- Recollecting a “tanks in the street” close call
- A 2008-style alphabet-soup bailout scheme
- Clowns to the left… jokers to the right
- Banking crisis kick-starts CBDCs… A “Trump just lost the election” moment… In defense of Warren G. Harding… And more!
For a while this weekend, we were back to threats of “tanks in the streets.” Right, Jim Rickards?
You might not remember it, but I do. On Monday Sept. 29, 2008 — in the midst of the 2008 financial crisis — the U.S. House rejected congressional leaders’ first attempt to pass a bank bailout. The vote was 205 in favor, 228 against.
The Dow Jones industrials promptly crashed 778 points — a big number in those days, a record that stood for nearly 10 years.
George W. Bush’s perpetually panicky Treasury secretary Hank Paulson was dispatched to Capitol Hill. He threatened Congress that if it didn’t act, the resulting economic meltdown would necessitate martial law.
This story is not internet lore: It was confirmed at the time by both Rep. Brad Sherman (D-California) and Sen. Jim Inhofe (R-Oklahoma).
By Friday of that week, the House reversed course and passed a minor revision to the bill, 263-171. With that, $700 billion in taxpayer money was used to rescue the banks — privatized profits, socialized losses.
The White House is going out of its way this morning to claim the bailout of Silicon Valley Bank isn’t really a bailout. Don’t you believe it.
When we left you on Friday, California regulators had moved in to shut down SVB — after it became obvious a $2.25 billion hole in its balance sheet was never going to be filled. SVB was a top-20 U.S. bank as ranked by assets… and it served as an essential source of financing for companies launched by venture capital.
By last night, the Treasury Department and the Federal Reserve concocted a 2008-style alphabet-soup scheme called the BTFP, or Bank Term Funding Program. It will make all depositors whole, not just the ones under the FDIC account limit of $250,000.
“It’s technically not a bailout in the traditional sense,” says Sean Ring this morning in our sister e-letter The Rude Awakening. For sure, owners of SVB stock will see their investment go to zero. SVB bondholders will be left twisting in the wind as well.
“But depositors’ funds over $250,000 are getting bailed out,” Sean says for emphasis. “And how? By a ‘special assessment’ on banks. And who ultimately pays for that?
“You. With your fees and commissions and anything else you pay your bank.”
It’s even worse than that, says Jim Rickards’ senior analyst Dan Amoss: “Guess who gets to absorb the losses? That’s right, other banks that were responsible.
“We now have reckless socialism invading the banking system itself. This action-reaction feedback loop is exactly why investors need to own some gold.”
And it was all so preventable.
As we mentioned on Friday, SVB got into trouble because deposits earning next to nothing in interest were rushing out the door in search of a much better yield on money market funds, etc.
Yes, SVB could have raised deposit rates to keep the money from rushing out, but that would have hurt profitability. Can’t have that now, can we?
So SVB had to raise cash, and the only way it could raise cash was by selling the bonds in its possession. But with the Fed raising interest rates, the price it could fetch for those bonds was significantly less than face value; remember, rising rates translate to falling bond prices. Thus, the $2.25 billion hole in SVB’s balance sheet.
As Sean pointed out in this morning’s Rude, SVB could have easily bought interest rate swaps to hedge the risk of rising rates. No need to get into the weeds here: Suffice it to say it’s trivially easy for finance pros. “It’s amazing, but Silly Valley Bank didn’t do that!”
Everyone has beclowned himself in this miserable episode — SVB management, the government, the Fed, the media.
Of course, the lines between those entities are a little blurry: For instance, SVB CEO Greg Becker served on the board of the San Francisco Fed. But anyway, here’s a (very) partial list…
- SVB handed out huge bonuses only hours before regulators seized the bank
- The Office of the Comptroller of the Currency — a unit of the Treasury Department — presumably could have seen this coming… but didn’t
- Fed chair Jerome Powell was asked last Tuesday during his testimony to Congress, “Do you see any systemic risk in the banking system because of the rapid rise of interest rates?” His answer was: “No”
- Also last Tuesday, SVB was ranked by Forbes among “America’s Best Banks” for a fifth-straight year.
Which reminds me of how Fortune celebrated Enron as “America’s Most Innovative Company” throughout the late 1990s before the whole fraudulent edifice collapsed in a heap.
On the theory that a crisis should never go to waste… we’re seeing chatter about how now would be a great time to launch a central bank digital currency.
Mr. Stoller is a left-populist we’ve cited approvingly in the past. And his rationale here is kinda-sorta understandable: SVB catered to a lot of startups. Why should the job-creators of the future have to fret about the safety of their cash for payroll and whatnot?
But as you know by now, a central bank digital currency — “Biden Bucks” in Jim Rickards’ parlance — would be nothing less than digital handcuffs.
A bank crisis would be the ideal pretext for “herding you into digital cattle chutes,” Jim said last year, “where you can be slaughtered with account freezes, seizures, etc.”
As you know, we spent much of last week warning that a major “Biden Bucks” announcement was only days away. Last night, Jim convened a summit called Biden Bucks: The Final Countdown. There, for the first time, more than 27,000 readers like you learned how to protect themselves with a special account many everyday Americans have never heard of before.
With two banks now shuttered… and trading in the shares of several others halted… time is of the essence. Click here for instant access to the replay.
If the don’t-call-it-a-bailout bailout is supposed to leave markets reassured… it’s working, but only up to a point.
