It’s been quite a weekend we just experienced that’s a memory lane Déjà Vu (video) for me if juxtaposed against the slow-roll trainwreck known as the Great Financial Crisis (GFC) when I occupied a cubicle with a risk management team in NYC. The launchpad into the populace’s psyche began with Bear Stearns’ demise in March 2008 shortly after the New York Federal Reserve Bank (NYFRB) provided an emergency loan that failed to stem its stock price plunge to oblivion and JPMorgan Chase bought the firm for a paltry $10 per share vs. the $2 offer they originally gave. For two years prior, Bear Stearns was considered the “most admired” securities firm in a prestigious survey conducted by Fortune magazine. I have a habit of collecting major headlines that parade on the Drudge Report.
The next Wall Street domino to fall was Lehman Brothers’ Chapter 11 filing on September 15, 2008. That event and the NYFRB weekend meeting that preceded it were infamous shots heard around the world as one of the largest investment banks with a 164-year history was forced to file for bankruptcy. Barclays Bank and Nomura Holdings eventually absorbed their assets.
A few days after Lehman’s failure, the largest bailout of that era emerged with the “too big to fail” insurance goliath American International Group (AIG) primarily due to its extensive exposure to a tidal wave of worthless assets and derivatives risk it insured. The finale in that confluence of financial destruction was the implosion of Washington Mutual (WAMU), which was the United States’ largest savings and loan association when it collapsed on September 25, 2008. The monetary policy end result was a historic round of quantitative easing (QE), aka money printing as per Ben Bernanke’s admission during his testimony before the House Committee on Financial Services.
Fast-forward to the present. It was during the fall of 2019 that the first sign of a liquidity and credit crisis emerged when the Federal Reserve embarked upon an unprecedented repurchase agreement (REPO) operation. When the pandemic panic took over in the spring of 2020, the money printing machine was allowed to exceed all previous endeavors of fiscal and monetary policy excess by passing the CARES Act and subsequent stimulus efforts to bail out the country from the stock market crash and economic hardship caused by societal lockdowns.
The REPO Market Disruption… “Fed officials concluded that the dysfunction in very-short-term lending markets may have resulted from allowing its balance sheet to shrink too much and responded by announcing plans to buy about $60 billion in short-term Treasury securities per month for at least six months, essentially increasing the supply of reserves in the system. The Fed has gone out of its way to say it’s not QE… Before coronavirus turmoil hit the market, the Fed was offering $100 billion in overnight repo and $20 billion in two-week repo… It is now on a weekly basis offering repo at much longer terms: $500 billion for one-month repo and $500 billion for three months. On March 17, at least for a time, it greatly increased overnight repo offered. The Fed said that these liquidity operations aimed to ‘address highly unusual disruptions in Treasury financing markets associated with the coronavirus outbreak.’ In short, the Fed is now willing to loan what is essentially an unlimited amount of money to the markets.” – Brookings, Jan. 2020
Sam Zell: This is the Weimar Republic – Bloomberg, Mar. 10, 2023
Today’s focus is on the immediate past and what might transpire going forward. Last weekend, Silicon Valley Bank (SVB Financial: $SIVB) collapsed almost 15 years to the day after global investment bank Bear Stearns failed. Numerous matters contributed to SVB’s downfall that are not limited to the deleterious fiscal and energy policies unleashed by the Biden administration and European allies, the Fed raising interest rates at the fastest pace in recent history, and domestic and geopolitical fallout resulting in financial and diplomatic blowback in the collective West from the extraordinary sanctions imposed against Russia over NATO’s proxy war in Ukraine (Part XII and Twitter thread).
