Hello fellow off-grid investors, I had to get this one out to you because we are at a very critical point in this current economic downturn. I am giving you a quick and dirty post about the current banking crisis situation. Excuse my errors!
The recent failure of Silicon Valley Bank has sent shockwaves through the business and investment communities.
The crisis was triggered by a drastic 60% decline in its parent company's share price on Thursday, which stems from a failure to sell bond assets to plug a $2 billion hole in their finances.
The failure of the bank to raise capital via the bond sell or a buyer caused venture capital firms to tell their portfolio startup company CEOs to get their money out of the bank.
The bank, which experienced a deposit run (too many customers trying to withdraw money the bank didn’t have on hand), was forced to freeze assets, causing the second-largest bank failure in U.S. history.
In financial systems, there is always a way to benefit. Subscribe to Off-Grid Income Premium to find out more.
Next week I will be sharing details on how seasoned investors are positioning their portfolios to benefit from this current crisis.
The Legislative Issue
As we all know in government, accountability from the other side of the coin happens many years later. Lawmakers definitely had a hand in this collapse.
There will be an "it was the bank's fault" narrative circulating about. On a much bigger degree, this was a "how business is conducted" post-08 crisis issue.
The Dodd-Frank act changed various rules for banks. One major change was what type of assets were seen as "safe" to hold.
Also, until March 2020, banks had to increase the amount of deposits they held in the fractional reserve system.
When the lockdown occurred, the deposit rule was suspended. Banks now had no obligation to hold reserves (cash on hand) because they can always go to the Fed and get some QE free money.
But what happens when QE stops, and the Fed halts handing out financial goodies?
We're experiencing the aftermath right now.
Note: When a bank buys low rate bonds during zero percent interest rates, this is seen as the bank being somewhat in compliance. As rates go up, the asset becomes a liability because it pays out less.
The Taxpayer Bailout
When a politician says no taxpayers will have to shoulder the burden and pay for this bailout, that is true and false at the same time.
Let me explain…
The president said, "the money for these bailout loans will come from the money banks pay for the deposit insurance fund."
Let me ask you a question. What do banks and governments have in common? They get their money from the same source; taxpayers. This will never change.
As banks have to deplete their deposit insurance funds, they will definitely pass on those costs to customers who are taxpayers. They will charge higher fees to recoup that money back.
Also, something tells me they will increase the amount of money the FDIC insures because as inflation goes high over time, $250k will be the new $50k in years to come.
The Hidden Truth
There is one dirty little detail about this new bailout fund. The Federal Reserve is not going to tell you which financial institutions are borrowing from the Bank Term Funding Program (BTFP).
Let's hear it from the horse's mouth…
“Under section 11(s) of the Federal Reserve Act, the Federal Reserve will publicly disclose information concerning the facility one year after the program ends (the program is currently scheduled to end on March 11, 2024). This disclosure will include names and identifying details of each participant in the facility, the amount borrowed, the interest rate or discount paid, and information concerning the types and amounts of collateral pledged or assets transferred in connection with participation in the facility. “
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The somewhat decent thing is the Fed will publish financial details about how much they are loaning out per week.
Let’s hear it from them.
“ On an aggregate basis, balance sheet items related to the Program will be reported weekly on the H.4.1 statistical release titled "Factors Affecting Reserve Balances of Depository Institutions and Condition Statement of Federal Reserve Banks," published by the Federal Reserve (Updated 3/13/2023) “
The Real Consequences
The one thought that comes to mind is in March of 08 Bear Stearns was the first bank to fail in the US. Six months later many more followed suit. Will this trend continue as the Fed continues to hike rates? Or will something else break because of the fed’s prior actions? We shall see…
There is so much more to tell you about this situation. New development will continue to come out. I will be closely monitoring the details.
Until Next Time…
Off-Grid Investor