In this section we provide trends analysis and trend forecast of the continuing Bankster Bust which Jami Dimon, the CEO of JPMorgan Chase warned today that “The current crisis is not yet over, and even when it is behind us, there will be repercussions from it for years to come.”
● Banking System Crisis Still Possible, Wall Street Journal Warns
● Various Regulatory Failures Allowed SVB to Collapse, Senate Told
● Four U.S. Megabanks Hold $3.3 Trillion in Uninsured Deposits
● Failed Credit Suisse May Face New Criminal Charges
● Banking Industry Tumult Sinks European Real Estate Stocks
Silicon Valley Bank (SVB) failed, in large part, because it held a sizable portfolio of low-yield bonds at a time when interest rates were rising, causing investors to put their money into venues that paid better returns.
When the bank needed to sell those low-yield bonds to raise cash, it found few buyers.
A new study from Stanford University reports that 11 percent of U.S. banks are sitting on larger unrealized losses than SVB had because of the U.S. Federal Reserve’s steady rise in interest rates.
From 2008 through mid-2022, the Fed held its key interest rate below 2 percent.
In those years, “banks boosted holdings of government and federally-backed mortgage bonds in search of yield,” Wall Street Journal analyst Greg Ip wrote in a 30 March essay.
“When rates began to rise sharply in 2022, those bonds’ market values plummeted,” he added. “While losses were especially acute at SVB, it was hardly alone.”
Still, banks are in better shape now than when the Great Recession began.
About 86 percent of banks’ securities were backed by the U.S. government at the end of 2022’s third quarter, compared to 71 percent during the same period in 2008, according to S&P Global Ratings.
However, deposits at banks have been dwindling as the Fed has raised its interest rate.
In the four weeks ending 26 January, the world’s money market funds took in $135 billion in new cash, the biggest haul since May 2020 when the funds bagged $175 billion as investors fled stocks and bonds when the COVID War set in, data service EFPR reported. (See “U.S. Bank Deposits Fall By Most in Four Years” 20 Sep 2022 and “Money Market Funds Bulge With New Cash” 31 Jan 2023.)
While money market funds pay interest of 3 percent or better, many banks are still rewarding savers with yields barely topping 1 percent, if that, as we reported in “Biggest U.S. Banks Short-Changing Savers” (13 Dec 2022).
With those better options available, it was easy for SVB’s account holders to yank their money with a few taps on their smartphones.
“Deposit behavior has changed,” James Bianco of Bianco Research told The Wall Street Journal. “It’s going to be much more sensitive to market versus deposit rates,” especially with the launch of the FedNow payment service this July.
With that new service, people, and businesses will be able to send money from one institution to another instantly.
The failure of Signature and Silicon Valley banks worsened the plight of smaller banks, which saw depositors move their funds to bigger banks that seem safer.
During the week ended 15 March, smaller banks waved goodbye to $120 million in deposits, while megabanks’ accounts took in $66 million more than usual.
“This will likely hurt smaller and regional lenders,” Ip predicted. “Depositors will reflexively move their money to banks they think are too big to fail.”
“I have real concerns about midsize banks,” Daleep Singh, chief economist at PGIM Fixed Income, said in comments Ip quoted.
Depositors with accounts exceeding the federal $250,000 insurance cap would likely shift those funds to banks the federal government would not let fail, Singh noted.
“Unless federal insurance is extended to all deposits, this suggests small and midsize banks could be in for prolonged pressure on their deposits, which, in turn, could force them to be acquired or limit their lending,” Ip said.
“It won’t be a crisis in the usual sense,” he added, “but the result will be the same.”
VARIOUS REGULATORY FAILURES ALLOWED SVB TO COLLAPSE, SENATE TOLD
On 9 March, Silicon Valley Bank’s depositors withdrew $42 billion in a panic. On 10 March, bank officials told the U.S. Federal Reserve that $100 billion was teed up to leave the bank that day.
The Fed tried and failed to find enough liquidity for SVB to cover the withdrawals, prompting the Federal Deposit Insurance Corp. to seize the bank before it could open.
SVB’s debacle happened because “there was a significant supervisory failure,” Dan Tarullo, a former member of the Fed’s board of governors who supervised financial regulation, said in a 23 March Bloomberg television interview.
