Silicon Valley Bank recently collapsed largely due to the deliberate actions of the US Federal Reserve bank (the Fed) and the conduct of venture capitalist funds. The Fed and leading investors have seemingly risked destabilising the entire global economy. The question is why?
Knowing full well that the US banking sector is bankrupt, instead of continuing with the monetary life support that has kept the system afloat for the last two decades or more, the Fed changed tack and precipitated the collapse of SVB and other similarly exposed banks.
In doing so the Fed exposed the truth. The US banking system and the entire US economy is bankrupt.
The SVB Crisis Waiting To Happen
SVB was a high risk, speculative venture from the start. It’s role was to finance tech and pharmaceutical startups. It acted as a conduit for venture capitalist funds, such as Peter Thiel’s Founders Fund, to reduce their risk when gambling on nascent high tech enterprises.
The venture capitalists bet on the startups making it to initial public offering (IPO). If so, they could potentially attract billions in investment. While such ventures are usually high risk, by giving SVB a US federal banking charter, backing it with taxpayer money and state regulatory protections, the risk was greatly reduced for speculative billionaire investors.
As the always informative Wall Street on Parade put it:
“To put it bluntly, [SVB] was a Wall Street IPO machine that enriched the investment banks on Wall Street by keeping the IPO pipeline moving. [. . .] Silicon Valley Bank – with this business model — should never have been allowed to hold a federally-insured banking charter and be backstopped by the U.S. taxpayer, who was on the hook for its incompetent bank management.”
While few of us should be surprised by this kind of financial skulduggery, there is far more to SVB’s collapse that just shifty dealings. SVB was broken as an almost inevitable consequence of the monetary policy of the Fed.
As noted by Professor J. Sonnenfeld:
“Fed overtightening [monetary policy] not only killed this bank but may send the economy into recession. The job of a central bank should be to provide steady steering to gently smooth cyclical peaks and valleys, not to violently jerk from one extreme to another [. . .] by keeping [interest] rates at 0% for too long and then by raising rates by 5% in less than one year[.] [. . .] Strategic planning has been derailed by a Fed behaving like a reckless drunk driver violently veering across lanes.”
As we shall see, the Fed’s actions led to SVB’s liquidity problem. This can cause a run on any bank, but the run on SVB began when depositors and investors pulled $42 billion in one day. Many were advised to do so by Peter Thiel’s Founders Fund.
Thiel is an accelerationist who advocates the theory of “creative destruction” first enunciated by the economist Joseph Schumpeter. In 2009, Thiel wrote The Education of a Libertarian, arguing that creative destruction could “lead to a real boom.”
There is no doubt that SVB’s collapse was caused by the monetary policy of the US central bank (the Fed). Nor is there any that the bank run that finished it off was instigated by venture capital firms and some major US commercial banks advising depositors to withdraw their funds.
This does not necessarily mean that these deliberate acts were made with the intention of causing wider financial contagion. Although, that is the result. Prof. Sonnenfeld is among those who claim these actions were all the result of “missteps” that were “misguided.”
Yet Sonnenfeld also acknowledges:
“Make no mistake about one of the prime reasons for SVB’s implosion: Fed shrapnel killed this bank and may send the economy into recession in the process. [. . .] The decline in the M2 money supply since March of last year is the sharpest decline in money growth since the Great Depression of the 1930s. [. . .] Continuing to tighten monetary policy in this environment of bank blowups and declining consumer and business confidence is a surefire recipe for disaster.”
In light of this, is it not reasonable to ask if the Fed, alongside many other central and large commercial banks, are in fact pursuing a policy of “creative destruction?” Are they trying to accelerate towards a global financial collapse?
Unfortunately, there is good reason to suspect that they are.
