Doomed I tells ya.
From the Milken Institute Review, January 23, 2024:
What do the 48 recessions since the founding of our country have in common? Financial panic, financial crisis – you pick the moniker. Indeed, one in five recessions have panic or crisis attached to their names. The Great Financial Crisis of 2008 probably comes to mind first, but historians will be happy to tell you about the Panic of 1907, the Panic of 1857 – or even the Panic of 1792, which occurred just two years after the Constitution was ratified. ¶ By my count, the U.S. has averaged a financial crisis, if not a wholesale run-for-yourmoney panic, every 15 years. Add 15 years to the unfortunate year of 2008 and you get 2023. We seem to have escaped the 15-year itch, but maybe our luck will run out in 2024. ¶ Since last March, we’ve seen the demise of Silicon Valley Bank, Signature Bank and First Republic Bank. Yes, some banks fail every year, typically disappearing with hardly a trace over a weekend when the FDIC lowers the boom. But these three were the third, fourth, and second largest bank failures, respectively, in U.S. history!
To be sure, commercial banks were a sideshow in the 2008 crisis, which featured the failures of massive financial companies, including Lehman Brothers, Bear Stearns and AIG. Lehman and Bear were investment banks, jacks of many trades that do not take deposits, while AIG was an insurance company. But there was a clear and present danger that the banks, too, would be engulfed.
Do these episodes of financial panic amount to Groundhog Day events that we are doomed to repeat? Yes, if all we do after each trauma is tighten a few nuts and bolts and pronounce the system fit for another few years. But no, if we are prepared to try something entirely different.
Read on.Banks Failing Yet Again?Tell Me it Ain’t So!In the case of the failures of these three banks with combined assets exceeding half a trillion dollars, the proximate cause was the bankers’ neglect of risks linked to changing market interest rates inherent in even default-proof bonds, coupled with legal but misleading accounting practices – and, alas, regulators’ neglect. The three banks purchased longer-term U.S. Treasury and high quality private-sector securities that yielded low (but better-than nothing) returns at a time when the Federal Reserve kept interest rates close to zero. Then, Fed policy changed and rates headed north. These “safe” assets plunged in value on the open market, leaving the banks insolvent on a “mark-to-market” (valued at market prices) basis.
The three banks had kept their investors in the dark (legally) by valuing their assets on their books at their purchase cost. This is no different from pretending a rock is worth its weight in gold when it’s painted gold – well, maybe a little different, but you get the idea. The three banks maintained this charade until SVB (Silicon Valley Bank) had to sell securities in order to return depositors’ money, acknowledging that all that glittered was not gold.
How did we get to the place where banks could take such risks and government accountants would turn a blind eye? Who knows. That’s a speculation for another essay. What we do know is that SVB’s forced admission that its assets were worth far less than their face value sparked a classic bank run – the kind pictured in It’s a Wonderful Life. But the three banks lacked a Jimmy Stewart to dissuade depositors from taking their money and running.
Those figuratively running, by the way, weren’t the good citizens of small-town- America Bedford Falls conjured by Frank Capra. They were mostly sophisticated corporations that ought to have known better, including the internet giant Roku, which had $487 million in deposits at SVB. And as most of the folks reading this article know, the limit on FDIC deposit insurance is $250,000 – a wee bit less than $487 million.
So when SVB was caught short, every depositor lacking deposit insurance started pounding the keys on their computers, transferring funds to safer climes. SVB lost $42 billion in deposits in 48 hours.
At that point, the FDIC stepped in and closed down the bank. Treasury Secretary Yellen then declared SVB to be “systemically” important to the stability of banking. Translation: all depositors, uninsured and insured, would be made whole. She also announced that insuring uninsured depositors after the fact was only something on which depositors in systemically important banks could depend. This means that small- and mediumsized uninsured depositors – think, for example, of a local supermarket that keeps $1 million on hand to cover vendors’ bills – have no guarantee their money won’t be vulnerable the second after big depositors’ catch a whiff of the odor of insolvency.
Our Clear and Present Financial Danger
One reason this last banking crunch feels like déjà vu all over again was the international fallout. What happens on Wall Street rarely stays on Wall Street. Nine days after SVB died (and seven days after Signature Bank followed), Credit Suisse met its maker. And Credit Suisse plays in a very different league. At the time, it was Switzerland’s second largest bank, whose importance as a global wealth manager far exceeded its size as a deposittaker before it went belly-up. The corpse was purchased for centimes on the franc by UBS (assets under management: $4 trillion) – this despite (or perhaps because of) Credit Suisse’s receipt of a $58 billion loan from the Swiss central bank four days earlier.
The run on Credit Suisse leading up to its demise should have been no surprise in the wake of SVB, Signature and First Republic. As with the American three, the run was fueled by uninsured depositors and other nervous creditors.
Uninsured depositors take down three huge U.S. banks. Uninsured foreigner depositors take down Credit Suisse. Gee? What more could happen over here and over there? A lot more. Let’s start with these two interesting factoids. First, on a mark-to-market basis, over half of FDIC-insured banks are currently insolvent – their liabilities (mostly deposits) exceed their assets over $2 trillion (no misprint). Second, two of every five dollars deposited in U.S. banks are uninsured.
The run on Credit Suisse should have been no surprise in the wake of SVB, Signature and First Republic. As with the American three, the run was fueled by uninsured depositors and other nervous creditors....
....MUCH MORE
