Silvergate Bank — Announced its bankruptcy on 8 March 2023
Silicon Valley Bank — Taken over by the FDIC on 10 March 2023
Signature Bank — Taken over by the FDIC on 12 March 2023
First Republic Bank — US$30 billion liquidity rescue by 11 banks on 16 March 2023
Credit Suisse — Swiss Government shotgun wedding with UBS on 19 March 2023
That’s five bank failures or rescues in 11 days, including Credit Suisse, one of the largest banks in the world and the second largest in Switzerland.
Combined losses of stockholders and creditors of these institutions exceed US$200 billion. Market losses in the banking sector are much greater.
Walter Wriston, the greatest banker of the 20th century after Pierpont Morgan, personally tutored me on this topic 40 years ago.
In a bank run, you can pull your money out of banks and invest in gold, silver, land, or anything else. But you give the money to the seller, and she puts it back in the bank.
The point is the money always ends up in the bank. The system is a closed circuit.
Of course, it could go to a different bank, but all banks can borrow from each other through the fed funds market and the Eurodollar market. Again, the money always ends up in the bank.
Putting cash in a coffee can (or mattress) is one exception, but if you try to withdraw more than US$10,000, your bank will file a Currency Transaction Report (CTR) with the Financial Crimes Enforcement Network (FinCEN), and you’ll end up in a file next to Osama bin Laden. And the IRS gets a heads-up.
So, that’s not a practical solution.
These failures and rescues were accompanied by extraordinary regulatory actions.
These actions have thrown the US banking system and bank depositors into utter confusion. Are all bank deposits now insured or just the ones Janet Yellen decides are ‘systemically important?’ What’s the basis for that decision?
The most important question is: Is the crisis over? Has the Fed done enough to reassure depositors that the system is sound? Has the panic subsided?
The answer is no.
The panic is just getting started
We base that answer on the history of the two acute financial crises in recent decades — 1998 and 2008.
The 1998 crisis reached the acute stage on 28 September 1998, just before the rescue of LTCM. We were hours away from the sequential shutdown of every stock and bond exchange in the world.
But that crisis began in June 1997 with the devaluation of the Thai baht and massive capital flight from Asia and then Russia. It took 15 months to go from a serious crisis to an existential threat.
Likewise, the 2008 crisis reached the acute stage on 15 September 2008 with the bankruptcy filing of Lehman Brothers.
But that crisis began in the spring of 2007 when HSBC surprised markets with an announcement that mortgage losses had exceeded expectations.
It then continued through the summer of 2007 with the failures of two Bear Stearns high-yield mortgage funds and the closure of a Société Générale money market fund.
The panic then caused the failures of Bear Stearns (March 2008), Fannie Mae and Freddie Mac (June 2008), and other institutions before reaching Lehman Brothers.
For that matter, the panic continued after Lehman to include AIG, General Electric, the commercial paper market, and General Motors before finally subsiding on 9 March 2009.
Starting with the HSBC announcement, the subprime mortgage panic and domino effects lasted 24 months from March 2007 to March 2009.
Averaging our two examples (1998, 2008), the duration of these financial crises is about 20 months. This new crisis could have a long way to run.
Regards,
 |
Jim Rickards,
Strategist, The Daily Reckoning Australia
