Tag: banks

This is What Deflation Looks Like

The failure of Credit Suisse vaporized $17 billion in corporate bonds and another $31 billion in market cap in the last year. That means the Swiss government would have to find nearly $50 billion in new debtors just to stay even:

Credit Suisse said 16 billion Swiss francs ($17.24 billion) of its Additional Tier 1 debt will be written down to zero on the orders of the Swiss regulator as part of its rescue merger with UBS (UBSG.S), angering bondholders on Sunday.

FINMA, the Swiss regulator, said the decision would bolster the bank’s capital. The move reflects authorities’ desire to see private investors share the pain from Credit Suisse’s troubles.

Chair Marlene Amstad said FINMA had stuck to the country’s “too-big-to-fail” banking framework in making the decision.

It means AT1 bondholders appear to be left with nothing while shareholders, who sit below bonds in the priority ladder for repayment in a bankruptcy process, will receive $3.23 billion under the UBS deal.

Engineered in the wake of the global financial crisis, AT1 bonds are a form of junior debt that counts towards banks’ regulatory capital. They were designed as a way to transfer risks to investors and away from taxpayers if a bank gets into trouble.

This is why “printing money” doesn’t work in a credit economy. Yes, it’s easier to generate the meaningless digits on a balance sheet than it is to print paper, but it’s not so easy to produce new borrowers. And mass immigration has completely failed to provide the answer it was intended to be, because the immigrants are far less inclined to service their debts.

Now do you see why the failure of the Clown World economy was always inevitable?

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Bank Contagion

Booster Patrol may need to do another remake here soon, because it’s not looking good for Credit Suisse or for Santander in Spain.

Just got fired from this awful bank. There is literally no money. They’ve made awful investments in at least six countries and want to downsize to an online banking service should they get a bailout. They
are cutting credit card limits so people can’t withdraw money.

This is actually big. Unlike the banks that crashed already, Santander is an international bank that works with middle to lower class private citizens much more than business and rich people. The mood is awful. There is already talks of a massive recession all across the west. It is all but confirmed.

When even people who know nothing about economics are talking about a massive recession, you know you’re already in a serious depression. We have been since 2008, of course, but the declining economic activity been disguised by the combination of zero percent interest rates, government spending, and mass immigration.

Remember, GDP measures economic activity in the form of spending, so every time a Guatemalan enters the USA, receives $30,000 in state and federal assistance, and spends it at McDonald’s and wherever people buy cheap clothes these days, the economy grows!

Notice how it’s the international banks that are particularly struggling now, due to foreign investments that were absolutely unnecessary from the start. Because, as the investment bankers like to say, bears make money and bulls make money, but pigs get slaughtered.

UPDATE: UBS has offered to buy Credit Suisse for up to $1bn, with Swiss authorities planning to change the country’s laws to bypass a shareholder vote on the transaction as they rush to finalise a deal before Monday. The Swiss National Bank and regulator Finma have told international counterparts that they regard a deal with UBS as the only option to arrest a collapse in confidence in Credit Suisse and were working to reach regulatory agreement by Saturday night.

So the biggest banks get even bigger, and banking becomes more centralized and intrinsically more fragile. This is not a fix, this is just buying time until the next failure. Remember, it was UBS that had to be bailed out in 2008.

And notice how the rules are completely ignored. It would normally require a six-week period for UBS shareholders to consider the acquisition.

UPDATE: It looks as if the merger is off as the offer from UBS was rejected, probably because it was for about one-eight the market cap. Now the Federal Council is looking at nationalizing Credit Suisse, which is probably the right way to go. It’s certainly better than handing bankers a windfall while increasing the fragility of the system.

UPDATE: UBS is doubling the size of its offer, to CHF 2 billion, and it appears the offer will be accepted. $6 billion in market cap just vanished. This is what deflation looks like.

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Shut Down Those Free Markets

Keep this timely trading halt in mind the next time you hear some moronic economist blathering on about the so-called “free market” and its very important benefits:

Trading was temporarily halted in dozens of regional banks this morning as shares fell by up to 75 percent when the market opened after Joe Biden claimed ‘US banking is safe.’ Major US banks were also hit as contagion fears spread through the sector with Wells Fargo plummeting 7.5 percent, Bank of America falling 7.4 percent, Citigroup plunging 5.8 percent and JP Morgan down 2.7 percent.

