By David Haggith, 3/12/23
It’s contagion all over the place already. So many are asking if the wipeout of two banks, including the nation’s 16th-largest, is a sign of contagion that the worries have caused US Treasurer Janet Yellen to assure the nation again and again that the banks are more solid than ever and that the Treasury and the Fed and the FDIC are working to make sure there will be no contagion from the crashes into insolvency that sprang up last week.
The more they say they are working to make sure there won’t be any contagion, the more you know there will be. The fact is there is already contagion and lots of it. That is what brought both Silvergate and Silicone Valley Bank (SVB) down — contagion from last Summer’s Cryptocrisis when many financial writers assured us there would be no contagion.
You cannot necessarily see the fall of any one part coming in an event like this, but you can certainly see coming the fact that many parts will be falling. That’s how it was was with Silvergate directly from the Cryptocollapse and then with Silicone Valley Bank, as the leader of a larger-scale banking collapse where crypto also played a major role because many of SVB’s big clients were crypto companies.
While the financial media and the Fed heads and the treasurer all assured us there would be no contagion from the Cryptocrisis last summer, which continues into the present, I began pointing out warnings to the contrary. So, before I get in to explaining crypto’s role in the SVB collapse last week, let’s go back over what, in fact, could be seen coming — at least as a high risk if not a definite prediction so no one can say the Fed couldn’t possibly have seen any of this coming.
Bringing cryptos current
I haven’t written a lot on crypto currencies because, frankly, I don’t understand how blockchain works, and I have never wanted to invest time into figuring it out. So, what I have written has all been in the form of warnings to be careful. I never saw the moment cryptos would crash last summer, but I was fairly cautious about them leading into the summer and even going back further. Because they function like a black box, I saw the likelihood of surprise perils and pointed those out as cautions going into the crisis.
Here is a synopsis of those warnings along the way to give some sense of the degree to which the Cryptocrash and contagion from it to major banks was always on the table as a high likelihood and should never have been minimized by the likes of Powell and Yellen and all the parrots in the financial media that mindlessly regurgitate whatever those two “experts” say. Let’s start with my earliest warnings about crypto about two-and-a-half years ago and work toward the most recent:
Cryptocurrencies could rise by more than enough to help you through this winter, but they can (and often have) just as easily crashed by 50% like the stock market, so don’t use crypto as the resource you can depend on for the winter. It may rise after it crashes, but that won’t help you if supplies are short when crypto comes up short, too. From a retirement standpoint, the crypto currency you’ve invested in may not even exist when you’re ready to retire — so I’d keep crypto a side bet.“This is Stagflation, and Here is an Easy, Practical Idea to Prep for it” Oct. 11, 2021
For those with some money to play it was a gamble many did well with; but one should never gamble with essential funds or with their retirement.
Then, half a year before the big summer bust of 2022, I gave the following warning as something I considered fairly evident:
The next obvious stage of the present ongoing crash … will likely also pull down a great number of crypto currencies with only a few survivors (as we saw in dot-com companies around the year 2000 that had huge valuations but no real profitable use).“Economic Predictions for 2022” Dec. 20, 2021
As the year of the big Cryptocrash began, I gave a stronger warning but with no specific timing:
Already in another one of their own bear markets, cryptos have proven to be highly speculative vehicles. Many of them, like those promising tech companies that made no actual profits or merchandise back in 2000 will nova into their own collapsing cores. A few companies survived the rumble and the tumble in 2000 and went on to do very well, but most disappeared in the dust of time and space. The same will likely be true this time for the hoard of crypto currencies.“How Bad Is the Stock Market Rout Now, and How Bad Will its Collapse Get?” Jan. 7, 2022
That big bust came in the summer of 2022, but I won’t claim I saw the timing of that coming — not in the sense of saying it would hit that summer or even that year — but only that I did consider that it would come at some point as being evident.