How SVB Was Broken
SVB followed the Fed’s regulatory regime to the letter and then had the rug pulled out from underneath it. The economist Danial Lacalle noted:
“The incredible growth and success of SVB could not have happened without negative rates [and] ultra-loose monetary policy[.] [. . .] [T]he bank’s liquidity event could not have happened without the regulatory and monetary policy incentives to accumulate sovereign debt and mortgage-backed securities. [. . .] SVB made one big mistake: Follow exactly the incentives created by loose monetary policy and regulation. [. . .] They were following the mainstream rulebook: Low-risk assets to balance the risk in venture capital investments. When the Federal Reserve raised interest rates, they must have been shocked.”
SVB’s tech startup casino was so successful that its deposits grew from around $60 billion in 2020 to reach more than $200 billion in 2022. To offset the rapid expansion of its deposit liabilities, it invested heavily in Treasuries (US government bonds) and mortgage backed securities (MBS) which were deemed “low risk” by the asset rating companies.
Notably, it was the banking industry’s speculation on MBS, fuelled by record low interest rates (cheap borrowing), that was a primary driver of 2007-2009 financial crash.
With its massive expansion of the money supply (Quantitative Easing – QE), the Fed caused inflation. Many blame other alleged causes, such as the pseudopandemic, the war in Ukraine, or supply chain stagnation, but US inflation began before any of these events occurred.
SVB loaded the assets it purchased onto its “Held ‘Til Maturity” (HTM) portfolio. By the end of 2022, more than 43% of its total assets, accounting for $91.3 billion of debt instruments, were wrapped up in these long term investments. When it went pop, SVP was holding nearly $120 billion in US Treasuries (US government bonds).
In response to its own inflationary monetary policy, the Fed then increased interest rates. This devalued the Treasuries and other securities that SVB and other US banks were holding. The Fed combined this with tightening monetary policy (Quantitative Tightening – QT) and restricted the money supply thereby reducing investor activity further.
Daniel Lacalle identified the underlying problem:
“The entire asset base of SVB was one single bet: Low rates and quantitative easing for longer. Tech valuations soared in the period of loose monetary policy and the best way to hedge that risk was with Treasuries and MBS. [. . .] [T]hese were the lowest risk assets [. . .] according to the Fed and all mainstream economists, inflation was purely “transitory”, a base-effect anecdote. What could go wrong? Inflation was not transitory and easy money was not endless.”
Despite this exposure, up until March 9th, SVB was said to be on a “sound financial footing.” It passed all the so-called “stress tests” and KPMG gave it a clean bill of health just 14 days before it failed completely. This confidence did not stretch to SVB’s senior management team who dumped their SVB stock prior to the collapse.
A bank’s liquidity is determined by the ease with which it can sell its assets and securities without affecting the asset or security’s market price. Thanks to the Fed’s inflation and interest hikes, investors were demanding higher yields and SVB was left holding a large volume of relatively worthless assets. This included a large volume of US Treasuries.
Government bonds (Treasuries) are supposed to be the lowest risk investments of all. They are, after all, backed by the US economy and the government. The liquidity problem faced by SVB is common to nearly every bank in the US. They all invest in Treasuries and it is the government bonds themselves that have proven to be toxic.
The Fed has effectively ended the notion of US financial, monetary and economic stability. It has done this with, what initially appears to be, flagrant monetary policy mismanagement.
The US Banking System Is Bankrupt
SVB’s implosion has exposed the weakness at the heart of the US banking system. Seeing as around 60% of the world’s assets are denominated in US dollars, the collapse of the US financial system is a big deal for everyone. Even if they don’t recognise it.
The problem is that the whole US commercial banking sector has been reliant upon the very cheap money fed to it—pardon the pun—by the Fed. Having eagerly swallowed it, the banks then invested it in a series of speculative bubbles and tried to mitigate some of the risk by investing in Treasuries.
The Fed created the monetary conditions that underpinned all of this. It has now changed direction, with very predictable results.
John Titus, on his excellent Best Evidence channel, exposed the unpalatable truth months ago. He accurately predicted the precise form of bank collapse we’re just starting to witness with SVB. He also exposed the much wider, systemic problem.
