Something Horrifying Is Spreading Across the Banking System
Apparently, some banks aren’t “too big to fail.”
By now, you’re aware that Silicon Valley Bank (SVB), the nation’s 16th largest bank with $342 billion in client funds and reported assets of $212 billion, was closed by federal regulators on March 10th.
At least Janet Yellen promised us the government wasn’t going to bail out the bank, making a Sunday appearance on CBS Face the Nation to assure taxpayers that:
According to the Federal Deposit Insurance Corporation (FDIC), standard deposit insurance would cover up to $250,000 per depositor. FDIC funding comes from banks themselves, so it’s not like taxpayer money (at least not directly) is on the line.
Unfortunately, the vast majority of SVB’s customers were businesses that kept much higher balances in their bank accounts – and, per the rules, those balances in excess of $250,000 per depositor would be “uninsured.”
This is bad news. It doesn’t necessarily mean the money’s gone. Rather, it means that the uninsured depositors are treated like everyone else to whom SVB owes money. It means their money on deposit might not be available for a while (if ever).
Maybe that’s why, less than 24 hours after Janet Yellen assured us SVB would not be bailed out, the FDIC did in fact bail out all accounts, above and beyond FDIC insurance limits.
To get an approximate sense for how much the bailout might ultimately cost, we can examine commentary that was provided by 10-year banking industry veteran Andrew Lockenauth. Here are the highlights:
Lockenauth also made a prediction:
He posted that about 48 hours before the federal shutdown of New York’s Signature Bank (as I mentioned on Monday).
Is it over? Does one more regional bank count as Lockenauth’s “a few”?
Moody’s doesn’t think the situation has stabilized yet – in fact, they’ve downgraded the entire U.S. banking sector:
The firm, part of the big three rating services, said Monday it was making the move in light of key bank failures that prompted regulators to step in Sunday with a dramatic rescue plan for depositors and other institutions impacted by the crisis.
At least five more banks added to Moody’s “death watch”
The job of a ratings company is to evaluate corporations and determine whether they’re a good credit risk (likely to pay you back) or a bad credit risk (more likely to fail).
That’s why this further action taken by Moody’s is tantamount to a death watch list:
There’s not just trouble here at home, either… Financial watchdogs worldwide have their eyes on embattled global megabank Credit Suisse:
The world-famous Swiss bank recently admitted, “it found material weakness in its financial reporting over the past two years because of what it said were ineffective internal controls.”
I don’t know about you, but that sounds an awful lot like what Sam Bankman-Fried said just before he was arrested by the Bahamian police. “Ineffective internal controls” might mean a misplaced spreadsheet, or it might mean someone embezzled millions…
And now is not a good time for this kind of corporate confession. In fact, the demand for protection from a Credit Suisse default hit Great Financial Crisis levels just today:
So far, these moves are limited to Credit Suisse and haven’t spread to other lenders.
Don’t worry, because “The U.S. Treasury Department is monitoring the Credit Suisse situation, a spokesperson said Wednesday.”
Well, thank goodness! I’m glad someone is “monitoring” the “situation.”
Yes, of course they were also “monitoring” the SVB “situation” – which is why federal agents showed up at corporate headquarters during business hours on a Friday.
(Maybe “monitoring the situation” is code for “deploying a cadre of highly-trained financial analysts to slam the barn door shut after the horses run screaming…?)
Will there be further consequences?
Yes, there absolutely will be. We don’t know what they are, or when they’ll strike – we only know that they call this sort of financial crisis a contagion for a reason.
But here’s the bottom line…
There’s a big difference between money and credit
Bank failures are not a sign of a healthy economy. They usually lead to a lot of finger-pointing and political posturing.
Let’s rise above that – like the famous banker J.P. Morgan did in his 1912 Congressional testimony regarding the particulars of a financial panic that led to the collapse of dozens of banks. He tried to explain how financial crises work, and the nature of money itself, to the committee. Though he’s most often quoted as:
What he actually said, according to the Congressional record, was the slightly less inspiring, “Money is gold, nothing else.”
In the simplest terms, your money in the bank? “Your” money? In accounting terms it’s a bank liability. It’s a promise from the bank to pay you so many dollars on demand.
It’s not “money,” in Morgan’s terminology – it’s “credit.” It’s an IOU.
Like any other promise, those made by banks to their depositors can be broken.
They are not a liability on someone else’s balance sheet. There are no accounting tricks. Once you purchase them, they are yours.
In J.P. Morgan’s day, the first thing that everyone did during a financial panic was go to the bank and withdraw all their money as gold and silver coins. They knew that paper money was an IOU, an easily-broken promise.
Fast-forward to today. What’s the first thing people do during a financial panic? They still go to banks and take out all their money – but banks won’t hand over gold and silver anymore. (Sometimes they won’t even hand over dollars.)
Here at Birch Gold Group, we’ve already heard from thousands of American families who have taken J.P. Morgan’s lesson about the differences between paper and real money. We’re standing by to help you, too – and you can take the first step by learning more here.
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