The declarations of the financial authorities and the big banks which try to stem the aggravation of the crisis of the financial system, crossed by contradictions, take on an increasingly bizarre character.
On the one hand, they announce emergency actions, citing mounting dangers, while at the same time insisting that all is well.
As a comment in the Australian Financial Review earlier this week, noted: “It’s one of those great unwritten rules of life: When someone tells you that everything is fine and nothing to worry about, you you can be pretty sure the opposite is true.”
When the Fed and the Federal Deposit Insurance Corporation (FDIC), backed by the Biden administration, launched the rescue operation for wealthy uninsured depositors holding more than $250,000 at Silicon Valley Bank and Signature Bank, they did so by invoking the threat of “systemic risk”. ”
And when, in the early hours of the morning, the Swiss National Bank and the country’s financial regulator, FINMA, announced the extension of liquidity at Credit Suisse, they insisted that there was no threat of contagion from the worsening crisis in the US banking system. Credit Suisse eagerly jumped on the offer and took out a $54 billion loan from the Swiss central bank.
Yesterday saw a major intervention by the biggest US banks to deposit a total of $30 billion with First Republic Bank, which has come under considerable pressure following the demise of SVB.
A total of 11 banks are involved in the deal, led by JPMorgan Chase, Bank of America, Citigroup and Wells Fargo, which will each invest $5 billion, while others including Goldman Sachs and Morgan Stanley will contribute amounts more modest.
Once again, the contradiction between the action taken and the words of comfort that accompanied it was flagrant.
In a joint statement, the banks said their actions reflected “their confidence in the country’s banking system” and that they were deploying their “financial strength and liquidity in the wider system, where they are most needed”.
If they are so confident, why is action necessary?
The decision of Jamie Dimon, the chief executive of JPMorgan, and other bank executives, who are not accustomed to spending billions of dollars at least where they see no prospect of return, indicates that there is real fears about the stability of the whole financial economy. system.
During the 2008 crisis, Dimon played a key role in the acquisition of Bear Stearns and then Washington Mutual. He has since said he would never again be involved in a government-led rescue operation. But the First Republic Bank bailout was exactly that.
Although not the same as the 2008 takeovers, it was arranged after intense discussions with Treasury Secretary Janet Yellen, Treasury officials and financial regulators over the past few days.
A joint statement released by Yellen, Federal Reserve Chairman Jerome Powell and financial regulators said “the show of support from a group of major banks is welcome and demonstrates the resilience of the banking system.”
In fact, it demonstrates the opposite and that the crisis triggered by the failure of SVB is deepening, and there were growing fears that the First Republic might be next to go down.
The First Republic has insisted that it is stable – they could hardly argue otherwise – and its losses are not crushing.
This opinion is not shared by the financial markets. S&P Global Ratings downgraded the company’s bonds to junk status on Wednesday, and its stock price has fallen about 60% this week. Since March 8, when SVB began to tumble, the bank’s market capitalization has plunged from $21 billion to around $5 billion.
A report in the the wall street journal indicated that he was considered something of a high thief. Its “business and stock market valuation has long been the envy of the banking industry”, its clients being mostly high-net-worth individuals and corporations, its lending business involving “the granting of huge mortgages” to clients such as Facebook chief Mark Zuckerberg.
The individual circumstances of the banks that have failed so far, and others that are experiencing growing problems, are not exactly the same. But they have a common denominator. The value of Treasuries and mortgage-backed securities, purchased during the essentially free money period under the Fed’s quantitative easing program and held on their books, has now fallen due to increases in interest rate for the past year.
This discrepancy between the market value of financial assets and their book value is not a problem as long as liquidity continues to flow into bank coffers. But it becomes one if there is an outflow of cash and the devalued financial assets must be sold, realizing the paper losses incurred, to meet customer demands.
And if there is a run on the bank, as was the case with SVB and Signature, then the bank risks insolvency.
The FDIC’s action to insure corporate and high-net-worth individual deposits at SVB and Signature, those holding more than $250,000, has drawn the ire of financial regulators elsewhere, particularly in Europe.
At the start of the week, the FinancialTimes reported that European financial regulators were ‘furious’ about SVB’s management, saying US authorities tore up the rulebook, which they helped draft.
“A senior eurozone official described his shock as ‘complete and utter incompetence’ by US authorities, particularly after a decade and a half of ‘long and boring’ meetings with Americans advocating an end to bailouts,” he said. reported the FT.
Another European regulator, quoted by the FT, said ultimately that the SVB was “a bailout paid for by ordinary people and it is a bailout of wealthy venture capitalists that is really wrong”. An example is the case of Peter Thiel, a Silicon Valley venture capitalist, who deposited $50 million with SVB when he went bankrupt.
A former US Treasury official said the SVB episode reinforced suspicions that “when times get tough, the US will not adhere to globally agreed reforms”.
The European Central Bank held its monetary policy meeting yesterday and decided to go ahead with raising its base interest rate by half a percentage point despite last week’s financial turmoil.
ECB President Christine Lagarde said some members of the bank’s governing council wanted to halt rate hikes to see how the situation develops, but the “vast majority” wanted to continue the hike to show confidence in the situation. the euro area banking system.
But the ECB has signaled it could halt hikes in the future by removing from its statement an earlier commitment that it would continue to “raise interest rates significantly at a steady pace”.
The question of the direction to take in terms of monetary policy will be even more raised at the meeting of the Fed’s governing body next week. It must decide whether or not to continue the rate hikes given the financial disturbances they cause and which are likely to worsen.
The Fed began its hikes a year ago when it became clear that inflation was not “transitional” and was producing a working class surge in favor of wage struggles. The purpose of tightening has never been to “fight inflation,” but to slow the economy, increase unemployment, and induce the recession needed to quell that trend.
The Fed was well aware that rate hikes could spell trouble in financial markets, but recognized that the greatest danger to the financial house of cards was a resurgent working class.
Over the past year, the situation has become more complex for the Fed and all the state mechanisms responsible for defending the interests of the financial oligarchy.
On the one hand, the working class movement continued to grow, presenting the greatest danger of all to the domination of finance capital. As far as the Fed is concerned, this raises the need for continued rate hikes, but on the other hand, they could intensify the underlying financial crisis that has erupted to the surface this week.