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Silicon Valley Bank is shut down by regulators in biggest bank failure since global financial crisis Login/Join 
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quote:
Originally posted by chellim1:
The New York Post ran an article yesterday headlined, “Obama Official, Hillary Donors, Improv Actor: Meet SVB’s Board of Directors.”
https://nypost.com/2023/03/14/...tor-meet-svbs-board/

You thought the bank’s woke, sex-obsessed risk manager was bad, wait until you hear THIS. It explains a LOT.

Lifetime bans from all financial institutions and business, for all officers and board members with SVB.
quote:
Less than 15 minutes away is the Napa Valley estate owned by Democratic Speaker Emerita Nancy Pelosi and her husband, Paul.

For some perspective, there's some 50-60 other vineyards within the same radius; the majority are simply farms that aren't set on a manicured estate with a cave celler and prominent manor house.

Yup, getting Madoff-vibes with this one....
 
Posts: 14548 | Location: Wine Country | Registered: September 20, 2000Reply With QuoteReport This Post
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Run Deep

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All those woke assholes are through college and now running companies in top management positions.

This is just the beginning of the shit storm of failed companies we will see in all industries.


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Posts: 6978 | Location: South East, Pa | Registered: July 04, 2002Reply With QuoteReport This Post
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Too soon?


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Posts: 5719 | Location: Florida | Registered: March 03, 2009Reply With QuoteReport This Post
His diet consists of black
coffee, and sarcasm.
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After all his posturing, his little speeches railing against millionaires and billionaires, here's Biden bailing them out. Roll Eyes You can cut the irony with a knife.
 
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Eisman > Cramer

 
Posts: 3478 | Registered: May 30, 2011Reply With QuoteReport This Post
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So Steve Eisman, the banking system has imploded and its bad, not that bad that it will blow up entirely but, it's bad. Were moving from one Paradigm to another Paradigm. Is that the gist Steve?
 
Posts: 1447 | Location: Western WA | Registered: September 11, 2006Reply With QuoteReport This Post
wishing we
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https://www.msn.com/en-us/mone...pitalism/ar-AA18EpNG

Federal deposit insurance was introduced 90 years ago during the heart of the Great Depression. Ever since then, small depositors within the F.D.I.C. limit of coverage have slept soundly. Now, in light of the bank failures of the last few days and the F.D.I.C.’s extension of coverage, why will any depositor worry about risk? Having bailed out depositors of two banks in full, how will the government refuse others?

Established as part of the landmark Glass-Steagall Act of 1933, the Federal Deposit Insurance Corporation initially provided deposit insurance up to $2,500, supported by premiums from member banks. The act was written by two Democrats, Senator Carter Glass of Virginia and Representative Henry Steagall of Alabama. Steagall wanted to protect rural banks, which had many small depositors, from contagious panics.

The idea was controversial. The president of the American Bankers Association protested that insuring deposits was “unsound, unscientific and dangerous.” It was opposed by President Franklin D. Roosevelt and by his Treasury secretary, William H. Woodin. Roosevelt opposed insurance because he thought it would be costly and also encourage bad behavior. If there was no need to mollify depositors, then banks would be free to take all sorts of risks. Today we call this “moral hazard.”

In 1933, an estimated 4,000 banks failed. Roosevelt took office in March, and declared a national bank holiday to prevent more failures. After a pointed debate, in June Roosevelt signed the Glass-Steagall Act.

The F.D.I.C. definitely prevented panics. From its creation until America’s entry into World War II, banks failed at a rate of close to 50 per year, not bad considering the economic depression in most of that period. And most of the banks that failed were small.

By the postwar period, deposit insurance seemed to have been created for an era that no longer existed. Bankers schooled in the 1930s tended toward prudence, and the industry was risk-averse. The failure rate was exceptionally low. That all changed in the 1970s and ’80s. A combination of financial deregulation, revived animal spirits on Wall Street, and rising inflation led to financial instability and swings in interest rates. Voilà — bank failures returned.

In recent days, many have been reminded of 2008 and ’09 (165 banks failed in those two years alone). But for the most part, that crisis was not the result of depositors pulling funds. Bear Stearns, Lehman and others failed or sought bailouts because overnight funding from professional investors disappeared. It dried up for two good reasons: Banks like Lehman had too much leverage, and they were overexposed to a very weak and widely held asset, mortgage securities.

