Global Economic Crisis

Sheldon Filger-blogger for GlobalEconomicCrisis.com

Today the California based First Republic Bank was seized by the FDIC (Federal Deposit Insurance Corp.). It had 229 billion dollars in assets, making its demise the second largest bank failure in US banking history. Only a month ago, the number two spot was held by another California based banking institution, Silicon Valley Bank.

The FDIC worked out an agreement whereby First Republic’s assets will be taken over by JP Morgan Chase. In return, the FDIC will pay out about 13 billion to cover losses. Under the agreement worked out by the regulator, all of First Republic’s 84 locations in 8 states will reopen as branches of JP Morgan,

With the collapse of First Republic, the FDIC has had to grapple with three major bank failures in just over a month. This is further evidence that a banking crisis is underway in the United States, it is accelerating and is reflective of deep seated financial and economic weakness in the national and global economy.

It should be recalled that the Great Depression, which began with the stock market crash of 1929, became far worse and spread globally when a major Austrian bank, Creditanstalt, collapsed in 1931. The collapse of 3 American banks during the past month, including the second and third largest banking failures in American history, is the canary in the coal mine as the Global Economic Crisis worsens.

Sheldon Filger-blogger for GlobalEconomicCrisis.com

The collapse of SVB (Silicon Valley Bank) has sent shock waves throughout the financial world. It has also aroused a morbid sense of deja vu harkening back to 2008, when the global banking system seized up, leading to the Global Financial Crisis. With 175 billion dollars on deposit as of December 2022, SVB was the largest regional bank in Silicon Valley, playing an important role in financing the hi-tech sector.

The highly speculative model employed by SVB (high level of unrealized losses accentuated by Fed rate hikes)) led to its failure, being forced to close after a run on deposits. Unable to engineer a quick sale of SVB, the Biden administration, in a fit of panic which may be justified, took extraordinary measures. About 85 percent of deposits at SVB were not insured by FDIC, which has a cap of $250,000 . The Treasury Department decided to ignore the cap and guarantee that all deposits at the failed bank would be covered. It added, as strictly PR, that U.S. taxpayers should not worry, as they would not cover the cost, leading to the question of who will.

The SVB deposit resolution had barely been announced when New York state regulators shut down Signature Bank, which had 80 billion dollars on deposit and was involved in speculative assets, in particular cryptocurrency..

Both these bank failures, occurring withing days of each other, took the financial world by surprise. The risk of contagion is real, explaining why entities such as the U.S. Treasury are taking extraordinary policy measures.

One likely casualty of these bank failures is the war on inflation being waged tardily by the U.S. Federal Reserve. Only days earlier the Fed had convinced the markets that another rate hike of up to fifty basis points was on the way. Now this seems doubtful, and if more bank failures occur the Fed may even go in reverse. This means that in addition to the danger of a banking collapse, an alarming acceleration in inflation is a serious possibility.

The FDIC once again did its Friday Night below-the-radar exercise; shutting down insolvent banks while Americans and their news media were in low gear or distracted. This time, five more banks were shuttered, while the U.S. media overdosed on coverage of the wedding of the daughter of former president Bill Clinton.

With the FDIC closing of 5 banks in Oregon, Washington,  Florida and Georgia, the total for the first 7 months of 2010 stands at 108 failed institutions. This compares with a mere 69 at the same point last year. And 2009 was supposedly one of the worst years ever for bank closings in the United States since the Great Depression of the 1930s.

Despite claims by U.S. economic policymakers that the American banking crisis was “cured” by the U.S. Treasury and Federal Reserve bailouts of the nation’s financial industry, there is no doubt that FDIC bank closings will set a record in 2010, eclipsing the already dismal figures for 2009.

In my book, “Global Economic Forecast 2010-2015: Recession Into Depression,”  I project a severe deterioration in the U.S. banking sector during the latter part of 2011. The accelerating pace of FDIC bank closings, combined with the  continuing global economic crisis and  indications of a double dip recession, would seem to provide growing validation of my prediction.

In 2009 the United States experienced its worst year for bank closures since 1992. It now looks like 2010 will be an even more critical year for U.S. banks, with the FDIC on pace to exceed the 2009 record of 140 banks closed. With three more banks shut down by the FDIC after the Friday news cycle slowed for the weekend ( the customary bank shut down procedure for the FDIC), the total number of bank failures for 2010 already stands at 86.

Why are so many U.S. banks being closed after the U.S. Treasury Department’s vaunted bank stress test last spring declared America’s financial institutions to be healthy and well capitalized? Because, as I stated in my blog comment at the time, the so-called banking stress tests were a complete charade. In reality, much of America’s banking and financial system is virtually insolvent, and about to face an implosion in commercial real estate valuations polluting its balance sheets, along with the asset erosion that will be worsened by the pending double dip recession.

The global economic and financial crisis is far from over. The next phase in the deteriorating banking crisis in America, the UK and Eurozone points to a global recession morphing into a worldwide depression.

