Some Repercussions of Bad Banking Policy

The USD is suddenly not as desirable as before. [The Rude Awakening] March 28, 2023 [WEBSITE]( | [UNSUBSCRIBE]( Some Repercussions of Bad Banking Policy - One last time with SIVB via the mailbag. - Contagion risk, operating funds, and foreign entities are looked at. - The dollar is looking frighteningly vulnerable. [Response Requested]( 1/1000th of an ounce of gold available for Reader As a Rude Awakening reader, Jim Rickards is offering you 1/1000th of an ounce of gold when you upgrade your account. It will come in the form of a “Gold Back” - a new type of gold currency that’s starting to spread across America ([click here to view](. If you have not responded to Jim’s offer yet, and want to know how to claim yours… Please click the link below for details. [Click here to learn how to claim your new Gold Back Currency<]( Thanks! Amber Anderson Customer Service [Click Here To Learn More]( [Sean Ring] SEAN RING Happy Tuesday! Yesterday’s markets were pancake-flat, so there’s not much to discuss. So after drinking a few coffees this morning, I remembered my good friend and colleague Justin Weisbecker sent me the name I missed last week. As a result, I omitted an important letter from the mailbag that I’d like to address today. They say, “Shit rolls downhill.” They forget to tell you the farther down the hill you go, the faster it rolls. So it is with the US dollar. Boy, are some friends, enemies, and frenemies getting uppity lately. It’s as if they can feel the unipolar American moment has passed. I will use Bruce P’s great comment below as the base for my argument that bad banking policy has led us to the brink of ruin. First, read this: I am not happy with the decision that all bank deposits will be covered in the recent SIVB and SBNY failures, but I strongly disagree with your characterization that “this may cause contagion (though I think, in this case, it’d be minor).” There were payrolls and operating funds were also on deposit. Kicking the SIVB high-tech customers would have dealt a stifling blow to one of our strongest elements of economic growth. There were also funds on deposit from foreign entities, which could have precipitated foreign depositors looking elsewhere with potential repercussions on the US Dollar. I know that you did not want to get into the weeds on the bank failure, but there will be negative consequences from the new Fed lending facility, backstopped by the US Treasury, which will allow banks to borrow face value (purchase price) on now devalued (low interest) treasuries. Although this facility only stands for 1 year, I suspect we will see it renewed next year and expanded to include other devalued securities. This will have a more serious result than the “bailout” of SIVB depositors. The immediate result could be an influx of cash in the banks (some of which will be required to go to “reserves”), and pump the economy with additional lending. Bruce P. Bruce, thank you for writing in with such a well-thought-out argument. I will present my rebuttals to each of your points in turn. Then, I’ll show some of the more immediate consequences I’ve seen lately. Contagion Risk Yes, Silicon Valley Bank was a big regional bank in the Bay Area. SIVB offered services specifically designed to meet the needs of the tech industry. It soon became the largest bank by deposits in Silicon Valley and the preferred bank of almost half of all venture-backed tech startups. The bank's customers were primarily businesses and people in the technology, life science, healthcare, private equity, venture capital, and premium wine industries. Ok, tech, life sci, healthcare… big industries. As are PE and VC. Premium wine? Not so much. This is why I think the “contagion” would’ve been minor. It’s just California businesses in a California bank. Were there exceptions? Sure. My friend’s London startup banked with them. But they are the exception to the rule. Payrolls and Operating Funds This was Bill Ackman’s and David Sacks’s big argument for saving SIVB. But for every company’s bank accounts, they’ve got payrolls and operating funds to mind. Everyone is making out like this is the first time it has ever happened. This stems from a fundamental misunderstanding. If you’re an uninsured depositor (anyone over $250,000), you are last in line in the case of bankruptcy. That’s right. It’s bondholders, then equity holders, and if anything is left over (usually not), uninsured depositors get that. They’re not first in line. It doesn’t matter if business owners think they haven’t taken on risk by putting all their eggs in one basket. They’ve taken on enormous risk. They and their defenders are just unaware of it. I’m gobsmacked at how many CFOs and company treasurers didn’t know that. It demonstrates the embarrassing lack of professionalism in the C-suite nowadays. (If you’ve got less than $250,000 in the bank, you don’t have to know that.) As a personal aside, I’ve got five different bank accounts in four different countries to keep my cash balances under each deposit insurance limit. I can’t recommend that strategy enough. Even if you can’t go global, going local will be good enough. [Patent #11,219,620: The Most Valuable Patent In History?]