Precursors Are To Be Taken Seriously – Even on Wall Street
Over the past months, we have repeatedly warned that as soon as a large financial institution goes bust due to central bank monetary tightening, and threatens a systemic contagion, those very same central banks would throw the “fight against inflation” out the window, and resume liquidity pumping on an unprecedented scale.
When the British Bond Crisis of 2022 hit last September, followed by the bursting of the cryptocurrency bubble in December, we characterized them as precursors of a bigger earthquake to come. Those forecasts were not based on a crystal ball, but on the laws of physics. Drawing liquidity from a system whose existence is based on continued expansion of that liquidity would inevitably lead to a collapse.
The sequence of events from March 8 on, with bank runs, multiple bank failures and stock market panic, indicate that the systemic earthquake might already be happening. Certainly, bank bailouts are again center stage.
- On March 8, Silvergate Capital Corp. in San Diego, a small bank with about $14 billion in assets, failed and is being liquidated. Silvergate had become a cryptocurrency-dominated bank, as to its deposits and loans.
- On March 10, Silicon Valley Bank (SIVB) in Santa Clara, California was shut down by the Federal Deposit Insurance Company. With $212 billion in assets, it was among the top 20 U.S.-based banks, and the largest U.S. bank failure since Washington Mutual ($328 billion in assets) in the fateful month of Sept. 2008.
- In March 12, the Federal Reserve created a new bailout fund, dubbed the Bank Term Funding Program (BTFP). It is to receive $25 billion from the Exchange Stabilization Fund, and will borrow from the Treasury (taxpayers money) if that’s not enough — which is more than probable, given the amount of deposits to be rescued. The new facility will lend money to banks in exchange for Treasury bonds taken at par value, thus preventing a collapse of the bond market in the event of rushed sell-offs to get liquidity.
- That same evening, a third bank, Signature Bank of New York, with $110 billion in assets at the end of 2022, was closed by the Treasury after suffering a collapse in its stock value, and also in the value of its bonds, to less than 60 cents on the dollar. This institution, too, has a lot of cryptocurrency deposits. The latter two were investment banks disguised as commercial banks. Most deposits were uninsured. Those deposits belonged to crypto companies in Silvergate, and to start-ups in SIVB.
- On March 13, Joe Biden appeared before journalists to proclaim that “all deposits are safe”, reminiscent of similar appearances by government officials at the onset of the 2008 crisis. Does the U.S. government intend to cover all the estimated $7-800 billion in unrealized losses in the banking system?
How things evolve in the next days will depend on the actions taken by the government and the Federal Reserve. Last week, Fed chairman Jerome Powell had announced an escalation in money tightening, with a higher-than-expected rise in rates. But it will hardly be possible to keep that promise at the next meeting on March 23.
A shocking feature common to all three banks is that in the past months, while suffering a run on deposits, they were bailed out by government-sponsored institutions such as Federal Home and Loan banks, which are supposed to loan money to banks in order to finance mortgages for family homes.