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Arthur Hayes discusses the current state of US banks: How to hedge against the devaluation of the US dollar? Just buy Bitcoin!

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Arthur Hayes discusses the current state of US banks: How to hedge against the devaluation of the US dollar? Just buy Bitcoin!

BitMEX founder Arthur Hayes has issued a lengthy article "The Denominator", even former Coinbase CTO Balaji tweeted about it, stating that "denominator" is a perfect term - in the end of an empire, whose assets will be confiscated to pay for unpayable bills? Those who remain 100% within the system, supporting it until the end, will bear the full force of devaluation, they are the "denominator".

This article is excerpted and compiled from "The Denominator", all views expressed in the text are those of the author, for any doubts, please refer to the original text.

Too Big to Fail (TBTF) Banks

The Federal Reserve established the Large Institution Supervision Coordinating Committee (LISCC) program in 2010 based on the lessons learned from the global financial crisis of 2007-09. This program includes the so-called Too Big to Fail (TBTF) financial institutions, which are closely monitored. Currently, the LISCC program covers 8 U.S. bank holding companies: Bank of America, Bank of New York Mellon, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley, State Street, and Wells Fargo.

Arthur Hayes claims that the U.S. government essentially provides unlimited government guarantees for the deposits of these eight large banks, making them essentially state-owned enterprises where profits are privatized for shareholders and losses are socialized for the public. In return, these banks are required to comply with a slew of new regulations, prompting them to spend hundreds of millions of dollars on political campaign donations to help shape these regulations to their advantage.

TBTF banks primarily serve large corporations and ultra-high-net-worth individuals, specializing in securities lending and trading. They also serve as conduits for the Federal Reserve and the U.S. Treasury's monetary policies, purchasing large amounts of U.S. Treasury bonds to support the U.S. government. For instance, JPMorgan Chase alone holds 16% of all U.S. deposits.

Other Non-TBTF Banks

Non-TBTF small and medium-sized banks drive the real engine of the U.S. economy by providing loans to small businesses and individuals with lower incomes. They fill their loan books with commercial real estate, residential mortgages, auto loans, and personal loans. As shown in the statistics below, small and medium-sized banks have an increasing share in lending, especially in real estate-related loans.

Recently, Charlie Munger also warned about the non-performing commercial real estate loans of banks. For more details, please see: Arthur Hayes Bearish on Bank Stocks Again, Charlie Munger Warns About Non-Performing Commercial Real Estate Loans

Bank Term Funding Program (BTFP) - Why is it Ineffective?

In March of this year, when three banks collapsed within a week, the Federal Reserve and the U.S. Treasury hastily devised a rescue plan called the Bank Term Funding Program (BTFP). Under this program, any bank holding U.S. Treasury bonds or mortgage-backed securities (MBS) could pledge them to the Fed, with the collateral being valued at face value without considering any book losses, in exchange for loans within a year.

While the BTFP seemed to inject confidence into the market, why do deposits at small and medium-sized banks continue to decline? In May, First Republic Bank was taken over by the FDIC, ultimately acquired by the TBTF JPMorgan Chase. This indicates that many assets held by small and medium-sized banks do not qualify for the BTFP rescue plan.

TBTF Rescue Plan - Let TBTF Take Over Non-TBTF

Arthur Hayes boldly speculates that U.S. Treasury Secretary Yellen has been explicitly informed that the U.S. government is unwilling to rescue more failing banks, meaning the conditions of the BTFP rescue plan cannot be relaxed, and she must find a solution to manage the collapse of non-TBTF banks.

Therefore, after the stock price of First Republic Bank plummeted by 99%, the FDIC offered a sweetheart deal to the largest TBTF bank, JPMorgan Chase, for acquisition. This deal was so good that JPMorgan Chase's CEO Jamie Dimon whispered during a shareholder conference call that the deal could immediately confirm a $20 billion profit.

In this example, JPMorgan Chase obtained low-interest loans from the FDIC, with the FDIC bearing 80% of the losses on the loan book. Arthur Hayes commends this as a clever move, as most politicians and voters are unlikely to realize that the U.S. government is expanding support for the banking system without formal announcement. Now, the FDIC's balance sheet will become bloated due to potential losses from failed bank loan books and providing low-interest loans to TBTF banks.

How to Avoid Being the Denominator? Embrace Gold and Bitcoin

Arthur Hayes also predicts that with President Biden telling Federal Reserve Chair Powell that inflation is his top priority, the Fed will be unable to lower rates enough to help stop deposits from flowing out of these faltering banks while inflation remains at 5%. Hence, deposits will continue to flow to TBTF banks and money market funds.

This will lead to more bank failures, more TBTF rescue plans, and the government will continue to support increasingly larger TBTF banks. This will expand the money supply, and according to Arthur Hayes' estimation, in addition to the $4.4 trillion in U.S. Treasury bonds and MBS currently held by U.S. banks under the BTFP, the total amount of loans from non-TBTF banks will reach $7.75 trillion.

Many readers might think that this banking issue is purely an American matter. But how does it affect those who are not U.S. citizens? Arthur Hayes mentions:

Due to the reserve currency status of the U.S. dollar, most countries adopt U.S. monetary policies. Moreover, many non-U.S. institutions such as sovereign wealth funds, central banks, and insurance companies hold assets denominated in dollars. The dollar will continue to depreciate against hard assets like gold and Bitcoin, as well as useful commodities like oil and copper. You are also in the denominator, just like an unnamed American fool.

So how can one avoid being the denominator? Ultimately, Arthur Hayes suggests that everyone should embrace gold and Bitcoin!