After the crash happened, I noted that I had in my Patron Posts always said the Federal Reserve would likely time the debut of its central-bank digital currency [CBDC] with a major crash in cryptocurrencies, so I pointed out some of those earlier private writings for my general readership to become aware of as soon as the Fed announced last fall it was going to start testing the ledger system for its CBDC:
Conveniently, the announced testing [of a Fed CBDC] is happening during a time of major crypto-currency scandals and carnage. I’ve been on the CBDC beat for about as long as it’s been whispered between central banksters. Clear back in 2019, I wrote that the Fed would try to convince the US populace that,
“It is in the ‘best security interest of the American people’ to let the Fed issue the ONLY legal digital currency in order to avoid some of the scandals we’ve already seen (more of which are certain) There are bound to be some digital currencies that aren’t anything other than a digital Ponzi scheme.…”
“The rapid implosion of many cryptos opens the doors wide for the Fed to ride into the cleared-out battlefield like the cavalry with something that will appear to the general public to give similar benefits but with none of the risks that blew up in the grand crypto explosions we recently saw….“
Now, you know I don’t think the Fed is the one [that should] come in and save us from anything. We need to be saved from the Fed, but most of the US population do not think like me … and most do not think like the cryptoverse either. So, I am certain the recent unravelling in crypto will play directly into the Fed’s hands as I said back in 2019 would happen once the coming out of the Fed’s debutant currency [CBDC] finally arrived.Whatever god central banksters offer their sacrifices to, they were praying or whirling their magic chakras or whatever for a moment just like this to frame the emergence of their champion onto the digital currency scene … because it [their CBDC] will seek to overcome the liabilities seen in those wild-west digital cryptocurrencies as its selling point.…“The Money of the Apocalypse is Rising in US Banks from the Ashes of the Cryptocrisis THIS WEEK!” Nov. 22, 2022
So, the stage is now set for the public debut of the system they have been experimenting with as soon as they are confident the bugs have been worked out. I also stated the significance of the summer blowout in crypto in that article:
“At the periphery of the US financial world, the crypto bubble has popped — the “periphery” being the fringes of finance where the greatest risks are taken in hopes of the greatest gains — the parts likely to go down before the core of finance. As with the dot-com bust or the consolidation of major auto manufacturers after WWII, the strong hands will survive. However, most cryptos will end as a quivering heap of rust, burning under the desert sun….“
While I am not by any means a crypto expert, I imagine Bitcoin will rule with a few others … just like the Big Three did — Ford, General Motors and Chrysler — after numerous other contenders like Hudson, Desoto, Packard and Studebaker got absorbed or went broke or faded away. Huge and highly speculative gambles are made on the fringes of new industries, and they may look promising for a long time, but in the end only a core survives, the industry consolidates and fortunes are lost, even if they were a beloved product to many. Crypto is at that stage of a great consolidation.
You can see, embedded around the underlined portions there, the implication that the collapse of core finance would start to appear now that crypto had gone down. At that point, even Silvergate had not failed. Alas, one cannot see it all, so I won’t pretend I saw the Cryptocrisis coming last year in any specific way, just that I saw perils throughout the cryptoverse as being increasingly likely to give way:
One thing I did NOT see coming, though I am not surprised in the slightest that it happened, is the massive cryptocrash. I never predicted this major event because I don’t know much about crypto-currencies. I don’t really understand how they work. They are black boxes to me, and I don’t make predictions about things I don’t understand. They were proclaimed to be this great hedge against a crashing currency, and I never really believed they would be that, but I also didn’t know. Maybe they would.“The Bear is Uncaged … Again” Dec. 6, 2022
In that article I also noted in my predictions that the bear market in stocks had more falling to do, foreseeing …
The likelihood of major financial breaks in stocks, bonds, crypto currencies, leveraged debt, interbank loans, business bankruptcies, etc., producing Lehman moments of sudden shock and awe that cause their own cascades due to contagion.
