The town’s Christmas celebration commemorates both favorite son Jimmy Stewart, who starred in the iconic movie, and the story’s message of redemption and hope.
In the film, a bank run threatens to devastate an affordable-housing business run by George Bailey, Stewart’s character. The Great Depression has come to Bedford Falls. With over 9,000 banks failing during that period, bank runs were common.
For nearly 100 years since that fictional Beaver Falls bank run, the federal government has insured bank depositors for the purpose of stopping bank runs, which have historically triggered economic depressions. That decision was part of a sweeping political movement in response to the financial crisis of the 1930s: the New Deal.
Could a political movement arise from the recent failure of Silicon Valley Bank, which collapsed in mere hours? That question may be best answered by looking to the distant past.
In what came to be known as the “Bank War,” President Andrew Jackson made it his mission to dismantle the U.S. National Bank, which many blamed for triggering the Panic of 1819. Elected in 1828, just forty years after George Washington was inaugurated, the nation’s first populist president consolidated a political base against federal overreach. He succeeded by stopping the bank from being rechartered.
It wouldn’t be the first time the Fed swore it would do one thing and then did the opposite. From Bill Bonner at bonnerprivate research.com:
(Source: Getty Images)
Bill Bonner, reckoning today from San Martin, Argentina…
What a week! Another exciting mix of the absurd, the ominous and the sublimely ridiculous.
The most important thing that happened was that the Fed revealed more of its ‘stealth pivot.’ It came out with a program to bail out the big depositors of failing banks. Already, the FDIC insures the deposits of small account holders (under $250,000). Now the new alphabet group – BFTB, or something like that – is going to look after large account holders. In other words, the whole banking system is being nationalized.
Well, not exactly. The losses are being nationalized. The profits will remain with the bankers.
What’s behind it? We recall our old friend Richard Russell:
‘The feds can control the banks to a large extent. They can control the bond market, to some extent. They can control the stock market, also to some extent. They can cause booms and trigger busts. But they can’t do those things and also control the value of the currency. The dollar is the pressure value. It suddenly pops open when the system needs a reset.’
All the gory details. Credit Suisse is”lucky” its failure is at the leading edge. Long before this is over all the king’s horses and all the king’s men won’t be able to put busted banks back together again. From Tyler Durden at zerohedge.com:
Update (1500ET): We finally have a deal, and what was at first a CHF1 BN acquisition priceof Credit Suisse by UBS, which then rose to CHF 2 BN, has now cranked up one final time to CHF 3BN (US$3.25 billion), or 0.76 per share, specifically shareholders of Credit Suisse will receive 1 share in UBS for 22.48 shares in Credit Suisse. As part of the deal, the Swiss National Bank is offering a 100 billion-franc liquidity assistance to UBS while the government is granting a 9 billion-franc guarantee for potential losses from assets UBS is taking over, i.e., this is a taxpayer-backed bailout.
More importantly, however, the bank’s entire AT1 tranche – some CHF16BN of Additioanal Tier 1 (AT1) bonds, a $275BN market – will be bailed in and written down to zero, to wit: “FINMA has determined that Credit Suisse’s Additional Tier 1 Capital (deriving from the issuance of Tier 1 Capital Notes) in the aggregate nominal amount of approximately CHF 16 billion will be written off to zero.“
This wipe out, pardon, bail-in is the biggest loss yet for Europe’s $275 billion AT1 market, far eclipsing the approximately €1.35 billion loss suffered by junior bondholders of Spanish lender Banco Popular SA back in 2017, when it was absorbed by Banco Santander SA to avoid a collapse.
AT1 bonds were introduced in Europe after the global financial crisis to serve as shock absorbers when banks start to fail. They are designed to impose permanent losses on bondholders or be converted into equity if a bank’s capital ratios fall below a predetermined level, effectively propping up its balance sheet and allowing it to stay in business.
As Bloomberg notes, investors had been concerned that a so-called bail-in would result in the AT1s being written down, while senior debt issued by the holding company, Credit Suisse would be converted into equity for the bank.
In retrospect, they were right to be worried… meanwhile equityholders get CHF3 billion; we are confident Swiss pensions will be delighted they are getting a doughnut while the Saudis get a not immaterial recovery.
One Swiss banker is free of the idiocy afflicting many of his cohorts. From Egon von Greyerz at goldswitzerland.com:
The financial system is terminally broken, toast, kaput!
Anyone who doesn’t see what is happening will soon lose a major part of their assets either through bank failure, currency debasement or the collapse of all bubble assets like stocks, property and bonds by 75-100%. Many bonds will become worthless.
Wealth preservation in physical gold is now absolutely critical. Obviously it must be stored outside a broken financial system. More later in this article.
The solidity of the banking system is based on confidence. With the fractional banking system, highly leveraged banks only have a fraction of the money available if all depositors ask for their money back. So when confidence evaporates, so do the balance sheets of the banks and depositors realise that the whole system is just a black hole.
