By Pam Martens and Russ Martens: March 14, 2023 ~
Last Wednesday, federally-insured Silvergate Bank announced that it was closing shop and liquidating. Its parent’s stock price (Silvergate Capital, ticker SI) had lost over 90 percent of its value over the prior year; it was under a Justice Department investigation for how it moved money for crypto-kingpin Sam Bankman-Fried’s house of frauds; and its depositors were fleeing. Oh – and by the way – its primary regulator was the Federal Reserve Bank of San Francisco.
Last Friday, California state regulators closed Silicon Valley Bank and the Federal Deposit Insurance Corporation (FDIC) became the receiver. Its stock price had lost over 80 percent of its market value over the prior year; $150 billion of its $175 billion in deposits were uninsured, either because they exceeded the $250,000 FDIC cap and/or they were foreign deposits. The bank was effectively operating as a Wall Street IPO pipeline in drag as a federally-insured bank. The Federal Home Loan Bank of San Francisco had quietly been bailing it out – to the tune of $15 billion. Oh – and by the way – its primary regulator was the Federal Reserve Bank of San Francisco. And while all of this hubris was occurring, the CEO of Silicon Valley Bank, Gregory Becker, was sitting on the Board of Directors of his regulator, the Federal Reserve Bank of San Francisco.
Let’s pause right here for a moment. This is far from the first time that the CEO of a questionable bank was sitting on the Board of a Federal Reserve Bank. As Citigroup CEO, Sandy Weill, was burying the bank under off balance sheet vehicles that would eventually crater the bank in 2008; send its stock price to 99 cents in early 2009; and require the largest bank bailout by the Fed in U.S. history, Weill was also serving on the Board of Directors of the New York Fed. And while Jamie Dimon was CEO of JPMorgan Chase and it was losing what eventually grew to $6.2 billion of bank depositors’ money in wild derivative bets in London, Dimon was also sitting on the Board of the New York Fed. Even when there was a big public uproar over Dimon’s presence on the New York Fed Board as the London Whale derivatives scandal came to light, Dimon remained in place.
Oh, and by the way, the Fed member banks in each of the 12 Federal Reserve Districts that can choose to be regulated by the Fed, literally own their regulator. That’s right, they own the stock in their regional Fed bank, which is a private institution, unlike the Federal Reserve in Washington, D.C. which is an “independent” federal agency. (See, for example, These Are the Banks that Own the New York Fed and Its Money Button.)
As the first crypto-related bank failure occurred on Wednesday (Silvergate Bank) and the second largest bank failure in U.S. history occurred on Friday (Silicon Valley Bank) and the third largest bank failure in U.S. history occurred on Sunday (Signature Bank), President Joe Biden attempted yesterday to reassure the public, stating that “Americans can rest assured that our banking system is safe.”
But by the close of the stock market yesterday, two more banks whose primary regulator was a Fed regional bank had lost more than 40 percent of their market value – in one day’s trading session. (That doesn’t sound to us like things are under control.) Western Alliance Bancorp (ticker WAL), which is also supervised by the San Francisco Fed, lost 47 percent of its market value by the closing bell. Metropolitan Commercial Bank (bank holding company ticker is MCB) lost 43.78 percent of its market value yesterday. It is supervised by the New York Fed.
Adding to the ongoing arrogance of the Fed, its Chairman, Jerome Powell, released a statement two minutes after the market closed yesterday, stating that “The events surrounding Silicon Valley Bank demand a thorough, transparent, and swift review…” So, once again, it’s decided to investigate itself. The Fed’s Vice Chairman for Supervision, Michael Barr, will oversee the investigation.
The last time the Fed decided to investigate itself was over its unprecedented trading scandal where various Fed officials engaged in highly inappropriate trading during the pandemic when Fed officials had insider knowledge of bailout actions the Fed planned to take to stem the stock market rout. Powell referred the investigation into that matter to the Fed’s Inspector General – who reports to (wait for it) the Federal Reserve Board, which is headed by Powell. The first news of that trading scandal came to light in early September 2021. It’s now 19 months later and the public has yet to hear a peep about the results of any investigation into the worst actor in the trading scandal, former Dallas Fed President Robert Kaplan. (See our report: Robert Kaplan Was Trading Like a Hedge Fund Kingpin for Five Years while President of the Dallas Fed; a Dozen Legal Safeguards Failed to Stop Him.)
Against this backdrop of Fed hubris, the PBS program, Frontline, will tonight premiere a two-hour documentary on the Fed’s controversial monetary policies that have led us to this dangerous point in time. The Age of Easy Money comes from the award-winning producers James Jacoby and Anya Bourg.
In the documentary, economist Nouriel Roubini says “We lived in a bubble, in a dream, and this dream and bubble is bursting.” Jim Millstein, Co-Chairman of Guggenheim Securities, shares this: “I’ve never been more worried in the 42 years that I’ve been a professional. The Fed is absolutely right to try and get it [inflation] under control by raising interest rates in slowing economic activity. But the most highly levered players in our economy are going to come under real stress whether that’s households or businesses or governments, as interest costs rise.”
Actually, what’s blowing up right at this moment and scaring the daylights out of the American people are the U.S. banks (some of which were supervised by the Fed) that are sitting on a cumulative $620 billion of unrealized losses.
According to a February 28 statement from the Federal Deposit Insurance Corporation on the condition of federally-insured U.S. banks and savings associations, “Unrealized losses on securities totaled $620.4 billion in the fourth quarter, down 10.1 percent from the prior quarter. Unrealized losses on held–to–maturity securities totaled $340.9 billion in the fourth quarter. Unrealized losses on available–for–sale securities totaled $279.5 billion in the fourth quarter.”
Age of Easy Money will air tonight on PBS stations (check local listings) and on Frontline’s YouTube channel at 9 p.m. eastern time and 8 p.m. central time.