It is the third week of January, 2010 and the FDIC has already shut down 9 insolvent banks. True to form, these bank closures are typically announced on Friday nights, with the expectation that the weekend will allow only limited news coverage. Nevertheless, this attempt by the FDIC to manage the news and limit media exposure cannot disguise the fact that the American banking system enters 2010 in a state of acute fragility.

The seventh bank of 2010 to be shuttered was the Charter Bank in Santa Fe, the first bank in New Mexico to be closed in more than 10 years. Other bank closings occurred in Oregon, Washington, Florida, Missouri and Minnesota. All in all, not an auspicious beginning to 2010, the year that the Obama administration predicted would show strong economic growth and the emergence of the U.S. from recession and job losses.

Like a thief in the night, the FDIC waits until Friday evenings to announce its latest list of bank failures. This propensity for stealth news on America’s crippled banking system is based on fear that if the information was released to the public in the middle of the week, with news rooms fully attentive, panic might result. This week’s quota of Friday bank follies courtesy of the FDIC is that seven more financial institutions have failed and had to be closed.

This streak of bank collapses posted on late Fridays is occurring with monotonous regularity. Yet, the bank stress tests stage-managed by U.S. Treasury Secretary Tim Geithner last spring were supposed to assure us that the banking system of the United States was solvent and well capitalized. This mythology is increasingly being ripped apart by this never-ending stream of nocturnal end-of-the-week press releases, courtesy of the FDIC.

Despite the record profits being posted by bailed out financial institutions, and the vast bonuses they are awarding to their top executives, I believe the growing list of bank closures, and the depletion of the  FDIC`s fund for paying depositors of these same banks, is a more reliable indicator on the state of banking in contemporary America.

The number of bank failures in the United States continues to climb. Over the weekend, the FDIC closed the 95th failed bank this year. The Federal Deposit Insurance Corporation is on track to shut down more than 100 before the year is done, versus a couple of dozen in all of 2008.

While U,S, taxpayers mortgaged their futures to prop up the “too big to fail” banks, those financial instituitons that don’t meet that threshhold are falling like autumn leaves. And Bernanke claims the recession is over. What planet is he living on?

The Obama administration will remove $250 billion for additional emergency funding for the financial system, and $78 billion for additional funds for Federal Deposit Insurance Corporation from the budget. That takes the projected deficit down to just below $1.6 trillion. Add those figures back in and the deficit would have been forecast at over $1.9 trillion, higher than the previous updated projection.

Of course, this is simply a bookkeeping exercise. With the FDIC shutting down insolvent banks at warp speed, and the global credit markets still largely frozen with toxic assets, who does the Obama administration think it is kidding?

In the wake of last fall’s  $700 billion taxpayer funded bailout of the financial and banking sector, the so-called TARP program, the decision makers in Washington have been engaging in a fiscal masquerade. The objective: convince the public that America’s banks, with balance sheets choking on toxic assets, are actually well-capitalized and secure. This, despite clear evidence that at least $2 trillion in additional funding would be needed to clean up the nation’s problem banks. To convince U.S. citizens and global investors that all is well with the American banking system, Treasury Secretary Timothy Geithner concocted a misnamed “stress tests” to demonstrate the fiscal health of the country’s banks. Not surprisingly, the major banks “passed” the Geithner test, for the most part with flying colors. My readers will recall that I labelled the Geithner stress test a fraudulent exercise in deception. Now, it is reality that is casting its impartial verdict.

The Federal Deposit Insurance Corporation (FDIC),  over the past few days , closed several banks, including Alabama based Colonial Bank. This institution, with $25 billion in assets, represents the 6th largest bank failure in American history. So far, 2009 has witnessed 77 bank failures in the United States. In all of 2008, the year that the banking crisis exploded, 35 banks were shut down by the FDIC, and only 3 in 2007.

With the number of bank failures accelerating, and running far ahead of last year’s pace, it is preposterous to conclude that the U.S. banking sector is well capitalized and strong enough to endure a severe economic recession. Yet, that is exactly the fantasy world the key economic policymakers in the Obama. administration  are beckoning us to embrace.

This problem of cognitive dissonance is not a uniquely American one, however. In Western Europe there is a numbing resistance to understating how vulnerable that region’s banks are to the disastrous and worsening economic situation in Eastern Europe. As with America and the UK, former Soviet bloc countries have suffered a severe contraction in home prices. In addition, many East European homebuyers obtained their mortgages from banks located in Germany, Italy, Austria and other parts of Western Europe. The loans were structured in euros, and now virtually all the national currencies in Eastern Europe have severely declined in value in relation to the euro. The results is a wave of mortgage defaults, which are eroding balance sheets throughout the European banking system.

Action speaks louder than words. Economic realities in the United States, Eurozone and UK, and the multiplication of bank failures in America, point to the futility of trying to pretend a problem does not exist, then converting that ignorance into a solution. Just as the political decision makers lost control over the financial system in 2008, they seem headed down the same path now, having failed to learn from their recent mistakes, which have already inflicted such a fearful cost on the global economy.