you paid for it,

(09:47):
so that's what it's worth. So we'll buy it from
you at full price so that you don't have to
sell it on the open market and take a loss
and affect the prices of the other houses in your neighborhood.
Sounds pretty nice, right. The only caveat to this is
that you have to repurchase the house back from them
in one year. And according to this fact cheep from
Federalreserve dot org, the BTFP is a temporary facility and

(10:11):
will shut down on March eleventh of twenty twenty four,
just a couple months from now, and to me, the
wildest part of this whole thing is how banks actually
access the BTFP. In order to obtain an advance under
the BTFP, eligible borrowers must submit a request using a
standard template email to its lending reserve bank at the
time it requests its first advance, like literally send an email.

(10:36):
Can you imagine sitting there ahead of your bank typing
up an email to your federal Reserve bank saying, Hey,
can I please access some of that free money and
sell you some of my underwater securities at full price
so that I don't have to shut down from a
bank run. Thanks Jamie Dine. And this is essentially the
reason why the BTFP is a bailout for all banks.

(10:56):
Because if you are a bank and you are sitting
on unrealized losses, assets that are worth less and what
you paid for them, you can sell them to the
FED right now for full price. Get access to that cash,
and do something else with it, anything else with it.
The only promise you have to make is that you'll
buy that asset back from them in a year. This
means banks don't have to worry about all those withdrawal

(11:19):
requests the deposit flights. They can meet that as much
as it happens, And as we can see from the
chart of the Bank Term Funding Program, it is skyrocketing
in usage lately. As of January third, the record usage
of this facility hit one hundred and forty one billion dollars.
So the situation that started in March of twenty twenty three,

(11:40):
or at least when we noticed the situation when Silicon
Value Bank failed, it is only getting worse under the hood.
So the next question is why does this amount to
an indirect bailout of the entire treasury market. Well, think
about this from the perspective of the house example. If
you're sitting on an unrealized loss of two hundred and
fifty thousand dollars and you have to say sell your

(12:00):
house now, suddenly that affects the comps. That means all
the other houses in the area that are equal are
probably worth two hundred fifty thousand dollars as well. With bonds,
like treasuries, it's even more so because there's one going
rate with very very little discrepancy. Bonds are basically fungible,
not quite but close enough. And so if banks faced
with these withdrawal requests had to start selling all these

(12:23):
US treasuries at massive losses, that would have been a
fire sale that would have pushed interest rates up extremely
quickly as the price of those bonds they were selling
started to collapse because every time one bank sold, that
would make the losses for everybody else even worse, and
that would force some of them to start to have
to sell as well, be a downhill spiral. And so
the fact that banks can sell these treasuries to the

(12:46):
FED at full price without unloading them on the market
at all, means that the treasury market doesn't experience a
single dollar of selling. It all goes direct to the
FED instead of to the open market, meaning that prices
are not affected downward. Now this alsounce to an indirect
bailout of the entire bond market overall. Because the United
States Treasury is considered the safe haven asset, the bedrock

(13:09):
the foundation of the financial system, it is considered the
risk free asset, which means when you're looking at loaning
money to a corporation, whether large or small, or the
US government, you're going to expect a higher interest rate
a higher yield if you lend money to a corporation
or an individual, or a small company or anybody else,
because they carry an inherently higher degree of risk. At

(13:30):
the end of the day, the US government can always
print the money or use this military to collect taxes
to pay its debts, and so if you could get
five percent from the US government, six percent, seven percent
from the US government, you're going to demand more than
that from anybody else. Imagine for a moment with me,
if the US government was paying twenty percent on its debt, Hypothetically,

(13:51):
there'd be zero money invested in the stock market. Everything
would sell from the stock market to be lent to
the United States government, let alone being lent out to
somebody else ast And since we know that when you
sell assets, that pushes the prices down, and when the
price of bonds goes down, interest rates go up. And
if banks were forced to sell all these treasuries on
the open market, it would push the prices of treasuries

(14:12):
down and the yields on treasuries up. It would have
the exact same effect on the rest of the bond market,
just to a greater extent. So why is the BTFP
skyrocketing in usage right now as we close in with
just a couple of months left before the facility expires. Well,
the first reason is because there's still massive losses sitting

(14:32):
on banks balance sheets right now. Unrealized losses make up
almost one third of bank equity capital. Still, this is
not a situation that is getting better is a situation
that is staying back. The second reason is that this
facility expires in March. Now you may think, well that
why would anybody be using it right now it's going

(14:53):
to be expiring in March. It's because it's not going
to be ending the way you think it's going to
be ending. According to this fact sheet from Federalreserve dot gov,
the program being open until March of twenty twenty four
means that advances can be requested until at least March
of twenty twenty four, and those advances, those loans, those
agreements I'm going to sell you the treasury to get

(15:14):
the cash and I'll buy it from you a year later,
can begin up until it expires in March of twenty
twenty four. So, as we've seen usage of this facility skyrocket,
all of these new loans that are being created still
have one year of time left on them from the
date that they were created. So starting in March of
twenty twenty four, no new advances can be made, but

(15:36):
the existing ones stay in place until they mature. So
from the bank's perspective, this is literally like the last
chance to unload those unrealized losses on the FED and
get that full price cash from them until it's no
longer available. So if we're not going to see all
these banks have to buy back all these underwater bonds
starting in March of twenty twenty four, then what exactly

(15:57):
does happen when this facility expires in US a couple
of months. Well. Coincidentally, another facility at the FED that
I talk about a lot is also probably going to
be stopping its usage right around March of twenty twenty four.
And this facility is the reverse or repurchase facility at
the Federal Reserve, which peaked in about April twenty twenty three,

