The widespread panic that we just witnessed is definitely not what the bureaucrats at the Federal Reserve were anticipating. Following the second largest bank collapse in U.S. history on Friday and the third largest bank collapse in U.S. history on Sunday, the Federal Reserve unveiled an unprecedented rescue plan that was supposed to end the banking panic. If you have not seen it yet, you can view the details on the official website of the Federal Reserve right here. The most important part of the plan is the Fed’s decision to fully guarantee all of the deposits at Silicon Valley Bank and Signature Bank. As Goldman Sachs CEO Lloyd Blankfein explained on Twitter, this bold course of action was supposed to have “removed reasons for bank runs”…
A few banks may have issues like SVB, but only a few. Govt actions removed reasons for bank runs. Biggest banks have much tougher regulation and stress testing. Anxiety and volatility high, but sharply lower interest rates, fed likely on hold, are strong positives for markets.
— Lloyd Blankfein (@lloydblankfein) March 13, 2023
But there was just one problem.
It didn’t work.
Right now, social media is being flooded with messages from ordinary Americans that withdrew money from their bank accounts on Monday.
Here is just one example…
This morning I began withdrawing my money out of my bank account at Wells Fargo it's going to take several days because of the large amount of money I'm going to take the money and buy gold bullion and put the gold into my very secure gun safe #BankRuns #WellsFargo #bankrun
— Johnny7 (@johnnyseven60) March 13, 2023
When the Fed announced their plan, I understood that they were implicitly guaranteeing all of the deposits in the entire system.
But that is only because I am constantly writing about this stuff.
Needless to say, most Americans didn’t get the message, and so now Bill Ackman is calling on officials “to explicitly guarantee” all of the deposits in the entire system…
‘Our economy will not function effectively without our community and regional banking system. Therefore, the Federal Deposit Insurance Corporation needs to explicitly guarantee all deposits now. Hours matter,’ Ackman said.
‘We need to hear from our gov’t that it is explicitly committed to preserving our system of smaller banks. While each small bank is not “systemically important” like @jpmorgan or @Citi, collectively they are as, if not more, systemically important.’
Will an explicit guarantee work?
Maybe.
But what our leaders have tried so far has definitely not worked.
On Monday, Joe Biden publicly declared that the American people “can have confidence that the banking system is safe”, but that certainly didn’t reassure anyone.
Instead, regional bank stocks plummeted so dramatically that trading in dozens of them had to be temporarily halted…
Trading was temporarily halted in dozens of regional banks this morning as shares fell by up to 75 percent when the market opened after Joe Biden claimed ‘US banking is safe.’
The Biden administration has made it very clear that investors are not going to be bailed out when any of these banks fail, and the carnage that we witnessed on Monday was absolutely staggering…
San Francisco’s First Republic shares lost 61.8% on Monday after declining 33% last week. PacWest Bancorp dropped 45%, and Western Alliance Bancorp lost more than 47% as regional bank stocks fell sharply. Zions Bancorporation shed about 26%, while KeyCorp fell 27%. Other financial firms were also under pressure, as Bank of America slipped 5.8%, while Charles Schwab tumbled more than 11%.
Unless federal officials explicitly guarantee all of the deposits in the entire system, people are going to keep pulling money out of small and mid-size banks, and stock prices will continue to fall.
At this point, even CNBC’s Jim Cramer can see that this crisis is definitely “not over”…
“It’s so easy to transfer money to the banks that are ‘not in trouble,’ that we have to deal with something which says you cannot move, period, end of story,” Cramer said. “So it’s not over. I do want to caution that if you have money in some of these banks, well, they’re obviously going to punish you. We don’t know which ones are which, obviously, and I don’t want to cause any run. It is easy for any of us to cause a run at this moment.”
Thanks to rapidly rising interest rates, Treasury bonds worth hundreds of billions of dollars that are owned by U.S. banks have declined in value dramatically.
This has left a 620 billion dollar hole that will not be filled any time soon…
Fallout from the Silicon Valley Bank collapse has directed attention to a $620 billion ticking time bomb in the banking system that has the potential to spell doom for the financial system.
SVB’s meltdown was partly caused by a chasm between its assets and what they were worth in the market. Eventually, SVB sold some of those assets, spooking investors and triggering a run on the bank. But SVB isn’t alone, as banks across the United States were sitting on $620 billion in unrealized potential losses at the end of last year, per the Federal Deposit Insurance Corporation.
Meanwhile, there is a much bigger problem that is looming.
As Michael Hudson has astutely observed, a major derivatives crisis is possibly brewing…
There is an even larger elephant in the room: derivatives. Volatility increased last Thursday and Friday. The turmoil has reached vast magnitudes beyond what characterized the 2008 crash of AIG and other speculators. Today, JP Morgan Chase and other New York banks have tens of trillions of dollar valuations of derivatives – casino bets on which way interest rates, bond prices, stock prices and other measures will change.
For every winning guess, there is a loser. When trillions of dollars are bet on, some bank trader is bound to wind up with a loss that can easily wipe out the bank’s entire net equity.
If the current chaos in the financial world causes the derivatives bubble to finally implode, it could potentially be an “extinction level event” for our deeply flawed financial system.
I have not written about the derivatives bubble in a while, but it truly is an existential threat to our entire society. According to Investopedia, the total size of the derivatives market has been estimated to be “over $1 quadrillion on the high end”…
The derivatives market is, in a word, gigantic—often estimated at over $1 quadrillion on the high end. How can that be? Largely because there are numerous derivatives in existence, available on virtually every possible type of investment asset, including equities, commodities, bonds, and currency. Some market analysts even place the size of the market at more than 10 times that of the total world gross domestic product (GDP).
When this mountain of risk finally comes undone, there won’t be enough money in the entire world to fix it.
Anyone that tells you that our financial system is “fundamentally sound” is lying to you.
We really are on the verge of the unthinkable, and so you better hope that our leaders are able to find a way to rescue the system before it is too late.