The U.S. stock market is rallying nicely as we write — the Dow up three-quarters of a percent and back above 32,000, the S&P 500 up nearly 1% and approaching 3,900 and the Nasdaq up nearly 1.5% at 11,300.
Granted, some of that reaction is based on anticipation that the Fed will dial back its rate-raising plans: Looking at futures trading, there’s now an 84% probability the Fed will raise the fed funds rate only a quarter percentage point next week.
For bank stocks, though, it’s another ugly day: The KBW Bank Index is down nearly 9.5%. The regional banks are taking it very hard and trading has been halted in several of them, including San Francisco-based First Republic.
Bonds are rallying hard, sending rates lower: The yield on a 2-year Treasury note has dropped the most in a day since 1987, back down to 4.16%.
Precious metals are rallying too, gold back above $1,900 and silver only 20 cents away from $22.
And crypto is staging a monster rally, perhaps because the powers that be extended the same all-deposits-covered promise to Signature Bank, a crypto-focused lender which New York state regulators shuttered yesterday. Bitcoin is back above $24,000 and Ethereum is approaching $1,700.
Before the mailbag, please indulge me a personal note: There’s a huge empty space today in the office where I prepare these daily dispatches.
As you might know, I took up remote work several years ago, long before the pandemic made it trendy. Once my home office was set up, our cat Scarlett decided to make herself at home here through the workday — in a way our other cats didn’t.
Scarlett was one of three litter-mates my wife and I adopted as kittens in 2006. But it was only she who chose to stay with me upstairs daily as I tried to make sense of the often-nonsensical and applied fingers to keyboard. In time, she made regular cameos on Zoom calls with colleagues.
Scarlett in her element, July 2021…
On Friday night, Scarlett threw a blood clot in her right hind leg. It all happened so fast: At 8:45 p.m., she was chilling with us downstairs as normal. Two hours later, we were driving home from the vet with an empty cat carrier. We’re still not over the shock.
I don’t usually write about myself here; this e-letter is about the ideas we publish at Paradigm. But Scarlett was an integral part of this e-letter’s preparation for the last several years. And it won’t ever be the same without her…
“I think you are overlooking a couple of things,” a reader writes after our Friday retrospective of how lockdown came into being three years ago.
“Italy was experiencing many of their population being infected to the point of not having enough doctors and hospitals to handle the onrush of patients. China was exporting infected people from Wuhan all over the world.
“Trump was in a pickle: If he refused to act on the advice of the ‘experts’ he would be held responsible for the spread of the ‘pandemic.’ Not being a doctor himself, he had no choice but to follow their advice and stop the spread.
“To his credit he instituted the speedy search for a vaccine and advised that he was taking hydroxychloroquine and it worked for him. But the deep state was ready for him and shut down any talk of common medications that could treat the infected. That’s an awful lot for you to leave out.”
The 5: Your rationalizations might cover the first “15 days to stop the spread.” But it was also Trump who on March 29, 2020, declared a 30-day extension of the federal “recommendations.”
“Trump just lost the election,” author Justin Hart tweeted that day.
Hart expanded on that thought in The Wall Street Journal last fall: “Mr. Trump paid lip service to the need to reopen the country but never rallied lawmakers or other officials to do anything about it.”
Alternative treatments, you say? Whether he realized it or not, Trump closed that door with the “emergency use authorization” for a vaccine. EUA is allowed only in the absence of a viable treatment that already exists. If the feds gave their assent to people successfully using ivermectin or HCQ for treatment, the Pfizer-Moderna gravy train would have been stopped before it ever left the station.
And while you might believe the “speedy search for a vaccine” is “to his credit”… the greater likelihood is that Trump is toast with a substantial portion of his base in 2024 until he disowns Operation Warp Speed. And it’s not in his makeup to admit he was wrong.
“No argument here about Trump,” counters another reader. “Seems to me his primary motive for running in ’16 was to have his ‘hey, look at me: I’m president!’ moment.
“All the evidence I needed to see that he was nothing more than a narcissistic blowhard and would be business as usual was him chanting his BS slogan of ‘drain the swamp,’ while he stocked his Cabinet with swamp creatures. The moment at the podium when he was paying attention to someone in the audience instead of what was being sprung upon us was just par for the course.
“Fast-forward to today, when we have the current idiot in chief telling us the banking system is fine, after the SVB collapse. Nothing to see here. Very telling on every level, how far we’ve fallen in 100 years: from presidents like Teddy Roosevelt and Warren Harding to what we’ve had in the past several cycles.”
The 5: Historians generally consider Harding one of the worst presidents ever. But it was Harding (and, uncharacteristically, the Fed) who refused to intervene in the depression of 1920–21 — the inevitable bust after the World War I boom.
The system was purged and cleansed; unemployment fell from 12% in 1920 to 6.7% by late summer 1921… and 2.4% by 1923.
In his magisterial volume Modern Times, the historian Paul Johnson wrote that Harding presided over the “last time a major industrial power treated a recession by classic laissez-faire methods…”
Harding also commuted the sentence of the socialist leader Eugene Debs — imprisoned under Woodrow Wilson merely for giving a speech saying the bankers and arms merchants stood to benefit most from U.S. entry into WWI.
Yeah, you could do a whole lot worse than Harding…
Best regards,
Dave Gonigam
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