( I believe this could over time become the single most valuable patent in history. [That’s because this patent is just some of the exciting work being done by a company which is developing treatments for one of the biggest and most common diseases in America…]( A disease which impacts 54 million people, or about 26% of the adult population in America. Whatever you do, do not let this opportunity pass you by. [Click here now for the details.]( [Click Here To Learn More]( Foreign Entities Again, this has turned out differently than you think. Sure, would foreign entities have deposited at SIVB? Most likely. And would they have been angry at losing everything over $250,000? Probably. But that’s their own fault. Here’s what’s much worse: thanks to [Janet Yellen not insuring all deposits over $250,000]( now the entire world knows the USG plays favorites. This has put a big dent in the trustworthiness of the USD. Here’s Xi and Putin talking about changes they’re bringing about that are [greater than anything that’s happened in the last 100 years](. Here’s Russia risking it all by [using the Chinese yuan in international trade](. Here’s [India’s significant role in de-dollarization](. Here’s [Saudi Arabia and Iran getting together]( to take a chunk out of the USD. Here’s [Kenya’s president telling his people to dump dollars](. I know many of those plans were already in motion. But those countries have put their feet on the floor. Here’s [Fareed Zakaria talking about it](. Here’s [Fox News covering it](. My goodness, it must be serious if the MSM is talking about it. Treasury Facility “Nothing is so permanent as a temporary government program,” said Milton Friedman. The ability to pledge discount t-bonds for the full face value without a haircut (usually about 2-4%) is insanely inflationary. This is while the Fed is still hiking rates. If you’ve got contradictory policies, it’s usually between the Fed (monetary) and the Treasury (fiscal). But here, you’ve got the Fed hiking rates (contractionary) while expanding its balance sheet (expansionary). Powell is trapped. His next moves will be interesting. Now, ask yourself this: if they didn’t bail out SIVB and the rest, would this dopey Fed policy even happen? I don’t think so. Again, based on the balance of probabilities, I’d prefer to have let the bank fail. Will more people borrow? I don’t think so. And the TBTF banks don’t even want this kind of small(er) business to begin with. And we didn’t even mention the cost of First Citizens buying SIVB. [The FDIC is on the hook for $20 billion](. Small when compared to the totality of banking. But it’s significant when compared to its resources. How will the FDIC replenish the $20 billion hole in its deposit fund? By charging you, that’s how. Wrap Up Thanks again to Bruce P. for writing such a stimulating email. But I stick to my guns and say it would’ve been better to let SIVB and the rest fail. As a believer in free markets, there’s no place where free markets are more important than banking. Sure, there are consequences. But regulatory medicine doesn’t cure anything. In fact, it makes the gamble riskless to the perpetrator, which we know it’s not to the broader public. The dollar is suffering for this. Let’s hope it’s not too late to pull back from the brink. All the best, [Sean Ring] Sean Ring Editor, Rude Awakening In Case You Missed It… The New Political World We Enter [Sean Ring] SEAN RING Happy Monday! I just got back from Brussels, a surprisingly great city. No one ever says, “Let’s take a vacation in Brussels.” And still, I wouldn’t recommend you hop the pond solely for Brussels. But if you’re planning a trip to Paris or Amsterdam, it’s definitely worth a day or two of your time. Parts of the city look like medieval villages, and parts look like the very definition of a regional capital. [SJN] The Grand Place in Brussels. But the one common thread that runs through all of Brussels is its cosmopolitanism. People from all over the world come here to learn, work, and play. On Saturday night, Aussie Trav and I were at an English bar (inevitably named Churchill’s) drinking with an Irish bartender, an Aussie bartender, an Irish EU official, a Turkish student, and a Finnish translator. It was a heck of a time. I had forgotten, for a moment, how much I loathe extra government layers and just enjoyed myself. And that’s the choice that faces all the world right now. Do you want more government? And if so, how much are you willing to pay for it? The Swiss clearly don’t want more government, much less be a part of the EU. Let me explain. [[CHART] Could Inflation Hit 20%+ In 2023?]