In 28 March testimony before the U.S. Senate banking committee, Michael Barr, the Fed’s vice-chair for bank supervision, said Fed regulators had noted “deficiencies” in SVB’s operations in late 2021 but did not meet with SVB officials until November 2022.
Those front-line supervisors did not notify Barr’s office of SVB’s risk from rising interest rates until mid-February, barely three weeks before SVB collapsed.
In addition, the stress tests used to see how banks would fare under various financial shocks did not include banks’ ability to withstand rising interest rates.
“Their exclusion implies that the Fed considered its ultra-easy monetary policies would continue,” the World Socialist Web Site noted in a recent analysis. “Little wonder that the executives of SVB made the same decision.”
Senator Tim Scott (R-C), the committee’s ranking member, called the mess “a clear supervisory failure” and that federal regulators were “asleep at the wheel.”
Much of the failure rests with the Federal Reserve Bank of San Francisco, which had direct regulatory oversight of SVB, Bloomberg said.
SVB president Greg Becker was a member of the San Francisco Fed’s board of directors from 2019 until his bank crumbled on 10 March.
The San Francisco Fed had seen unusually large turnover among regulators, Bloomberg reported.
Also, “ the culture under President Mary Daly at times put more emphasis on improving relationships among staff and…improving happiness in the ranks…than installing people with strong oversight backgrounds, leading to departures, according to people close to the situation,” Bloomberg reported.
Daly believed that apathy and low morale among regulators in her branch could result in lax supervision.
“The real question is, how come the supervisors didn’t pick up on the fact that SVB had gamed the rules to take on a lot of interest-rate risk without holding an adequate amount of capital against it?” Lev Menand, an associate professor of law at Columbia University who specializes in banking, said on a recent Bloomberg podcast.
“It’s a pretty obvious maneuver and not a novel one—you would think any seasoned supervisor looking at the balance sheet could pick up on this quickly,” he added.
“It looks like the regulators knew the problem but nobody dropped the hammer,” Senator Jon Tester, a Montana Democrat, said to Barr during his testimony.
Barr told the committee that he is leading a thorough review of the Fed’s supervisory and oversight practices.
Barr said the central bank is evaluating whether more stringent standards would have led to better risk management at SVB. He was unable to tell lawmakers whether Fed officials were visiting SVB’s offices in person on a daily basis or if supervisors met with the lender’s risk committee.
“Do [Fed] supervisors have the tools to mitigate threats to safety and soundness?” Barr said. “Do the culture, policies, and practices of the board and reserve banks support supervisors in effectively using these tools?”
Already, Barr has created a unit that will examine banks with “novel risks.”
Usually, oversight becomes more stringent as banks grow in size. The new team will focus on unusual risks and practices, regardless of a bank’s size, Barr said.
TRENDPOST: Regulatory structures change only after a crisis has already done damage. Even then, such changes come slowly as politicians get paid to put out for their corporate pimps.
The Dodd-Frank Act passed in the aftermath of the Great Recession contained provisions that destroyed the Glass-Steagall Act, which had protected the U.S. financial system from crisis for 66 years until it was destroyed under the Wall Street flunky Bill Clinton in 1999. Less than a decade later, the financial system crashed and the Federal Reserve pumped in some $29 trillion to bail out the Banksters according to the Levy Institute at Bard College.
Clinton’s wife, Hillary, earned some $675,000 for speaking gigs at Goldman Sachs.
And between Bill Clinton and Hillary, the two of them, according to a CNN analysis, were paid more than $153 million to give speeches from 2001 until Hillary ran for president in 2016.
Morons and imbeciles call them speaking fees, adults with a brain call them payoff’s. Indeed you can hear both of them bullshit for free non-stop.
CNN notes that “In total, the two gave 729 speeches from February 2001 until May, receiving an average payday of $210,795 for each address. The two also reported at least $7.7 million for at least 39 speeches to big banks, including Goldman Sachs and UBS.
