Mark Twain once said that “history never repeats itself, but it does often rhyme.”
I was reminded of this last week, when I saw headlines like this one…
Silicon Valley Bank Collapses, FDIC Takes Over
– Bloomberg
For five years straight, Silicon Valley Bank was voted one of the best banks in America. But on Friday, it collapsed.
And on Sunday, it took another big bank down with it – Signature Bank of NY.
These were the second- and third-biggest bank failures in U.S. history. All in a matter of days…
And 15 years, almost to the day, after global investment bank Bear Stearns failed.
I still remember speaking to my former colleagues when Bear collapsed in March 2008. I had left the firm about eight years earlier.
Many of them knew that Bear was buckling under the weight of its own over-leveraged positions, even before the doors shut.
But few realized how quickly it all could unravel in the final moments.
Then, six months later, another one of my former employers failed – Lehman Brothers.
When Lehman went under on September 15, 2008, it took other “too big to fail” banks to the brink of collapse.
Lehman’s failure caught fewer of my former colleagues by surprise. After Bear, they had seen the writing on the wall.
Still, that 161-year-old institution unraveled fast. And as you know, the fallout caused a financial crisis, followed by a global recession.
Over the past few days, alarm bells have been going off that sound a lot like 2008. CBS News reports:
The startling collapse of Silicon Valley Bank and Signature Bank continued to ripple across the American economy even as the U.S. raced to stabilize the banking system.
Even President Joe Biden took to the podium. He assured Americans that “the banking system is safe.”
And just this morning, Reuters reported:
European bank stocks slumped on Wednesday, with embattled Credit Suisse (CSGN.S) tumbling as much as 30% to another record low, on renewed investor concerns about stresses within the sector triggered by Silicon Valley Bank’s sudden collapse.
So today, I’m going to look beyond the headlines. And I’ll show you what this latest banking crisis means for you.
The Fed Did Not Have Your Back
This past Friday, California regulators shut down Silicon Valley Bank. It had nearly $210 billion in assets.
It’s the largest bank failure in the U.S. since the collapse of Washington Mutual in 2008. And it was one of three U.S. banks to go bust in a week.
Silvergate went belly up first, on March 8. Silicon Valley followed on March 10. And on March 12, Signature Bank shut down, too.
This all happened under the watchful eyes of the Fed and its thousands of bank regulators. That’s ironic, since the Fed’s one real job is to regulate the banking system.
It also happened under the eyes of thousands more Wall Street analysts and financial media talking heads. In fact, CNBC Mad Money host Jim Cramer praised Silicon Valley weeks before the bank imploded.
Silicon Valley was no ordinary bank. The majority of its customers were venture-backed companies and startups. And that leads us to another stunning twist in this story…
Bank Bailouts Are Back
On Sunday, the Biden administration took an extraordinary step. It guaranteed that Silicon Valley customers would be made whole… even uninsured deposits.
That flies in the face of deposit insurance for bank customers.
As my fellow history buffs will know, that insurance first happened in the wake of the 1929 crash. It was through the Banking Act of 1933. That act established the Federal Deposit Insurance Corporation (FDIC).
The FDIC insures depositors up to $250,000. But when Silicon Valley collapsed, there was a problem…
Many larger tech companies used Silicon Valley as their bank, for personal and business deposits. So depositors had a lot more than $250,000 in their accounts.
In fact, according to the bank’s latest annual report, customers held at least $165.4 billion in uninsured deposits by the end of 2022.
So, the government bailed them out.
The Problem of Trust
This gets to the heart of the problem with the financial system today.
Everything relies on us trusting a handful of powerful institutions. From issuing money to setting interest rates.
The problem is that institutions can’t always be trusted.
I had the dubious pleasure of learning about this firsthand during my 15 years working on Wall Street. That’s essentially why I left in 2002.
By then, the banking system was involved in many questionable dealings, with companies like WorldCom and Enron. These companies went bankrupt in a cloud of fraud.
In 2004, I published a book about this, Other People’s Money. I wrote about the banks’ role in that kind of fraud, through securities called credit derivatives. And I warned that it would ultimately bring the system to the brink of disaster.
And that’s exactly what happened in 2008.
So when Silicon Valley went under last week, it brought back not-so-fond memories of my days on Wall Street.
Back then, the Street was brimming with firms that over-allocated their capital, and often over-leveraged into subpar assets.
And when those started to crash, it caused a domino effect that shook the global financial system to its core.
In 2008, the government doled out $7 trillion to big banks in emergency funding, with little to no oversight.
This fueled The Great Distortion I’ve been writing to you about in these pages. And it destroyed any chance of bridging the gap between the markets and the real economy.
2008 All Over Again
Fast forward to 2023, and the same bailouts are coming back. Once again, the government is swooping in to save the day.
Now, some may point out that the Silicon Valley bailout isn’t a traditional bailout. That’s because it bails out the depositors, not shareholders.
But this doesn’t change the fact that Congress set the $250,000 insurance limit to protect average Americans… Not venture capitalists in Silicon Valley.
It also doesn’t change the fact that government regulators were asleep at the wheel with last week’s bank failures.
And here’s the part that really makes my blood boil…
By the time the story broke, some Silicon Valley executives and shareholders had already cashed out.
Most notably, CEO Greg Becker sold $3.6 million worth of his shares less than two weeks before the bank’s collapse.
What’s worse, Becker was one of the people who lobbied to deregulate his own bank.
What This Means for Your Money Today
My gut tells me there’s probably another ticking-time bomb waiting to go off in the banking sector. In fact, as I mentioned above, trouble is already spreading to Europe.
That means we can expect many investors to get burnt. Not everyone is a Silicon Valley millionaire.
But there are things you can do to protect your money. And I want you to be prepared.
The important thing is to make sure that your deposits are FDIC-insured. Not all banks are. You can find out which ones are through this directory.
You don’t need to apply for coverage. But again, you have to make sure that your bank is FDIC-insured. And that your account within that bank is, too.
Remember, the FDIC insures bank accounts up to $250,000 per person. It only covers certain financial categories. That includes things like checking and savings accounts, money market deposit accounts, and money orders.
And if you have more than $250,000 at one bank? In some cases, you can divide it into different account categories to meet FDIC limits.
For more on that, check out the FDIC’s deposit insurance FAQ page.
There, you’ll find answers to common questions, such as, “Can I have more than $250,000 of deposit insurance coverage at one FDIC-insured bank?” And “Can I check to see if my accounts are fully covered?”
Regards,
Nomi Prins
Editor, Inside Wall Street with Nomi Prins
P.S. In 2008, the government bailed out Lehman Brothers and Bear Stearns, widening the gap between the markets and the real economy. Now, the government is on the same path as it rushes to save the day.
These events are all fueling a massive wealth transfer worth $150 trillion in the markets, or what I call “The Great Distortion.” And as I explained today, you can’t always trust our financial institutions to have your back once things turn sour.
But there’s a way to position yourself on the right side of this shift. Just go here for more details.