The Federal Deposit Insurance Corporation (FDIC) provides the asset and liability data for the whole US commercial banking system on its composite balance sheet. If we take Titus’ advice and look at the total assets and liabilities (report issued February 2023 covering period to the end of December 2022), Aggregate Condition and Income Data (Table II-A) records 4,706 US Banks with $23.6 trillion total assets and $23.6 total liabilities.
The US banking systems’ assets chiefly comprise of $12.2 trillion in total “loans and leases,” nearly $5.9 trillion in “securities” and just over $5.2 trillion in “all other assets.” The Fed has also included $430 billion of “goodwill and other intangibles” as an asset.
As of December 2022 (Q4), the US banking system was sitting on more than $625 billion of “unrealized losses” in investment securities. These are mainly the Treasuries and MBS securities devalued by the Fed.
SVB had $15 billion of “unrealized losses” in Treasuries and other securities. This wiped out its equity. The FDIC’s composite balance sheet shows the same risk exposure across the entire US banking system. For example, Wells Fargo has recently reported $50 billion in “unrealized losses” for precisely the same reason.
The $625 billion potential loss represents a 10.6% discount on the nominal “market price” of $5.9 trillion in “securities” that the FDIC claims as a banking system asset. This reflects the damage caused by Fed’s “reckless” monetary policy switch.
Similarly, when the commercial banks made their “loans and leases” they would have overwhelmingly done so at the pre-inflation interest rate. Therefore, it is not unreasonable to apply the same 10.6% discount to value of the claimed $12.2 trillion “loans and leases” asset. This represents a further $1.3 trillion in potential losses across the US banking system.
We could also apply a similar discount to the $5.2 trillion in “all other assets.” Further analysis would be required to accurately calculate it. Suffice to say, this is an additional unknown loss. Even disregarding “all other assets,” we can still see the problem.
If we add the $625 billion in possible “securities” losses to the likely $1.3 trillion shortfall in “loans and leases” assets, it appears that the US banking system actually holds something closer to $21.7 trillion in assets—equivalent. With $23.6 trillion in liabilities, US banks are seemingly in the hole for $1.9 trillion.
The FDIC also asserts that there is approximately $2.2 trillion in “total equity capital” held by the beneficial owners of the commercial banks. This explains why, even with near equal total assets and liabilities on the composite balance sheets, the FDIC can maintain that the US banking system is fine.
While a $1.9 trillion black hole is cutting alleged equity to the bone, the FDIC can perhaps claim that the banking system still has sufficient equity to stay solvent. At least it could if “goodwill and other intangibles” really were assets.
The Basel III Accord regulations issued by the central bank of central banks—the Bank for International Settlements (BIS)—define bank capital. According to the BIS, “goodwill and other intangibles must be deducted” when calculating bank equity. The FDIC has not deducted the $430 billion “goodwill” from the US banking systems’ alleged equity, as it should.
“Total equity capital” is actually less that $1.8 trillion. This does not cover $1.9 trillion wiped off the systems’ assets by the Fed’s monetary policies.
The US banking system has the mother of all “equity problems:” it is insolvent.
Confidence is crucial to the banking and monetary system. When US commercial banks encounter liquidity problems, borrowing from the highest profile lender—the Fed—attracts attention. Therefore, it is better to go to a lower profile lender to avoid unwelcome scrutiny.
The Federal Home Loan Bank (FHLB) is the go-to lender for US commercial banks when they are in trouble. In the year leading up to its collapse, SVB borrowed $15 billion from the FHLB. It seems likely it was trying to cover is “unrealized losses.”
Investopedia explains the function of the FHLB:
“The Federal Home Loan Bank System (FHLB) is a consortium of 11 regional banks across the U.S. that provide a reliable stream of cash to other banks and lenders to finance housing, infrastructure, economic development, and other individual and community needs.”
