Americans Are Wrong to Worry About FDIC-Insured Bank Deposits; They Need to Worry About Sales Hustlers Inside those Banks and Short-Selling Barbarians

Gunnar Larson g at xny.io
Fri May 5 02:35:11 PDT 2023


https://wallstreetonparade.com/2023/05/americans-are-wrong-to-worry-about-fdic-insured-bank-deposits-they-need-to-worry-about-sales-hustlers-inside-those-banks-and-short-selling-barbarians/


By Pam Martens and Russ Martens: May 4, 2023 ~


SEC Headquarters, Washington, D.C.

Federal deposit insurance was created under the Banking Act of 1933 and
became effective on January 1, 1934. Since that time, no depositor in a
federally-insured bank account has ever lost a dime of their deposits if
they stayed within the deposit insurance cap and they made sure that the
deposit was actually in a federally-insured instrument.

For example, you can’t buy the corporate bonds of a federally-insured bank
and get federal deposit insurance on the bonds. You can’t walk into a
federally-insured bank and sit down with a fast-talking insurance salesman
and buy an insurance product, such as an annuity, and get federal deposit
insurance on the annuity. You can’t walk into a federally-insured bank and
sit with a wily securities salesman (a/k/a “wealth advisor”) and get
federal deposit insurance on a stock mutual fund he might decide to sell
you because it pays him five times the commission of an FDIC-insured
Certificate of Deposit.

Federal deposit insurance, also known as FDIC insurance, provides a cap of
$250,000 per depositor, per bank on checking and savings accounts,
Certificates of Deposits, and money market deposit accounts. (Money market
mutual funds are not FDIC insured.) For more detailed information on this
topic directly from the FDIC, see “Are My Accounts Insured by the FDIC?”
and “Financial Products that Are Not Insured by the FDIC.”

Yesterday, the survey organization, Gallup, released a poll which had asked
the question: “How worried are you about the safety of money you have
deposited in banks and other financial institutions?” A total of 48 percent
of survey respondents said they were either “very worried” or “moderately
worried.” Only 20 percent of survey respondents said they were “not worried
at all.” Clearly, confidence is draining from the U.S. banking system and
the ad nauseum repetitions from Fed Chair Jerome Powell that the banking
system “is sound” is not rebuilding that confidence.

A good part of the worry likely stems from the recent bank failures and
fear that the FDIC will run out of money. Bank depositors should know that
in addition to the $128.2 billion that the FDIC’s Deposit Insurance Fund
held on December 31, 2022, it also has a line of credit from the U.S.
Treasury, can assess fees on the banking industry to replenish the Deposit
Insurance Fund, and all FDIC-insured deposits are unconditionally “backed
by the full faith and credit of the United States government.”

The big problem right now is that short sellers are the barbarians storming
the gates to the U.S. banking system and have massive financial incentives
to take it down. Two of the banks that collapsed this year, Silvergate Bank
and First Republic Bank, were the target of short sellers, who had taken
massive short positions.

The latest target of short sellers, PacWest Bancorp (ticker PACW),
collapsed in half in after-hours trading last evening, printing at $3.05 on
the tape at one point. That’s down from a share price of $29 in early
February.

Another short sellers’ target, Western Alliance Bancorporation (ticker
WAL), has plunged by 50 percent year-to-date and was down another 17
percent in pre-market trading this morning. (For the short sellers’ target
list of banks and where they are increasing their short positions, see the
charts provided by S&P Global Market Intelligence at this link.)

PacWest and Western Alliance are not small, insignificant banks. According
to PacWest’s filing with the Securities and Exchange Commission for the
quarter ending March 31 of this year, PacWest had $44.3 billion in assets
and $28.2 billion in deposits.

The SEC filing for Western Alliance for the quarter ending March 31 of this
year, shows it had $71 billion in assets and $47.6 billion in deposits.

An even larger bank, Comerica, is also a current target of short sellers.
Its SEC filing shows that as of March 31 of this year it had assets of $91
billion and deposits of $64.7 billion. Comerica carried this statement in
its filing with the SEC for the period ending March 31:

“The Corporation’s focus is commercial customers, and accordingly, it has a
larger percentage of uninsured deposits relative to financial institutions
with a higher consumer focus. These deposits are well-diversified between
geographies, industries and customers…

“Total uninsured deposits as calculated per regulatory guidance were $35.0
billion, or 54% of total deposits at March 31, 2023….”

A high percentage of uninsured deposits, which are subject to quick flight
out of the bank into Treasury bills or government money market funds, have
made some banks vulnerable to attacks by the short sellers, as have
significant losses on available-for-sale (AFS) securities.

Short-selling is where a speculator borrows shares from his brokerage firm
and then sells the shares on the expectation that the shares can be
repurchased later at a lower price, thus locking in a profit for the
speculator. The Financial Times reported on April 5 that “Hedge funds made
more than $7bn in profits by betting against bank shares during the recent
crisis that rocked the sector, their biggest such haul since the 2008
financial crisis.” Given the massive losses in regional bank stocks this
week, that $7 billion figure now likely tops $10 billion or more.

On September 19, 2008, during the collapse of financial institutions on
Wall Street, the SEC halted short selling in 799 financial institutions.
The counterpart to the SEC in the U.K., the Financial Services Authority,
took similar action. The statement released by the SEC to announce its
decision said in part:

“This decisive SEC action calls a time-out to aggressive short selling in
financial institution stocks, because of the essential link between their
stock price and confidence in the institution. The Commission will continue
to consider measures to address short selling concerns in other publicly
traded companies.

“Under normal market conditions, short selling contributes to price
efficiency and adds liquidity to the markets. At present, it appears that
unbridled short selling is contributing to the recent, sudden price
declines in the securities of financial institutions unrelated to true
price valuation. Financial institutions are particularly vulnerable to this
crisis of confidence and panic selling because they depend on the
confidence of their trading counterparties in the conduct of their core
business.”

This year, in the span of seven weeks, running from March 10 to this past
Monday, May 1, the second, third, and fourth largest bank failures in U.S.
history have occurred. In respective order, those are First Republic Bank,
Silicon Valley Bank and Signature Bank. (The largest bank failure in U.S.
history, Washington Mutual, occurred in 2008 during the financial crisis.)

Where is the decisive action on short selling of bank stocks from the SEC
this time around?
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