That was not the case with S.V.B.

This panic was a classic bank run, and it bears an echo to a different historical episode. In the 1980s, lenders known as savings and loans had invested their funds in long-term mortgages paying a fixed rate of interest. When the Federal Reserve, under pressure of rising inflation, began to jack up rates, S.&L.’s had to pay higher rates to attract deposits.

The mismatch between the cost of their money and the (lower) rate that their mortgages earned sank the industry. Many switched to riskier assets to juice their returns, but as these investments soured, their problems worsened. Roughly a third, or about 1,000, S.&.L.’s failed. The F.D.I.C. was not (luckily for it) involved, because the S.&L.’s were covered by a separate federal insurer. This agency, known as F.S.L.I.C., became insolvent, and the subsequent bailout was estimated to have cost taxpayers more than $100 billion.

Silicon Valley Bank’s failure looks a bit like an S.&.L. crisis in miniature. Like its 1980s counterparts, S.V.B. grew extremely rapidly, had many assets parked in fixed, long-term bonds, and was done in when inflation caused the Fed to raise interest rates, raising the cost of keeping deposits.

Like the S.&.L.’s, Silicon Valley Bank was heavily concentrated. It catered to start-ups for whom an S.V.B. account was a matter of status. One tech savant who had recently changed jobs (aren’t they always switching jobs?) told me that in his experience, roughly two thirds of start-ups banked with S.V.B. (the bank claimed that nearly half the country’s venture capital-backed technology and life science companies were customers).

Until the 1970s, the F.D.I.C. limit on deposit coverage increased only slowly. But in 1980, as banks came under pressure from soaring inflation, Congress raised the cap to $100,000, over the objections of the F.D.I.C. itself. In the 2008 crisis, the limit was raised to $250,000. And after the failure of IndyMac in 2008, the F.D.I.C., when possible, quietly protected uninsured depositors.

In the rescue of S.V.B. on Friday and of Signature Bank in New York two days later, the F.D.I.C. overtly ignored the cap and rescued all depositors, irrespective of size. This is a breathtaking leap.

Rescued seven-figure depositors were primarily venture companies steeped in the ideology of investing. The first plank of capitalism is that it entails risk. You cannot sensibly invest without assessing the chance for loss. If venture firms relied on groupthink rather than financial due diligence, that was their doing. In the case of Signature, which was exposed to the crypto industry, the rescue probably bailed out gamblers on speculative assets.

Federal officials have seized on a technicality to claim that it is not a bailout: Any required rescue payments will come from a special assessment on (private) banks, not the public. Prudent banks, which hedged their exposure to interest rates and suffered a competitive cost for doing so, will be hit with the added expense. Most likely, banks will pass along the rescue costs in the form of higher fees to consumers.

Strictly speaking, President Biden’s assurance that taxpayers are not on the line was accurate. However, in the sense that banking customers are a pretty big group, the “public” will be affected.

In past bank failures, uninsured depositors did not lose all — 10 percent to 15 percent was typical. And in this episode, there wasn’t any systemically bad asset à la mortgages in 2008. Given that the risk was contained, and that the Federal Reserve provides liquidity to banks facing runs (and provided emergency liquidity this week), allowing uninsured depositors of banks that fail to suffer a haircut might have been healthier for the system in the long run.

And the bailout does nothing to address the condition that fostered financial instability: inflation. It may even exacerbate it. This is not what Henry Steagall had in mind.
 
Posts: 19493 | Registered: July 21, 2002Reply With QuoteReport This Post
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I apologize if this has been mentioned. I heard this on the Hugh Hewitt radio show yesterday morning with Sen. Tom Cotton.

Imagine a bank based out of Midland, TX with $200B in assets that caters exclusively to oil and gas companies and pipeline companies. If this bank was leveraged like SVB and collapsed, would the Biden administration come to its rescue?

I doubt it.


P229
 
Posts: 3808 | Location: Sacramento, CA | Registered: November 21, 2008Reply With QuoteReport This Post
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The Dow and SPY are both up. Wall Street Bets is saying we may never close red again because the fix is in.


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Posts: 638 | Location: Crestview Florida | Registered: July 23, 2008Reply With QuoteReport This Post
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^^^Yup, that's because 'Wall Street' is in on the grift, and manipulates the market(s) to their own benefit, and that of a particular/preferred investor class! The regular Joe/everyday 'Main Street Investors' are just along for the ride!