The FDIC’s composite balance sheet reveals that US commercial banks have been borrowing in desperation from the FHLB for more than a year. In 2021 total US commercial bank debt to the FHLB stood at $189 billion. In 2022 it reached $587 billion.
US commercial banks increased their FHLB borrowing by 211.6% in 2022. Following the collapse of the SVB bank, FHLB borrowing has spiked to record levels.
The US banking system is bankrupt.
The Fed’s Half Baked Solution
The Fed maintained near to zero interest rates the best part of 20 years, printed money like it was going out of fashion and then, in response to the inflation it caused, started hiking interest rates. Next, it pulled back on the money creation (QT) at an unprecedented rate.
This devalued the speculative assets purchases it encouraged and broke SVB—to start with—and once again raised the possibility of systemic financial collapse. Just 15 years after the last one.
As Prof. Sonnenfeld said, the Fed’s behaviour has been “a surefire recipe for disaster.”
The nothing to see here crowd have completely ignored this, even going so far as to congratulate the Fed on its smart response to the crisis it caused. Seemingly dismissing the fact that the Fed has applied pressure to the US banking system while knowing it is already bankrupt.
The failure of Silicon Valley Bank is not an isolated event. Silvergate bank and Signature Bank soon followed. Allegedly to avert contagion, the FDIC responded by extending its Bank Term Funding Program (BTFP).
Many so-called financial experts claim there is no need for alarm. Nonetheless, following SVB’s collapse, US banks borrowed on an unprecedented scale. They sucked up $152.85 billion from the Fed’s discount window and an additional $11 billion from the BTFP. The previous discount window record was set during the 2008 financial crisis when US banks borrowed $111 billion.
The FDIC guarantees deposit accounts holding up to $250,000. In the event of a bank collapse, it will need to cover each and every deposit liability customers hold with the affected bank, up to that amount. The BTFP response to the SVB collapse extends that cover to deposit accounts of any size.
President Biden’s reassurance to the American people that US banks are “safe” and that “no losses will be born by the taxpayers” was a deceit. He also said that “no one is above the law.”
The FDIC is empowered under the Federal Deposit Insurance Act. Section 11 states:
“The net amount due to any depositor at an insured depository institution shall not exceed the standard maximum deposit insurance amount as determined in accordance with subparagraphs (C), (D), (E) and (F) and paragraph (3).”
The “maximum” amount is set at $250,000 and the only leeway afforded under the Act is for minor adjustments for inflation. Contrary to Biden’s statement, the FED seemingly is above the law. It is now free to exceed the “maximum” amount as it likes. The law has not changed.
Furthermore, the Fed’s response to the banking collapse does put working Americans on the hook for the banks’ “mistakes.” That part of Biden’s statement wasn’t entirely truthful either.
US treasury secretary, Janet Yellen, said that this response did not constitute a bailout of the banks by the Fed. In keeping with Biden’s deception, she too said that the US banking system is “safe and well-capitalized, it’s resilient.” None of this is true.
Announcing the extended BTFP, the Fed said that it would offer:
“[. . .] loans of up to one year in length to banks, savings associations, credit unions, and other eligible depository institutions pledging U.S. Treasuries, agency debt and mortgage-backed securities, and other qualifying assets as collateral. These assets will be valued at par. The BTFP will be an additional source of liquidity against high-quality securities, eliminating an institution’s need to quickly sell those securities in times of stress.”
In other words, by soaking up the US banking systems’ devalued assets “at par,” the Fed is going to pay market price for them. It is proposing to cover the $625 billion “unrealized losses” that the US banking system currently faces on those securities. To claim this isn’t a “bailout” is playing with semantics.
Biden said “the money will come from the fees that banks pay into the Deposit Insurance Fund.” Again, this wasn’t true. According to the FDIC, at the end of 2022:
“The Deposit Insurance Fund (DIF) balance increased by $1.0 billion to $125.5 billion.”
