How the Federal Reserve Broke the Banks

[Inside Wall Street with Nomi Prins]( Welcome to Inside Wall Street with Nomi Prins! It’s the only daily newsletter featuring the insights of renowned author and former Wall Street insider, Nomi Prins. Every day, Nomi shines a light on a massive wealth transfer she calls The Great Distortion. That’s the true cause of the permanent disconnect she sees between the markets and the real economy. And she shares ways you can come out ahead, if you know where the money is flowing. You’ll find all Nomi’s Inside Wall Street issues [here](. If you have questions or comments, send Nomi a note anytime [here]( or at feedback@rogueeconomics.com. How the Federal Reserve Broke the Banks By Nomi Prins, Editor, Inside Wall Street with Nomi Prins It’s personal. When I hear about the biggest failure of a U.S. bank since the 2008 global financial crisis, and the second biggest U.S. bank failure on record, it really does feel that way. As you probably know, I’m talking about Silicon Valley Bank (SVB). When I heard the news, I recalled my career on Wall Street. In the ’90s, I worked as a strategist at Lehman Brothers and as a senior managing director at Bear Stearns. Both collapsed during the 2008 crisis. Back then, the banks were aware of internal problems. And they hoped they would weather the storm. This month, the same scenario played out with SVB. Insiders were aware of trouble below the surface. But the downturn didn’t pass. So when the 16th-largest bank in the U.S. failed, people were quick to blame the bank and its poor management. That’s fair – and not entirely wrong. But what makes this time different from 2008 is the Federal Reserve’s role. So, today, I want to dive into the reasons that took this “too big to fail” bank to the brink of collapse… and show you what it means for your money. Recommended Link [Strange Force Coming for American’s Savings? (Prepare Now)]( [image]( A strange phenomenon is washing over America… (NOT inflation, rent increases, gas, groceries, political division, or a pandemic) And former Goldman Sachs managing director and best-selling author, Nomi Prins, says: “A reshaping of our global financial system has [ignited a $40 trillion transfer of wealth from the middle class to the rich…]( that could forever split the entire nation into two groups: ‘the new rich’ or ‘the new poor’ – you will have to make a choice.” Because the world’s most powerful groups: MIT, The Gates Foundation, The United Nations, Visa, 77 global Governments, the world’s most powerful group of unelected officials, and a [new Executive Order from President Biden…]( Are igniting a financial event that could soon transfer $40 trillion of middle-class wealth – your savings – funneled to the rich. [Click Here For The FULL Story.]( -- Trouble at One of the “Best Banks” in America For five years straight, Silicon Valley Bank was voted one of the best banks in America. And yet, it was terribly mismanaged. There’s plenty of blame to go around, and many are pointing the finger at SVB CEO Greg Becker. As I wrote to you [last week]( Becker was one of the people who lobbied to deregulate his own bank. He led the bank's half-million-dollar push to reduce scrutiny of his institution, citing its “strong risk management practices.” [Featured: Must See! Florida Dad “hacks” gas pump. What happens next will STUN you…]( Yet, SVB was lacking in that exact department. The bank suffered from internal issues. For example, it failed to properly manage its assets, liabilities, and risk hedging. In fact, the only risk management that CEO Becker did was sell $3.6 million worth of his shares – less than two weeks before the bank’s downfall. And when problems started piling up, Becker publicly confessed to the extent of the bank’s financial troubles… before ever preparing the necessary financial support to weather the storm. That news unleashed a wave of panic across Silicon Valley. Up until that point, SVB served as a key lender to tech companies and startups. The result? Customers tried to pull out $42 billion in deposits on March 9 alone. SVB had a negative cash balance of about $958 million by the end of that day. Its stock price declined by 60%. Not long after, regulators shut down the bank. Recommended Link Millionaire Trader Reveals: [How to Make One “Backdoor” Currency Trade – Every Month – And Start Making All the Money You Need to Fund Your Retirement]( [image]( [Click here for the name of the currency trade.]( -- The Fed Broke SVB But the story behind the collapse is bigger than just mismanagement. You see, the Federal Reserve helped break SVB. Remember, the SVB fiasco happened under the watchful eyes of the Fed and its thousands of bank regulators. And as you well know, the Fed’s been hiking interest rates aggressively since March 2022. This has wreaked all sorts of havoc on the broader economy. But it also took a toll on banks… For one, with rates going up quickly, banks had to compete with government-issued Treasuries. They were late to the rate-hiking party, and they failed to raise interest rates on their deposits fast enough. So when people chose to put their money in Treasuries instead of bank deposits, the banking sector was in trouble. It lost over a trillion dollars in the first three quarters of 2022 alone. But that’s not the only problem banks are facing… When rates went from zero at the start of 2022 to over 4% by the end of that year, bond prices fell fast on the open market. [Featured: Strange Force Coming