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Posts: 8756 | Location: New Hampshire | Registered: October 29, 2011Reply With QuoteReport This Post
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Barney Frank Pushed to Ease Financial Regulations After Joining Signature Bank Board

Former congressman and co-sponsor of the Dodd-Frank bill says there is no evidence the change abetted bank’s failure

https://archive.fo/yzWCy#selection-115.5-119.116

Former Rep. Barney Frank co-sponsored the law that tightened banking regulations after the financial crisis, but since leaving office he has been working the other side of the street—as a board member of Signature Bank, which regulators shut down Sunday.

The 2010 Dodd-Frank legislation set tougher regulatory safeguards on banks with more than $50 billion in assets. After leaving office and joining Signature’s board, Mr. Frank publicly advocated for easing those new standards for smaller banks.

Part of what then-President Donald Trump signed into law in 2018 raised the asset threshold to $250 billion, meaning Signature and other regional banks no longer needed to comply with the extra regulation set out in Dodd-Frank.
After the bill was signed, New York-based Signature more than doubled in size to $110 billion in assets, and $88.6 billion in deposits as of the end of 2022. The stricter requirements, had they been in place, might have prompted bank executives and their overseers to move more quickly to place the lender on sounder financial footing, some industry observers say.

Mr. Frank, who has earned more than $2.4 million in compensation from Signature Bank since 2015, rejected the idea that the regulatory change abetted to Signature’s collapse.

“Nobody has shown me any evidence of systemic or other kinds of fraud that would have been prevented” without the 2018 rollback, Mr. Frank said.
Lifting the threshold, Mr. Frank said, was a good change that “saved smaller banks a lot of paperwork.” Mr. Frank said that as early as 2013 he began talking publicly about the need to change it, predating his employment with Signature Bank.

Jeff Hauser, who analyzes corporate influence on government for the liberal Center for Economic and Policy Research, said Mr. Frank’s position with Signature Bank after years of working on banking regulation was “a classic case of having your cake and eating it, too.”
“Democrats like to develop story lines about institutions it is supposedly OK to revolve into,” Mr. Hauser said. “It always comes back to bite.”
Both Signature Bank and Silicon Valley Bank, which failed and was taken over by regulators Friday, have close ties to policy makers.
Mary Miller, a former Treasury official under President Barack Obama, has been on SVB’s board since 2015. “Her investment and regulatory knowledge as well as cultural alignment will enable Mary to add unique perspective and insight,” the board’s chairman at the time said in the announcement of her appointment.
Ms. Miller couldn’t be reached for comment.

The bank’s president and chief executive officer,Greg Becker, was on the board of directors at the Federal Reserve Bank of San Francisco until Friday, and was one of its three finance executives.

All seven of Silicon Valley Bank’s registered lobbyists last year previously held government positions, according to public records. Signature Bank didn’t employ registered lobbyists last year, the records show.
During the lobbying push ahead of the 2018 legislation, Signature Bank retained former Sen. Al D’Amato
(R., N.Y.) and his firm, records show.

Mr. Frank joined Signature Bank’s board in 2015, about two years after retiring from Congress. Mr. Frank’s long government career and “distinguished expertise in financial services” will be an asset to the bank, the board’s then-chair wrote at the time.
He didn’t register as a lobbyist, but appeared frequently on television and in opinion pieces and newspaper articles to weigh in on the 2018 plan to roll back pieces of his namesake bill.

He told The Wall Street Journal in 2017 that the $50 billion threshold in Dodd-Frank was “arbitrary” and “seemed like a much bigger number” than it was.
And in a March 2018 op-ed for CNBC, he wrote that the limit was “a mistake” and that a higher amount—he suggested $100 billion—“could in fact provide a more competitive environment, lessening, even marginally, the foundation of the mega banks.”
Lawmakers including then Sen. Heidi Heitkamp (D., N.D.) and Sen. Tom Carper (D., Del.) cited Mr. Frank’s assessment as a reason they felt comfortable voting for the bill.


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Posts: 12546 | Registered: January 17, 2011Reply With QuoteReport This Post
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California's governor, Gavin Newsom, may have conflicts of interest in pushing for the bailout of SVB. He, of course, has been seen going around rules that were put in place for California residents that appeared not to limit himself.