We just entered that stage where stocks and cryptos are all sliding together. Bond yields, on the other hand, are plunging (raising bond valuations) for the simple reason that money is now rapidly fleeing stocks for the perceived safety of bonds. Leveraged debt is collapsing quickly as we’ve seen in the commercial real-estate situation I recently described. (See “Real-Estate Bust 2.0.”) Business bankruptcies, particular in banks, are already emerging, and that clearly included our first major Lehman moment last week, and all of that will CERTAINLY have a contagious effect in moments of “shock and awe,” like this last week, as it cascades through the world of business and finance.
We’ve now seen that entire cascade begin to lay itself out before us. That is why Janet Yellen just said the Treasury is working hard this weekend with the Fed to make sure contagion doesn’t happen …. because it already HAS happened, and will rapidly spiral out of control unless the Fed and feds pull off some pretty potent magic. (Which Yellen has assured us this weekend will not include money-printing bailouts. Well … not for now, but you know bailouts of some kind are coming. I suppose by “no bailouts” she means the banks will, in each case, be allowed to collapse in insolvency, but not that there is no chance depositors will not be bailed out, including big-money depositors whose full deposits are not insured. The question is will they go back to expanding the Fed’s balance sheet — QE — to do those bailouts now that something big has broken?)
This last December, I also noted particularly how the Fed’s monetary tightening had already brought down crypto’s house of cards — the realm where the riskiest money was at play on the periphery of finance (and, therefore, less watched or guarded) — and would now be driving us into a deep recession in 2023:
Powell stated today the Fed has finally gotten into “restrictive territory….”
And, of course, “restrictive territory” is where you see the breakdowns start to occur as emerged first in crypto markets recently, but the Fed is taking us deeper into a recession Blackrock now says is a “foretold” conclusion and one that might easily become “severe” because there will be no Fed support possible when the deeper crash hits due to inflation.“Powell’s Peril Lies in Lanquishing Labor Market” Dec. 14, 2022
And, so, we just saw some of those deeper breakdowns near the core of our financial system. First we saw the breakdown due to Fed tightening starting to occur in commercial real estate, and now already we’ve seen it occur in two banks that are the most closely tied to cryptocurrencies.
Pointing out this high likelihood of contagion from the Cryptocollapse, I had warned last December,
The loss of coinage value, though, was far from the only damage in DeFi. There was also that whole cryptocurrency exchange bust-up where the “banking world,” so to speak, of crypto fell off the back of the sled like Santa’s sack of packages spilling all the way to where people got froze out of their funds. Witness the now infamous FTX whose nefarious Ponzi pirate, the appropriately named Sam Bankman-Fried (recommend saying it with a snarky long “I”), is sitting in jail awaiting trial because no one trusts him not to run … since he already did to the Bahamas. There is likely to be some serious prison time in that one as he joins the likes of Bernie Madoff and ol’ Charles Ponzi, himself, in penury purgatory.“2022: The Year that Imploded … Bigly” Dec. 21, 2022
So, the banking world of crypto collapsed, and last week we saw that play a role in the first collapse in the mainstream banking world (SVB), which I’ll lay out below. While I was unable to say for certain exactly where these macro problems would emerge in specific enterprises, in January of this year, I did note the dangerous losses that were happening at Silvergate:
Cryptocurrencies saw a global loss of over $3-trillion last year, and in the past week’s Daily Doom one of the largest crypto banks, Silvergate, was reported to have seen day-after-day massive losses (well over 40% down in share values) due to an equally massive (40%) stack of withdrawals from scared customers trying to run from the bank with as much of their money as they can still get their hands on.…
Crypto is going through something like the huge compression that took place in the auto industry in the last century as many manufacturers went out of business and the rest got conglomerated into the “big three….” Maybe this year will see some fear of missing out on great fire-sale value. Well, just be careful you’re not snarfing up a lot of Studebakercoin….
