When First Republic Bank stock lost 47% of its value on Monday, some onlookers were surprised and appalled. Events like these are practically inevitable, though, as banks are trust-based institutions that can’t be trusted to manage their depositors’ funds responsibly.
Silicon Valley Bank, First Republic, and others took the deposits of their customers and invested large portions of them into government bonds. Those bonds lost a lot of value, and so did the net worth of the banks, when the Federal Reserve hiked interest rates at a faster pace than it has ever done before.
When the net worth of those banks cratered, customers got nervous and started putting their money out of the banks – or at least, they tried to. That’s when the customers discovered that Silicon Valley Bank, First Republic, and other banks had high levels of uninsured deposits – again, they were irresponsible with the customers’ money.
This banking failure contagion isn’t only happening in the U.S., by the way. Failed Swiss bank Credit Suisse, which has a lengthy history of mismanagement, was in such dire straits that it had little choice but to accept a takeover offer by UBS.
As part of the deal, some of Credit Suisse’s bondholders will effectively be wiped out following the bank’s takeover by UBS. Consequently, those bondholders’ investments, which were valued at 16 billion Swiss francs ($17 billion), will become worthless.
This is happening even though the Swiss National Bank, Switzerland’s central bank, assured that it would support Credit Suisse with up to 50 billion francs ($54 billion). Sometimes, even central bank backstopping can’t overcome the massive failure of poorly managed financial institutions.
Courtesy: Yahoo Finance
The victims in this scenario aren’t only Credit Suisse’s bondholders and customers, but also the company’s shareholders. As you can see in the chart shown above, after UBS effectively bought out Credit Suisse for 50 cents per share, Credit Suisse’s stock got cut in half in a single day.
On the other hand, it’s hard to say whether people who invested in Credit Suisse stock shares and bonds were actually victims. Maybe they were victims of misinformation and mismanagement, but at the end of the day, investors are responsible for understanding what they’re buying and the risks involved.
Granted, there’s a pretty good chance that you never invested in the stocks of Silicon Valley Bank, First Republic Bank, or Credit Suisse. Perhaps you feel safe because you own shares of U.S. mega-banks like JPMorgan Chase, Bank of America, Citigroup, and others.
Bear in mind, if you own any funds in your 401(k) or anywhere else that track indexes like the S&P 500 or Dow Jones, then you’re probably invested in some large U.S. banks. So, you can rest assured that these mega-banks are investing your deposit money responsibly – right?
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Don’t count on it. Shockingly, 11 of the biggest U.S. banks – including JPMorgan Chase, Bank of America, Citigroup, Wells Fargo, and others – agreed to deposit a total of $30 billion into First Republic Bank. Federal Reserve Chairman Jerome Powell, Treasury Secretary Janet Yellen, and other regulators called this “show of support by a group of large banks… most welcome.”
Of course, it’s “most welcome” among politicians who have vested interests in a corrupt banking system. Did the customers of these giant banks “welcome” or even give approval to this investment in a terribly mismanaged regional bank?
And now, even if you don’t have your money deposited in any of these banks, just being a U.S. taxpayer means you’ll probably end up backstopping irresponsibly managed banks like First Republic. Janet Yellen just announced that the U.S. government is ready to provide further guarantees of deposits to these banks – which is easy for her to say, since the bailout money ultimately comes from you, me, and other taxpayers.
Courtesy: Yahoo Finance
Meanwhile, folks who store their wealth in precious metals are resting easy, knowing that there’s no counterparty risk and no need to worry about how much of their wealth is uninsured or mismanaged. The silver price, as shown in the chart above, looks ready to rally above $25 in the near term and, most likely, above $30 in the coming months.
Gold, meanwhile, is on the cusp of breaking through the crucial $2,000 level once and for all. Yet, the idea isn’t just to own gold and silver for quick gains in 2023. At the end of the day, owning precious metals is a form of insurance against banks and politicians who would rather look out for each other than take care of their customers, and their customers’ money.
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