The DIF is at least $500 billion short of the amount the BTFP will require if it really is going to stave off the imminent collapse of the US banking system. In reality, it doesn’t even have $125.5 billion. The DIF itself is part funded through “interest earned on funds invested in U.S. government obligations”—Treasuries. It faces losses, just like the banks.
Initially, the FDIC drew $40 billion from the US Treasury General Account (TGA), held by the Fed. This is US taxpayers’ money. The FDIC states it has now returned those funds.
The TGA has $208 billion available should the FDIC calls on the Treasury again, which it surely must. Even if the DIF consumes the whole TGA pot, it would still be nearly $300 billion shy of being able to cover just the US banking systems “unrealized losses.”
To purchase these relatively worthless assets “at par” the US government will need to increase its borrowing. It does this by issuing more Treasuries to the Fed which will then create “base money”—central bank reserves—out of thin air in return. Literally conjuring this money into existence, as if it were fairy dust, by adding some numbers to Fed balance sheets.
The US economy is in no position to increase government debt. Currently, Federal Reserve Economic Data (FRED) shows that, by the December 2022 (end of Q4), the US government’s total interest payment on US national debt was $852 billion. As of September 2022 (end of Q3) the US government’s total tax take stood at $3.2 trillion. This means that the US government is currently spending more than 26% of its entire tax take simply to service the interest on its debt.
Nothing the Fed is doing addresses the fundamental problems deeply rooted within the US banking system and its economy. It’s BTFP solution is half baked and appears to be both inadequate and a diversion to temporarily hide the scale of the real problem. If anything, the Fed’s “solution” is continuing to make matters worse.
There is a major caveat we should consider. The assumption is that the Fed is at least trying to fix the problems it has caused. But there is reason to suspect that the Fed may, in fact, welcome a global financial collapse.
It’s All Too Convenient
Presently, the Fed is among the 114 central banks racing to establish Central Bank Digital Currency (CBDC). It is not hyperbole to say that, as it stands, CBDC will enslave humanity. It places the limits of our freedom in the hands of bankers. For us to ever accept CBDC, central banks like the Fed need an argument to convince us to use it.
The current Fed induced crisis is a liquidity crisis that threatens financial stability. In its exploration of the “Dollar in the Age of Digital Transformation,” referring to CBDC as “central bank money,” the Fed stated:
“Central bank money carries neither credit nor liquidity risk, and is therefore considered the safest form of money. [. . .] The use of central bank money to settle interbank payments promotes financial stability because it eliminates credit and liquidity risk in systemically important payment systems. [. . .] The Federal Reserve is engaged in extensive economic and policy research on digital currencies, focusing especially on financial inclusion and financial stability [. . .] depositors may prefer CBDC over bank deposits in a crisis.“
The Fed is a leading central bank among those currently listed as members of the Bank For International Settlements (BIS). The BIS instructed its members to engage in “forceful” interest rate hikes to tackle global inflation. It did so knowing that the global economy faced recession. The Fed duly obliged.
More than that, the BIS knew that both banks and non-banks, such as pension funds, were exposed to enormous levels of risk. For example, financial institutions were using foreign-currency swaps—called FX swaps—to reduce the cost of borrowing in their own national currencies. The BIS stated that the accumulated market debt stood at around $80 trillion.
The BIS assessed that this collective debt was greater than “the stocks of dollar Treasury bills, repo and commercial paper combined.” Yet it still advocated “forceful” rate hikes.
The BIS too is an avid CBDC enthusiast and is working hard with central banks to develop “interoperable” CBDC for cross border payments through it “innovation hubs.” The Fed joined six other central banks, including the European Central Bank (ECB) and the BIS, to work together on the development of CBDC.
