Arthur Hayes: Fed’s Banking Solutions are Unsustainable

BitMEX co-founder Arthur Hayes thinks the Federal Reserve is yet to find a permanent solution to the ongoing crisis in the banking sector. Hayes believes that all the measures that the US Fed has so far proposed are half-baked and leaves the broader issue unsolved.

Hayes explained his position on the ongoing issue in a recent Twitter thread, noting that selling the embattled First Republic Bank (FRC) was one of the faulty steps in resolving the banking crisis.

5/
I will be looking through my sell-side research for a chart that shows the US banks with the largest CRE portfolios. I will then take a hard look at 50%-75% OTM short-dated puts on these banks to be purchased after the Fed meetings.

Yachzee!!
BTC=$1mm

— Arthur Hayes (@CryptoHayes) April 30, 2023

Earlier today, the Federal Deposit Insurance Corporation (FDIC) declared JP Morgan Chase Bank (JPM) as the winner of the bid for the troubled lender after a bidding process that involved competitors like PNC Financial (PNC).

FRC became the third American bank to fail since the latest wave of the banking crisis in 2023, despite efforts to get rival lenders to support the ailing bank. By the acquisition, JPM takes over all of FRC’s deposits, including uninsured deposits and a “substantial majority of assets”.

In a statement, the FDIC said all 84 FRC branches in eight states would reopen as JPM branches, National Association. Also, all depositors of FRC will become depositors of JPM and will have full access to all of their deposits.

Hayes believes the latest bank failure should prove to regulators that interest rate cuts do not solve the lingering financial problems. He thinks the Fed is unaware that such measures only postpone the impending doom, considering reports that the financial regulator is planning a 0.25% rate hike during its meeting this week.

According to Hayes, FRC has a loan book full of jumbo mortgages made to rich people at low rates that have depreciated way less after interest rates rose. He believes the situation is not peculiar to FRC, as another bank could fail soon, with a loan book full of illiquid Commercial Real Estate (CRE) loans.

Hayes sees this trend as a valid signal to short assets of US banks with the largest CRE portfolios. He indicated he would look at 50% to 75% Out-of-the-Money (OTM) puts on the banks to be purchased after the Fed’s meetings.

Source