And guess what was banked in all that crypto that vanished when the Fed started tightening the dollar? A goodly amount of those stimulus checks that made consumers so flush during our first Covid year….
The cryptocrash is a lesson in contagion — how one company like Terra can start a landslide among other big and small companies. Eventually, all that downflow causes a major slab of the mountain, like Ponzi FTX, to slide. FTX then slides into Silvergate, and now Silvergate is falling off a cliff and laying off 40% of its workforce.“It’s Worse Than it Looks” Jan. 6, 2023
So, yes, contagion was already quite evident at the very start of this year. We saw one slab of earth knock into another ad then saw that slide last week into Silicone Valley Bank and take it out.
So, here we are: crypto banks breaking, then venture-capital banks deeply involved in the cryptoverse breaking, and now stocks back on the plunge as the avalanche of contagion builds. It could all be anticipated by just seeing the shear scale of perils built into the whole unregulated house of cards that was built inside of a massive black box. Now the whole hillside is moving to such a degree you naturally wonder what additional big piece might crack off tomorrow … and the Fed and feds are scrambling to try to make certain that doesn’t happen, which shows you they are seriously afraid it COULD happen.
When “Big Short” investor Michael Burry warned the “mother of all crashes” is coming, I noted that he believed it would start a crypto crash first and foremost. (“Why ‘Persistent Inflation’ Will Become an Intense Fire Tornado, Greater Than the Fed Even Imagines” June 25, 2021) It looks like he got that big short right, too.
What’s all the Yellen about?
One could see the likelihood of a major crypto crash and that it would take out banks that lay in front of it early last year. Burry even saw that cryptos would lead the collapse of the Everything Bubble. While the major stock indices started falling several months before the Cryptocrisis emerged last year, cryptos and stocks both entered their bear-market levels at about the same time. So, I’d say they fell together as a result of the Fed sucking money back out of the rigged economy. (Rigged in that it was ALWAYS impossible for the Fed’s economic “recovery” to survive once the Fed’s life support was removed for the reasons I laid out in my little ebook, DOWNTIME: Why We Fail to Recover from Rinse and Repeat Recession Cycles.)
First, a major crypto exchange that also functioned as a crypto bank went down when FTX fell apart. Then a somewhat more conventional crypto bank, Silvergate, went down; and now the first major national bank of note crashed into oblivion … all while Janet Yellen and Jerome Powell assured us there was no contagion coming from the Great Cryptocrash of 2022.
SVB, you see, was not just heavily invested in the tech world that surrounds, supports and embraces crypto in many ways; it was also a bank where many cryptocurrency companies stored the dollars they would use to pay their own crypto depositors/customers when those customers demanded dollars, and that is where SVB’s major troubles began. They initiated the run on bank deposits months ago.
While many people were telling us last summer, including Jerome Powell and Janet Yellen, there would be no contagion between the Cryptocrisis and the banking industry, SVB was already feeling those troubles. The assurances by our Fedhead and former Fedhead were as void as so many other historic assurances by Fed chairs — that there was no housing crisis in sight in 2007, no recession in sight in 2008, no repo crisis in sight at the Fed’s repo facilities in 2019 because there was no problem with bank reserves running short under the QT of 2018. All these things broke apart while the Fed was giving its assurances.
So, as former chair and current treasurer, Janet Yellen, now reassures us there is no contagion or that it will be prevented and that other banks are strong, your best strategy would be to believe the opposite. And the nation’s best strategy would be to kill the Fed as it exists today. Put it to rest … at least in its current form by stripping it of its most empowering and economically manipulative mandate (assuring a sound jobs market) and making its sole mandate to maintain a currency with zero inflation.
If you believe those assurances after all the other times she has been wrong in major ways, you deserve a peck on the head with a sharp stone. Yellen, herself, has already stated she is concerned about “a few banks.“
There is, however, one part you can take to heart: you can be certain she is spending the weekend scrambling to keep this from going wild. So is Fed Chair Powell. The Fed has already posted a notice for an emergency-closed-door board meeting on Monday morning. The stated purpose is to determine discount rates charged by Fed banks. (You know at those emergency facility windows that are deployed in force when credit freezes overnight because FEAR is the contagion that happens between banks, causing them not to loan to each other.)