( [Click here to learn more]( Take a close look at this scary chart pictured here… What you see is the money supply in America… And as you can see, the number of dollars in circulation has exploded in the last few years. In fact, more than 80% of all dollars to ever exist have been printed since just 2020 alone! Which is why some say inflation could soon explode even higher than it is now, to 20% or more. And if you’re at or near retirement age you must take action now to protect yourself… otherwise you risk losing everything. [Simply click here now to see how to survive America’s deadly inflation crisis](. [Click Here To Learn More]( The Swiss Retain Sovereignty, Pissing Off the Davos Crowd I’ve been watching this [fascinating video with The Duran and Tom Luongo](. I’m not through it yet, but I’ll watch the rest later today. Tom talked about something on the Additional Tier 1 (AT1) CoCo bonds that I missed. We know that if the Swiss government didn’t wipe them out completely, UBS would’ve been on the hook for about $17 billion. What I didn’t quite grasp is that those bonds would’ve been converted to equity first, and then UBS would’ve had a bunch of new shareholders to dilute their capital. Neither the Swiss government nor UBS wanted that, so they wiped out the bonds. Who were the biggest bondholders to get wiped out? - Invesco - $370m - PIMCO - $340m - BlackRock - $113m, but allegedly started to unwind that position long ago. David Tepper, of the hedge fund Appaloosa (and owner of the Carolina Panthers), made his fortune buying distressed debt. This time, it didn’t go so well. From marketwatch.com via [msn.com]( The U.S. hedge fund manager billionaire, who is known for buying up distressed debt, had bought an array of Credit Suisse’s senior and junior debt as the crisis hit the troubled Swiss lender, the report said. “Contracts are made to be honored,” Tepper said. Investors need to read the fine print, I’d say. Though litigious American investors are calling their lawyers, a court case would take a decade. And those debtholders would probably get nothing anyway. So Big Brother just stepped in, or so I thought: [pub] Luckily, I read further down (bolds mine): (Bloomberg) -- Credit Suisse Group AG and UBS Group AG are among banks under scrutiny in a US Justice Department probe into whether financial professionals helped Russian oligarchs evade sanctions, according to people familiar with the matter. The Swiss banks were included in a recent wave of subpoenas sent out by the US government, the people said. The information requests were sent before the crisis that engulfed Credit Suisse and resulted in UBS’s proposed takeover of its rival. Subpoenas also went to employees of some major US banks, two people with knowledge of the inquiries, said. The Justice Department inquiries are focused on identifying which bank employees dealt with sanctioned clients and how those clients were vetted over the past several years, according to one of the people. Those bankers and advisers may then be subject to further investigation to determine if they broke any laws. Ok, so these subpoenas were not sent in retaliation for the AT1 writedown. Be that as it may, with friends like America, who needs enemies? How much do you have to pay out in fines to the USG before you start asking if it’s worth doing business in America? It’s worth mentioning the Swiss didn’t consult the EU on this rescue package, either. Are teams starting to switch sides? The Bank of Japan’s Major Change Another fascinating nugget from Tom Luongo was the change over at the Bank of Japan. Haruhiko Kuroda was the Governor of the BoJ for the last decade. His term ended last week. Kuroda-san’s unorthodox methods of monetary policy were part of the greater central bank coordination between the Fed, the Bank of England, the European Central Bank, the Swiss National Bank, and the BoJ. Then-Deputy Governor Masayoshi Amamiya, a close aide of incumbent chief Haruhiko Kuroda, was most likely to succeed him this spring but turned the job down. I can’t overstate how rare it is in a country like Japan to turn down a job of that prestige. It’s unheard of. Apparently, Amamiya-san, who helped Governor Kuroda craft this (some would say, “insane”) monetary policy, said he wouldn’t be objective enough to stop it. The new man in charge, Kazuo Ueda, will probably reverse the last decade’s policies in Japan. Why would I be paying attention to this? Wrap Up I wrote this earlier in “[Got Rubles?]( (bolds mine): But the final nail in the coffin of USD dominance is the lack of trust. Those in DC who don’t know about commodities, logistics, and supply chains took a gamble they shouldn’t have. Now the entire world knows confiscation is one arbitrary decision away. Watch China, Russia, India, and Iran skirt the sanctions and build out a new monetary architecture. Total conjecture here, but I think when Japan finally realizes what’s happening, they’ll switch sides. That is when you know the world has really changed. I might be reaching here. But if the Bank of Japan is about to change the way it does business, it will have profound implications for central bank coordination. In fact, it could spell the end of central bank coordination. And that would be a great thing, indeed. Maybe things aren’t as bad as they seem. All the best, [Sean Ring] Sean Ring Editor, Rude Awakening [Paradigm]( ☰ ⊗ [ARCHIVE]( [ABOUT]( [Contact Us]( © 2023 Paradigm Press, LLC. 808 Saint Paul Street, Baltimore MD 21202. By submitting your email address, you consent to Paradigm Press, LLC. delivering daily email issues and advertisements. 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