Welcome to the Global Financial Crisis of 2023 (Part One)

At least that’s what the Federal Deposit Insurance Corporation (FDIC) said on 10 March. By Sunday, 12 March, the story had turned 180 degrees.

In a joint statement, the Federal Reserve System (Fed), US Treasury, and FDIC said deposits would not be wiped out after all. All deposits would be fully insured regardless of the amount.

The US$250,000 limit on FDIC insurance was completely shredded. There was now no limit. Some accounts had as much as US$3 billion on deposit with SVB. The government said, ‘no problem’ and promised to keep the entire amount protected.

Not only that but another bank, the Signature Bank of New York, was closed on Sunday, 12 March. Its deposits were also protected 100% without regard to size.

The Fed also created something they called the Bank Term Fund Program (BTFP). This program allows any bank to send its Treasury bonds and mortgage securities to the Fed in exchange for cash. The amount of cash would be 100% of the par value of the securities, even if the market value were 20% or 30% lower.

Bonds with an original value of US$1 billion could be pledged to the Fed for that amount even if they were only worth US$850 million in market value today. This under-collateralised loan would be for one year at an interest rate close to the Fed’s policy rate. But the one-year term could easily be extended by the Fed this time next year.

Developments happened so quickly between 9–12 March that it was hard to keep up, let alone comprehend the meaning of it all. By the time the dust settled on Monday, 13 March, we could see at least a few things clearly.

This emergency rescue was bigger than the Savings & Loan crisis of the 1980s (about US$150 billion), the LTCM rescue in 1998 (about US$4 billion), the Global Financial Crisis of 2008 (about US$4 trillion added to the Fed’s balance sheet), and the pandemic panic of 2020 (about US$6 trillion added to the Fed’s balance sheet).

This was the largest financial bailout in history

The bailout of 12 March was not just a bailout of SVB and Signature Bank. It was a bailout of more than 50,000 depositors of SVB with more than US$170 billion in deposits. It was a bailout of all SVBs customers, its employees, its suppliers, and the entire high-tech startup ecosystem in Silicon Valley and around the world. It was a bailout of the billionaires and high-powered venture capital firms that own those startups. And while the Fed may not have intended this, it was also a bailout of the US$1 trillion cryptocurrency market.

Fat Tail Investment Research

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This story is not a one-day wonder. There has been financial contagion already and there will be far more. The ripple effects of the SVB collapse will continue for years. In complex dynamic systems such as the banking and capital markets, it is impossible to know in advance exactly which firms will fail next, but it is certain that such failures will arise.

In this series of articles, we will explore the matters raised above and many more. We’ll look at the timeline of events, the technicalities of the bailout, the international effects of the SVB meltdown, the connections between mainstream banking and the crypto world, and a deep web of corruption surrounding the entire turn of events.

Even those who have followed the story closely will be shocked at some of what we’ve uncovered. We can promise that even more shocking developments await.

All the best,

Jim Rickards Signature

Jim Rickards,
Strategist, The Daily Reckoning Australia

The post Welcome to the Global Financial Crisis of 2023 (Part One) appeared first on Daily Reckoning Australia.