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March 14, 2023 - Epoch Times
16:00
Fed Panics as 2nd Bank FAILS; Biden Announces Federal Takeover
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You know that weird feeling when the federal government is telling you that the financial sector is just fine and the economy in our country is stronger than ever, but you're looking around and you're seeing all these banks suddenly failing and long lines outside of ATMs for people wanting to get their money out?
Well, that's exactly what's happening.
You see, three days ago, one of the largest banks in all of America...
On Friday, Silicon Valley Bank was closed by financial regulators, but also, given the fact that they had over $175 billion worth of deposits, they are the second largest bank to fail in all of U.S. history.
But it gets worse, because just yesterday, another bank, right here in New York, also suddenly failed.
But before we dive into what happened with these particular banks, as well as the possible domino effect that it could have on the whole economy, I would just like to set all of your minds at ease and let you know that the federal government, just like I mentioned earlier, is saying that everything is okay.
In fact, here was Joe Biden just earlier today.
Americans can have confidence that the banking system is safe.
And so if these sudden bank failures have you worried, well, they shouldn't, because the federal government says that things are under control.
Now, in terms of what actually happened, let's start at the very beginning.
About a month ago, Mr.
Jim Cramer, the host of CNBC's Mad Money program, he recommended his viewers to buy shares of Silicon Valley Bank's parent company.
Here's specifically what he said during his program, at a time, I should mention, when the stock price of that bank was about $320 a share.
The ninth best performer to date has been SVB Financial, which is the bank's parent company.
Don't yawn.
This company is a merchant bank with a deposit base that Wall Street has mistakenly been concerned by.
The stock is still cheap.
And from that point on, well, wouldn't you know it, the bank's fate was sealed.
In case you don't know, there's a running joke within the finance community that whatever Jim Cramer suggests to buy is exactly what you should stay away from.
And in this case, well, it proved to be exactly what happened.
Because as of today, SVB financial stock price is worth exactly nothing.
And so what happened?
Well, to start with, Silicon Valley Bank is a publicly traded merchant bank specializing in tech startups over in California.
And within Silicon Valley, this bank was very popular, accounting for about half of all U.S.-based startups that were backed by venture capital.
And so what that means in practice is that about half of all the people who launched some type of tech startup would go to Silicon Valley Bank in order to have their needs met.
And as such, among their clients were some heavy hitters, some of the biggest players in the tech industry, such as Shopify, Roku, BlockFi, among a huge list of others.
However, this niche specialization of the bank, it caused a very large problem.
Because when the economy was booming, when everything was going well, when tech startups were flush with cash and they were hiring workers left and right, that was a great time for Silicon Valley Bank.
Because naturally enough, these tech startups, loaded with venture capital money, they kept very high bank balances.
However, starting last year, as inflation was raging across the whole country, you likely know that the Federal Reserve began to increase their interest rates.
This dramatic increase in the rates then led to a problem for many of these tech startups, who were no longer able to raise as much money through either IPOs, SPAC offerings, or venture capitalists.
And because they weren't able to raise much money, more and more of these tech startups began to pull cash out of their bank accounts in order to pay for their business expenses.
And so, throughout the entirety of last year, throughout the entirety of 2022, the amount of cash on deposit at the Silicon Valley Bank was withering away.
However, within the context of modern banking, this can only go on for so long.
That's because when you, let's say, go to a modern bank today and you deposit, let's say, $100, that $100 is not just sitting there at the bank waiting for you.
Instead, what all modern banks do is that they hold a small portion of your money in the bank, and the rest of it, they either lend out or they gamble with it or invest.
And in the case of the Silicon Valley Bank, they, over the last year, bought a tremendous amount of 10-year U.S. Treasury bonds.
And so, eventually, it got to a point where in order to cover the amount that's being withdrawn, the Silicon Valley Bank needed to start selling their U.S. Treasury bonds at a loss in order to cover their position.
But even though this was happening behind the scenes, investors were not really aware of the severity of the situation.
As I showed you a moment ago, even Jim Cramer, on his national television program, was singing the praises of Silicon Valley Bank and telling people to invest in it.
However, that all changed last Wednesday, because on Wednesday, the bank put out a statement to their investors saying that they need to quickly raise $2.25 billion in order to shore up their balance sheet.
This revelation not only shocked the investors, but it also caused essentially a run on the bank.