Two articles linked here.

ARTICLE 1

https://www.msn.com/en-us/news...6e0f3b4b415b57&ei=14

Gavin Newsom’s Wineries Get Rescued By Biden Bailout He Praised

Democratic Gov. Gavin Newsom of California has several business ties to the collapsed Silicon Valley Bank (SVB), which he failed to disclose when praising the Biden administration’s decision to guarantee the deposits of all the bank’s clients, even those above the usual limit of $250,000 that aren’t eligible for federal insurance, according to investigative journalism outlet The Intercept.

A trio of wineries owned by Newsom — CADE, Odette and Plumpjack — are all named publicly as clients of the bank, and the governor has maintained personal accounts with the bank for years, The Intercept reported, citing a former employee of Newsom’s responsible for managing his finances. On March 11, the day after the FDIC formally took over SVB, Newsom announced that he had been “in touch with the highest levels of leadership at the White House and Treasury” for the past two days regarding the crisis.

Newsom also publicly praised the Biden administration for acting “swiftly and decisively to protect the American economy,” after the Federal Depositors Insurance Corporation (FDIC) invoked a “systemic risk” exception to guarantee that all clients of SVB would be made whole, in a statement Sunday.

SVB — which became the second largest U.S. bank to fail after it collapsed amid a bank run on March 10 — also donated $100,000 to the California Partners Project (CPP), a nonprofit founded by Newsom’s wife, Jennifer Siebel Newsom. The gift took the form of a “behested” payment, which means it was made “at the request, suggestion, or solicitation of, or made in cooperation, consultation, coordination or concert with the public official,” in this case Newsom.

John China, president of SVB Capital, is both a board member and gender equity advisory council member at the CPP, according to the group’s website.

(see article for embedded chart of payouts requested by Newsom)

“Governor Newsom’s business and financial holdings are held and managed by a blind trust, as they have been since he was first elected governor in 2018,” Nathan Click, a Newsom spokesperson, told The Intercept.

Newsom’s blind trust is managed by family friend and attorney, Shyla Hendrickson, while his sister Hilary Newsom, has continued to serve as the president of PlumpJack Group, a set of businesses founded by Newsom including hotels, wineries, restaurants and liquor stores. However, a similar system used by then-President Donald Trump, which installed his sons as the leaders of a blind trust that managed his business affairs upon taking office, has been criticized by ethics experts as misleading, since Trump was still aware of what businesses he owned, according to The Intercept.

The Biden administration’s restoration of deposits greater than the statutory limit of $250,000 will also make whole more than 1,500 climate companies poised to take advantage of subsidies and programs offered by the president’s signature Inflation Reduction Act.

Newsom’s office did not immediately respond to a Daily Caller News Foundation request for comment.

ARTICLE 2

https://www.msn.com/en-us/news...248513fe8a384f&ei=46

California Gov. Gavin Newsom failed to publicly disclose his SVB ties while lobbying for a bailout

- California Gov. Gavin Newsom reportedly had substantial personal ties to Silicon Valley Bank.
- Reports link Newsom to the bank through personal accounts, three wineries, and his wife's charity.
- California law bans officials from influencing decisions in which they have "a financial interest."

California Gov. Gavin Newsom lobbied the White House and the Department of the Treasury about the pending bailout of Silicon Valley Bank, even as three of his private wineries had apparently been among the bank's clients, according to a Tuesday report by Ken Klippenstein of the Intercept.

According to Klippenstein's reporting, Newsom's personal relationship with SVB went beyond the wineries. One anonymous former employee who handled Newsom's finances told Klippenstein that Newsom "maintained personal accounts at SVB for years."

It is unclear whether those personal accounts were still active at the time of the bank's collapse last week. If they were, Newsom could have stood to benefit directly from the Biden administration's rescue package, which will reimburse SVB account holders even if their balances surpass the $250,000 limit insured by Federal Deposit Insurance Corporation.

On Saturday, Newsom's office issued a statement that Newsom had "been in touch with the highest levels of leadership at the White House and Treasury." He said the goal was to "stabilize" "the entire innovation ecosystem that has served as a tent pole for our economy."

