Two weeks ago, Warren Buffett tried to warn people that there would be more bank failures. The Treasury Department’s apologists dismissed Buffett, which is rarely a good idea. As it turns out, he was 100% spot-on as usual, as First Republic Bank collapsed before our very eyes.
Mr. Kenneth Ameduri also sounded the alarm to our readers about what was coming. Now that the Federal Reserve is back to draining liquidity from the banking system – a process commonly known as quantitative tightening – regional banks hardly have a fiscal leg to stand on.
There was a brief period of financial support from the Federal Reserve to the banks, in the form of quantitative easing, during the initial stages of the regional bank implosion. As Signature Bank and Silicon Valley Bank fell apart, the Fed pumped capital into the banks and the economy through rapid purchases of Treasury bonds.
At the same time, Treasury Secretary and former Federal Reserve Chair Janet Yellen assured, “Certainly, we would be prepared to take additional actions if warranted.” Of course, everything Yellen says needs to be taken with a gigantic grain of salt as she’s among the most vocal recession deniers in the U.S. government.
The first sign that the government wasn’t actually going to support regional banks was when Yellen turned around and said, “I have not considered or discussed anything having to do with blanket insurance or guarantees of deposits.” In other words, no bank is actually too big, medium, or small to fail now.
What we have here is an odd situation in which the government doesn’t want to look like it’s bailing out the banks and leaving the customers out to dry, like it did in 2008. Of course, the Federal Reserve will always come to the rescue of big banks, so the sacrificial lambs in 2023 will be midsize banks like First Republic.
Courtesy: Yahoo Finance
If anybody was sacrificed, though, it’s First Republic Bank’s common stockholders. It’s hard to believe that FRC stock was once worth $219 per share. After coming down to around $6, FRC stock plunged 43.3% on April 28 during the trading session and then an additional 33.62% in after-hours trading.
This occurred even though JPMorgan Chase and other big banks collectively deposited $30 billion into First Republic. Meanwhile, the common stocks representing Silicon Valley Bank parent company SVB Financial Group and Signature Bank are available for trading but only at drastically reduced prices.
At this point, what happens to First Republic Bank is less important (unless you’re among the company’s depositors or shareholders) than how deep and wide the ripple effects will be. Notice that banking giants like JPMorgan Chase didn’t seem too concerned about whether Silicon Valley Bank and Signature Bank would survive, but put up their own capital to try to save First Republic.
The concern wasn’t actually for First Republic Bank, but for what the company represents. If First Republic can fail, there’s risk to the U.S. banking system as a whole. People don’t usually spend much time thinking about regional banks, but they’re an integral part of the American economy.
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If you’re wondering how we got into this mess in the first place, the two best words to describe the root cause would be “moral hazard.” Warren Buffett’s explanation is timely: “Accounting procedures have driven some bankers to do some things that have helped their current earnings a little bit and caused the recurring temptation to get a little bit bigger spread on record, a little more than earnings.”
Suddenly, assets like gold and Bitcoin, which don’t require investors to place their trust in the banking system, make perfect sense. Don’t be too surprised if, as more banks fail, so-called alternative assets gain significant value in 2023.
And, don’t be shocked if central bankers try to distract you from the slow-motion banking sector train wreck that’s currently in progress. To quote Joseph E. Stiglitz, a Nobel laureate in economics, the “Fed and its chair have lost credibility on every front.”
My only quibble with that quote is the assumption that the Federal Reserve Chairman had credibility in the first place. If you’re looking for credibility, I invite you to listen to Warren Buffett, who categorically and correctly stated, “We’re not over bank failures.”
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