In 2021, this led to a joint communiqué from G7 central banks and finance ministries:
“G7 Central Banks have been exploring the opportunities, challenges as well as the monetary and financial stability implications of Central Bank Digital Currencies (CBDCs) and we commit to work together [. . .] on their wider public policy implications. We note that any CBDCs, as a form of central bank money, could act as both a liquid, safe settlement asset and as an anchor for the payments system.”
Working in partnership with governments, the BIS states:
“Central banks are exploring safeguards that could be built into any CBDC to address financial stability risks. [. . .] This could include measures such as access criteria for permitted users, limits on individuals’ CBDC holdings or transactions, and particular choices around CBDC remuneration. [. . .] CBDC design or its framework can help control the risks to financial stability.”
The BIS adds:
“[. . .] during a systemic banking crisis, transfers from bank deposits into CBDC would face lower transaction costs than those associated with cash withdrawals [. . .], and would provide a safe-haven destination in the form of the central bank.”
The BIS highlights that the “low costs” associated with CBDC, and the “safe haven” they claim CBDC would offer depositors, means that “in a financial crisis” people would flock to CBDC. The BIS warns that this could cause bank runs and suggests this is a potential CBDC risk:
“In the absence of any sufficiently binding CBDC constraints, periods of stress could require additional safeguards, over and above prevailing deposit insurance and crisis management frameworks in order to avoid or slow bank runs into a CBDC.”
Equally, we could flip this on its head. If the intention was to encourage people to adopt CBDC, then bank runs, leading to systemic financial crisis would leave “depositors” clamouring for the “safe haven” of central bank money, wouldn’t it?
For the central banks and the major financial institutions that are working in partnership to introduce CBDC, banks runs and financial crisis are not necessarily unwelcome. Regardless of US government assurances, some leading lights in the financial world are willing to discuss the idea of a deeper crisis.
For example, BlackRock CEO Larry Fink is among those warning that contagion could spread. His comments carry such weight that this has, in turn, led to increasing alarm in the markets. Worsening the financial crisis that Fink claims he wishes to avoid.
The SVB collapse has prompted a flight of capital from the smaller regional banks towards the larger banks, further centralising the US financial sector. Presumably some of those banks, such as JP Morgan, won’t be surprised, seeing as they too advised SVB customers to jump ship and helped to start the run on SVB.
Just as the SVB run was underway, the Chair of the Fed, Jerome Powell, informed the US House Committee on Financial Services that “wholesale CBDC” could be introduced by the Fed without congressional approval.
Coincidentally, the Fed’s New York Innovation Centre had just concluded its 12 week trial of “wholesale CBDC.” Its “partners” were the large US financial institutions whose massive exposure to “unrealized losses” lies at the core of the impending financial collapse. Their liabilities have just increased significantly as new customers have run to them.
The proposed wholesale CBDC is intended to provide:
“[. . .] a multi-asset, always-on, programmable infrastructure containing digital representations of central bank, commercial bank, and regulated non-bank issuer liabilities, denominated in U.S. dollars.”
With US government treasuries unlikely to maintain the same level of investor appeal, some other form of “safe haven” may well be needed soon. Especially if the newly consolidated US banking system wants to save itself.
Should the crisis deepen, and there is every reason to think that it will, it is incredibly fortuitous for the Fed and its major US commercial bank partners, that, having caused the crisis, they now have a solution prepared, in the form of a possible “wholesale CBDC,” that they can implement without government approval.
The BTFP may stave off collapse in the short term, affording central banks around the world enough time to complete development of their “interoperable” CBDCs. Their efforts will largely be coordinated by the BIS.
But the fact that the US banking system is bankrupt cannot be covered up forever. The BTFP, or whatever future “packages” the FDIC and the Fed concoct, may be able to slow its demise, but terminal failure seems inevitable.
The introduction of CBDC is a primary objective for the BIS and its member central banks, such as the Fed. It seems SVB’s ignominious end wasn’t bad news for everyone. In light of the string of deliberate actions and policy decisions that caused it, we might wonder if its collapse wasn’t deliberately orchestrated.