The notice states that other matters discussed won’t be laid out until after the meeting. The part they announce, of course, is always the most innocuous part, least likely to raise alarms so they don’t ignite any new fires; but even that one line tells you there is deep concern that credit between banks could freeze over the weekend, sending banks to flee to the reserve-bank credit windows.
You likely remember how during the GFC, the Fed and Treasury also scrambled without public notice behind the scenes over weekends to rapidly find an emergency buyer for failed banks. Last time around, the actual bailouts came after the emergency buyers found they had consumed a lot of garbage that was making them sick. For now, Yellen has assured us there will be no bailouts. Take it with a grain of salt.
We have hit the point where the Fed’s financial takedown of the economy via QT and rising interest to try to crush inflation gets very disorderly.
Listen to the following former FDIC head say like she’s an idiot, “It’s going to be hard to say this is going to be systemic in anyway“: (Seriously? The crash of the nation’s 16th-largest bank, which she actually downplays as being small, which is the second-largest bank to have ever crashed in US history, makes it hard to say this is going to be systemic???)
Actually, it’s very easy to say its going to be systemic. Just move your mouth, and it practically falls off your lips without trying. That is why everyone is saying that everyone on Wall Street is asking that question this weekend. It’s easy because it already is systemic. That is why the Treasury and Fed are rushing in alongside the FDIC — to mitigate the systemic damage that has already begun! The question is can they stop this systemic cascade that has already begun? She wants to assure us the problem will be handled easily with a sale already “hopefully” being worked out this weekend so that the problem will go no further. That is vapid assurance for those of us who saw this many times during the GFC.
Again, the bailouts last time didn’t come until big banks like JPMorgan Chase ate the garbage of smaller failed banks that the Fed pushed through via the very kind of “purchase on assumption” agreements this former FDIC official describes. The bailouts came when that garbage they consumed caused the big banks serious indigestion because it turned out there was way more spoilage in the garbage than first met the eye. (Though their noses should have warned them even before they saw all the rot.) The guarantee behind the purchase-on-assumption agreement was typically a bailout. Soon the bailouts became printouts — as in money-printing — because all banks became so caught up in the mess that the Fed started printing money into the banking void. (All of that — and the solution — is laid out in my little book Downtime.)
And here you have the typical former Goldman Gollum of Greed and onetime government financial leader under Trump (one of the reasons I said back then Trump never drained the swamp; he put it in charge of everything) already advocating for good old-fashioned bailouts, in spite of Janet Yellen’s claim that there will be none . He does it so sanguinely as being what is “good for American workers” so they can get paid:
He makes me sick!
These Goldman fatheads just cannot stop themselves from always saying the US taxpayer should be on the hook for guaranteeing rich, uninsured bank depositors get all their money back. In short, don’t assume, even if the FDIC sells the SVB and Slivergate over the weekend, that is the end of the matter. The bailout cries by the rich have already begun, and we know the bailouts in the past largely began after those deals went sour as the megabanks claimed, “Well, we had to swallow a lot more garbage than we thought, so now we need that backstop you promised.”
SVB’s deep ties to the crashing cryptoverse
While Yellen and others hit the video screens this weekend, keeping their emphasis on SVB as having unique problems and to steer the topic off of contagion from the Cryptocrash and ultimately from the Fed tightening that is behind all of this, that is probably because they spent so much time assuring us there would be no contagion during the Cryptocrash! The fact is, that is exactly where all of this began for SVB. It started with numerous crypto companies needing to get cash out of SVB to pay off their customers/members who were demanding dollar payouts (cashing in). And likely a fair part of that involved individuals who were struggling to pay their bills because of Fed-fed inflation, who had banked their government stimulus checks in crypto, cashing out when they needed the money last summer and fall. Regardless of why people were turning crypto into dollars, the run started with crypto companies and other high-tech companies. SVB was THE major banker for many crypto companies. (You even see some of them named in one of the videos posted here and hear quick acknowledgement that it was not so much those companies’ operating funds that were banked in SVB as the dollars they would use to pay out to their crypto clients whenever dollars were demanded.) That all started the initial run on SVB cash deposits.
