As Senate Banking Committee Convenes Hearing on Exploding Banks, an FDIC Chart Shows the Banking Crisis Is Far from Over

[Gunnar Larson]

https://wallstreetonparade.com/2023/03/as-senate-banking-committee-convenes-hearing-on-exploding-banks-an-fdic-chart-shows-the-banking-crisis-is-far-from-over/


By Pam Martens and Russ Martens: March 28, 2023 ~

Senator Sherrod Brown (D-OH), the Chair of the Senate Banking Committee,
will convene a hearing this morning at 10 a.m. to take testimony from
federal bank regulators on why the second and third largest bank failures
in U.S. history occurred within two days of each other this month. (A
number of other regional banks have seen their share prices plunge this
month.)

Martin Gruenberg, Chair, Federal Deposit Insurance Corporation (FDIC)
Martin Gruenberg, Chair, Federal Deposit Insurance Corporation (FDIC)

The two banks that failed and were taken over by the Federal Deposit
Insurance Corporation (FDIC) were Silicon Valley Bank (SVB) and Signature
Bank. Both had experienced bank runs in March and both had extreme exposure
to uninsured deposits. One of the witnesses at today’s hearing, Martin
Gruenberg, Chair of the Federal Deposit Insurance Corporation (FDIC),
explains as follows in his written testimony for today’s hearing:

“A common thread between the failure of SVB and the failure of Signature
Bank was the banks’ heavy reliance on uninsured deposits. As of December
31, 2022, Signature Bank reported that approximately 90 percent of its
deposits were uninsured, and SVB reported that 88 percent of its deposits
were uninsured. The significant proportion of uninsured deposit balances
exacerbated deposit run vulnerabilities and made both banks susceptible to
contagion effects from the quickly evolving financial developments. One
clear takeaway from recent events is that heavy reliance on uninsured
deposits creates liquidity risks that are extremely difficult to manage,
particularly in today’s environment where money can flow out of
institutions with incredible speed in response to news amplified through
social media channels.”

Gruenberg has included a chart in his written testimony that is nothing
short of stunning. (See chart above.) It shows that the unrealized losses
on investment securities at federally-insured U.S. banks during the 2008
financial crisis were less than $75 billion while at the end of the fourth
quarter of 2022 they were over $600 billion.

You are no doubt asking yourself how 2008 could have been the worst
financial crisis since the Great Depression if banks had less than $75
billion in unrealized losses on their investment securities. That’s because
the mega banks on Wall Street were highly interconnected, understood how
highly-leveraged each one was, and backed away from extending credit as the
panic started to spread. The official report from the Financial Crisis
Inquiry Commission (FCIC) reveals the following about the leadup to the
2008 crash:

“…as of 2007, the five major investment banks—Bear Stearns, Goldman Sachs,
Lehman Brothers, Merrill Lynch, and Morgan Stanley—were operating with
extraordinarily thin capital. By one measure, their leverage ratios were as
high as 40 to 1, meaning for every $40 in assets, there was only $1 in
capital to cover losses. Less than a 3% drop in asset values could wipe out
a firm.”

Also, the chart above does not capture the losses and contagion the Wall
Street banks themselves created in the broader financial system through
their bundling and selling of hundreds of billions of dollars of toxic
subprime mortgage debt and derivatives. The FCIC reports explains as
follows:

“Most home loans entered the pipeline soon after borrowers signed the
documents and picked up their keys. Loans were put into packages and sold
off in bulk to securitization firms—including investment banks such as
Merrill Lynch, Bear Stearns, and Lehman Brothers, and commercial banks and
thrifts such as Citibank, Wells Fargo, and Washington Mutual. The firms
would package the loans into residential mortgage–backed securities that
would mostly be stamped with triple-A ratings by the credit rating
agencies, and sold to investors. In many cases, the securities were
repackaged again into collateralized debt obligations (CDOs)—often composed
of the riskier portions of these securities—which would then be sold to
other investors. Most of these securities would also receive the coveted
triple-A ratings that investors believed attested to their quality and
safety. Some investors would buy an invention from the 1990s called a
credit default swap (CDS) to protect against the securities’ defaulting.
For every buyer of a credit default swap, there was a seller: as these
investors made opposing bets, the layers of entanglement in the securities
market increased.”

In the 2008 crisis, there was also the obscene greed and callous disregard
for the well being of the country by Wall Street investment banks actually
shorting the toxic drek they had knowingly created and sold off to pension
funds and other investors. Goldman Sachs created one of these toxic debt
structures called ABACUS, allowing John Paulson’s hedge fund to select debt
instruments likely to fail to stuff into ABACUS so the hedge fund could
short it, while Goldman Sachs sold it to its own customers as a good
investment. See our report: ABACUS, London Whale: Frenchmen Take the Fall
for Wall Street’s Crimes.

The other two witnesses scheduled for today’s hearing are Michael Barr,
Vice Chairman for Supervision at the Federal Reserve; and Nellie Liang,
Undersecretary for Domestic Finance at the U.S. Treasury. The same three
witnesses will appear before the House Financial Services Committee
tomorrow at 10:00 a.m. to further examine the collapse of these banks.
-------------- next part --------------
A non-text attachment was scrubbed...
Name: not available
Type: text/html
Size: 6483 bytes
Desc: not available
URL: <https://lists.cpunks.org/pipermail/cypherpunks/attachments/20230328/86527c77/attachment.txt>