News/Commentary

Biden admin’s reaction to ticking US bank time bomb, ‘no cost to taxpayers’ uses economic theory known as ‘magic’

March 13, 2023 | | Print Article

As Silicon Valley Bank and Signature banks collapsed this week, the FDIC proclaimed it would make all depositors whole in what appears to be a bailout to prevent contagion while it also revealed that America is sitting on a $620 billion timebomb of unrealized losses in US banks.

(Video Credit: Forbes Breaking News)

The “unrealized losses” are assets that have dramatically decreased in value but haven’t been sold off yet. The warning comes from Federal Deposit Insurance Corporation (FDIC) Chair Martin Gruenberg, according to the Daily Mail.

Just hours before the announcement that depositors would get all their money back, Treasury Secretary Janet Yellen had vowed there would be no bailout. The word games have commenced and the Biden administration is avoiding the term like the proverbial plague. They are also laughably claiming that no taxpayer money will be involved and that it will come from the FDIC.

“Any losses to the Deposit Insurance Fund to support uninsured depositors will be recovered by a special assessment on banks, as required by law,” a statement by the FDIC said. They added that “the Federal Reserve Board on Sunday announced it will make available additional funding to eligible depository institutions to help assure banks have the ability to meet the needs of all their depositors.”

Silicon Valley Bank was the 16th largest bank in the US. It is the largest bank default since Washington Mutual in 2008 and many fear there will be more. Rumors are swirling that a third bank may detonate and others look very dodgy. SVB is being auctioned off and the UK branch of the bank was snapped up by China’s HSBC, according to Reuters.

Alarm bells are ringing everywhere over the run on the bank at SVB and its subsequent failure.

Commentator Liz Peek at Fox News wrote, “There’s plenty of blame to go around, but when a financial institution goes under, you have to wonder: where were the regulators? After all, there were more red flags than you see at a CCP convention.”

The stage was set for potential catastrophe when US banks massively bought Treasuries and bonds while interest rates were low. When President Biden’s raging inflation kicked in, rising interest rates caused those bonds to decline in value, turning balance sheets on their heads.

When interest rates climb, newly issued bonds start paying higher rates to investors. That results in older bonds with lower rates being less attractive and less valuable. Most banks and pension funds are being walloped over the development despite Biden claiming everything is peachy keen economically.

“The current interest rate environment has had dramatic effects on the profitability and risk profile of banks’ funding and investment strategies,” Gruenberg alarmingly stated.

“Most banks have some amount of unrealized losses on securities. The total of these unrealized losses, including securities that are available for sale or held to maturity, was about $620 billion at yearend 2022. Unrealized losses on securities have meaningfully reduced the reported equity capital of the banking industry,” he commented on March 6 at the Institute of International Bankers, just days before the collapse of SVB.

Jens Hagendorff, who is a finance professor at King’s College London, told CNN in an interview that the problem was widespread.

“Many institutions — from central banks, commercial banks, and pension funds — sit on assets that are worth significantly less than reported in their financial statements. The resulting losses will be large and need to be financed somehow. The scale of the problem is starting to cause concern,” he warned.

Sunday night, President Biden reassured depositors at SVB that those “responsible for this mess’ must be brought to justice.”

“At my direction, [Treasury Secretary Janet] Yellen and my National Economic Council Director worked with banking regulators to address problems at Silicon Valley Bank and Signature Bank,” Biden tweeted Sunday night. “I’m pleased they reached a solution that protects workers, small businesses, taxpayers, and our financial system.”

“The American people and American businesses can have confidence that their bank deposits will be there when they need them. I am firmly committed to holding those responsible for this mess fully accountable and to continuing our efforts to strengthen oversight and regulation of larger banks so that we are not in this position again,” Biden proclaimed.

Senator Tim Scott (R-SC) told “Sunday Night in America” host Trey Gowdy that regulators appeared to have been “asleep at the wheel” and failed to take timely action to prevent the collapse of SVB.

(Video Credit: Fox News)

Scott is very concerned over the Biden administration’s decision to insure all deposits, including those over the $250,000 limit, which he contends would lead to corporate cronyism.

“We just heard recently that they’re going to really have the greatest form of corporate cronyism that we’ve seen in a very long time. They’re going to insure all the deposits, even the ones over the $250,000 limit, which means that the most sophisticated investors are now going to have the insulation of the federal government. That is problematic,” Scott pointed out. “It sends a very negative statement to the marketplace, and it is something that we’re going to have to wrestle with over the next couple of days as we delve into what actually happened.”

“The high inflation led to high-interest rates, high-interest rates meant that more depositors departed out of that bank quicker than they thought, leading to the collapse. We have failure at the Fed, failure at the regulators, and failure with the management of that bank. We have a lot to uncover,” he charged.

“The American taxpayer should not be on the hook for this failure. We’re going to do everything in our power to make sure that doesn’t happen,” Scott vowed.

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