What happened for SVB, as a direct result of the Fed’s tightening, was that the bonds in which it invested its major depositors’ dollars became devalued as yields rose and prices fell. It had the money, but it was all tied up in bonds THE FED HAD DEVALUED by way of its tightening policy. Banks never have to write down the value of those capital holdings until they sell the bonds; but so many crypto companies were demanding their money in order to pay off people getting out of crypto after the FTX spectacle that the bank was forced to sell a great many of its bonds and write the value of its capital down rapidly. If SVB, the crypto-companies’ banker, could have let those bonds mature, it would never have had to write them down, but the run by crypto companies forced the sale of those bonds rapidly.
That problem snowballed for the bank as it lost a total of $1.8 billion in capital just from having to sell its low-yield bonds rapidly and write down those losses. This was a combination of zombie high-tech companies and crypto companies seeking their funds simultaneously. That loss forced SVB to try to raise capital, and that effort immediately failed because it drove other high-tech companies and crypto companies and all other kinds of companies and individuals to remove funds from SVB in a panic that rapidly escalated to a classic general run on the bank.
How that happened was the bank’s CEO begged the bank’s clients for a little patience, but you might as well drive a stake through your own heart in public as make that big ask. It sent everyone running for cover like he’d just pounded an alarm bell, forcing the California government and FDIC to literally lock the bank’s doors and computers. Before the lock-down was in place, $42-billion had already rushed out the door on March 9 due to the CEO’s announcement. That one-day drawdown of about a quarter of the bank’s total deposits rendered the SVB immediately insolvent with its obligations to the Federal Reserve.
Some of the companies with unsecured deposits trapped in SVB for the time being are USDC (the crypto stablecoin run by Circle, which used SVB to store some its reserves for cashing in stablecoins — dollars being the promised backup for stablecoins), Roku, BlockFi (another crypto exchange/lender), Roblox (which bills itself as the “ultimate virtual universe” and has its own virtual money system), Lending Club, Payo (a payment platform designed for the hospitality industry). On and on goes a huge list, but that gives you an example of other digital financial companies of various kinds on which this event has an impact that could easily cause further contagion but that also had an impact in creating the event. Likely, no one knows (externally) which of those companies are weak enough to be knocked down until it happens.
Almost immediately, leading crypto exchanges Binance and Coinbase both said that they would temporarily suspend USDC conversions as the contagion from the collapse of SVB plays out…. [There you go with more contagion in crypto.]
USDC prices fell almost immediately, dramatically breaking the $1 peg, trading as low as 87c to the $1 at one point but currently ‘stabilized’ around 90c….
As CoinTelegraph reports, according to Dante Disparte, the chief strategy officer and head of global policy for Circle, SVB is critical to the United States economy and warned that “its failure – without a federal rescue plan – will have broader implications for business, banking and entrepreneurs….
Additionally, following USDC’s depegging, the stablecoin ecosystem immediately came under pressure, as DAI, USDD and FRAX also depegged from the U.S. dollar….
If Silicon Valley Bank is ultimately liquidated, Circle’s liquidity losses of $3.3 billion will be confirmed immediately. Although the loss of $3.3 billion seems to account for only 8% of total assets, from the perspective of accounting views, it is enough to make Circle’s net assets below zero.Zero Hedge
No signs of contagion there!
“Critical to the United States economy” hardly squares with the words of the former FDIC chair who told us (see the video above) SVB was small and one could hardly see how it would become systemic. What a sour, scoffing laugh that should raise!