And this is exactly what is about to happen.
For anyone who believes that this is just a problem with a few smaller US banks and one big one (Credit Suisse), they must think again.
One quick indicator is to check and see how much your bank and its officials donated to Democrats. From Mark E. Jeftovic at bombthrower.com:
The Elites are bailing out their own banks, not yours
The systemic banking and financial crisis I’ve been warning about for years has arrived. (In fact, the report I put out in January seems to be playing out in spades).
The printing of 37 trillion dollars out of thin air over the pandemic widened the wealth inequality gap – and they followed that up with the most drastic and rapid interest rate hiking cycle in Fed history.
What did they think was going to happen?
Now the banks are failing – Silicon Valley Bank went from passing its KPMG audit with flying colours and getting their debt rated “A” by Moody’s mere weeks ago, to the executives frantically paying themselves bonuses and selling their shares in the hours and days before the bank failed and was taken over by the FDIC.
98% of the deposits in SVB were uninsured, meaning that those deposits wouldn’tshouldn’t have been covered by FDIC insurance. That means any accounts with balances above $250K were facing the loss of their funds.
But this is Silicon Valley Bank – this is where the elites place their bets on Silicon Valley unicorns. So we can’t have that.
In a hastily convened meeting between the FDIC, the Fed and the US Treasury, it was decided that all deposits would be covered, insured or not.
Crisis averted, right?
Wrong. It turns out that only SVB and Signature banks would be covered; if any other banks fail, like your bank, your community co-op in your hometown or state, or any other bank in flyover America far away from the Coastal elites – if they get into trouble (because people are moving their money into “protected” banks), then that’s not covered.
When the slaves revolt, they will seek the blood of their masters.
In 2013, a century after the establishment of the Federal Reserve, I published The Golden Pinnacle. The novel’s hero is Daniel Durand, a Wall Street banker. Chapter 27, “Fools’ Gold,” features Daniel’s testimony in 1913 before a House of Representatives subcommittee against legislation under consideration that would establish the Federal Reserve. Eleanor is Daniel’s wife and Tom and Alexander are two of his four sons. As the current banking crisis unfolds, I won’t have much to say that will add in any meaningful way to what I said in “Fools’ Gold”. Why repeat myself? Perhaps I’ll just keep linking back to this post. Please share in whole or in part with attribution and a link back to this post.
From “Fools’ Gold”
Daniel sat at a table in a committee hearing room of the House of Representatives. The drafts crisscrossing the room carried the winter cold of February. There were few spectators in the gallery. Daniel glanced at Eleanor, who sat with Tom and Alexander, but she was staring in a different direction. Although she had wished him well, she had seemed preoccupied when they met briefly in the hall outside the hearing room.
Members of the subcommittee of the House Committee on Banking and Currency strolled to their seats, signs denoting the representative, at an elevated, semicircular panel at the front of the room. They chatted with each other. Nine representatives sat down. The chair for Representative Bulkley of Ohio remained empty. The chairman of the subcommittee, Representative Carter Glass, from Virginia, banged his gavel.
“The hearing in consideration of House Bill 7837, for the establishment of a federal reserve bank and the furnishing of an elastic currency, shall now come to order. The subcommittee will hear the testimony of Mr. Daniel Durand, from the firm of Durand & Woodbury, of New York.” Chairman Glass’s accent had an unmistakable Virginia lilt that reminded Daniel of Aldus Kincaid, his attorney for the court of inquiry. A dapper gentleman in his mid-fifties, Glass had prominent ears and a nose that filled a larger proportion of his face than the average nose filled of the average face.
“Thank you, Mr. Chairman, and thank you, members of the committee,” Daniel said. “This legislation is still in its early stages and the details of the reserve system are the subjects of dispute. However, before everyone is enmeshed in them, it’s time to consider not just the purported benefits but also the real dangers of central banking and government-created money, or an elastic currency, if you will, and to ask if this supposed innovation is in the best interests of our country.” He glanced at his notes.
“A persistent misnomer is the term ‘bank deposit,’ which is not a deposit at all. If I take an item to a warehouse and pay a fee to deposit it for safekeeping, when I exercise my contractual rights and claim it, the owner of the warehouse must give it back to me. The owner can’t lend it out, use it to secure a loan, or give it to another depositor to satisfy his claim. On the other hand, when I put my money in a bank, the banker can lend or invest it, use those loans and investments as collateral to borrow money, or use my funds to pay creditors or other depositors. I haven’t deposited my money in the same sense that I deposited the item at the warehouse.
“My deposit is actually a loan and I’m an unsecured creditor of the bank. Much of the instability of the present system stems from a fiction. The respectable bank is housed in a neoclassical fortress and prominently displays a sturdy vault, to convince the depositor his money is safe. In fact, almost all his money leaves the bank in search of a return higher than the interest the bank pays him. Only a small portion is held in reserve to meet depositor withdrawals, although all depositors are told they can withdraw their money on demand.
