Sunday, March 12, 2023
With the following phrase from the Federal Reserve that "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 United States officially became Socialist. The death knell you hear ringing in the distance is from Capitialism. ~250 years of "the American Experience" has effectively been destroyed tonight. Checkmate Socialism.
Consider, the Federal Reserve, an unelected agency, has unilaterally made the decision to eliminate ALL depositor risk from the banking system. Bluntly, they changed the rules of the game for an institution that was politically connected at the highest levels.
Previously, poor leadership and bad banking decisions had dire consequences. Accepting billions in deposits, buying longer-term bonds for higher yields while keeping insufficient funds available to meet the liquidity of on-demand withdrawals would result in bank failure. FDIC insurance historically covered only up to $250K per account, per depositor, per institution. There was a reason for this termed "moral hazard." Now the taxpayer is on the hook for limitless losses. How did this happen?
When the tide went out this time though, lots and lots of startups (3,500+) with far in excess of $250K were left naked. And afraid. Even after knowing for months that the on-demand cash reserves, burn rate, and long-term loss risk were all significant factors, the FDIC did nothing until the moment of receivership.
The normal course of events in a situation like this would have been for the bank to enter receivership, the FDIC pay the limits of insurance, and then either a liquidation or sale of the remaining bank assets to make depositors partially whole. Not this time. These were very special depositors; the Federal Reserve "broke bad" to save a litany of politically aligned startups with billions in deposits unlikely ever to be recovered save by the largess of the Federal Reserve.
Almost universally, the client profile of the depositors at Silicon Valley Bank that taxpayers just bailed out were wealthy investors and startups with an average balance of $4,000,000. Silicon Valley Bank would NOT qualify as the typical "community bank" almost anywhere else in the country. These startups were the darlings of Silicon Valley.
Banking relationships at SVB were by invitation only, and this "members-only" bank just stuck the average working class taxpayer with billions in losses and triggered a global bank run. The Federal Reserve was only too happy to spent billions in taxpayer money to shoring up the finances of thousands of millionaires and many billionaires at Silicon Valley Bank. As Jackie Chiles would say: "Outrageous, Egregious, Preposterous!"
Sadly this is not an isolated incident, almost every bank in America, to some degree, was/is in a similar situation to Silicon Valley Bank. SVB bought long-dated bonds with incoming despositor cash and held those bonds at increasing losses as interest rates rose. With the Federal Reserve hellbent on raising rates and the bank apparently caught on its heels, they were trapped. The "surviving" banks, however, have one major difference: their deposit bases are largely focused on retail investors who do not have the ability (or wherewithal) to coordinate an almost simultaneous run on the bank.
When rumors on the "bro network" that Silicon Valley Bank had taken significant losses on its bond portfolio, failed to raise capital, and CEO Greg Becker uttered the fateful words "keep calm," VCs jumped on their smartphone apps while riding the Sun Valley ski lift and moved $40B+ with a swipe of their middle fingers. Silicon Valley Bank was the first "victim" of a fintech-enabled bank run.
What does this "full backstop" by the Federal Reserve mean for FDIC insurance and the banking industry in general? What's good for the goose is good for the gander, and if startup companies with hundreds of millions of UNINSURED deposits are going to be made whole, well then EVERY SINGLE AMERICAN now also has "full backstop."
Think of the potential here. Your banker makes a bad decision? No problem. Bank goes under for risky loans? No problem. Bank invests in longer dated bonds, bond value drops 15-20%, and bank becomes insolvent? NO PROBLEM!
There do seem to be a couple caveats, however, to the "proportionality of risk;" it is unlikely a community bank with retail deposits say in Detroit, would have been saved. Silicon Valley Bank was the poster child of progressive liberalism applied to banking, yet they did not practice what they preached. Their client base and leadership were almost exclusively of mind and race alike. They are politically connected at the highest levels. Taxpayers should be drooling for a list of "public servants" who had accounts at Silicon Valley Bank in excess of $250,000.
As the fallout from Silicon Valley Bank radiates over the country in the coming days, weeks, and months (years?) it has become obvious that the Federal Reserve is far, far too powerful. The Federal Reserve Act needs to be amended at the least, and perhaps revoked. Centralized authority for the global economy is not working (well, at least not for the vast majority of people.) For the uber-elite it works quite well.
The glaring problem is that too many powerful people are juiced in to the existing structure, and time and again bear no consequences for failure. A bank run can be a healthy event in that bad decisions are held accountable by customers literally voting with their feet. It is a shameless debacle that taxpayers feet are now held to the fire to pay the inequities of failed regulatory bodies, executive malfeasance, and corrupt politicians. The failure of SVB has left many Americans wondering if we just saw the end of capitalism.
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