The closure of substantially profitable banks is the ongoing battle in the economic wars that continues to force smaller banking institutions to close. What we’ll have left are major, legacy banks offering little financial wiggle room.
It was all good just a week ago, but last Friday, Silicon Valley Bank (SVB) experienced the second biggest bank failure in U.S history, with $151 billion of its $175 billion in deposits left uninsured.
Just last month Forbes magazine listed SVB as one of America’s greatest banks to invest in. To pour more salt on the financial wounds of many, Jim Cramer, the host of “Mad Money” urged his followers to “buy buy buy” shares of SVB.
So, why would one of the country’s most robust banks suddenly fail? The breakdown is anything short of a ponzi scheme that keeps smaller banking institutions more vulnerable to folding. Watch the breakdown.
You see, U.S. banks like SVB were given interest free money by the Federal Reserve Bank to beef up its financial portfolio. This tactic is known as an artificially low interest rate. In turn, the infusion propped up SVB to go beast mode in the stock markets. With their free money, they were able to purchase high-yielding government bonds, mortgage backed securities and long term interest rate products. To their investors, these bonds assured great profits because SVB got paid from the interests of the bonds they bought with the non-interest injected money that they received from the Reserve.
From the Federal Reserve’s perspective, SVB’s high profits will boost the dollar in return. So, in the end, everyone wins. However, this is what I call a common sense extinction level cycle, which means, if banks keep doing this, eventually they will implode and die. Due to the fluctuation of the markets, interest rates will change, and when they change, those high-yields fall and investors start to lose their money. Which is what happened in the case of SVB.
To worsen matters, the Federal Reserve did not catch SVB as they fell. That means they did not offer them a bailout like they have done to bigger banks like JP Morgan Chase, Bank of America or Wells Fargo in 2008. They just let SVB crash.
As a result, SVB was forced to write down the value of its capital holdings due to the Fed’s tightening policy. The bonds in which it invested its major depositors’ dollars became devalued as yields rose and prices fell. Following this adjustment, many crypto companies began to demand their money in order to pay off people getting out of crypto after the FTX spectacle. If SVB had let those bonds mature, it would never have had to write them down, but the run by crypto companies forced the sale of those bonds rapidly.
The CEO of the SVB, Gregory Becker, asked his clients for patience, which sent everyone running for cover and forced the California government and FDIC to lock the bank’s doors and computers. Before the lockdown was in place, $42-billion had already rushed out the door, making the SVB immediately insolvent with its obligations to the Federal Reserve.
Oh, and by the way, Becker sold over 12,000 shares two weeks before the crash. He cashed in for $3,578,652.31 on February 26 according to a February 27 filing with U.S. Securities and Exchange Commission (SEC). But wait, it gets better, the bank’s CFO Daneil Beck sold $575,180 in stocks in a separate transaction on the same day, plus Chief Marketing Officer Michelle Draper dashed with her lion’s share too.
The bigger picture.
Debt manipulation and a market driven by the government rather than an organic flow, are much to blame for failed U.S. banks. Over generations, the banking system has become a tool for the government to create an illusion of a strong economy by printing money and using banks to raise debt. But, this only works for a limited time. As more money is printed, the higher inflation rises. Now, banks are sitting on mountains of U.S. Treasury bills that have lost value due to rising interest rates.
At the beginning, the cash infusion beefs up the banks, but what it also does is flood the market with cash. Eventually, the value of the dollar becomes compromised. To curb inflation, the government and the Federal Reserve had to stop the interest-free flow of printed money to U.S. banks, all the while, increase interest rates. As a consequence, the government bonds bought by the banks with interest-free money are now toxic assets.
This means the cycle of banks buying more bonds to continue their cash-flow infusions by the Feds comes to an abrupt halt. Ultimately, it causes banks to struggle without their regular financial fix.
Circling back to the SVB fiasco, the lines of banking customers you saw in the news is what you call a run on banks. It happens when investors and shareholders wanting to withdraw what they had left from those negative-yielding bonds. What adds fuel to the fire is President Biden claiming SVB investors and shareholders will not be compensated due to their bad investments.
I agree that investors and shareholders are also conspirators. The return on profits was a steal, almost literally. But an analogy that best fits what happened is when you give a kid a bag of candy for Halloween then tell them not to eat any. Banks have a sweet tooth, and these yucky silver caps will not mend their fragile fiscal teeth.
Like all the contagions before, this virus was created in a lab too. What is for certain, the U.S. financial sector is in terrible shape. Along with the international demand drying up, the future outlook for the U.S. economy is dire. This is not a drill, just check the numbers.
💱 Trading of Credit Suisse, Commerzbank, Federal Republic, Western Alliance Bancorp, PacWest, and Bank of America were halted overnight due to a 15 percent plunge in stock value.
💱 Over the weekend, Wells Fargo reported problems with account balances and funds availability.
💱 Depositors in Bank of America (BoA) put videos on social media showing lines at some BoA branches filled with customers who could not get answers from the bank’s customer service department.
💱 Investor confidence is still plummeting for most of the same banks, and whether these banks can avail themselves of the new, loosened credit resources and possibly save themselves today remains to be seen.
Adding more worry to mayhem, the wipeout of two banks, including SVB, the nation’s 16th-largest, has caused worries about an overwhelming lack of confidence in the banking system spreading like a virus without a cure. To offer some calm, U.S. Treasurer Janet Yellen, has assured the nation that the banks are more solid than ever and that the Treasury and the Fed and the FDIC are working to make sure there will be no contagion. However, the more they say there won’t be any contagion, the more you know there will be.
Michael Burry, the investor featured in “The Big Short,” has warned that “today we found our Enron.”
Then the Federal Reserve announced a rescue plan that is going to radically change banking in America. All deposits at SVB and Signature Bank, the second shuttered institution, will be fully guaranteed and will be available this week. This means that the Federal Reserve is guaranteeing every bank account in America, which is quite a promise to make considering the fact that more than 19 trillion dollars is deposited with U.S. banks.
While everyone might not be lining up at their respective financial institution, the ponzi scheme of flooding the markets with artificial money exposes cracks in the economy. It seems as if there is this sentiment that the system will continue to stand until it can stand no more.
Certainly, someone or something will benefit? At the end of this rainbow is another pot of gold reserved only big banks. While it looks like they are pitching life jackets to the small banks who by protocol, are being blamed for this latest fiscal fiasco, it is really another wave to consolidate power so that the banking industry’s influencers are in one concentrated area, or line of families. At best, the power is relegated to a few.
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