That's the claim of a thread on X in which the author, Porter Stansberry, describes the danger of large-scale bank failures as very real. Here's an excerpt.
How bad is it? Quoting from the St. Louis Fed's Bank Capital Analysis report of June 30, 2022: Since 2019, banks increased securities holdings by $2.0 trillion, increasing the share of securities as a percentage of total assets to 33.7% in the second quarter of 2022 from 17.8%
Let me make sure you understand what that means. It means that fully one-third of the reserves of our biggest banks are deeply “underwater.” That's because they bought $2 trillion worth of long-term bonds (and mortgages) at interest rates around 1%.
The real market value of these assets has plummeted because of rising interest rates. It was soaring losses on these assets, which led to the run on deposits in the spring of 2023 at Silicon Valley Bank, Signature Bank, and First Republic Bank.
These banks didn't fail because they made bad loans. They failed because they owned long-dated Treasury bonds. Total losses on those bank failures were $40 billion.
. . .
Today, Bank of America reports it has $86 billion in unrecognized “mark to market” losses on that bond portfolio. The bank has tangible equity (that is, real equity) of $200 billion. If rates go above 5%, I believe Bank of America's tangible equity would be wiped out.
It' not just $BAC either. The end of the Fed's BTFP will lead several major banks to raise more capital. But, if interest rates continue to rise, the bank runs we saw in the spring of 2023 will return – with Bank of America most at risk.
With $2 trillion in deposits, Bank of America's shareholders would, most likely, not survive a run on its deposits.
There's more at the link. You'll need to read the entire thread to grasp what's been happening, and its implications for the future of the American banking system as a whole.
I don't know whether Mr. Stansberry (a controversial analyst and economic pundit) is correct to correlate "mark to market" losses with the widespread selling-off of banking shares by top investment firms and authorities such as Warren Buffet (as discussed in the thread). Nevertheless, it is feasible, and makes for a very scary picture. For small fry like you and I, with mere pennies to our names compared to the millions and billions held by such investors, the picture is even worse, because our funds will be wiped out along with the banks if this comes to pass.
It's not certain that a collapse will come soon. So far, our politicians have "kicked the can down the road" at every possible opportunity. However, remember Stein's Law: "If something cannot go on forever, it will stop." Sooner or later, the road will run out (as we discussed just last week), and then there'll be no place to kick the can any further. If Mr. Stansberry's forecast is correct, that can't be long delayed.
Peter
12 comments:
If you don't sell at a loss, you haven't lost anything. Those bonds are still paying 1% face value.
People are panicky herd beasts.
Yes... BUT.
Should the bank need to raise capital, they would do so by selling those bonds. Who would buy bonds that yield less than the current Treasury rates? The banks would have to sell the bonds at a discount below face value.
This would only become an issue if they needed to rapidly raise capital due to a bank run or say... due to underperforming commercial and residential loans.
McChuck - research the Great Taking. Mark to market could be a good way of initiating that. Of course you can look at the rate of accelerating national debt, the unfunded liabilities, and other fiscal irresponsibility. Social Security has always been non-sustainable. Remember, your bank deposits are unsecured loans and the FDIC has 99 years to pay the insured amount.
I would not be surprised if China or all of Brics quits accepting US dollars. That could precipitate things as well. There are so many possibilities as to the initiator of showing the real US dollar that the mind boggles.
And TPTB want panic in the streets. They will protect us and fix everything, just trust them.
So as long as the bank's customers are willing to leave their money in, everything is fine. As soon as too many people want out the bank has to sell at a loss and then we hit the dreaded bank run as more people notice how shaky things are
Fear and greed runs the market.
Panicked beasts creates bank runs as fear of losing MORE MONEY by wait and see is real.
"SELL MORTANHIMER,SELL" isn't just a line in Trading Places movie.
Loss of faith in the Dollar can create a run on America.
Not good.
Michael
Considering how the Fed is wrong from the start, but has inflated this whole balloon since 1913, I can't see the Fed allowing those banks to fail. "Too big to fail" was practically federal law and not just Federal Reserve policy in '08.
If anything can prevent it.
But Kamala has been running on the idea of taxing unrealized gains from paper assets. The argument people keep making is being taxed on the paper value of your home, and losing it because you don't have the money to pay that tax. Taxing unrealized gains is going to kill long term investment. The stock markets are going to collapse, 401k accounts are going to collapse. "In the blink of an eye" people's savings for retirement are going to disappear.
Remember Voltaire's quote about paper money always returning to the value of the paper.
It depends whether those banks intended to hold those bonds and mortgages, or needed to be able to liquidate them at some point. If they needed them for liquidity, they're in trouble.
Mark-to-market is just another way to say unrealized gains and losses. If you can hold the asset until maturity, it shouldn't matter.
@Mcchuck. While it’s true that the bonds are yielding, that does not mean that they have not lost value. The lower yielding interest has reduced their sticker price in favor of higher yielding assets and, if liquidity is needed (think covering losses and defaults), they will not sell for what was paid.
And some banks are "too big to (let) fail" ... right until they aren't.
I'm reminded of the MF.Global debacle where segregated funds were subject to bankruptcy distribution because some of the funds had been invested in securities. Could that be. In play here?
I only use credit unions. Different rules, no "buy in" authorized.
Banks don't lend real money, they lend fiat money they create in an electronic spreadsheet. A default loses them NOTHING except the value of the interest they won't earn in the future.
Know what the mandatory holding rate for banks is now? Zero (0.0) percent. They can lend infinite money, made of nothing. Do you know why depositor money isn't on hand? They invest that money in the markets to hopefully make even more profits.
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