for American’s Savings? (Prepare Now)]( This meant that any bank that bought these bonds before the rates went up saw a big paper loss. Here’s why… When new bonds are issued with a higher-paying rate, investors are better off buying them. So this makes existing bonds with lower rates less attractive. You wouldn’t pay the same price for a five-year bond that pays 1% on the open market versus one that the government now pays you 4% to buy. The 1% bond is giving less interest, so you’d pay less for it. As bond investors act on these rate changes, the value of existing bonds on the open market drops. Now, normally, a bank holding these bonds should not face any problems... As long as it keeps the bonds for the duration of their maturity. But what if there’s a bank run and you need to process withdrawals you no longer have? Well, you’d have to sell some of those assets right away. Yet, those government bonds would still be underwater. So your “paper” losses turn into actual ones. It also means you’d get a lot less money than what you need to pay back your customers. Which is exactly what happened to SVB. When SVB’s CEO announced that the bank was selling $21 billion worth of bonds (and mortgage-backed securities) at a $1.8 billion loss... customers rushed to withdraw their money. And SVB collapsed. But it wasn’t the only bank at risk. After all, the Fed’s steady rate hikes caused the value of banks’ reserves – their balance sheets – to plummet. In fact, banks are currently saddled with $600 billion in unrealized paper losses on their portfolios of government securities. You don’t have to be a finance wiz to see why this is a problem. It’s like banks are sitting on a financial time bomb. You never know when the next bank run will happen. But as we’ve seen, when they do, those “paper” losses become very real. Recommended Link [Bear or bull market, this highly successful trader has shocking new forecast]( [image]( Nobody believed Larry Benedict’s prediction in February 2020. The DOW plunged 3.5%, and he told CNBC, “It seems like there’s much more to come.” Within a month, the market plummeted 34%. Then, nobody believed Larry at the start of last year, either. He predicted that “all the indexes will be negative for the year,” with the Nasdaq leading the way. Once again, he was spot-on. Anybody who followed his recommendations could be well in the black. Now, for the first time, Larry’s coming forward to share a brand-new forecast. [Click here to watch his interview right now.]( -- What This Means for Your Money Poor risk management may have spurred the SVB failure, but the Fed’s rate hiking was central to it. After all, even the biggest banks are not immune to the central bank’s aggressive policies. So, what does that mean for you? Here’s what Bloomberg wrote last week: The cliché is that the Fed must tighten until something breaks. Now that something’s broken, it’s far more plausible that the Fed will change course. They are referring to the Fed’s pivot to a more neutral monetary policy, which I’ve been talking about since August. (For a refresher on that, check out this [video update]( As you may recall, the Fed raised interest rates by 0.25% at the Federal Open Market Committee (FOMC) meeting in February. And yesterday, at their March meeting, the Fed raised interest rates by another 0.25%. This means the Fed chose to tread carefully. And it means that we remain firmly in what I call Stage 1 of the Fed’s pivot. But, given the banking uncertainty, it would not surprise me to see Stage 2 take place earlier than expected. Stage 2 would mean a pause in rate hikes. It could happen as soon as the Fed’s next meetings in May or June. If this happens, the markets will breathe a sigh of relief. And they may begin an, albeit choppy, path toward higher prices. With the Fed’s three-stage pivot in action, the question then becomes: Are we going to see a dramatic collapse of the global banking system? In other words, is this truly the next Lehman moment? We already know that SVB was just one of three U.S. banks to collapse. Silvergate and Signature Bank collapsed the same week. And in Europe, Credit Suisse failed not long after. I’ll have more to say on this next week, where I’ll dive into the contagion risk in the global financial system. I’ll also show you what it means for you… and how you can counter these effects in your portfolio. In the meantime, as I wrote [last week]( there are things you can do to be prepared. The most important precaution you can take is to make sure your deposits are FDIC-insured. You can find out which banks are insured through [this directory](. Regards, [signature] Nomi Prins Editor, Inside Wall Street with Nomi Prins --------------------------------------------------------------- Like what you’re reading? Send your thoughts to [feedback@rogueeconomics.com](mailto:feedback@rogueeconomics.com?subject=Inside Wall Street Feedback). MAILBAG Do you think we’ve seen the last of this banking crisis? Or are more dominos sure to fall? Write us at [feedback@rogueeconomics.com](mailto:feedback@rogueeconomics.com?subject=Inside Wall Street Feedback). IN CASE YOU MISSED IT… [New Panic Could Sweep America]( Mark these words in 2023. Everyone’s going to cash… Wall Street legend says: “A little-known vehicle outside of banks could double… triple… or even quadruple your life savings if you know where to find it right now.” We urge you to move your cash into this vehicle in 2023. 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