Regional bank Western Alliance saw its stock price plunge by three quarters as the opening bell sounded on Wall Street, while shares in First Republic dived 67 percent and PacWest by more than 35 percent. Trading circuit breakers were swiftly implemented to protect the market from rampant volatility.

I doubt this is the final cataclysmic crash, but it is certainly a harbinger of the eventual and inevitable one.

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Systemic Risk Exception

The FDIC is now effectively ensuring ALL bank deposits for all depositors, no matter how much money they have in their accounts.

The statement from the regulators was issued to announce a new emergency program to protect depositors of failing banks. They explained that they would make a “systemic risk exception” for both Signature and Silicon Valley Bank (SVB), a tech and start-up focused lender that was shut down following a bank run last week, allowing the clients of both banks to have full access to their deposits.

“[SVB] depositors will have access to all of their money starting Monday, March 13… We are announcing a similar systemic risk exception for Signature Bank… all depositors of this institution will be made whole. As with the resolution of Silicon Valley Bank, no losses will be borne by the taxpayer,” the regulators said, adding that they would use the FDIC’s deposit insurance fund to fully protect all depositors, both insured and uninsured.

The deposit guarantee was raised from $40,000 to $100,000 in 1980 and from $100,000 to $250,000 in 2008. This “new emergency program” is not really new, as despite the initially responsible statements by Yellen and the Federal Reserve, plans to implement the no-limit program have been in place since at least 2020:

The FDIC radically increased account protections from $100,000 to $250,000 for a temporary period; eventually, the $250,000 protection level became standard. Now, the revised level is expected to greatly surpass the $250,000 protection mark, though it’s unclear how much the increase will be. It’s also unclear what additional protections and safeguards are being considered. Another source tied into the U.S. banking sector said to expect a “drastic increase” designed to calm any run on the banks and general banking jitters. It was also noted that one possibility would be a no-limit FDIC protection plan, at least temporarily.

FDIC Planning to Increase Deposit Insurance Protection Beyond $250,000, 26 March 2020

Now the protection level has been made de facto limitless, which means that the next series of failures will threaten the collapse of the entire system. This is the fundamental problem with centralization, as it removes the protective limits of decentralization in a foolish, and inevitably futile, attempt to avoid the consequences of limited failure. Combine a) this increased centralization, with b) the $620 billion in unrealized losses that the US banks had not yet accounted for at the end of 2022, and c) the fact that the current zero-reserve banking system is a literal Ponzi scheme with the Fed desperately trying to make depositors whole each time a bank can’t keep up with its outstanding loans, and systemic failure is inevitable.

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The SVB Death List

This was posted on Gab tonight:

30 companies now face extinction as a result of being tied to the SVB failure. They are as follows:

  • Coinbase
  • DoorDash
  • TikTok
  • Twilio
  • Plaid
  • Affirm
  • Etsy
  • Zoom
  • 23&Me
  • Airbnb
  • AllBirds
  • DocuSign
  • Udacity
  • Betterment
  • Checkr
  • Klarna
  • Marqeta
  • NerdWallet
  • Stripe
  • WeWork
  • ImpossibleFoods
  • Instacart
  • Patreon
  • BigCommerce
  • FarFetch
  • Lemonade

Now, not all of these companies will find the disruption, and possible partial loss of funds, to be a killer. I’d be very surprised if Stripe, Zoom, Airbnb, or Etsy found the collapse of SVB to be much more than a minor annoyance due to the particular natures of their respective businesses. TikTok probably won’t even notice. But companies like Patreon, which are very low-margin operations that don’t run a profit, are considerably more vulnerable.

So it will be interesting to see precisely how severe the eventual consequences turn out to be.

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Knock-On Effects

The SVB failure is having serious consequences for the California wine industry.

California’s wine industry is on the brink of a financial crisis following the collapse of Silicon Valley Bank.

The bank had been the main financial institution for bank for wineries in the Golden State for almost three decades.

The California Department of Financial Protection and Innovation closed the bank on Friday following a run by venture capital customers.

On Friday night, thousands of wineries found that they were completely locked out of their accounts with no clear timeline as to when they might be able to access their funds…

Wineries represented 2 percent of the bank’s total loan business but the ramifications are far-reaching including an inability to pay employees, bills, or credit card payments. Silicon Valley Bank, the nation’s 16th largest bank, had extended more than $4 billion in loans to wineries and vineyards since 1994.

Interesting that it says “16th largest” when just two days it was being reported as the 14th largest. But this demonstrates the folly of both the easy credit economy and allowing banks to buy other banks, as the consequences of single failure points become considerably more serious. In this case, the negative effects are crossing not only the United States, but the Atlantic Ocean.