The following day, Newsom praised the administration for acting "swiftly and decisively." Again, there was no mention of his own ties to the bank. Instead, Newsom expressed gratitude on behalf of "small businesses that can now make payroll, workers who will get their paychecks," and "non-profits that can keep their doors open tomorrow."

Newsom's wife, Jennifer Siebel Newsom, happens to be the co-founder of one of those non-profits, California Partners Project. SVB reportedly donated $100,000 to that charity. The former bank's president is listed as one of the charity's board members.

The son of an attorney for the Getty Oil dynasty, Newsom's fundraising prowess and deep ties to California Democrats have put him in the first tier of the party's future presidential contenders. But as Newsom's national profile has grown, his privileged background has emerged as a potential Achilles' heel with voters. During the pandemic, he was photographed dining maskless with a large group of lobbyists at the French Laundry, an exclusive Napa Valley restaurant where foodies pay upwards of $300 a plate. He apologized, and claimed that the seating was outdoors.

Newsom has not discussed his personal ties to SVB publicly. It is unclear whether he disclosed them to the White House or Treasury during his contacts with the administration over the weekend.


As an elected official, Newsom is prohibited by state law from influencing a governmental decision "in which the official knows or has reason to believe the official has a financial interest."

Nathan Click, a spokesperson for Newsom, told Insider that Newsom's "business and financial holdings are held and managed by a blind trust," and have been since he was elected governor in 2018. Click did not respond to detailed questions about the Intercept's reporting on Newsom's SVB ties.

Spokespeople for the White House and California Partners Project did not immediately return Insider's requests for comment.
 
Posts: 2768 | Location: Northern California | Registered: December 01, 2006Reply With QuoteReport This Post
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https://hotair.com/tree-huggin...-are-insured-n537411

Republican Sen. James Lankford of Oklahoma pressed Yellen about how widely the uninsured deposit backstops will apply across the banking industry.

“Will the deposits in every community bank in Oklahoma, regardless of their size, be fully insured now?” asked Lankford. “Will they get the same treatment that SVB just got, or Signature Bank just got?”

Yellen acknowledged they would not.

…Uninsured deposits, she said, would only be covered in the event that a “failure to protect uninsured depositors would create systemic risk and significant economic and financial consequences.”

Lankford said the impact of this standard would be that small banks would be less appealing to depositors with more than $250,000, the current FDIC insurance threshold.

“I’m concerned you’re … encouraging anyone who has a large deposit at a community bank to say, ‘we’re not going to make you whole, but if you go to one of our preferred banks, we will make you whole.’”

“That’s certainty not something that we’re encouraging,” Yellen replied.

They are going to drive larger depositors out of the smaller regional banks, straight to their corporate cohorts at J.P. Morgan, Chase, Citicorp – you name the big playah.

how very convenient both of these failed and bailed institutions are chock-full of Democratic MEGA bucks and glitterati accounts of the First World Order.
 
Posts: 19493 | Registered: July 21, 2002Reply With QuoteReport This Post
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About half of the Israeli's companies had accounts with this SVB. The one of the greatest bank heist in America that most people are not even aware of or even care.
 
Posts: 74 | Registered: February 05, 2000Reply With QuoteReport This Post
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50 Trillion. Sure, cause it only matters compared to GDP. US debt ratio is approx 128%. Japan is currently 268%. The roaring 20s for sure.



 
Posts: 3478 | Registered: May 30, 2011Reply With QuoteReport This Post
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quote:
Originally posted by RogueJSK:
Yeah, Bank of America is still paying 0.01% interest on their savings accounts.

The big banks don't feel like they have to compete for deposits, like the smaller, hungrier banks that are offering 4%+ do.


O/T rant here but the State of Michigan sure loves BOA. Unemployment benefits are paid out via a BOA debit card. Wonder how much that costs us taxpayers here?


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————————--Ignorance is a powerful tool if applied at the right time, even, usually, surpassing knowledge(E.J.Potter, A.K.A. The Michigan Madman)
 
Posts: 8064 | Location: Livingston County Michigan USA | Registered: August 11, 2002Reply With QuoteReport This Post
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Posts: 8347 | Registered: July 21, 2010Reply With QuoteReport This Post
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Capitalism, except for the capitalists

What happened over the weekend is bigger than Silicon Valley Bank; once again the wealthiest, most politically connected companies and executives are proving the rules don't apply to them.