Immediate pressure on “the stablecoin ecosystem” hardly sounds systemic. (Sure it doesn’t.) For those who don’t know stablecoin is not a brand, but a type of cryptocurrency, so it is a much broader system than just one company.
USDC is the second-largest stablecoin on the market, and SVB was one of its major banking partners, making the crash of SVB just another domino in the continuing contagion within the cryptoverse. But that particular domino connects the Cryptocrash to mainstream banking and the Fed. USDC’s corporate owner, Circle, also held USDC money at the now deceased Silvergate and at the now rapidly plunging Signature Bank.
Definitely no problems of systemic contagion in all of that mess!
(Someone needs to peck that former FDIC head on the head with a sharp stone for that dumb comment … and, no, I’m not advocating actual violence against her, but come on, Lady! Get a brain or stop the lies, whichever your problem is.)
[Update after I compose the first draft of this article: regulators just closed Signature Bank, too!
Nothing to see here, Folks!
And look at how THEY summarized the event:
“We are also announcing a similar systemic risk exception for Signature Bank, New York, New York, which was closed today by its state chartering authority,” Treasury, Federal Reserve, and FDIC said in a joint statement Sunday evening.…CNBC
I don’t think it’s a systemic risk “exception,” but ALL THE MAJOR AGENCIES INVOLVED certainly acknowledge it IS a “systemic risk.“
Signature is one of the main banks to the cryptocurrency industry, the biggest one next to Silvergate, which announced its impending liquidation last week.]
Now, back to what I was saying in the first draft of this article before that CRYPTOCONTAGION update came out and had to be snapped into place …
And to think Janet Yellen assured the entire United States there would never be another financial crisis in her lifetime! Then we had the repo crisis, then the Covidcrash, two stock-market crashes married to two recessions, a housing-market collapse beginning again and a commercial real-estate collapse and now the Cryptocrisis with all of its dominoes falling all over the place, taking us into another core collapse of the financial system. Dang she’s good! (At being as wrong as one can possibly be and still holding her top-level government job!)
You should definitely trust her on her assurances now, right alongside of investing with Bernie Madoff’s ghost. Suffice it to say, Gramma Yellen has apparently outlived her own lifetime. But that’s why she’s qualified to be treasurer, just as outliving his lifetime apparently qualifies Joe Biden to be president.
Of course, the SVB got clubbed hardest when billionaires Peter Thiel and Jamie Dimon, CEO of JPMorgan Chase, urged some people to pull their funds. Maybe JPMorgan will emerge as the winning bidder to buy the bank now that SVB has been destroyed by the run that Dimon helped accelerate. Always a good plan to watch for a competitor ready to stumble then shove him with your foot in the back down the steps.
Thank goodness SVB’s CEO got most of his money out of the company’s stocks before the bank collapsed. At least, someone is safe! It’s a good thing he didn’t listen last month to this Bonzo’s verbal vomit from the financialsphere of media pukestream:
But that’s why y’all have me!
To be sure, crypto was only part of the cause of SVBs collapse, but you can see its fingerprints all over the mess. It was a big enough part that the bank may have weathered through, or the crisis may not have even begun for SVB if it didn’t have all those early withdrawals by its crypto clients that had to be managed with forced sales of bonds that had priced way down due to the Fed’s tightening. It all ultimately comes back to the failure of highly speculative businesses made possible by quantitative easing and stimulative interest rates once the Fed reversed those policies that inflated those bubble markets in the first place and let the hot air out of those balloons.
Easy money can make for bad bets, and no prostitute has been easier than the Fed. All of this is ultimately the Fed’s fault for running its low rates far too long after “solving” debt problems in previous collapses by stimulating massively more debt to take us all up one more spin cycle, in all creating very sloppy investments and supporting zombie companies within an utterly Fed-dependent economy, and that is how you can know the whole Fed-dependent mess will collapse when the Fed withdraws its artificial support of low interest rates and easy money.
