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Biggest U.S. Bank Failure Since WaMu in 2008—and Two Others

March 10, 2023, 2022 (EIRNS)—The U.S. Treasury Department released a statement at about 2:00 p.m. Friday, March 10: “Today, Secretary of the Treasury Janet L. Yellen convened leaders from the Federal Reserve, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency to discuss developments around Silicon Valley Bank. Secretary Yellen expressed full confidence in banking regulators to take appropriate actions in response and noted that the banking system remains resilient and regulators have effective tools to address this type of event.”

Interest rates are rising—which is normally a good thing for banks—and yet banks are failing. It’s a last chance for Congress to re-enact the Glass-Steagall Act.

Silvergate Capital Corp. in San Diego, a small bank with about $14 billion in assets, failed on March 8,  and is being liquidated. Silvergate had become a cryptocurrency-dominated bank, as to its deposits and loans.

Silicon Valley Bank in Santa Clara, California was shut down by the Federal Deposit Insurance Company on March 10; FDIC will resolve it over the weekend. This bank had $212 billion in assets, was among the top 20 U.S.-based banks, and the largest U.S. bank failure since Washington Mutual ($328 billion in assets) in the fateful month of September 2008.

Silicon Valley Bank is one where most depositors are tech startups which deposit their venture capital loans there; and because of the current “tech swoon” of mass layoffs and cutbacks, these startups are not getting any more venture capital and are spending through what they have; i.e., pulling deposits out of Silicon Valley Bank. This week, in addition, there was a fear-driven (in part, Peter Thiel-driven) run on the bank by those depositors, and its stock market capitalization nearly disappeared. Silicon Valley Bank made a last-ditch, unsuccessful attempt to sell itself, although the FDIC may sell a lot of its assets to another big bank by Monday.

And now a third bank, Signature Bank of New York, with $110 billion in assets at the end of 2022, is suffering a collapse in its stock value, and also in the value of its bonds, to less than 60 cents on the dollar. This is another bank with a lot of cryptocurrency deposits.

Treasury Secretary Yellen had said to the House Ways and Means Committee earlier Friday morning, “There are recent developments that concern a few banks that I’m monitoring very carefully and when banks experience financial losses, it is and should be a matter of concern.”

There is a possible common cause. The interest rates on U.S. one- and two-year Treasury bills have anomalously gotten much higher, at around 5%, than both the 10-year Treasury note (around 4%) and the (overnight) Federal Funds rate of the Federal Reserve at 4.5-4.75%. This is the result of the Federal Reserve’s driving interest rates upward—claiming, with no evidence, that it is trying to control inflation—while the economy goes into recession; so that Wall Street and investors only want the short-term stuff to speculate with. So first, banks’ bonds and deposits are being sold off/cashed in to buy short-term Treasuries instead. And worse, banks are having to take “unrealized losses” on the longer-term Treasuries and other securities they hold in their capital. This seemed to finish off Silicon Valley Bank, which had to sell some of those and take “realized losses” wiping out its capital, to try to get liquidity.

In one indication of this interest rate distress, Treasury interest rates plunged Friday: the 2-year from 5.01% to 4.58%; the 10-year from 3.99% to 3.70%. That meant more funds were running into “safe-haven” Treasuries—but isn’t there a “debt ceiling” crisis threatening that safety? Comically, bank analysts completely changed their view, overnight, of what the Federal Reserve is likely to do to interest rates, claiming the Fed would be cutting them by the fall. This does not mean the Fed actually will cut rates; rather it indicates some panic about continuing to raise rates into deepening recession.

It’s worth remembering now that 85% of all derivatives bets are on interest rates.

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