Special Report: Bankser Bust, 'Dot-Com This'
NOTE TO READERS: The following is one of the dozens of economic articles found in last week’s issue of The Trends Journal. Consider subscribing here for in-depth, independent geopolitical and socioeconomic trends and trend forecasts that you won’t find anywhere else.
PUBLISHER’S NOTE: Throughout this Trends Journal, we have forecast that the recent bank failures are just the beginning of the worst that is yet to come… economically, socially, and geopolitically.
History is repeating itself. In the October 1999 Trends Journal, our front-page Notice to Readers was “DOT-COM THIS.” We had forecast that the tech sector would crash by the second quarter of 2000 because much of it was artificially created with no real earning potential:
We wrote: “Dot-com overloads will short circuit many high expectations for huge profits in Internet commerce, entertainment, and a wide array of dot-com services. Following the holiday season, many of today’s high-flying internet stocks, the hottest IPOs, and newly emerging IPO-wannabees will have begun the descent from their overvalued heights.”
Welcome to the present. The future has returned.
As we have greatly detailed, during the COVID War equity markets flew high when people were forced to stay home and live online. This wealth and growth surge in the tech sector was fertile ground for new tech visions to keep cashing in on the boom. And like back in the 1990s, when the Internet Revolution began, while there were solid firms producing solid products and tech services, there was a flood of nonsense, no-sense hi-tech startups that made no sense.
Therefore, as the COVID War ended so too has the zoom, work, learn and live on-line full-time trend ended. Therefore, not only have the high profit margins of established firms plummeted as life went back to “normal”… the new startups that The Street was betting on failed and IPOs became IOUs.
This is just the beginning of the worst economic calamity in modern history.
As we have continually noted, to fight the COVID War governments created countless trillions to artificially prop up the economy and the Bankster Bandits flooded the markets with cheap money/low interest rates so the Bigs could get Bigger and the Rich Richer.
The following is an overview of the current banking calamity.
DOT COM BUBBLE: HOW SILICON VALLEY BANK FAILED
Silicon Valley Bank (SVB), a 40-year-old bank specializing in services to tech start-ups, entrepreneurs, and venture capital firms was shut down by federal regulators on 10 March after depositors pulled their money out in an old-style run on the bank.
SVB was among the 20 largest banks in the U.S., reporting $209 billion in assets at the end of 2022, according to the Federal Deposit Insurance Corp., and ranked as the U.S.’s 16th largest bank.
Its failure is the second largest bank collapse in U.S. history, second only to the failure of Washington Mutual in 2008 during the Great Recession.
SVB’s COVID-era story is common among American banks.
As COVID-related lockdowns were imposed early in 2020, people had few places to spend their money. The national savings rate went from the low single digits to 14 percent of income and, at times, as high as 30 percent. Banks were suddenly wallowing in cash.
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Homebound consumers and remote workers began to spend on tech, buying all manner of digital devices and subscribing to online services.
That brought SVB even more deposits.
ECONOMIC UPDATE: PREPARE FOR A CRASH
Like most other banks, SVB needed to put all that money to work to earn a return so it could pay interest to its depositors.
In times of economic uncertainty, the safest place to put cash is in government securities, so SVB and scores of other banks did.
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Three things then happened that ultimately sealed SVB’s fate.
First, when the lockdowns began to lift, inflation set in and the U.S. Federal Reserve began to raise interest rates in March 2022. Because of higher interest rates, new government securities paid higher returns than the bonds SVB and other banks held.
SVB’s $21-billion bond portfolio was returning an average of 1.79 percent; the 10-year treasury bond’s current yield is now close to 4 percent.
Second, people stopped buying tech items and shifted their spending to experiences. Venture capital began to dry up. The small tech start-ups that were SVB’s bread-and-butter depositors had to draw down their bank accounts to meet expenses.
Third, higher interest rates tanked tech stocks. Many tech companies are young and rely on low interest rates to keep their cash flowing and earnings rising.
As these events collided, the tech industry tanked and SVB’s deposits began to drain away, plunging from $16 billion to about $8 billion.
To raise cash to meet those rising demands for withdrawals, SVB sold those low-yield bonds at any price it could get, leaving it with a $2-billion loss.
On 8 March, the bank announced it had sold a packet of securities at a loss and would issue $2.25 billion in new stock to raise cash. That sparked concern among depositors, particularly venture capital companies.
