Category Archives: Debt

The great credit unwind and Powell’s hidden pivot, by Alasdair Macleod

Posted on March 25, 2023 | Leave a comment

Another trenchant analysis in real time by Alasdair Macleod. From Macleod at goldmoney.com:

We are all now aware that the global banking system is extremely fragile. Driving bank failures is contracting credit, which in turn drives interest rates higher. Though it is not generally appreciated, central banks have failed to suppress them.

Some regional banks have failed in the US and the run on Credit Suisse’s deposits has forced the Swiss authorities into forcing a reluctant rescue by UBS. Undoubtedly, as the great credit unwind plays out, there will be more rescues to come.

In this, the earliest stages of a banking crisis, some questions are being answered. We can probably rule out bail-ins in favour of bail outs, and we can assume that nearly all banks will be rescued — they must be in order to prevent systemic contagion. 

In this article I quantify the position of the global systemically important banks (the G-SIBs) and point out that the central banks which are meant to backstop them are themselves bankrupt — or rather they would be properly accounted for. 

Because even a minor failure in the banking system could undermine the entire global banking system, the much heralded pivot is now here, but not in plain sight. Because central banks have lost control over interest rates, the focus on preserving the financial markets underpinning the banking system has shifted to supressing bond yields. This is why the Fed has introduced its Bank Term Funding Programme, likely to be copied in other jurisdictions. 

It is Powell’s hidden pivot — his line in the sand. But it is the last desperate throw of the dice and depends entirely on inflation being transient and interest rates not rising much more. 

The price of even a successful preservation of the banking system is the destruction of fiat currencies, because the bigger picture is still of the greatest credit bubble in history unwinding. And that process has only recently started.

The great unwind accelerates 

Now that everyone in finance knows that there is a banking crisis, cynicism prevails. When a central banker or treasury minister tries to reassure the public, it is disbelieved. The risk to an extremely fragile global banking system is that if disbelief in public statements spreads from financial sceptics to the wider public, the system is doomed. All credit is based on confidence and confidence alone.

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Is a full-blown global banking meltdown in the offing? By Satyajit Das

Posted on March 25, 2023 | Leave a comment

It’s not looking too good. From Satyajit Das at newindianexpress.com:

If everything is fine, then why have US banks borrowed $153 billion at a punitive 4.75% against collateral at the discount window, a larger amount than in 2008/9?

A New Banking Crisis?

Financial crashes like revolutions are impossible until they are inevitable. They typically proceed in stages. Since central banks began to increase interest rates in response to rising inflation, financial markets have been under pressure.

In 2022, there was the crypto meltdown (approximately $2 trillion of losses).

The S&P500 index fell about 20 percent. The largest US technology companies, which include Apple, Microsoft, Alphabet and Amazon, lost around $4.6 trillion in market value  The September 2022 UK gilt crisis may have cost $500 billion. 30 percent of emerging market countries and 60 percent of low-income nations face a debt crisis. The problems have now reached the financial system, with US, European and Japanese banks losing around $460 billion in market value in March 2023.

While it is too early to say whether a full-fledged financial crisis is imminent, the trajectory is unpromising.

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The affected US regional banks had specific failings. The collapse of Silicon Valley Bank (“SVB”) highlighted the interest rate risk of financing holdings of long-term fixed-rate securities with short-term deposits. SVB and First Republic Bank (“FRB”) also illustrate the problem of the $250,000 limit on Federal Deposit Insurance Corporation (“FDIC”) coverage. Over 90 percent of failed SVB and Signature Bank as well as two-thirds of FRB deposits were uninsured, creating a predisposition to a liquidity run in periods of financial uncertainty.

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How Covid lockdowns primed the current financial crisis, by Christian Parenti

Posted on March 24, 2023 | Leave a comment

First came Covid, then came monetary inflation, then came higher interest rates, and then came a financial crash. From Christian Parenti at thegrayzone.com:

The lockdowns and the stimulus required to keep the economy alive helped drive inflation. Then the Fed jacked up interest rates. And all hell broke loose.

On Friday March 10th, 2023, Silicon Valley Bank (SVB) died of Covid. Alright, it’s a little more complicated than that, but Covid lockdowns followed by massive government stimulus were a critical – and massively under-acknowledged – factor in propelling the bank’s demise.

At the heart of the crisis is the gigantic pile of low-interest debt that was issued during the height of the pandemic. While private-sector pandemic-era debt like corporate bonds also soared, US government debt like Treasury bonds piled up.

In a nutshell, during the pandemic the government issued enormous amounts of extremely low interest government debt — about $4.2 trillion of it. But now interest rates, including on government debt, are higher than they have been in 15 years and investors are dumping their old low-interest debt. As they dump, the resale price of the old debt goes down. The more it declines, the more investors want to dump. And thus, a panic is born. 

To understand the problem fully, the question of US government debt has to be put into its larger context, which is: the pandemic response as a whole.

When news of the Covid virus first broke in December 2019, the 2 Year Treasury bond was being offered at 1.64% interest; the 10 year was at about 1.80%, and the resale value of such bonds on secondary markets was strong. Then, in March 2020, as Covid cases and deaths spiked, the US began to shutter its economy with panicked lockdowns that were supposed to “flatten the curve” or slow the spread of the virus and thus protect the hospitals. But Covid was politicized and the lockdowns were extended. 