I completely disagree with the following guy’s statements that SVB was a good bank. (My opinion on that matter is that a good bank should have seen all of this coming for the inevitable reasoning just stated and that SVB had an obligation to make adjustments in its bond portfolio a year ago while its bonds had full value before the Fed’s promised tightening that would crush that value began. You COULD see those changes in the trading values of existing bonds coming under interest hikes and QT.) That said, he’s right on about how the Fed is ultimately fully to blame because it set all of this up and then pulled the plug … as it has done again and again in its “rinse and repeat cycles” that I wrote about in my little book, and as the Fed keeps getting permission to do. The implications of this failure for the Fed are huge. That’s why I post this banker’s statements about it as he lays the blame squarely at the Fed’s feet. He also gives a simple analogy of how this contagion for banks all started in the cryptocrash:
This event is a catastrophe for the Fed. So, yes, we already hit that point where something big has broken. That means Fed plans will have to change. I’ve always said the Fed will keep tightening UNTIL it badly breaks things. It wouldn’t pivot to save stocks. It would tighten until it breaks the economy. Well, this BADLY breaks things in a way that threatens the economy’s spine once again, as in 2008. If it doesn’t maneuver through this adroitly, the Fed could trigger runs at other banks as early as Monday. It must immediately gain public trust. This time, however, the Fed cannot relent from its tightening without creating an equally devastating inflation crisis, and its mandate makes creating high inflation illegal. It would take an act of congress for it to choose inflation over bank failures.
So, it will be interesting to see how the Fed tries to maneuver through this. If its solution starts sending inflation back up, it will have to ask congress to amend its charter (a massive faceplant ad invite for political intervention in the Fed) or stop its attempted solution, and things get even uglier for the banks.
The Fed has totally screwed up, and now faces a no-win scenario. Rather than admit total failure in its inflation fight, the Fed will, I believe, try to invent new facilities to attempt to manage the problem, but the Fed’s moves to tighten liquidity will mean the contagion continues if it doesn’t reverse course on tightening (which was always the catch-22 for the Fed). It may attempt dropping rates at its discount widow with unique provisions, but that will effectively take out its interest target and lead back to rising inflation rates, creating a huge problem for it in congress. So, it will be interesting to see how it tries (and fails) to get itself (and all the rest of us) out of the mess it has created for everyone.
Conclusion
Finally, here is a recap of how Thursday and Friday’s “CONTAGION” played out and why you should completely ignore all assurances there will be no contagion that are being made after contagion has already begun. This whole event is contagion:
The reverberations are already going out, not just to fears at other banks, especially those highly involved with high tech or crypto, but also to the businesses that have money stuck in SVB — the nearly 80% of funds that were not insured. A minor degree of contagion already hit the stocks of other banks last week, dragging shares down cliffs at First Republic, Schwab, and Western Alliance Bancorp, PacWest, and Signature Bank to name a few and taking out all the year’s gains on the S&P and the Russell 2000. Financial stocks as a whole sector dropped almost 8% last week; and, of course, major cryptos like Bitcoin threw up. (Bitcoin plunged 10% last week as did several others).
There is no one who can say there is “no contagion” problem here where so much contagion has already happened in something that began to cascade last summer with the crash of crypto and has clearly burst on the scenes now as a systemic event, never mind what the idiots or liars say.
“Three days ago the view in the market was that economy was teflon vs the rate hikes and that there were not going to be any financial accidents because we have made it this far without much damage….
“What has now changed is that people now realize that we are not teflon and there can be impact and very negative impact at that from these hikes. It is not about which bank is next, or who has similar exposure, or will depositors be made whole. It is about there likely being more time bombs out there that we have no idea about right now. That is what has changed, people no longer believe we are teflon … finally.”Zero Hedge — Eric Johnston at Cantor Fitzgerald
Exactly!
