By Tom Luongo - March 21, 2023

So, Credit Suisse is no more. Good riddance? I think this is an open question given the very complicated landscape of the global banking system today. By the time I’m done here I think you’ll have an answer that no one, including me, was expecting.

There’s a lot to cover, so let’s start at the beginning.

In the wake of the “three-fer” take out of Silvergate, Silicon Valley and Signature banks by the ‘market’ I think we have a pretty clear picture of what’s really going on.

This wasn’t a ‘market’ operation. It was a Fed/NY Boys operation and a very successful one.

The Fed (and only the Fed through its proxies) had the motive, means and opportunity to perform the hit job. I wrote a big post for my patrons on March 11th (now made public) going over this.

These Three S’s were all operating as offshore Shadow banks. As Phil Gibson pointed out on his most recent Substack article:

SVB ultimately runs its funding the way Startup funding does:

- A person with $1b comes in and puts $1b into SVB. They go out to a startup and sign a term sheet. This sheet says that the startup will deposit its money in SVB.
- Then SVB goes out and loans that $1b out to another VC. Who ‘invests’ it in another startup, who’s term sheet says they will keep their deposits in SVB.

- So now SVB has take $1b dollars and made it $2b dollars. Without any fed regulation or intervention.

To which I would add the deposits coming back in were then invested in long-dated US Treasuries and marked as ‘hold to maturity.’ This meant they couldn’t be sold. This was a good deal as long as the short-end of the yield curve stayed at the zero-bound, or at least below that of the long-end.

As the Fed raised rates, well, not so much. Too bad, so sad, see you at the Auto Show, SVB.

Rates rising were one thing impairing SVB’s balance sheet but the inversion of the US yield curve didn’t help things either. All it took was a whisper campaign by people with three working brain cells to see the situation for what it was and execute the bank.

Easy peesy, bank run squeezy.

A lot of people have been all over the Fed for this screaming that the Big Banks are rolling up the small banks, but if that were the case why have no other small banks failed?

Why did the Bank Term Funding Program (BTFP) basically allow the Regional banks who had similar holes in their balance sheets to SVB (but who also had risk management officers on staff!) to swap them at par with the Fed at a fixed-term rather than forcing them onto the Walk of Shame to the Discount Window?

Bueller? Frye?

It’s because the BTFP actually saved the regional banks, while simultaneously raising FDIC insurance for insured accounts to infinity and beyond. And while that is a real problem of moral hazard which the Fed and the US will pay for later, it was absolutely the right strategic move from the Fed’s perspective today.

It also created a virtuous cycle for the onshoring of US Treasuries now that the US banking system will need high quality collateral to offset higher savings rates that are inevitable thanks to the Fed taking the smaller banks under its protection.

The ones screaming for the Fed to lower rates and go back to QE are the ones who can’t use the BTFP or they are gold bugs who need to be right that this is it, this is the day they get vindicated for years of being myopic putzes thinking only gold is the answer.

Don’t even get me started on the Bitcoin Maxis.

When, honestly, tboth groups refuse to realize they are simping for the very people who have ensured that gold and bitcoin stay on the margins of the financial system through egregious leverage for more than a decade.

But, I digress.

In effect, the swiftness with which the Fed acted (and crammed an unpalatable solution down Janet Yellen’s throat) actually shores up the regional banks while leaving the Fed free now to continue raising rates and shrinking its balance sheet all while increasing the demand for US Treasuries during a period of intense de-dollarization.

The price? A few extra billions of rent was paid off to the thieves. But, that’s it. The spigot has been closed, the stopcock broken off and the valve filled with molten lead. Gone. Done.

Well, except a few here and there via swap lines to make it look like they aren’t heartless.

But please note the ECB got the same terms on a USD/Euro swap that the Regional Banks get from the Fed. We didn’t see Powell announce an emergency rate cut or anything like that.

If anyone did the bank Walk of Shame it was the ECB.

The point of my opening argument is that the Fed did exactly what it was chartered to do here…. protect the US banking system. And it did that while paying lip service to coordinating central bank policy to keep US dollar funding markets liquid, which is also part of its job, as long as it is in service of its primary job, protecting US banks.

And, as I’ve argued over and over, while there are still massive holes in the global financial system because there aren’t enough dollars to go around, the Fed is now in control of who gets those dollars. Watching who does and who doesn’t get preferential treatment is now the key to understanding what happens next.

You, Me and the FDIC

Right up until his death, the Calvinist OG of the Austrian Economic Sewing Circle, Dr. Gary North, wrote about FDIC and its importance in ending the Great Depression. He wrote volumes on the subject. North understood better than nearly everyone that fractional reserve banking is a confidence game.

And FDIC in the US is the bedrock on which confidence in the post-Great Depression US Empire was built. Well, okay, FDIC, the Marshall Plan, LIBOR, and the whole Eurodollar global reserve fantasy world if you want to be pedantic.

Whether you agree with fractional reserve banking or not is irrelevant. It exists, is the paradigm on which our banking system operates, and has very predictable fault lines within it guaranteeing bank runs at some point.

Milton Friedman and his disciples are wrong about what started and stopped the Great Depression. Capital flight out of Europe because of a sovereign debt crisis sent US equity markets to new highs thanks to a strong US dollar, per Martin Armstrong’s analysis, and North was right that FDIC was the only thing that curbed the demand to hoard dollars under mattresses and put them back to work in the banking system.

So, read his 2019 missive explaining the situation in the aftermath of the Repo Crisis and think through the massive liquidity injection by Keynesians in our government in “response” to COVID-19, which FOMC Chair Jerome Powell argued against, and you’ll see echoes of where we are today.