Following SVB’s collapse, tech companies in Britain have had their accounts frozen, meaning they have no access to their money and are unable to pay staff.

Major firms such as online retail giant Shopify and Pinterest are also directly affected by the failure.

UK business leaders have raised concerns that the failure could create further problems in Britain, warning they face going bust if they cannot get their funds from the bank – which could cause thousands of job losses.

There are also fears the crash of the bank will spread around the world, with bases in countries including China, India and across Europe.

These knock-on effects may have even affected us. Starting Friday night, without any reason being provided or communication from our account manager, Castalia was suddenly locked out of one of our regular book production sites for the first time in nine years. This will have no effect on the Library, but could affect our traditional book publishing business. Fortunately, we already have an alternative lined up, although I very much doubt that it will be necessary.

UPDATE: Yellen: No federal bailout for collapsed Silicon Valley Bank

UPDATE: Treasury: New York State regulators are shuttering Signature Bank – a major New York bank – adding that all depositors both at Signature Bank, and also the now insolvent Silicon Valley Bank, will have access to their money on Monday.

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Bösenschadenfreude

ITEM: BREAKING: HARRY AND MEGHAN STAND TO LOSE MILLIONS IN COLLAPSE OF SVB BANK. Sources tell iSN the couple set up accounts following the advice of friends in Silicon Valley. “This is a major blow,” said our source, “They had all of Harry’s money there.”

ITEM: OPRAH LOSES MILLIONS IN SVB COLLAPSE. iSN has learned Oprah kept millions at the failed bank. “Like other celebs she went all in and now may have lost serious money,” said a person familiar with the situation.

That’s just too good to be true, isn’t it? Is there really that much justice to be found in a fallen word?

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First Domino Down

Silicon Valley Bank just crashed so hard that the FDIC had to step in and seize it on a Friday morning before the close of business.

The Federal Deposit Insurance Corporation seized the assets of Silicon Valley Bank on Friday, marking the largest bank failure since Washington Mutual during the height of the 2008 financial crisis.

The bank failed after depositors — mostly technology workers and venture capital-backed companies — began withdrawing their money creating a run on the bank.

The FDIC ordered the closure of Silicon Valley Bank and immediately took position of all deposits at the bank Friday. The bank had $209 billion in assets and $175.4 billion in deposits as the time of failure, the FDIC said in a statement. It was unclear how much of deposits was above the $250,000 insurance limit at the moment.

Notably, the FDIC did not announce a buyer of Silicon Valley’s assets, which is typically when there’s an orderly wind down of a bank. The FDIC also seized the bank’s assets in the middle of the business day, a sign of how dire the situation had become.

But don’t worry. We are cross-the-FDIC’s-heart pinky-swear assured that there is little danger of contagion throughout the financial industry because all of the other banks are absolutely just fine and have totally no issues at all. It’s just a flesh wound, nothing more.

Please continue to consume with confidence and don’t forget to be tolerant and inclusive!

PS: this is what debt-deflation looks like. Billions of dollars in debt-wealth vanishing in an instant.

UPDATE: Wells Fargo customers have reported that their direct deposits were missing from their accounts on Friday morning, according to reports.

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Germany Braces for Deflation

German leaders fear the German public running out of cash this winter:

On Tuesday, Reuters reported German authorities are moving to acquire emergency cash deliveries to keep their economy running in the event power outages take down electronics-dependent methods of payment.

People familiar with the government plans reported that the Bundesbank, Germany’s central bank, had begun hoarding extra billions in the event there is a surge in demand for cash, or limits placed on withdrawals.

Government officials and bank authorities are also looking to secure the distribution mechanisms for the cash, giving priority fuel access to cash transporters, according to the sources. The planning sessions have also reportedly included multiple financial industry associations as well as financial market regulator BaFin.

The Reuters article noted, “Although German authorities have publicly played down the likelihood of a blackout, the discussions show both how seriously they take the threat and how they struggle to prepare for potential crippling power outages caused by soaring energy costs or even sabotage.”

Another illustration of how digital currency is a complete non-starter in any scenario that involves interrupted electricity flows. Which also goes for electric cars and the digital economy in general. If the power goes out anywhere along the way, you’re not going to be watching YouTube videos or streaming Netflix.

And yes, the inability to spend credit money is extremely deflationary. As with generals, economists always prepare to fight the last banking crisis.

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