We Are in the Eye of the Hurricane – What Happens Next? – Investment Watch


The Eye of the Hurricane

ESA/A.Gerst, CC BY-SA 3.0 IGO by way of Flickr

From Peter Reagan at Birch Gold Crew

Lately, March sixteenth, is the fifteenth anniversary of the primary financial institution failure of the World Monetary Disaster.  For those who have been taking note of monetary markets again then, you most likely take into account…

On March 14, Endure Stearns, an 85-year-old Wall Boulevard funding financial institution with a good pedigree, introduced main liquidity issues.


To be transparent, “liquidity issues” are dangerous, however they aren’t the tip of the arena. “Liquidity issues” is the banking word that suggests, “We’re excellent for the money, we simply don’t have able cash at this time.”

That used to be believable – in the end, Endure Stearns used to be the fifth greatest funding financial institution within the U.S. They in an instant won a 28-day mortgage from the New York Federal Reserve.

However that wasn’t sufficient – as it became out they didn’t actually have “liquidity issues,” that they had “solvency issues.” (That’s the banking word for, “The entire money’s long gone.”)

Two days later, the Federal Reserve paid JP Morgan $29 billion to procure Endure Stearns. Now, most often in industry, while you achieve a competitor, you pay for it – however JP Morgan executives took one have a look at the poisonous hellscape of Endure Stearns’ stability sheet and would’ve fled the boardroom screaming, with the exception of the Fed’s brokers had locked the door.

Only for a second, attempt to consider for a second a deal so extremely dangerous it’s important to receives a commission $29 billion to mention sure.

A yr prior to this shotgun marriage ceremony, Endure Stearns used to be value $25 billion. By the point the deal used to be signed, its inventory had misplaced 97% of its price and the financial institution used to be possibly value about -$29 billion.

On the time, Federal Reserve Chairman Ben Bernanke defended the transfer via bringing up contagion fears: 

Given the phenomenal pressures at the international financial system and fiscal device, the wear and tear led to via a default via Endure Stearns can have been critical and very tricky to comprise.

In different phrases, his common sense used to be, “We did this now to forestall larger issues later.”

Jamie Dimon, head of JP Morgan, agreed:

A Endure Stearns chapter may just smartly have touched off a series response at different main monetary establishments. That might have shaken self belief in credit score markets that have already got been battered.

Challenge achieved?

Nope. Now not even shut.

In hindsight, Endure Stearns’ surprising fall from grace wasn’t the tip of the monetary disaster, however the starting.

“How do you pass bankrupt? Two techniques: Steadily, then all of sudden”

I consider this Hemingway quote so much. It sort of feels particularly suitable when having a look again at the Nice Monetary Disaster.

As I remembered it, as I lived it, the dangerous information got here suddenly: Endure Stearns collapsed. Then Lehman Brothers, IndyMac, Countrywide, the federal government nationalized Fannie Mae and Freddie Mac – and all of sudden the Federal Reserve used to be bailing out each and every financial institution on the earth, masses of billions of greenbacks gushing out of the central financial institution like water from a damaged hearth hydrant.

It looks like the worldwide monetary device fell aside all through one nightmarish three-day weekend.

However reminiscence’s a humorous factor. As a result of that’s now not the way it came about.

There have been no surprising crises, no earth-shattering occasions for the following six monthsTill September, 2008.

That’s when the government nationalized the 2 lending insurers Fannie Mae and Freddie Mac.

One week later, Lehman Brothers, the 150-year-old international funding financial institution and one of the crucial revered companies on Wall Boulevard, filed for chapter.

The next day to come, the Federal Reserve bailed out AIG, the most important insurer within the U.S.

Prior to the tip of the month, Washington Mutual used to be seized via the FDIC. Wachovia, any other main U.S. financial institution had a shotgun marriage to Wells Fargo.

And the 2 greatest funding banks, Morgan Stanley and Goldman Sachs, shapeshifted into “financial institution protecting firms” so they may line up with the remainder on the Fed’s bailout window.

Right here’s my level:

The final monetary disaster began slowly – and grew all of sudden.

If we have a look at even a primitive timeline of key occasions within the 2008 monetary disaster, my level turns into transparent:

a very primitive timeline of the main events of the 2008 financial crisis

Will this time be other? Most likely now not.

I wouldn’t be in any respect shocked if we noticed a months-long quiet duration after the Silvergate and Silicon Valley Financial institution (SVB) and Signature Financial institution screw ups. I’m calling this the attention of the typhoon.

Right here’s the item: each and every financial institution is dealing with the similar problems that toppled SVB. Check out what Patrick McKenzie known as “one of the crucial vital charts within the monetary global,” courtesy of the FDIC:

FDIC report, U.S. bank capital reserve losses, February 2023

by way of FDIC

The U.S. banking device has misplaced $620 billion (up to now). The losses will proceed, as a result of they’re because of the Federal Reserve’s rate of interest hikes. I plan to speak about this in additional element the next day.

So what’s the lesson right here?

  • 3 banks failed first, as a result of they skilled surprising withdrawals – and that makes a big decline of their capital reserve unsurvivable.
  • Just about each and every different U.S. financial institution has precisely the similar drawback.
  • And, because it isn’t simply the Federal Reserve preventing inflation via elevating rates of interest, however the Financial institution of England, the Ecu Central Financial institution (mainly each and every central financial institution) – banks international have precisely the similar drawback.

(As an example, nowadays at 2 a.m. Credit score Suisse used to be rescued via a $54 billion line of credit score from the Swiss Nationwide Financial institution. That’s the primary central financial institution bailout since 2008.)

I imagine we’re within the eye of the typhoon nowadays.

Right here’s my worry. When issues relax, it’s simple to put out of your mind that the typhoon ever came about.

However the typhoon hasn’t disappeared – a long way from it.



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