Alex Berenson

Back to the banks.

For a few hours on Sunday, they fooled me.

At 6:15 p.m. Sunday, the government and Federal Reserve announced they would guarantee all deposits at the two big banks they’d closed, Silicon Valley Bank and Signature Bank - removing the $250,000 limit on insured accounts to help prevent a bank run.

Taxpayers would not be on the hook for any losses, they said. The banking industry would pay for the extra insurance.

I didn’t think the deposit insurance should be extended at all.

When banks failed in 2008, we didn’t have unlimited deposit insurance, and we didn’t have widespread bank runs on healthy or unhealthy institutions. Very few individuals have more than $250,000 in their plain vanilla bank accounts (as opposed to brokerage accounts where they are saving for retirement).

So extending the limits at taxpayer expense to protect very wealthy depositors and - in the case of Silicon Valley Bank - venture-capital backed companies didn’t seem fair.

And we have limits on government backed deposit insurance for good reason. Without it, large depositors have every reason to chase the highest possible interest rates on their money, even at badly managed banks. Why? They know that even if the bank squanders their deposits on bad loans, they’ll get their money back.

This risk is not theoretical. In the 1980s, many savings and loans crashed after offering high-yielding deposits. As financial historian and journalist Roger Lowenstein explained yesterday in the New York Times:

When the Federal Reserve, under pressure of rising inflation, began to jack up rates, S.&L.’s had to pay higher rates to attract deposits…

Many switched to riskier assets to juice their returns, but as these investments soured, their problems worsened. Roughly a third, or about 1,000, S.&.L.’s failed.



But venture capitalists - led by David Sacks, a good friend of Elon Musk - spent the weekend screaming that bank runs would be inevitable if the government didn’t guarantee all depositors.

Many if not most of these folks had not-at-all hidden conflicts-of-interest - either personal deposits at Silicon Valley Bank or investments in companies that had deposits there. Nonetheless, they insisted that they were warning about bank runs solely because they wanted to save ‘Merica from bank runs!

Whether or not they were trying to worsen the crisis, their warnings certainly did. They essentially forced the government’s hand.

My old friend and colleague Jesse Eisinger (I guess he’s now a ex-friend, thanks to my reporting on Covid and the mRNAs, but that’s a story for another day) captured the dynamic nicely:



If regulators and the Treasury Department felt they had no choice but to guarantee all deposits, then forcing the industry to pay for the extra insurance seemed like the fairest option.

“Any losses to the Deposit Insurance Fund to support uninsured depositors will be recovered by a special assessment on banks, as required by law,” the Federal Reserve’s press release explained.

Yes, banks would probably wind up passing the cost along to customers anyway. But at least they’d upheld the principle that taxpayers shouldn’t - yet again - bail out the wealthiest Americans. “So the Fed found a semi-decent solution here,” I tweeted at the time, adding a warning: “The devil is in the details, of course.”



So it was.

The deposit insurance extension got the attention, understandably. But the most important news on Sunday came buried in a different Federal Reserve press release, seven little words: These assets will be valued at par.

quote:
The additional funding will be made available through the creation of a new Bank Term Funding Program (BTFP), 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, 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.


Why do those seven words matter so much?

The reason that depositors started pulling money from Silicon Valley Bank last Thursday wasn’t because they suddenly woke up and decided Silicon Valley had a weird-looking logo. It was because Silicon Valley had lost huge amounts of money buying low-yielding Treasury notes and mortgage-backed securities.

Bonds carry two kinds of risk, credit and interest rate risk. (Bearer bonds carry a third kind of risk, that they will be stolen, ala Die Hard. But bearer bonds don’t really exist anymore.)

Credit risk is obvious - if a company goes bankrupt and can’t pay back a bond, it’s worthless, give or take. Interest rate risk is more subtle. Bond prices rise as interest rates fall and fall as rates rise.

For a person who owns a bond and just plans to hold it until it matures, interest rate risk doesn’t matter much.

But for a bank, interest rate risk matters hugely.

A bank takes money from depositors and uses it to make loans or buy bonds (or other, more esoteric financial instruments). If the depositors want their money back, the bank has to give it to them. If it has to get that money by selling bonds when their value has dropped because interest rates have risen, it will lose money. A bond for which it paid $100 might only be worth $90.

But not to the Federal Reserve.