To reassure them, SVB CEO Greg Becker held a call with them to tell them the bank was sound.
The call had the opposite effect: panicked venture capital companies sent emergency messages to the companies in which they were invested, telling them to yank their money out of SVB.
That created an old-fashioned run on the bank. On Thursday, 9 March, depositors tried to withdraw $40 billion from SVB, vastly more cash than it could come by in the course of a day. By 9 a.m. Friday morning, state regulators had stepped in and shut it down.
“SVB’s condition deteriorated so quickly that it couldn’t last five more hours,” Dennis Kelleher, CEO of nonprofit watchdog Better Markets, wrote in a note.
“Its depositors were withdrawing their money so fast that the bank was insolvent and an intraday closure was unavoidable due to a classic bank run,” he said.
“CRYPTO BANK” SILVERGATE CAPITAL SHUTS DOWN
Silvergate Capital, a San Diego bank, announced on 8 March that it was ceasing operations and liquidating its assets.
The bank had been a major connection between the financial system and the cryptocurrency market.
From its beginnings as a small bank making real estate loans, in 2016 it decided to join the crypto revolution. By 2019, it had become the crypto world’s bank of choice, with around 1,600 crypto-related businesses funneling their conventional financial transactions through it.
From $2 billion in deposits in 2020, it had more than $16 billion at the end of last year. Ten months after listing on the New York Stock Exchange at $12 a share, its stock price had soared to $200.
After FTX—perhaps the world’s premiere crypto platform—collapsed in December, deposits at Silvergate began to leak away as crypto lost its luster. By some time in January, customers had taken out more than $8 billion.
To cover customers’ demand for cash, Silvergate sold its portfolio of securities at emergency prices, taking a loss of $718 million, a figure higher than the profits the bank had made during its entire existence.
Deposits continued to drain and the bank collapsed.
“When banks get involved with crypto, it spreads risks across the financial system and it will be taxpayers and consumers who pay the price,” U.S. Senator Sherrod Brown (D-OH) said in a statement.
Brown serves on the Senate’s banking committee and on its Subcommittee on Financial Institutions and Consumer Protection.
Silvergate is an indirect victim of the U.S. Federal Reserve’s policy, held too long, of low interest rates that gave cheap money to speculators who then overindulged in risk, the World Socialist Web Site said.
“The policies of the Fed in supplying trillions of dollars in essentially free money created a financial minefield, sections of which are now starting to blow up,” it noted.
BANK FAILURES ERASE BILLIONS FROM BANKING INDUSTRY’S STOCK VALUES
Investors ditched shares of banks across the board Friday after the failure of Silicon Valley Bank (SVB) and Silvergate Capital shook markets’ confidence in the U.S. financial industry.
The country’s four largest banks collectively lost $52 billion in market capitalization. JPMorgan Chase, the biggest U.S. bank, saw 5.4 percent of its market value disappear.
The KBW NASDAQ Bank Index dove the most in a single day since the beginning of the COVID War in spring 2020. SVB stock lost 60 percent of its value.
PacWest Bancorp had lost 38 percent of its market cap and Western Alliance Bancorp had shed 21 percent; Charles Schwab Corp., First Republic Bank, and Signature Bank, all listed on the S&P 500, were the index’s three worst performers, down more than 10 percent each.
The turmoil that beset California-based First Republic Bank is a case in point.
Its stock price plummeted 52 percent Friday on fears that, like SVB, it had large, unrealized losses in government securities. Although the price regained all but 15 percent of Friday’s loss by day’s end, the share value was off 34 percent for the week.
The SVB disaster is seen as a consequence of the U.S. Federal Reserve’s steady increase in interest rates over the past year.
The bank holds a large portfolio of bonds it bought when interest rates were still at rock bottom. As interest rates increased, those bonds lost value and became difficult to sell without incurring losses.
Those higher rates disproportionately dented tech stocks’ value; high interest rates eat into those companies’ future cash flow, making the shares less attractive.
As the industry slumped, so did the volume of deposits at SVB.
As the bank teetered, venture capitalists urged the companies they held shares in to withdraw their money. Founders Fund withdrew millions of its own money from the bank earlier and, as the bank began to fall apart, urged its partner companies to get out.
