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:
Let me be clear that during the financial crisis, there were investors and owners of systemic large banks that were bailed out, and the reforms that have been put in place means that we’re not going to do that again.
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).
As you might expect, Silicon Valley tech CEOs lost their minds. Fortune once called SVB “one of the startup industry’s most important banks.” The nation’s tech sector, collectively, freaked out.
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:
Over 95% of Silicon Valley Bank's deposits are not insured by the FDIC (due to being over the $250,000 limit)
That is over $160 billion in uninsured customer deposits
About half of all venture capital-funded startups in the U.S. are customers of SVB
That's 65,000 startups.
Lockenauth also made a prediction:
Silicon Valley Bank's collapse will create a ripple effect throughout the economy
I predict we see a few more regional banks fail
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:
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.
Five more banks added to Moody’s “death watch” (at least)
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:
Western Alliance Bancorp., Intrust Financial Corp., UMB Financial Corp., Zions Bancorp. and Comerica Inc. were the other lenders put on review by Moody’s. The credit rating company cited concerns over the lenders’ reliance on uninsured deposit funding and unrealized losses in their asset portfolios.
There’s not just trouble here at home, either… Financial watchdogs worldwide have their eyes on embattled global megabank Credit Suisse:
For global investors still on edge after the rapid-fire collapse of three regional US banks, the growing crisis at Credit Suisse Group AG has added to concerns about financial stability.
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 frantic was the demand for the derivatives, known as credit-default swaps, that they spiked to levels that signal Credit Suisse is in deep financial distress – something unseen at a major global bank since at least the throes of the financial crisis…
So far, the 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:
“Gold is money. Everything else is credit.”
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.
Physical precious metals, on the other hand, whether American gold eagles and silver bullion bars are your property.
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.)
During uncertain times like these, I encourage you to educate yourself on the benefits of diversifying with historic safe haven assets.
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.
Peter Reagan is a financial market strategist at Birch Gold Group. As the Precious Metal IRA Specialists, Birch Gold helps Americans protect their retirement savings with physical gold and silver. Based in the Los Angeles area, the company has been in business since 2003. It has an A+ Rating with the BBB and hundreds of satisfied customer reviews.
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