The Federal Reserve just told the world that it will pretend that a bond which is really only worth $90 is actually worth $100 - “par.” That’s what “these assets will be valued at par” means.

This program is similar to the way the Fed started to bail out banks in 2008, when it bought mortgage-backed securities that no one else would. That program, like this one, was supposed to be a temporary response to a crisis that threatened to destroy much of the banking system.

How’d that work out for us? Before the banking crisis of 2008, the Fed had under $1 trillion in assets. In bailing out banks that fall, it more than doubled the size of its balance sheet - to over $2 trillion.

Today the Federal Reserve has over $8 trillion in assets - loans and bonds that it has taken from banks (and since Covid, from companies directly). It is a larger and more crucial backstop to the banking system than it was 15 years ago.



For a long time, all that extra help didn’t seem to matter. Yes, interest rates were artificially low, mightily benefitting to the richest people in the world - on Wall Street and in Silicon Valley. But inflation was also low.

In 2021, though, the bill came due. Inflation suddenly spiked, and it has stayed high since.

To get inflation under control, the Federal Reserve has had no choice but to raise interest rates - and even more importantly, to reduce the size of its balance sheet and thus the amount of money in the banking system.

But the interest rate increases have caused a massive problem for banks. Over the last decade, they grew addicted to paying nothing - as in zero percent interest - on more deposits than they knew what to do with. They parked the money in Treasury notes and other low-risk bonds.

Low credit risk, that is. Those bonds had interest-rate risk like all the others. And when the Fed began to raise interest rates, they lost value. Some banks did a better job managing that risk than others, and - coming back to last week - Silicon Valley Bank did a particularly bad job.

As of last week, the bonds that Silicon Valley held were worth about $16 billion less than it had paid for them.

Coincidentally, Silicon Valley’s entire equity capital base - all the money it had to backstop depositors against all losses - was also about $16 billion. Thus Silicon Valley was effectively broke before the run on its deposits started.

The only question was who would get out whole and who wouldn’t.



On Sunday night, the government solved that problem: everyone.

But though extending depositor insurance reduces the pressure for bank runs, it does not magically make banks solvent.

If banks like Silicon Valley have assets (bonds) that are worth less than what they owe depositors, they will eventually fail. And someone will have fill the gap to make those depositors whole.

Other, stronger banks can help, but if the entire industry has lost money because interest rates have risen, the problem will quickly become too big for banks to solve. Then taxpayers will have to step in.

The Federal Reserve (and the White House) desperately want to avoid the appearance of a government bailout - taxpayer money going directly to pay off the wealthiest depositors. The solution is the “Bank Term Funding Program,” a disguised bailout.

These assets will be valued at par - though they aren’t worth par. The Fed will lend money on them, and if banks have to pay back depositors, they can do so with that borrowed money.

The program lasts a year. What then? Everyone will hope that by this time next year interest rates and inflation have fallen and the bonds the banks have pledged to the Fed are actually worth par.

If not, maybe the program will be extended another year, or another 15 years.



Worse, what if inflation doesn’t come down? What if it rises, and the Fed has no choice but to keep raising interest rates, and Treasury bond yields also rise? In that case, the bonds the Fed has taken will be worth even less, and the hole on bank balance sheets will be even larger, and bailout will be even larger, and the system will be even more unstable.

Bailouts are very easy to start. And very hard to stop. Especially when sophisticated people have figured out how to make money from them.

What happens next? Where and how does all this end? I don't know. But it WILL end. Eventually these excesses will have to be unwound, gradually or suddenly. When they are, you can bet that all the people who have made fortunes from cheap cash for the last 15 years will be reaching into someone else’s pockets to save themselves - just as they did over the weekend.

And the only pockets left will be the federal government’s.

In other words, yours.

https://alexberenson.substack....rue&utm_medium=email



"Some things are apparent. Where government moves in, community retreats, civil society disintegrates and our ability to control our own destiny atrophies. The result is: families under siege; war in the streets; unapologetic expropriation of property; the precipitous decline of the rule of law; the rapid rise of corruption; the loss of civility and the triumph of deceit. The result is a debased, debauched culture which finds moral depravity entertaining and virtue contemptible."
-- Justice Janice Rogers Brown

"The United States government is the largest criminal enterprise on earth."
-rduckwor
 
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