“The bank has made a promise that it can’t always keep. Business and financial cycles are as immutable as human nature. When famine follows feast and fear replaces greed, the demand for money inevitably increases. The banker faces his worst nightmare—a run on the bank. Banks with sufficient reserves or borrowing power survive. Those without them go bankrupt.”
Daniel looked up at the representatives. Only a couple appeared interested.
Why should the state control money? It’s a license to steal, and states invariably exercise it. From Jacob G. Hornberger at fff.org:
The United States once had the finest monetary system in history. It was a system that the U.S. Constitution established. It was a system in which the official money of the United States consisted of gold coins and silver coins.
We often hear that the “gold standard” was a system in which paper money was “backed by gold.” Nothing could be further from the truth. There was no paper money in the United States. That’s because the Constitution did not empower the federal government to issue paper money. It also expressly prohibited the states from issuing paper money.
The Constitution used the term “bills of credit.” That was the term people at that time used for paper money. The Constitution expressly forbade the states from issuing “bills of credit” or paper money. It also did not delegate the power to issue “bills of credit” or paper money to the federal government.
Instead, the Constitution empowered the federal government to “coin” money. At the risk of belaboring the obvious, one does not “coin” money out of paper. One “coins” money out of such metallic commodities as gold and silver.
The Constitution also expressly forbade the states from making anything but gold and silver coins “legal tender,” or official money, which further established the intent of the Framers.
Anyone wearing the ideological tag “woke” has ties to the WEF. From Brandon Smith at alt-market.us:
After the implosion of the FTX crypto exchange run by Sam Bankman Fried, questions of due diligence and competency immediately arose, suggesting that perhaps the company mishandled assets “accidentally” and that Fried was naive and “in over his head.” Numerous central bank officials and globalist organizations jumped into the debate almost immediately, arguing that FTX was a perfect example of why centralized regulation of crypto and digital currencies was necessary. They claimed that without oversight by banking elites, disaster was inevitable.
Of course, what they did not mention was that FTX and Sam Fried already had extensive connections with globalist groups including the World Economic Forum. In fact, the very basis of Fried’s business model was the WEF’s “Stakeholder Capitalism” theory, which he often referred to as “Effective Altruism.”
Don’t trust anyone who says that this bank thing is a one off or who tells you to take a Covid vaccine. From James Howard Kunstler at kunstler.com:
“Deny, deflect, minimise & mock your enemies questions. Don’t engage them in good faith, they’re attacking you with a view to undermining you. Don’t fall for it. Don’t give them an inch.” — Aimee Terese on Twitter
The net effect of all the lying propaganda laid on the public by the people running things lo these many recent years is a peculiar inertia that makes us seemingly impervious to gross political shocks. Momentous things happen and almost instantly get swallowed up by time, as by some voracious cosmic amoeba that thrives on human malignancy. Case in point: the multiple suicide of several giant banks just days ago that prompted “Joe Biden” to nationalize the US banking system.
As if all the operations around finance in this land were not already unsound and degenerate enough, the alleged president just cancelled moral hazard altogether. It’s now official: from here forward there will be no consequences for banking fraud, poor decision-making, fiduciary recklessness, self-dealing, or any of the other risks attendant to the handling of other people’s money. Bailing out the Silicon Valley Bank and Barney Frank’s deluxe Signature Bank means that the government will now have to bail out every bank every time something goes wrong.
Maybe setting up a state-sanctioned banking cartel wasn’t such a good idea after all. From MN Gordon at economicprism.com:
“The bank is something more than men, I tell you. It’s the monster. Men made it, but they can’t control it.”
– John Steinbeck, The Grapes of Wrath
Negative Carry
Borrowing short and lending long works mostly well most of the time. This is how modern banking works. You may be a customer at a bank. But you also supply the product.
In short, a bank will pay you a small percent for the deposits in your checking and savings accounts, which you can withdraw at any time. This is the borrowing short side of the operation.
The bank then takes your deposits and invests the money in some longer-term assets, such as loans and bonds that aren’t paid back for years. Say the bank earns 2 percent on its money while paying depositors a fraction of a percent. The bank pockets the spread, the net interest margin. Easy money.
However, when the Federal Reserve intervenes in the market and presses the federal funds rate to zero and holds it there for 2 years (March 2020 to March 2022), driving yields across the range of maturities to 5,000-year lows, something bad is bound to happen.
The experience for consumers over the last 24 months has been raging consumer price inflation. But that’s only a small part of the bad stuff that can happen.
Because as the Fed jacked up the federal funds rate starting in March 2022, to contain the consumer price inflation of its own making, the yield curve has inverted. Short term yields are higher than long term yields. And banks, having borrowed short to lend long, have negative carry.
Perhaps it would all works out for the banks if depositors stayed put. But in a world where you can score nearly 5 percent from Treasury Direct – with no brokerage fees – why keep excess deposits in the bank when you only get a fraction of a percent?
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