And as for the repeal of The 1933 Glass-Steagall Act that Clinton killed that was passed by Congress at the height of the 1929 Wall Street stock market crash, as detailed by Wall Street on Parade:
“The legislation addressed two equally critical flaws in the U.S. banking system. It created, for the first time, federally-insured deposits at commercial banks to restore the public’s confidence in the U.S. banking system and it barred commercial banks that were holding those newly-insured deposits from being part of Wall Street’s trading casinos—the brokerage firms and investment banks that were underwriting and/or trading in stocks and other speculative securities.”
FOUR U.S. MEGABANKS HOLD $3.3 TRILLION IN UNINSURED DEPOSITS
The cost of resolving business at the collapsed Signature and Silicon Valley banks will be about $22.5 billion to the federal Deposit Insurance Fund, a pool of money collected from banks to pay insurance claims on deposits at failed institutions, Martin Gruenberg, chair of the Federal Deposit Insurance Corp. (FDIC) said in 28 March testimony to the U.S. Senate’s banking committee.
Roughly 18 percent, or $18 billion, is the cost of reimbursing the banks’ deposits that were uninsured, he noted.
Federal officials and bank regulators decided to treat all accounts at the bank as insured. To not do so, they said, would make it impossible for many large tech companies to meet their payrolls, pay bills, and keep operating.
At the end of last year, the two failed banks together held about $263.6 billion in deposits, an estimated $185 billion or more were uninsured.
However, “we are talking about minnows compared to the deposit exposure at the whale banks on Wall Street,” an investigative report in Wall Street on Parade (WSOP) said.
Federal filings reporting bank holdings as of 31 December, 2022, showed that more than half of deposits at four of the largest U.S. banks lacked insurance coverage.
On 31 December, JPMorgan Chase, the largest U.S. bank, had $2.015 trillion on deposit, $1.058 trillion of which—slightly more than half—was uninsured.
Bank of America’s deposits totaled $1.9 trillion, with $909.26 billion uncovered by the FDIC.
Citibank’s uninsured deposits amounted to $598.2 billion, roughly 77 percent of its $777-billion total.
At Wells Fargo, $721.1 billion of its $1.4 trillion of deposits lacked insurance coverage.
At the end of December, U.S. banks had $17.7 trillion on deposit, while the FDIC’s insurance fund held just $128.2 billion.
The insurance fund is backed by “the full faith and credit of the United States government,” meaning taxpayers are ultimately on the hook for any losses to accounts that are insured, even if the losses exceed the amount in the fund.
If regulators decide to give all depositors all their money back from deposits in a failed bank, taxpayers would be dunned for the entire sum of all bank deposits in the country.
Deposits in foreign branches of U.S.-based banks are not FDIC-insured, according to a 2013 agency ruling.
However, that does not protect U.S. megabanks from a different kind of risk.
For example, Citibank had $622.6 billion in deposits in branches outside the U.S. at the end of 2022. When Signature and Silicon Valley failed, those foreign account holders could have panicked and yanked their money out of Citibank.
Many foreign depositors did, in fact, withdraw their money from U.S. banks.
That could have created an overseas run on Citibank that it would have been unable to fend off, crashing a pillar of the country’s financial system and, in a knock-on effect, destroying faith in the safety of money in U.S. banks.
Citibank ran a similar risk during the Great Recession, WSOP noted.
From 2007 to 2010, Citibank’s parent company Citigroup and other financial institutions had access to trillions of dollars in federal emergency loans and other supports.
However, Citibank had only $125 billion in domestic insured deposits, most of which was in foreign branches, according to Sheila Bair, FDIC chair at the time, in her 2012 book Bull By The Horns.
Had those depositors chosen to bail out of Citibank, the bank would likely have crumbled and the damage would likely not have been just $125 billion in insurance payments, but “the rest of the financial system was looking at $2 trillion on the books of Citigroup, $1 trillion off the books of Citigroup, and trillions of dollars in derivative counterparty agreements,” WSOP said.
Bair believed the two main regulators overseeing Citigroup were not being forthright at the time about the degree of danger the bank faced, Bair wrote in her book.
Bank regulators often have been found to shade inconvenient truths in efforts to prevent panic.
The two regulators survived unscathed. One, Timothy Geitner, became Barack Obama’s first treasury secretary; the other, John Dugan, is now Citigroup’s board chair.
