This quote from Emma Sky, founding director of Yale University’s International Leadership Center, who served as political adviser to the Commanding General of U.S. Forces in Iraq, is the kernel of Tom O’Connor’s retrospective in Newsweek on the U. S. invasion of Iraq which began 20 years ago today:

“The Iraq War undermined the rules-based international order,” Sky said, “and America’s reputation as the standard bearer of democracy.”

I recommend reading the piece in full.

I have seen an enormous amount of historical revision connected with the U. S. invasion of Iraq over the last several days. Suffice it to say that IMO the only way you can characterize Iraq as freer today than it was 20 years ago is to define Islamism as freedom. That would make Saudi Arabia and Iran among the freest countries in the world which certainly goes against any Western idea of freedom let alone an American idea of it.

While we’re on the subject can someone explain Roku’s behavior to me? Why are they holding a whole year’s worth of operating revenue as a deposit in the late Silicon Valley Bank? Unless there’s some sort of ploy going on that sounds like corporate mismanagement to me. Roku management appears to be assuming that even uninsured deposits will be covered by the federal government, a clear instance of moral hazard, while not scrutinizing the risks as is its fiduciary responsibility to do.

So, we’ve got the bank not scrutinizing its risk profile, corporate management not scrutinizing the bank, shareholders scrutinizing neither the bank nor the corporations, and the Federal Reserve failing to scrutinize the banks.

That’s not how it works. That’s not how any of this works.

And I haven’t even touched on the reality that every single public/private hybrid, “parastatals”, on which we’ve been depending has been a flop in the U. S. They’ve become a method for avoiding accountability, either to the voters or under the law.

The editors of the Washington Post urge the Federal Reserve Open Market Committee not to raise interest rates when it meets next week:

The United States has a stubborn inflation problem. Food, rent and transportation costs remain high, and many parts of the service economy aren’t cooling off. It’s worrisome. But there’s a larger concern right now: the stability of the financial system. The rapid downfalls of Silicon Valley Bank and Signature Bank have zapped confidence in critical parts of the banking sector and triggered concerns about what is next to rupture. The Federal Reserve should temporarily pause interest rate hikes on Wednesday to give the financial system time to adjust to the new reality.

Bank failures are scary. This is not a repeat of the 2008-2009 financial crisis. But people are shaken. Many are moving money out of small and midsize banks and into larger ones. It’s getting harder to get a loan as banks have little appetite for additional risk. Regional banks remain under pressure. First Republic Bank needed a $30 billion cash infusion. Overall, banks have borrowed $308 billion from the Fed, up from $5 billion a week ago. A crisis abroad at Credit Suisse only adds more jitters. As the Wall Street saying goes, “When the Fed tightens, something breaks.” The nation needs certainty that nothing else is at a breaking point.

What I believe is being lost is that the OMC has already been too timid in raising rates as the inflation numbers clearly show and that inflation is a tax that falls hardest on the poor. Let it be noted that the WaPo is taking sides here and it’s not taking the side of the poor.

What I think this highlights is that if there is any target for the use of artificial intelligence it should be the Federal Reserve. Its failure to scrutinize Silicon Valley Bank would not have happened but for human error as is the case with stress testing banks at 2% interest rates when the interest rate has risen over 4%.

Let’s consider a tally of things that should be done all of which will require an act of Congress:

• Reimpose Glass-Steagall
• Require the Federal Reserve to observe the Taylor Rule.
• If all deposits are to be insured, let’s amend the law to reflect that and fees on the banks that correspond to that practice.

And we should pick one. Either the FOMC should stay the course or we should abandon the notion that the Federal Reserve can control inflation on the grounds that it’s politically impossible for it to do so.

Update

This morning on one of the talking heads programs the present chairman of the House Financial Services Committee sounded just the right notes. This matter may be a legal problem, a regulatory one, a bank mismanagement problem, corporate mismanagement, or all of the above and it’s the Congress’s job to determine what in the heck happened and make the necessary adjustments to laws and regulations.

