Banks Went Dumb, And We’re All About to Pay For It

The one-two punch facing small banks right now could fuel a bigger crisis. ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ June 08, 2024 Banks Went Dumb, And We’re All About to Pay For It “Banking is very good business if you don’t do anything dumb.” – Warren Buffett [Special Reminder: In case you missed [our recent announcement]( The Essential Investor has merged with legacy contributors to Agora Financial. The new, larger, more inclusive project is called The Grey Swan Investment Fraternity. If you’re interested in the scope and benefits of our new endeavor, please see what prompted us to merge [here](. If you’ve been a member of The Essential Investor, please keep an eye out for your new benefits.] Dear Reader, June 7, 2024 – For years, I’ve warned investors about the dangers America’s banking system poses for the global economy. I specifically warned readers about banks leading up to the meltdown of Silicon Valley Bank in March, 2023. The Grey Swan Investment Fraternity was founded in part to look at how the banking system could easily face another massive meltdown… which would materially impact your wealth. Consumer banking is especially vulnerable right now, given the Fed’s efforts to rein in inflation with interest rates at their highest levels in 15 years. That’s why we look at several angles to the baking story, including total consumer loans relative to the personal savings rate. Our Managing Editor, Andrew Packer, has been closely following the meltdown of the banking actor, and he’s got a concerning update for you today. Enjoy ~~ Addison  More BELOW... --------------------------------------------------------------- --------------------------------------------------------------- --------------------------------------------------------------- >>ADVERTISEMENT<<   Millionaires will be minted OVERNIGHT [Turn Your Images On]( Headline: Legendary tech futurist who predicted the rise of Amazon, Netflix, and Apple YEARS in advance now says: “The biggest, most profitable technological advances in the future will ALL stem from this single breakthrough. Millionaires will be minted overnight.” He’s revealing EVERYTHING here. [Click here now](.    --------------------------------------------------------------- --------------------------------------------------------------- --------------------------------------------------------------- CONTINUED FROM ABOVE...  Banks Went Dumb, And We’re All About to Pay For It  Andrew Packer, Grey Swan Investment Fraternity Banking is a simple concept. Even a child can grasp the idea. You collect deposits, make loans, and get by on the spread between the two. In practice, it’s as simple as following the 3 – 6 – 3 rule. That’s when you borrow money at 3%, lend it out at 6%, and set a 3 p.m. tee time. Done right, it’s a good life. So if it’s really this simple … then why do American banks keep failing? In short, it’s because of dumb decisions. And that’s created a nightmare for all involved. We saw a hint of that trouble last year. In 2023, the second, third, and fourth-largest bank failures in U.S. history occurred. What happened? Bankers abandoned the 3 – 6 – 3 rule. And now taxpayers face at least half a trillion dollars in potentially bailing out the banks yet again. Let me explain how this latest banking mess started… Losing Money on Risk-Free Investments In theory, banks tend to operate as risk-averse entities. When they make loans, they want to have sufficient collateral. That’s why a typical 30-year, fixed-rate mortgage is secured by a home and why the borrower typically has to put 20% down. When interest rates hit zero during the pandemic, lending didn’t look attractive. It wasn’t just the lower rates. After all, most banks stopped paying depositors after the 2008 housing crisis, or only offered token yields of less than 1%. Rather, it was the risk of the economy staying mired in a recession for years. So banks started buying U.S. Treasury bonds. In the financial world, U.S. Treasury bonds are considered the only risk-free asset. That’s because Uncle Sam can either tax, borrow more, or simply print money to pay back its lenders. It usually does a mix of all three (at least for now). So there’s no default risk. But there’s another kind of risk, which bankers ignored entirely, even though they could have hedged it. I’m talking about interest rate risk. When the Federal Reserve started belatedly raising interest rates in 2022 to combat inflation, bond yields rose. For yields to rise, bond prices have to fall. If you hold a 30-day Treasury bill, you won’t notice a change if the Fed hikes rates during that time. But if you hold a 10-year or 30-year Treasury bill, you’ll see a big drop in price. Those were exactly the bonds banks were buying to get a higher yield on their cash. This created a liquidity crisis for many banks, starting with Silicon Valley Bank. They weren’t bankrupt per se … as long as they could hold the bonds to maturity. But when bank depositors want their money back en masse, assets have to be liquidated at their current value. Bug, meet windshield. The collapse of Silicon Valley Bank ended the second-longest run between bank failures in U.S. history.  [Turn Your Images On]  Only in the period between 2004 and 2007 – during the buildup of the housing bubble – was there a longer period of blue skies and sunny days for banks. Fortunately, the Federal Reserve was able to quickly paper over the 2023 banking crisis by creating the Bank Term Funding Program (BTFB). Under the BTFB, banks were able to hand their long-dated bonds over to the Fed and get the full face value. While that stopped the banking crisis from escalating, that program only lasted a year. This week, the FDIC quietly announced that banks have unrealized losses of over $517 billion. And that 63 banks are at high risk of seizure. For comparison, for all of last year’s banking fears, the FDIC closed just five banks. But there’s a bigger problem banks face today… Meet the New Property Meltdown Pinnacle Bancorp Texas just foreclosed on Burnett Plaza, the largest building in Fort Worth, last month. The 40-story office building has had trouble maintaining its vacancy rate in the post-Covid era. The rise in remote and hybrid work means companies need less office space. That’s why a number of liens and lawsuits have piled up against the building’s prior owners. And there’s now claims of fraud tied to a ground lease. That’s just an extreme example. Two weeks ago, an office building in Denver’s Greenwood Village neighborhood sold for half of its last prior sale. One of the largest office towers in St. Louis sold for over a 70% discount to its last prior sale earlier this year. These numbers are worse than the housing market during the bubble. In most markets between 2007 and 2012, home prices declined around 20%. The fact is … the demand shock for office properties is real, even in fast-growing states like Texas and Florida. Some owners are considering converting their office buildings to residential or even mixed-use buildings. However, converting properties will take time, and more loans will likely be needed in the meantime. One estimate from Capital Investors suggested that commercial properties could see a full 20% loss in value, on average. Meanwhile, Pinnacle Bank’s new albatross property highlights the problem. Many local commercial loans originate and stay at local banks, which don’t have the financial diversity of Wall Street firms. That may be why just yesterday, ratings agency Moody’s just put six regional banks on downgrade watch. Moody’s specifically called out these banks for their high levels of commercial real estate debt. If these banks continue to report the loans on their books without considering impairments, they’re misleading the changing nature of the office market. Moving Forward Safely Banks have made some dumb moves. They’re holding too much long-dated debt, and interest rates are surging to their highest level in 15 years. Meanwhile, their exposure to the collapsing office market makes smaller banks particularly vulnerable. That’s a powerful one-two punch that could knock out a number of small banks. There are over 4,000 banking institutions in the U.S. right now, but that number has been declining for decades. The current crisis could accelerate that process. For now, investors in bank stocks should stay nimble. There may be a chance to buy a bank that takes an unfair hit in a crisis. But those opportunities are few and far between. You can still keep your money in a small bank. The recent FDIC seizures typically cause a bank to close its doors at 5 p.m. on Friday, with a big buyer like JPMorgan Chase taking over operations in time for the bank to open under new management on Monday. But if you’re a shareholder in that bank … you’ll be wiped out by government decree. For now, it may be best to avoid owning banking stocks in general. A big enough crisis in the commercial property market could easily trickle up to the Wall Street banks, much like how bundling home mortgages nearly caused the financial system to collapse in 2008. There are times when banking is a good business. Right now? Even smart bankers could get blindsided by events. ~~ Andrew Packer, Grey Swan Investment Fraternity So it goes, Addison Wiggin, The Wiggin Sessions P.S. Having some of your wealth stored outside of a bank is a good idea, given the increased risks to the banking system right now. While gold’s price may take a hit in a global crisis, in the aftermath, which is likely to prove inflationary, gold could come out even stronger. Plus, it’s wealth that isn’t held by an intermediary like a banker of money manager. (How did we get here? An alternative view of the financial, economic, and political history of the United States from [Demise of the Dollar]( through [Financial Reckoning Day]( and on to [Empire of Debt]( all three books are available in their third post-pandemic editions.) (Or… simply pre-order [Empire of Debt: We Came, We Saw, We Borrowed]( now available at [Amazon]( and[Barnes & Noble]( or if you prefer one of these sites:[Bookshop.org]( [Books-A-Million]( or [Target]( Please send your comments, reactions, opprobrium, vitriol and praise to: addison@greyswanfraternity.com The Daily Missive from The Wiggin Sessions is committed to protecting and respecting your privacy. We do not rent or share your email address. By submitting your email address, you consent to The Wiggin Sessions delivering daily email issues and advertisements. 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