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A Poisoned Broth, by Bill Bonner

Posted on March 23, 2023 | 1 comment

“Double, double, toil and trouble, Fire burn and cauldron bubble.” That’s what Shakespeare had to say about the banking crises. From Bill Bonner at bonnerprivateresearch.substack.com:

(Source: Getty Images)

Bill Bonner, reckoning today from San Martin, Argentina…

“Would I say there will never, ever be another financial crisis? You know probably that would be going too far but I do think we’re much safer and I hope that it will not be in our lifetimes and I don’t believe it will be.”

~ Janet Yellen, June 20, 2017

According to a recent study, the US banking system – heavily regulated by Janet Yellen, her forerunners and successors – faces huge losses.    

We are not experts in banking, but we think we understand the basic model. Banks take in cash from depositors and ‘lend’ it out or ‘invest’ it. The depositors can ask for their money back at any time. But the loans and investments only come back when they are ready. Between the two time periods, long and short, the banks can get squeezed…if depositors suddenly want their money back. Central banks were set up to prevent it. In a crisis, they provide solvent banks with liquidity.

But what if the banks aren’t solvent? What if their ‘assets’ – loans and investments – go down? What if they loaned out money at 3% interest…and then interest rates go up to 5%? What if their investments – say in Amazon or Rivian – lose so much money that they can never give depositors back their money?

Broke and Broken

Here’s the money line from academic researchers Erica Jiang, Gregor Matvos, Tomasz Piskorski and Amit Seru:

The U.S. banking system’s market value of assets is $2 trillion lower than suggested by their book value of assets.

The net worth (book value) of the entire US banking industry is only $2.1 trillion. Which means, the whole banking system is already nearly insolvent. Busted. Broke.  You can imagine what would happen if stocks went down another 10%…20%….or 40%. There would be Hell to pay.

No one would suggest subsidizing plumbers who install leaky pipes, nor providing grants for restaurants that make customers sick…but those groups don’t have lobbyists!

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Raiding The Taxpayer Piggy-Bank, by David Stockman

Posted on March 23, 2023 | Leave a comment

They call it moral hazard because it’s a moral issue. The people responsible should have to pay when things go wrong, not the taxpayers. From David Stockman at lewrockwell.com:

Janet Yellen is one continuous anti-prosperity horror show and the reason is obvious enough. She got her indoctrination at Yale from the granddaddy of Professor Keynes’ US disciples, James Tobin, in the late 1960s and has spent most of her years since then pontificating in academia or dictating from the Fed.

So now with the arrival of screaming evidence that the banking system desperately needs the disciplining effect of depositor flight, she comes out four-square for euthanizing the $9 trillion of still uninsured deposits in the US banking system.

But let’s cut to the chase. Banks not disciplined by their depositors and not at risk for deposit flight are dangerous institutions. They leave bank executives free to swing for the fences on the asset-side of their balance sheets without fear that attentive depositors will move their money to safer pastures.

For crying out loud. It was bad enough during the last several years when deposits were dirt cheap and knuckleheads like those who ran SVB decided to load up their balance sheets with 10-30 year duration assets against overnight demand deposits, most of which were uninsured.

For the moment that allowed them to book outsized profits and reap the consequent benefit of soaring stock options, but these “profits” were phony as a two-dollar bill. That’s because they were being generated off long-term fixed income assets, the prices of which had nowhere to go except down.

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The ‘Stealth Pivot’, by Bill Bonner

Posted on March 20, 2023 | Leave a comment

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.’

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This Has Got to Stop, by James Howard Kunstler

Posted on March 20, 2023 | Leave a comment

And somebody’s going to have some splainin to do . . . under oath. From James Howard Kunstler at kunstler.com:

“As the evidence mounts of an even broader censorship effort by the Biden administration, the Democrats’ attacks have become more unhinged and unscrupulous. After shredding any fealty to free speech, they now are attacking journalists, demanding their sources and claiming their reporting is a public threat.” — Jonathan Turley

And it will stop because, as the old wag Herb Stein laid down in his law years ago: Things that can’t go on, stop. Which raises the question: which things? And the answer is the things Western Civ is doing in its attempted suicide: inciting war, recklessly running up debt, persecuting its own citizens and stealing their liberties, subjecting them to medical malfeasance, destroying their goods production and food-growing capabilities, and subjecting the public to incessant mind-fuckery in a campaign to falsify and disfigure reality.

     A consortium of public and corporate bureaucracies has institutionalized the falsification of reality under the pretense of saving the human race from a pack of hobgoblins led by climate change, racism, and normal sexual reproduction. They have been driven insane by the actual reality of pending economic collapse, which has only been accelerated by their own suicidal activities. What they apparently really want to save is their own positions, perquisites, and power. Their enabling mechanism is the digital computer and its many ways of assembling and controlling information, and thus controlling people, especially those who object to totalizing control. They do it because they can.

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UBS To Buy CS For $3 Billion As AT1 Bonds Get Wiped Out In Record Bail-In; Swiss Govt Grants CHF9BN Guarantee; SNB Offers $100 Billion Liquidity Backstop, by Tyler Durden

Posted on March 20, 2023 | Leave a comment

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.

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“This Is It!” – Von Greyerz Warns “The Financial System Is Terminally Broken”

Posted on March 20, 2023 | 2 comments

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.

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Is your bank “important” enough to save? Don’t count on it. By Mark E. Jeftovic

Posted on March 19, 2023 | Leave a comment

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’t shouldn’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.

That’s tough titties for you.

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