“[T]he different branches of Arithmetic – Ambition, Distraction, Uglification, and Derision.” Lewis Carroll
As our installed President and our enormously corrupt Uniparty Congress hurl the nation towards ever-escalating financial chaos – that they and they alone have created and inflicted on the country – it’s appropriate to ask if anyone in Washington can do simple arithmetic.
The obvious answer, of course, is no. Hucksters don’t “do math” to use colloquial slang. They profit from math. Outright graft, collusion, government subsidies and grants, back-door payments, campaign funding schemes, non-profit scams, back-scratching exclusivity, bending the law and regulations to drive competition from the marketplace – the list goes on and on – have now in many ways effectively replaced the free market as the go-to economic model.
Big government, big business, and big institutions have formed a ménage à trois, if you will, a tawdry relationship leaving the rest of us to pay for their pleasure.
If there is any doubt about that new model, the current bank crisis explains a great deal.
Silicon Valley Bank (SVB), with $210 billion in assets, collapsed twelve days ago when it became illiquid after it announced it had to sell $21 billion in near zero-interest rate securities in today’s much higher interest rate market, riding on 6 to 7% percent inflation. The bank reported a $1.8 billion loss on the sale (Forbes here). Spooked depositors then drew $42 billion out of the bank before the state, and the FDIC could shut the bank down.
And Signature Bank, a $110 billion regional New York bank, was also forced to close last week after the value of its shares collapsed, and investors began moving deposits out (Forbes here). Both banks had 60% of their balance sheet assets in these low interest rate securities.
This week we have learned that there is a staggering $620 billion in unrealized losses sitting on the balance sheets of US banks in near zero interest rate securities and mortgage-backed securities (or MBS). These securities were part of the approved Fed asset list during the multi-year campaign to keep interest rates at near zero. Of course, the Fed’s new campaign to rapidly increase interest rates to fight inflation has created this “spread” dilemma banks are facing.
To stem a general run on the system, and provide some confidence in the banks, the Fed is making more liquidity available to banks with a new lending ability to backstop potential risks in their long-term securities portfolios. This may solve a short-term problem but not the long-term chaos it caused in the first place by maintaining its near-zero interest rate policy for far too long. The old saw in the finance business is the ‘Fed always breaks something before it stops.’ Proving that adage may be borne out as the Fed seems intent on another upward rate correction in its war against inflation in spite of last week’s events.
Here’s the rub that affects the average citizen. The FDIC insures individual deposits (through a fund paid for by member banks) up to $250,000, but 85% of SVB’s depositors exceed that limit (and nearly 90% of Signature’s) and are uninsured based on recent regulatory filings. But these investors aren’t just anybody. Both banks had a business clientele (SVB had nearly 38,000 business accounts) made up of the wealthy and influential tech and investor class, Hollywood elite, crypto-currency traders, and real estate investors – among the Democrat’s most important funders. By last Friday, the Biden gang announced that the Federal Reserve, FDIC, and the administration had agreed to cover all the losses in both banks, regardless of the deposit size, including foreign accounts, some of which are Chinese companies.
Last Thursday, the US Senate’s Finance Committee held a hearing, and former Federal Reserve Chair and current Treasury Secretary Janet Yellen testified. Oklahoma Republican Senator James Lankford asked an obvious question that every investor is probably asking. “Will the deposits in [every] community bank [regardless] of their size be fully insured now? [Will] they get the same treatment that SVB just got, or Signature Bank just got?”
Secretary Yellen’s answer should shock every American to the core.
“A bank only gets that [extraordinary] treatment if a majority of the FDIC board, a supermajority of the [Federal Reserve] Fed board, and I, in consultation with the President, determine that the failure to protect uninsured depositors would create systemic risk and significant economic and financial consequences.” (Watch the Lankford-Yellen exchange here.)
Wow. Just wow. There is no other way to interpret what Ms. Yellen is saying. If you’re banking in a community bank or a regional bank, well, good luck. If you’re “one of us,” don’t sweat it. If you’re rich and influential we’ll cover you.
The second shoe to drop is that ordinary investors and depositors must now consider the risk of escalating federal involvement in a community or regional bank, already facing strong economic winds caused by managerial and legal waste. Are the feds trying to force them to close or at least drive their depositors to big national banks?
The massive proportional cost imposed by complying with complex rulemaking generated by Washington and the Dodd-Frank reforms, and enlarged now with ESG standards for “environmental, social, and governance responsibilities” in their operational and lending practices will drive many of these banks to the brink.
It’s hard not to believe this is the plan.
Some see the prospect of having only five or six national banks as a market-driven reality – and in the digital age, the argument is that we don’t need more than a handful of banks. Billionaire Kevin O’Leary recently made that case on Tucker Carlson’s Fox show. But the danger is not in the number of banks – but in the uncontested power having a small number of super-banks would confer on Washinton’s power-hungry ruling class.
The danger is blaring at citizens like a tornado warning in this real-time example of the federal government picking winners and losers in private banks and between their depositors. It would be only a matter of time – and it won’t take much time at all – before those same banks and their symbiotic relationship with the federal government were completely politicized and corrupted. Your money, loans, and mortgages will be under the control and scrutiny of the most unscrupulous humans on the planet – not the best.
(Canada already demonstrated this administrative proclivity with the “trucker convoys” last year when they froze the banking accounts of professional truck drivers (and financial contributors) participating in the “Freedom Convoy” demonstrations. Shocked citizens soon began pulling their money from banks causing a mini-run.)
Picking winners and losers once cemented in place, would quickly yield to our corrupt government the financial power to make every citizen kneel to the power and policies deemed important or essential. It kills what little justice is left in how our government works. It would render the Bill of Rights mute, following the golden rule – he who has the gold rules.
It’s hard to imagine a more dangerous precedent coming out of Washington. With a handful of exceptions, our Uniparty politicians seem tongue-tied on the profound consequences this action could set in motion.
Photo Credit: REUTERS/Dado Ruvic/Illustration