US banks: battered by hard reality of bond maths… “Life can come at you pretty fast. One week ago, Silicon Valley Bank had a market capitalization of $17bn. Today that figure is essentially zero. US regulators have stepped in with a guarantee for all deposits for SVB as well as Signature Bank, which was closed at the weekend. The latter had a concentrated exposure to technology companies. Much of its deposits were uninsured. Most banks fail because of poor lending or, in the case of the global financial crisis, owning complex assets that turned out to be largely worthless. But SVB’s sin was holding a portfolio of dull long-dated US municipal or agency bonds whose paper value eroded following sharply tightened US monetary policy.” – FT
US Banks Sitting on Billions of Losses – Bloomberg
- Crypto-focused bank Silvergate shutting operations and liquidating – CNBC
- How the second-biggest bank collapse in U.S. history happened in 48hrs – CNBC
- SVB crisis will force the Fed to slash rates by 100 basis points – Yahoo Finance
- Morgan Stanley, BlackRock funds among exposed to regional bank failures – Reuters
- The world is dumping US Treasuries. Raising new debt is now difficult – Kim Dotcom
“Everyone from @BillAckman to Janet Yellen is crying about depositors ‘pulling their money out of the banks.’ Wriston tutored me on this forty years ago. The issue is when you pull money out you have to put it back in another bank. It’s a closed circuit.” – Jim Rickards, Mar. 12
- Large US banks inundated with new depositors, smaller lenders face turmoil – WSJ
- Federal Reserve announces it will make available additional funding – FRB
- Joint Statement by Treasury, Federal Reserve, and FDIC – FRB
- Shareholders and certain unsecured debt holders will not be protected – FDIC
“Talk about asleep at the switch. Two days of testimony and not a peep about SVB from Powell. Yellen on Friday on the banks being ‘resilient’ and yesterday with ‘no bailout’. Come again? We’re back to the 1970s all right — when it comes to economic leadership (or lack thereof).” – David Rosenberg
- JPMorgan warned about SVB’s $16B in ‘unrealized losses’ in November – NYPost
- Credit risk surges as investors fear bank failures threaten markets – Reuters
- Bailout Sparks Buying Panic In Bonds, Bitcoin, & Bullion – ZH
- Class action suit filed against Silicon Valley Bank parent – AP
- WSJ Calls out Biden For Blaming Trump For SVB Collapse – Political Insider
- Japan Bank Shares Get Hit in Wake of SVB Collapse – WSJ
- The 2023 Financial Crisis Has Begun (Video) – Peter Schiff
- First Republic Bank cut to Junk by S&P – Yahoo Finance
- Credit Suisse Wrecked After Saudi Backer Rules Out Further Assistance – CNBC
- Credit Suisse Gets Swiss National Bank $50 Billion Loan – Credit Suisse
The fallout developing from the SVB situation is fluid and may not be a Lehman moment, but it certainly adds up as a Bear Stearns moment. Innumerable risks remain in global financial markets that catalyzed the SVB collapse. Before you digest the following credit rating headline and excerpt, consider the current derivatives exposure in the U.S. banking sector as of Sep. 2022.
Moody’s cuts outlook on U.S. banking system to negative, citing ‘rapidly deteriorating operating environment’… “In a harsh blow to an already-reeling sector, Moody’s Investors Service cut its view on the entire banking system to negative from stable. 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… ‘We have changed to negative from stable our outlook on the US banking system to reflect the rapid deterioration in the operating environment following deposit runs at Silicon Valley Bank (SVB), Silvergate Bank, and Signature Bank (SNY) and the failures of SVB and SNY,’ Moody’s said in a report.” – CNBC, Mar. 14
Despite the turmoil taking place behind the scenes within numerous board rooms, corporate conference calls, and the banking industry et al., the U.S. stock market indices and gold and silver have rallied on a realized #TaperCaper and renewed expectations of more QE, interest rate cuts, or additional bailouts as individual bank stocks, regional banking ETFs (like $KBWR, $QABA, and $KRE), and banking sector indices (like $BANK, $BKX, and $DJUSBK) continue their plunge that started last Friday.
The Latest Bank Bailout Is a Bailout, You Are Paying for It… “The first prong of the bailout plan is to use extremely low-cost loans to shovel more money at banks in order to make them look more financially sound. The idea here is to head off depositor panics over uninsured deposits before they start. The first indication that this scheme is a bailout comes from the text of the press release on the creation of the Bank Term Funding Program (BTFP). It states that the new program will be offering loans of up to one year in length to banks, savings associations, credit unions, and other eligible depository institutions pledging U.S. Treasuries, agency debt and mortgage-backed securities [MBS], and other qualifying assets as collateral. These assets will be valued at par. The BTFP will be an additional source of liquidity against high-quality securities, eliminating an institution’s need to quickly sell those securities in times of stress… The FDIC Will Need a Bailout… The second prong of the bailout is the FDIC’s promise to cover all depositors at troubled banks, rather than just those with deposits up to the usual limit. The not-a-bailout narrative claims that the new promised expansion of insurance will all be funded by FDIC fees and imposes no costs on taxpayers. ‘The banks will pay for it,’ we are told.” – Mises Institute
Carl Icahn: ‘our system is breaking down, we have a major problem in our economy’ – CNBC
According to the Dodd-Frank Wall Street Reform and Consumer Protection Act signed into law by Barack Obama in 2010, bailouts are illegal and bail-ins are the new policy as witnessed in Cyprus during Mar. 2013. Gabor Gurbacs has put the FDIC situation into perspective. There is more than $22 trillion in the U.S. banking system, the FDIC has a total of $124.5 billion on its balance sheet, a $100 billion credit line from the Treasury Department, and its assets only cover roughly 1.25% of deposits – or about the size of SVB.
In my most recent technical analyses of the U.S. stock market indices in early March, I repeated what I’ve stated in previous articles:
“Keep in mind that when or if the Fed returns to full-blown QE or some other mode that provides liquidity to the recessionary West and/or a stock market crisis, markets would rally until the global debt endgame is played out.”
This is not a time to be complacent, a bottom picker, or a top picker. Preserving your capital is of utmost importance in the current environment. Keep a daily record of all bank balances to prove all deposits and transactions in case you’re bailed-in, have your financial house and home pantry in order, and keep a stash of cash that’s equal to a month of expenses. Gold and silver physical coin in your possession is an appropriate safe haven.
Why the whole banking system is a scam – Godfrey Bloom MEP, EU Parliament 2013
GOP rep. exposes ‘underlying cause’ of SVB’s collapse – Fox Business, Mar. 14
Headline Collage Art by TraderStef