Gary Tan, president of the Y Combinator start-up incubator sent a similar warning to his fledgling firms.
“We have no specific knowledge of what’s happening at SVB,” he wrote, “but any time you have problems of solvency at any bank, you should take it seriously…not exposing yourself to any more than $250K of exposure there.”
Bank accounts are federally insured to a limit of $250,000.
“Your start-up dies when you run out of any money for any reason,” he warned.
As SVB began to unravel, CEO Greg Becker held a call with customers Thursday, asking them to leave their deposits in the bank and to not spread panic.
The message failed to take.
“This is the first sign there might be some kind of crack in the financial system,” Bill Smead, chair of Smead Capital Management, which holds shares of both Bank of America and JP Morgan.
“People are waking up to the gravity,” he added. “This was one of the biggest financial euphoria episodes.”
The question now is, how many other banks could be sunk by a portfolio heavy with low-yield, illiquid bonds?
The answer: maybe a lot.
At the end of 2022, the U.S. banking industry’s pending losses in securities totaled $620 billion, compared to $8 billion a year earlier.
Most of those unrealized losses are among the largest banks, The Wall Street Journal reported. Bank of America said the value of its government securities to be held to maturity was $524 billion at the end of last year—$109 billion less than the value the bank showed on its balance sheet, the WSJ said.
During the COVID War, the U.S. savings rate rocketed from single digits up to as high as 30 percent of income at one point. Deposits by American households and businesses into federally insured institutions shot up 38 percent through 2020 and 2021.
Over the same period, the volume of loans grew by just 7 percent.
Banks suddenly were drowning in cash they needed to make a return on and government bonds were the safest bet during a time of economic turmoil.
U.S. commercial banks’ holdings of government securities ballooned by 53 percent over those same two years, Fed data shows.
CONTAGION: HOW MANY BANKS? HOW MANY COUNTRIES?
Shareholders fled bank stocks Friday after Silicon Valley Bank and Silvergate Capital failed.
They were right to be cautious.
On Sunday, Signature Bank, one of Friday’s biggest losers in that day’s bank stock rout, was closed by New York state bank regulators. Depositors will continue to have access to their accounts, a joint statement on Sunday by the U.S. treasury department, the U.S. Federal Reserve, and the Federal Insurance Deposit Corp. said.
With $110 billion in assets, Signature’s became the third-largest bank failure in U.S. history.
Signature has been under a cloud since the spectacular collapse of the FTX crypto trading platform. FTX had accounts with Signature.
Signature has said FTX’s accounts made up less than 0.1 percent of its deposits. Following FTX’s implosion in December, Signature said it would cleanse itself of as much as $10 billion in deposits from clients involved in digital assets.
After that, deposits by crypto-involved customers would make up 15 to 20 percent of its total deposits. Signature also vowed to limit the proportion of its deposits that would be allotted to any single client from the digital asset world.
Investors also are closely watching California-based First Republic Bank.
First Republic’s stock price plummeted 52 percent Friday on fears that, like SVB, had large, unrealized losses on its books. Although the price regained all but 15 percent of Friday’s loss by day’s end, the share value was off 34 percent for the week.
Unlike SVB, First Republic’s $29.6-billion chasm between book value and current fair-market value is mostly in loans, not government bonds.
The bank’s bonds in question are largely municipal bonds and are currently down $4.8 billion in value that the bank has yet to write off.
In a statement issued Sunday, First Republic said it has more than $70 billion in unused liquidity through agreements with the U.S. Federal Reserve and JP Morgan Chase and through the treasury department’s new lending initiative.
Also unlike SVB, First Republic specializes in dealing not with the tech industry but with wealthy individuals, who now have a much wider range of choices to earn respectable returns than they did when U.S. interest rates languished at 0.25 percent.
More broadly, U.S. banks are sitting on $620 billion worth of losses in securities that those banks have yet to realize. (See “U.S. Banks Hold $620 Billion in Unrealized Losses” in this issue’s special report.)
Over the past week, investors have scrubbed 40 percent of the value from Keycorp’s stock; the U.S.’s 20th largest bank recently has mentioned restructuring its portfolio of securities available for sale.
Fears about the safety of banks immediately spread to Canada, China, and India, Bloomberg reported, with British regulators declaring SVB’s U.K. branch to be insolvent.