TREND FORECAST: Given the risk to businesses if uninsured deposits are not reimbursed—and given the precedent set by paying off all depositors in Signature and SVB, even those without full insurance—while the Biden administration will likely push to authorize the FDIC to insure all accounts to full value, they will be “too-big-to-bailout.”
FAILED CREDIT SUISSE MAY FACE NEW CRIMINAL CHARGES
Credit Suisse (CS), the second-largest Swiss bank that abruptly failed earlier this month and is now part of UBS, is the subject of at least two new accusations of wrongdoing.
In 2014, the bank pled guilty to charges that it had illegally helped U.S. depositors hide assets from the U.S. Internal Revenue Service. It admitted destroying account records, creating phony entities to hide taxable income, and even hand-delivering cash to American depositors.
CS was fined $2.6 billion but was allowed to pay half that amount in return for an agreement that it would take a hard line against U.S. tax dodgers, to disclose all foreign transactions, and to share information as requested by authorities, among other reforms.
Now two whistleblowers and former CS employees say the bank has continued to abet tax evaders for years, “well after the plea agreement and sentencing.”
They have cooperated in a two-year investigation by the U.S. government that resulted in a new 77-page report by the U.S. Senate’s finance committee.
Since the plea agreement, CS has aided at least 25 U.S. families in hiding more than $700 million inside the bank, the investigation alleges.
The report details years of furtive abuses and raises questions about how much money American depositors are still hiding in the bank’s shadows.
In one case, the bank allegedly hid $100 million on behalf of a family with dual citizenship between the U.S. and a Latin American nation.
In another, the bank is said to have helped a wealthy Israeli conceal $220 million from U.S. taxes. In 2017, the person was sentenced to seven months in prison for tax evasion, the Financial Times reported.
The investigation alleges that in some cases, the bank changed the nationalities listed with the accounts; in others, bankers hid Americans’ funds in other banks by not reporting them.
Last week, “even more money has been found to have been concealed,” Senator Ron Wyden (D-OR) said in a public statement. “Clearly, it’s time to prosecute and ensure strong penalties that send a message.”
“Credit Suisse employees aided and abetted a major criminal tax evasion scheme,” a Senate committee staffer told CNBC. “To date, no Credit Suisse employees involved have faced any consequences for their participation.”
Should the U.S. justice department press charges, it is unclear what UBS’s liability would be. However, the whistleblowers’ lawyer said U.S. officials could seek as much as $1.3 billion in penalties and restitution from the bank.
As Credit Suisse was sinking, the Swiss central bank poured $54 billion into it to keep it afloat long enough to find a buyer. UBS quickly arranged to pay $3.25 billion for the bank.
As part of UBS’s takeover, the Swiss government pledged to cover up to $9 billion worth of losses UBS could incur by taking on CS’s legal and financial baggage.
In its defense, Credit Suisse pointed out that, since its plea deal, it has disclosed details of previously undeclared accounts totaling about $1.3 billion.
A CS spokesperson added that any crimes were “legacy issues” committed by employees no longer there and that current bank officials from CS and at UBS are cooperating with the investigators.
U.S. investigators were not mollified.
“It’s not a question of whether Swiss banks continue to do this,” the committee staffer said. “It’s a question of which Swiss banks still do this.”
TRENDPOST: Again, regardless of the illegality or criminality of the Big Banksters, not only are the heads of the crime syndicates never prosecuted for their crimes, they are rewarded for the massive failures.
As noted by Wall Street on Parade, after Sandy Weill built the massive Citigroup,
“By early 2009, it was a 99-cent stock and clearly insolvent. Despite this reality, the Federal Reserve made secret, cumulative loans of more than $2.5 trillion to prop up Citigroup from December 2007 through at least July 21, 2010, according to a Fed audit conducted by the Government Accountability Office. In addition, the U.S. Treasury injected $45 billion in capital into Citigroup; there was a government guarantee of over $300 billion on its dodgy assets; and the FDIC provided a guarantee of $5.75 billion on its senior unsecured debt and $26 billion on its commercial paper and interbank deposits. But Sandy Weill made out just fine, walking away as a billionaire…”