In addition to Ukraine, Burma, Syria, Ethiopia, Somalia, and various other areas in West Africa, there’s another conflict that appears to be heating up according to this piece in The National Interest by Brandon Patterson and Dino Bozonelos. This one has the added complication of being between two NATO members—Turkey and Greece:

Turkish president Recep Tayyip Erdoğan has threatened an invasion of its neighbor and NATO partner Greece. The disputes between the two countries are numerous but lately have settled on the “militarization” of Greek Islands near the Turkish Aegean coast. Turkey claims that the military buildups in the islands are in reaction to Greek violations of the 1923 Treaty of Lausanne. Article 13 of the 100-year-old treaty states that “No naval base and no fortification will be established in the said islands.” However, the same Article 13 also states that “Turkish aircraft will forbid their military aircraft to fly over the said islands” and that “The Greek military forces in the said island will be limited to the normal contingent called up for military services.”

Greece’s counterclaim is that Turkey has repeatedly violated its historical treaty obligations through continuous military flyovers and a consistent naval presence in the region. Greece has said that this threatens not only the territorial sovereignty of the islands but also the economic sovereignty of Greece’s continental shelf. While this source of friction brought the neighbors close to war in the 1970s, the two countries largely agreed to try to develop a framework for drilling rights and natural resource extraction in the eastern Aegean.

Perhaps the better way of looking at this matter than as a new conflict is as a conflict that has been going on for the last millennium with periodic détentes. Turkey has been a NATO member in name only since the Kemalists lost power. Indeed, I think that the NATO member was a regime rather than a country. Since there’s no formal way of expelling a member of NATO, we have the specter of an armed conflict between NATO members. That would certainly place additional strain on the alliance.

At Evergreen Gavekal Michael Johnston provides some insights into the operations of Silicon Valley Bank worth reflecting on:

Taking a step back, SVB carved out a distinct and riskier niche that catered to early-stage technology and science/healthcare companies. Venture Capital (VC) firms and their portfolio companies often turned to SVB for venture debt due to its attractive debt packages that were much cheaper than those offered by nonbank lenders. SVB was also more willing to lend to higher-risk growth companies that many traditional banking institutions would only lend to at a premium or avoided altogether.

While SVB’s lending business is attempting to stage a comeback under FDIC-controlled Silicon Valley Bridge Bank, it’s unclear whether the bank with find a buyer for its loan book. It’s also likely that traditional bank lenders will take a more conservative approach that limits venture debt exposure while the dust settles.

This uncertainty opens the door for nonbank lenders and PE firms to fill a huge void in the venture debt market. Given that capital is the lifeblood for growth companies, and many of these companies are facing a triple whammy that includes (1) depressed valuations, (2) a more challenging fundraising environment, and (3) tech’s most popular banking partner on life support, founders may be more willing to accept higher borrowing costs offered by private credit lenders. This is bullish for nonbank lenders and PE firms that were previously boxed out of venture debt opportunities by Silicon Valley Bank.

Additionally, companies will naturally gravitate to private lending companies given the heightened solvency concerns with banks and bank liabilities. Unlike banks, private credit vehicles do not have a deposit base that can just leave. This should create less competition and increase returns for private credit – whether that’s through higher cash flow, more points up front, or larger equity kickers/warrants.

I for one think that commercial banks should be prohibited from engaging in investment banking, especially as long as the federal government is underwriting all deposits in them.

There’s new evidence that the raccoon dog might be the source from which the COVID-19 virus originated. Benjamin Mueller reports at Yahoo News:

An international team of virus experts said Thursday that they had found genetic data from a market in Wuhan, China, linking the coronavirus with raccoon dogs for sale there, adding evidence to the case that the worst pandemic in a century could have been ignited by an infected animal that was being dealt through the illegal wildlife trade.

The genetic data was drawn from swabs taken from in and around the Huanan Seafood Wholesale Market starting in January 2020, shortly after Chinese authorities had shut down the market because of suspicions that it was linked to the outbreak of a new virus. By then, the animals had been cleared out, but researchers swabbed walls, floors, metal cages and carts often used for transporting animal cages.

In samples that came back positive for the coronavirus, the international research team found genetic material belonging to animals, including large amounts that were a match for the raccoon dog, three scientists involved in the analysis said.

The jumbling together of genetic material from the virus and the animal does not prove that a raccoon dog itself was infected. And even if a raccoon dog had been infected, it would not be clear that the animal had spread the virus to people. Another animal could have passed the virus to people, or someone infected with the virus could have spread the virus to a raccoon dog.

