From Peter Reagan in birch gold group
Today, March 16, marks the 15th anniversary of the first bank failure of the World Financial Crisis. If you were paying attention to the financial markets back then, you probably remember…
On March 14, Bear Stearns, an 85-year-old Wall Street investment bank with a respectable pedigree, announced significant liquidity problems.
To be clear, “liquidity problems” are bad, but they are not the end of the world. “Liquidity problems” is the banking phrase that means, “we are good for moneyWe just don’t have cash available right now.”
That was plausible: Bear Stearns was the fifth-largest investment bank in the US, after all. They immediately received a 28-day loan from the New York Federal Reserve.
But that was not enough, because it turned out that they did not actually have “cash problems”, they had “solvency problems.” (That’s the bank phrase for “All the money’s gone.”)
Two days later, the Federal Reserve paid JP Morgan $29 billion to acquire Bear Stearns. Now, usually In business, when you buy a competitor, you pay for it, but JP Morgan executives took one look at the toxic inferno of Bear Stearns’ balance sheet and would have fled the boardroom screaming except Fed officials had closed the door. door.
Just for a moment, try to imagine for a moment a deal so unbelievably bad you have to get paid $29 billion to say yes.
A year before this forced wedding, Bear Stearns was worth $25 billion. When the deal was signed, its shares had lost 97% of their value and the bank was presumably worth about -$29 billion.
At the time, Federal Reserve Chairman Ben Bernanke defended the move quoting contagion fears:
Given the exceptional pressures on the global economy and financial system, the damage caused by the Bear Stearns default could have been severe and extremely difficult to contain.
In other words, their logic was: “We did this now to avoid bigger problems later.”
Jamie Dimon, head of JP Morgan, agreed:
A Bear Stearns bankruptcy could well have set off a chain reaction at other major financial institutions. That would have shaken confidence in already battered credit markets.
Mission accomplished?
No. Not even close.
In retrospect, Bear Stearns’ stunning fall from grace was not the end of the financial crisis, but the beginning.
“How do you go bankrupt? In two ways: gradually, then suddenly.”
I think about this Hemingway quote a lot. He seems especially apt when he looks back on the Great Financial Crisis.
as i remembered it, how i lived it, the bad news came with a bang: Bear Stearns collapsed. Then Lehman Brothers, IndyMac, Countrywide, the government nationalized Fannie Mae and Freddie Mac, and suddenly the Federal Reserve was bailing out every bank in the world, hundreds of billions of dollars pouring out of the central bank like water from a broken fire hydrant.
It feels like the world’s financial system collapsed during a nightmarish three-day weekend.
But memory is a funny thing. Because that’s not how it happened..
There were no sudden crises, no momentous events. for the next six months. Until September 2008.
It was then that the federal government nationalized the two credit insurers Fannie Mae and Freddie Mac.
A week later, Lehman Brothers, the 150-year-old global investment bank and one of Wall Street’s most respected firms, filed for bankruptcy.
The next daythe Federal Reserve bailed out AIG, the largest US insurer.
Before the end of the month, the FDIC seized Washington Mutual. Wachovia, another major US bank, was forced into a marriage with Wells Fargo.
And the two largest investment banks, Morgan Stanley and Goldman Sachs, became “bank holding companies” so they could align themselves with the rest on the Federal Reserve’s bailout window.
Here is my point:
The last financial crisis began slowly – and grew suddenly.
If we look at even a primitive timeline of key events in the 2008 financial crisis, my point becomes clear:
This time it will be different? Probably not.
I would not be at all surprised if we see a quiet period of months after the failures of Silvergate and Silicon Valley Bank (SVB) and Signature Bank. i’m calling this the eye of the hurricane.
Here’s the thing: all banks face the same problems who overthrew SVB. take a look at what Patrick McKenzie called “one of the most important charts in the financial world,” courtesy of the FDIC:
through FDIC
The American banking system has lost $620 billion (until now). the losses to be continue, because they are due to interest rate hikes by the Federal Reserve. I plan to discuss this in more detail tomorrow.
So what is the lesson here?
- three banks failed firstbecause they experienced sudden withdrawals, and that makes a large decline in their capital reserve insurmountable.
- Virtually all other US banks have exactly the same problem.
- And, since it’s not just the Federal Reserve that fights inflation by raising interest rates, but the Bank of England, the European Central Bank (basically each central bank) – Banks around the world have exactly the same problem.
(For example, today at 2 am Credit Suisse was bailed out by a $54 billion credit line from the Swiss National Bank. That’s the first central bank bailout since 2008.)
I think we are in the eye of the hurricane right now.
Here is my concern. When things calm down, it’s easy to forget that the hurricane ever happened.
But the hurricane has not disappeared, far from it.