“The loss of deposits has the potential to cripple the sector and set the ecosystem back 20 years,” 180 tech firms and investors wrote in a letter to prime minister Rishi Sunak. “Many businesses will be sent into involuntary liquidation overnight.”
Over the weekend, British bank HSBC bought SVB’s U.K. operation for £1, giving some hope to its depositors and borrowers that business can continue.
In addition to Canada, China, India, and the U.K., SVB had branches in Denmark, Germany, Israel, and Sweden, too. Entrepreneurs are saying that SVB’s collapse could kill young companies around the world unless governments intervene, Bloomberg said.
“The impact of the SVB incident on the technology industry should not be underestimated,” China International Capital analysts wrote in a note.
“If these cash deposits finally have to be impaired in the process of bankruptcy or restructuring, some tech firms may face high cash flow tension,” the note said. “The risks of bankruptcy should not be excluded.”
U.S. BANKS HOLD $620 BILLION IN UNREALIZED LOSSES
Silicon Valley Bank collapsed, in significant measure, because it held a portfolio of government bonds it bought when interest rates were at rock bottom. Banks were awash in cash as households had few places to spend money during the COVID War. Banks needed to put that cash to work and what could be safer during times of economic uncertainty than government securities?
Then inflation took hold, the U.S. Federal Reserve began steadily jacking interest rates, and those securities paying rock-bottom yields suddenly were worth less and less as newer bonds paying higher returns became better investment choices.
When Silicon Valley Bank (SVB) had to sell its assets to meet customers’ demand for cash, it had to sell those old securities for whatever price they would fetch—which was far below what the bank had paid for them.
SVB’s story is common among U.S. banks—not the collapse but the cloud of collectively holding bonds now worth $620 billion less than what the banks paid for them as of the end of 2022, according to the Federal Deposit Insurance Corp.
“The current interest rate environment has had dramatic effects on the profitability and risk profile of banks’ funding and investment strategies,” FDIC Chairman Martin Gruenberg said last week in a speech at the Institute of International Bankers.
“Unrealized losses weaken a bank’s future ability to meet unexpected liquidity needs,” he added in comments quoted by CNN Business.
In short, if the collapse of SVB and Silvergate Capital prompts a rush of depositors to suddenly withdraw their money, some banks would be hard-pressed to survive.
“Many institutions—from central banks, commercial banks, and pension funds—sit on assets that are worth significantly less than reported in their financial statements,” finance professor Jens Hagendorff at King’s College London told CNN Business.
“The resulting losses will be large and need to be financed somehow,” he warned. “The scale of the problem is starting to cause concern.”
Still, customers need not suck out their bank deposits in a panic, analysts say.
Falling bond prices are “only really a problem in a situation where your balance sheet is sinking quite quickly,” forcing banks “to sell assets that you wouldn’t ordinarily have to sell,” Luc Plouvier, senior portfolio manager at Van Lanschot Kempen, said in a CNN interview.
Most large U.S. banks are in good financial condition and won’t find themselves in a situation where they’re forced to realize bond losses, Gruenberg emphasized.
FEDS GUARANTEE SVB DEPOSITS, OPEN EMERGENCY LENDING PLAN, BUT REFUSE TO RESCUE THE BANK
After working through the weekend trying, then failing, to find a buyer for the collapsed Silicon Valley Bank (SVB), federal officials guaranteed that insured SVB depositors would have full access to their accounts as of Monday, 13 March.
About $151 billion—about 85 percent of the bank’s remaining deposits—were uninsured, according to a recent regulatory filing by the bank.
Bank deposits are insured by the Federal Deposit Insurance Corp. (FDIC) to a limit of $250,000. If an account has a balance higher than that limit, the remainder is uninsured.
On Sunday, treasury secretary Janet Yellen emphasized that taxpayer money would not be used to salvage the bank itself.
In the Great Recession, banks deemed “too big to fail” were propped up with various forms of federal bailouts. SVB will have no such recourse, Yellen stressed.
“During the financial crisis, there were investors and owners of systemic large banks that were bailed out,” Yellen said in a “Face the Nation” interview Sunday morning. “The reforms that have been put in place means that we’re not going to do that again.”
Immediately after SVB failed, the FDIC created something called the Deposit Insurance National Bank of Santa Clara and transferred all SVB assets to it.