But the analysis did establish that raccoon dogs — fluffy animals that are related to foxes and are known to be able to transmit the coronavirus — deposited genetic signatures in the same place where genetic material from the virus was left, the three scientists said. That evidence, they said, was consistent with a scenario in which the virus had spilled into humans from a wild animal.

A report with the full details of the international research team’s findings has not yet been published. Their analysis was first reported by The Atlantic.

We still don’t know. It could be a “chicken or the egg” situation in which humans spread the disease to raccoon dogs. Or vice versa. Or something else entirely. It does bolster the case for those who are promoting a zoonotic origin for the virus.

At Reuters Bart H. Meijer and Stephanie van den Berg report that the judges of the International Criminal Court have issued a warrant for the arrest of Russian President Vladimir Putin:

AMSTERDAM, March 17 (Reuters) – The International Criminal Court (ICC) issued an arrest warrant on Friday against Russian President Vladimir Putin, accusing him of being responsible for the war crime of illegal deportation of children from Ukraine.

Moscow has repeatedly denied accusations that its forces have committed atrocities during its one-year invasion of its neighbour and the Kremlin branded the court decision as “null and void” with respect to Russia.

Neither Russia not Ukraine are members of the ICC, but Kyiv granted it jurisdiction to prosecute crimes committed on its territory.

The tribunal, with 123 member states, has no police force of its own and relies on member countries to detain and transfer suspects to The Hague for trial.

While it is unlikely that Putin will end up in court any time soon, the warrant means that he could be arrested and sent to The Hague if travelling to any ICC member states.

When the actual text of the warrant becomes available I will post a link.

It will be interesting to see if this warrant has any effect especially in consideration of it coming on the eve of Chinese President Xi’s visit to Moscow.

I wanted to comment Jeffrey Snider’s observations at RealClearMarkets to your attention. It’s accurate as usual and somewhat less opaque than usual. Here’s the kernel:

The latest instance of this modern version of a bank run, the one which took down Silicon Valley Bank and Signature is largely of the same “substance.” Virtual cash was drained from both for various reasons, but it did not disappear into public hands. Rather, it migrated to others in the system as more book entries.

Therefore, the failures of SVB and Signature are uninteresting and pretty much irrelevant. The more important question is the same one about arbitrage; how there wasn’t any to help either of them. What must be inhibiting wholesale redistribution from those who have benefited from this migration, and was it specific to these two banks?

While we have no way of knowing for sure, it’s not as if we don’t have useful clues. Money market prices such as eurodollar futures give us a systemic sense of arbitrage potential, more so the risks dealers might be perceiving when considering them. And it is here where trading over the past week has been both illuminating and frightening.

Single-day moves in eurodollar futures contracts were historic. The price for the September 2023, for example, gained nearly 45 bps last Friday, March 10, in the wake of SVB’s seizure. That was almost the same as the March 2009 contract had been moved on September 15, 2008, the day Lehman Brothers’ insolvency was made public.

But then on Monday, March 13, a buying panic in these hedging instruments became so intense, the same September 2023 added an unthinkable 101 bps! In a single day, more than double Lehman. After a relatively small reverse on Tuesday, massive buying stuck again on Wednesday with the contract rising another 35 bps.

What do these moves tell us about perceptions of systemic risk? Bill Dudley, then the Federal Reserve System’s Open Market Manager, spilled the secret on August 7, 2007:

“MR. DUDLEY. That said, the Eurodollar market is a very deep market, and if one thought that the Fed was not going to do what the market priced in, there certainly would be the ability of people to take the other side of the bet…In the short run, that kind of thing certainly goes on. If I can’t sell the bad asset that I hold, then I will buy something that will perform well if the bad asset deteriorates.”

He goes on to say that whatever we want to call what’s happening is far from over. That’s what the markets are telling us.

I want to make one additional point. If the Biden Administration really, truly wants to underwrite the uninsured deposits of Silicon Valley Bank, there should be a special tax levy (call it a fee) placed on banks for doing so. Anything else is horrifically regressive. Allow me to explain.

If any governmental entity or the Federal Reserve, a public-private hybrid, underwrites SVB’s depositors by issuing credit (“printing money”), it will increase inflation. That will fall most heavily on the poorest people. We’ll be taxing the poor to pay the rich. Robin Hood in reverse.

And that doesn’t even get into the insanity of underwriting the uninsured deposits of foreign companies. I honestly have no idea why we’re doing that.