The businesses who were keeping their funds in Silicon Valley Bank, they saw the situation, they saw the shakiness and precarious nature of what was happening, and they began to withdraw their money at a furious pace.
By the end of Thursday, one full day after their announcement, customers had withdrawn a staggering $42 billion worth of deposits.
All this made it obvious that the bank was about to become insolvent, and so on Friday, the next day, California regulators stepped in, they seized the deposit, and they officially closed the bank, making it the second largest bank failure in American history.
But, funny enough, wouldn't you know it, right before the regulators took over the bank, right before the bank collapsed, the top management team at the Silicon Valley Bank was selling off their shares of the company left and right.
In fact, according to Unusual Wales, which is a Twitter page which tracks these types of, let's say, corrupt-looking types of transactions, they found that the CEO of the bank, shortly before the collapse, sold off 11% of a stake in the company.
The chief financial officer sold off 32%, the chief marketing officer sold off 25%, and the general counsel sold off 19%.
Looks like they were trying to get out before the stock went to zero.
Furthermore, the Quite literally, the very day before the bank collapsed, in a shocking coincidence, bank employees received their bonuses.
Now think about that.
Hours before the bank shut down, instead of using the money to make their clients whole, the upper management was instead making sure that these fad bonuses were being paid out right before the bank collapsed.
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Now, the next logical question here is what happens to the people's money?
What happens to the money of the tech companies, the tech startups, that were banking with Silicon Valley Bank, now that the bank has collapsed?
Well, to start with, all balances below $250,000 are insured by the FDIC, the Federal Deposit Insurance Company.
This was a program created right after the Great Depression, And essentially, the way that it works is that all banks in America pay into the FDIC in order to insure deposits up to $250,000, meaning that if you had $250,000 in Silicon Valley Bank, there was no problem, and you would likely have your money by the end of Monday.
And so, for people with small balances, this whole thing was not really a problem.
However, because Silicon Valley Bank dealt mostly with tech startups rather than with individual customers, there was a huge problem.
The vast majority, close to 95% of the accounts were not covered by the FDIC. 95% of the accounts in that bank were well above the $250,000 threshold.
And these were tech companies with payrolls, they had expenses, They had rent payments and so on and so forth.
These companies had a lot of bills to pay, meaning that if they were not able to get their money soon, that would spell trouble for a sizable portion of the economy.
Now normally, there is a procedure in place for a situation like this.
What would normally happen is that federal regulators would come in, they would take over the bank, like they already did, and they would sell off all the assets that the bank had on their books in order to make their clients as whole as possible.
And based on the assets that the Silicon Valley bank possessed at the time that it was closed, their business clients would be able to recover about 80 to 90% of their money, which sounds rather reasonable given the situation.
However, that is not what happened.
Instead, federal regulators were convinced that this bank was just too big to fail, that they must bail out this bank in full as quickly as possible, or else it will have a cascading effect on the entire banking system.
Essentially, the Feds were convinced that if these clients were not bailed out this time, then all depositors across the entirety of the country, who have over $250,000 in their respective accounts, will put out their money from their own bank, causing a nationwide run on the bank.
In fact, here is a short video from Mr.
Jeff Jackson.
He's a member of Congress from the state of North Carolina, describing what took place just last night.
Earlier tonight there was an emergency Zoom call with several hundred members of Congress.
It was convened by the Treasury Department and we were given about 15 minutes notice.
It was literally on regular Zoom.
I was sent a link, I clicked the link, and most of Congress was there.
That's not normal, but neither is the situation.
The purpose of the meeting was to announce extraordinary steps that will now be taken to secure our financial system.
You're going to hear from the president today, along with leaders of both parties, but here's what's happening.
Three days ago, we had the second largest bank failure in American history.
It happened because there was a bank in California called Silicon Valley Bank.
It lost a lot of money, causing a lot of its customers to get scared and try to withdraw their money, and it caused a run on the bank.
So the federal government, through the FDIC, stepped in and closed the bank.
Here's the problem.
Typically, your deposits in a bank are only protected up to $250,000.
But the vast majority of customers at this bank had deposits more than that because this bank specialized in startups and small businesses.
And the uncertainty about what would happen to customers with more than $250,000 in deposits started to spread to other banks.
A New York bank failed last night.
Others have started flashing red, and we were in the early stages of a domino effect.
Which brings us back to the emergency Zoom call.
All the depositors at the Silicon Valley Bank will be made whole.