All insured depositors will have access to their insured deposits by Monday morning. Depositors who had uninsured funds in the bank will receive an “advance dividend” within a week, the FDIC said.
The FDIC also guaranteed that account holders at New York-based Signature Bank, which state regulators shut down on Sunday, will have full access to their funds as of 13 March.
Depositors with uninsured funds will be repaid those funds out of the proceeds of the sale of SVB’s assets.
Future dividend payments may be made to uninsured depositors as the FDIC sells Silicon Valley Bank’s assets.
“We’re very aware of the problems that depositors will have,” Yellen said. “Many of them are small businesses that employ people across the country, and of course this is a significant concern and [we’re] working with regulators to try to address these concerns.”
They also announced steps that are intended to protect the bank’s customers and prevent additional bank runs.
“This step will ensure that the U.S. banking system continues to perform its vital roles of protecting deposits and providing access to credit to households and businesses in a manner that promotes strong and sustainable economic growth,” the agencies said in a joint statement.
Federal officials also have set up a $25-billion plan to lend as much cash as needed to banks that experience a flood of demands from customers to withdraw their money.
The program will allow banks to borrow from the U.S. Federal Reserve to raise cash instead of selling securities at a loss, which led to SVB’s downfall. Instead, banks can use those securities as collateral when they borrow from the Fed.
“Monday will surely be a stressful day for many in the regional banking sector, but [the government’s emergency lending plan] dramatically reduces the risk of further contagion,” analysts at the investment bank Jefferies wrote in a weekend research note.
FAILED BANKS WERE BORROWING FROM FEDERAL HOME LOAN BANKS, INVESTIGATION REVEALS
An investigation by the nonprofit news outlet Wall Street on Parade(WSoP) has found that the Federal Home Loan Bank of San Francisco (FHLBSF) was steadily lending money to Silicon Valley Bank (SVB) and Silvergate Capital through much of 2022, both of which failed last week.
Silicon Valley Bank was lending to local property developers and had loaned $52 million to a 112-unit affordable housing project in downtown San Francisco, among numerous other projects.
Since 2002, SVB has loaned about $2 billion to affordable housing projects in the city. California’s government estimates that 1.2 million households are unable to afford to pay for adequate housing, which puts an urgency on funding construction of low-cost housing.
SVB, which began in 1983 as a real estate lender, was ready to help.
Now it appears that SVB may have been using some of the money from the home loan bank as a crutch to continue in business longer than it otherwise could have.
“Federal home loan banks are also not supposed to be in the business of bailing out venture capitalists or private equity titans,” WSoP said. “Their job is to provide loans to banks to promote mortgages to individuals and loans to promote affordable housing and community development.”
In filings with the U.S. Securities and Exchange Commission, the FHLBSF showed it had no loans to SVB at the end of 2021, but had loaned a staggering $15 billion to SVB by December 31, 2022.
That made SVB the bank’s largest borrower at that time, holding 17 percent of all the outstanding loans by the home loan bank.
Silvergate Capital, the crypto industry’s bank of choice, was among the FHLBSF’s 10 heaviest borrowers last year. It voluntarily ceased operations on 8 March, a victim of the FTX crypto platform’s collapse in December.
To what degree, if any, Silvergate is in the home loan business is unknown.
Silvergate is under investigation for possibly laundering money for FTX, according to WSoP.
First Republic Bank, whose share price fell by as much as 70 percent on 13 March, has come under special scrutiny as another bank that might be close to failure. First Republic also holds loans from the Home Loan Bank of San Francisco, as does Western Alliance Bancorp, another of the home loan bank’s 10 heaviest borrowers. These banks also may be involved in lending for home construction and purchases.
In premarket trading on Monday, Western’s stock price was down 50 percent from 9 March.
Signature Bank, another favorite of crypto-involved depositors, was ordered closed by New York state regulators Sunday. It was handling a series of loans by the Federal Home Loan Bank of New York, WSoPreported. Its involvement in lending for mortgages or home construction was not revealed.
Signature had borrowed $11.3 billion from the federal New York bank by last year’s fourth quarter and had a total credit line there of $23.4 billion.
“If you want to know which banks are going belly up next, simply look at which ones took the largest loan advances from a federal home loan bank last year,” WSoP noted. “That appears to mean that they were seeing an exodus of depositor money and needed to plug their liquidity holes.”