(16:18):
and over the course of the rest of that year
declined in its usage. And as of the day of
this recording, there is only six hundred and seventy nine
billion dollars left in this facility. Considering the rate at
which funds are leaving this facility, about one point six
trillion dollars has left this facility in the last nine months.
This facility will probably be completely empty by the time

(16:40):
the bank term funding program expires. So why is that
a big deal? What do those two things have in
common with each other? Well, one of the reasons why
banks were seeing issues with deposit flight is because interest
rates were going up. Money market funds, new banks offering
hyled savings accounts, and treasury bills were all paying way

(17:02):
higher interest rates than what you could get in a
bank because the bank was locked into assets paying almost nothing,
so they had almost nothing left over to pass on
to depositors. So depositors said, hey, look, you're not going
to be able to pay me what I want, but
they are, so I'm gonna take my money out and
put it over there. One of the biggest recipients of
this deposit flight from banks went into money market funds.

(17:23):
So what does the reverse repo facility have to do
with this, Well, money market funds put most of the
cash that they got into the reverse repo facility, and
this is because the reverse repo facility was paying a
risk free rate directly from the FED the money printer
that was equal to the FED funds rate. So for
a while, if you were able to get your cash
into the reverse repo facility at the FED, the FED

(17:44):
would pay you a better interest rate than you could
get anywhere. So over the course of twenty twenty one
and twenty twenty two, this facility attracted trillions of dollars
in cash, speaking out about two point three trillion dollars
in March of twenty twenty three. Most of this from
money market fund people taking money out of the bank,
putting it in money market funds, and the money market
fund taking that putting it in the reverse repof facility,

(18:06):
passing most of those earnings back through to the investors.
And any dollar held in the reverse repo facility is
not held inside the banking system. You see, when you
go to the grocery store to buy a gallon of
milk and you swipe your debit card, a dollar or
five dollars leaves your bank account and gets transferred over
to the bank account of the grocery store. Now this

(18:27):
might be at the same bank, if you and the
grocery store both have your bank accounts at the same bank,
in which case the only thing that happens is that
bank goes into their Excel spreadsheet and says five dollars
move from this account to this account. Nothing changed is
just on paper. But it also might be true that
they bank at a different bank than you. So all
day long, you have a bunch of people and a
bunch of businesses making transactions with each other. And you've

(18:49):
got trillions of dollars going through the system, and you've
got money being sent from this account over this account,
from this bank to this bank. But the reality is
those dollars never actually move because they're batch set up
at the end of the day. At the end of
the day, Chase will look to Bank of America and
Chase will say, hey, we've got ten billion dollars that
need to be sent over to you, but you've got

(19:09):
nine billion dollars that needs to be sent over to
us because of all of our customers who have transacted
with each other. So instead, I'm just going to send
you one billion dollars and we'll call it even. No
reason for me to send you ten and then you
to send me back nine. I'll just send you the
one and it's the same. As a result of this,
most transactions that happen in the banking system net out
at the end of the day. Some banks have a

(19:30):
little bit extra cash, some banks have a little bit
less cash, but all of the money stays inside the
banking system. But when you have the reverse repo facility
sucking cash out of the banking system. You wind up
with banks on net not having enough cash, you end
up with bank runs, you end up with deposit flight,
and then the FED has to step in with their
other facility to bail those same banks out. But that

(19:52):
whole situation is unraveling now, and it is undoing itself
because if you look at the interest rate that the
US government is paying on short term debt tea bills,
you can get over five percent by loaning your money
to the government for even just a couple of months,
which is better than what you can get by keeping
your money in the reverse repo facility at the FED.

(20:13):
And so logically that money is being pulled out of
the reverse repo facility and being lent to the US
government instead of what happens when money gets lent to
the US government, they spend it. And what happens when
the government spends money it goes into somebody's bank account.
So over the last six to nine months, we've seen
the reverse repo facility being drained, which is getting lent
to the US government through tee bills instead, which the

(20:35):
government is then spending going into people's bank accounts, which
is reversing the deposit flights that caused some of the
issues to begin with, not the unrealized loss issues, but
the deposit flight issues that would have caused them to
have to sell those assets at the lower prices. And
so when the Fed ends the bank term funding program
in March, that will likely be around the same time

(20:57):
when the reverse repo facility has been fully drained, which
means that banks at that time won't necessarily have to
worry about deposit flight on net because all that cash
has been recycled and re entered the banking system. Which
is why despite many people saying that the Federal Reserve
is just going to extend the BTFP, I don't think
that they will because they're going to realize they don't

(21:17):
have to. The only thing that causes a problem when
a bank has an asset with an unrealized loss is
being forced to sell it and the only way they're
forced to sell it at that loss is through deposit withdrawals,
and that is no longer happening. Instead, we are seeing
the reversal happen. Now. Unless you are a bank, you
don't have a bailout, you don't have anybody coming to
rescue you. Increasing your income and protecting your wealth has

(21:40):
always been up to only you, So if you'd like
to work with me, enjoining hundreds of other members of
Heresy Financial University who are learning how to grow their
wealth despite the crazy economic storms happening all around us
pretty much on an ongoing basis. Now, I'm running a
limited use sale right now. There's ten slots available. You
have to use code YouTube. This is for the annual

(22:02):
plan only. If you use code YouTube fifty you'll get
half off for life. This code can only be used
ten times. It is on a first come, first serve basis,
and so if you miss it, you'll just have to
wait until I open up another ten slots at some
point in the future. As always, thank you so much
watching have a great day.