Same with the bank in New York.
We're going to pay for that with a fund that banks already pay into, not with taxpayer money.
Right now, every step being taken has one purpose.
To make sure this domino effect ends now.
And indeed, just as he mentioned in the video, over the weekend, New York state regulators shut down Signature Bank, which is a major bank here in New York which had a heavy position in cryptocurrencies.
And then also, just as a congressman mentioned, Joe Biden.
He came out this morning and he announced that the FDIC will insure all depositors, no matter how much money they had in their accounts.
And he added that the financial system in this country is very strong.
I want to briefly speak about what's happening in Silicon Valley Bank and Signature Bank.
Today, thanks to the quick action of my administration over the past few days, Americans can have confidence that the banking system is safe.
Your deposits will be there when you need them.
Small businesses across the country that deposit accounts at these banks can breathe easier knowing they'll be able to pay their workers and pay their bills.
And their hardworking employees can breathe easier as well.
Last week, when we learned of the problems of the banks and the impact they could have on jobs of small businesses and banking system overall, I instructed my team to act quickly to protect these interests.
They've done that.
They've done that.
On Friday, the government regulator in charge, the FDIC, took control of Silicon Valley Bank's assets.
And over the weekend, it took control of Signature Bank's assets.
Treasury Secretary Yellen and the team of banking regulators have taken action, immediate action.
And here are the highlights.
First, all customers who had deposits in these banks can rest assured, rest assured they'll be protected and they'll have access to their money as of today.
That includes small businesses across the country that bank there and need to make payroll, pay their bills and stay open for business.
No losses, and this is an important point, no losses will be borne by the taxpayers.
Let me repeat that.
No losses will be borne by the taxpayers.
Instead, the money will come from the fees that banks pay into the deposit insurance fund.
Because of the actions of that Because of the actions that a regulator has already taken, every American should feel confident that their deposits will be there if and when they need them.
Second, the management of these banks will be fired.
If the bank is taken over by FDIC, the people running the bank should not work there anymore.
Third, investors in the banks will not be protected.
They knowingly took a risk, and when the risk didn't pay off, investors lose their money.
That's how capitalism works.
Now, the idea that Joe Biden mentioned in that video, that this is not being paid by our taxes, is true on the one hand, but on the other hand, it's not.
Because up until now, the FDIC, as I mentioned earlier, has only been insuring deposits up until that $250,000 threshold, meaning that at this very moment, based on the amount that they were collecting, the FDIC only has funding worth $126 billion.
However, across the entirety of the U.S., there are $9 trillion in deposits that are above the threshold, meaning there are $9 trillion worth of uninsured deposits.
And so, even if this time, with Silicon Valley Bank as well as the bank in New York, even if for just these two banks the money can come from the FDIC and cover everyone, what if other banks fail?
What if several more banks fail and the FDIC runs out of funds to continue bailing everybody out?
What happens then?
Well, naturally enough, the Fed will bail them out, ultimately, with your own mind, tax dollars.
However, now that the standard has been set, such that if a bank fails, your deposit is safe no matter what, where do you think that money will be coming from?
Ultimately, it'll be coming from you and me, the American taxpayer.
Meaning that what this actually looks like in practice is that banks can take money from their customers, use that money to loan out, invest, and gamble with, make millions and billions of dollars in profits, but if that bank fails, then everything of theirs is fully insured by the American taxpayers.
Meaning that the basis that the bankers will be using to score their massive profits will now be insured by you and me.
For them, banking becomes, even more, a high-reward, no-risk type of game.
And I should mention this is not a purely hypothetical concept, as right now, the shares of different banks are crashing across the whole country.
For instance, the shares of First Republic Bank just crashed 60%, Western Alliance crashed 76%, packets dropped 41%, regions dropped 31%, with many of these banks having their stock trading halted because they were just crashing so fast.
Furthermore, what's happening with these stock prices is paired with videos, which are now circulating online from the entirety of the country, of people lining up to get their money from either the bank or the ATM. It really looks like a nationwide run on the bank.
And so, given the size of the disaster that might be upon us, the idea that this giant backstop is not going to be funded by the American taxpayers, well, that seems like a pipe dream.
Now, obviously, this story is developing by the minute, and if you'd like to go deeper into anything that we discussed thus far, I'll throw all my research notes down into the description box below this video for you to check out.
And then, until next time, I'm your host, Roman from the Epoch Times.
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