By Jim Rickards - June 5, 2024

I’m sure you recall the banking crisis of March to May 2023. It began with the collapse of the little-known Silvergate Bank on March 8. This was followed the next day by the collapse of the much larger Silicon Valley Bank (SVB) on March 9. SVB had over $120 billion in uninsured deposits.

Bank deposits over $250,000 each are not covered by FDIC insurance. Those depositors stood to lose all their money over the insured amount. This would have led to the collapse of hundreds of startup tech businesses in Silicon Valley that had placed their working capital on deposit at SVB.

There were also much larger businesses such as Cisco and at least one large cryptocurrency exchange that had billions of dollars on deposit there. Those businesses would have taken huge write-downs based on the size of their uninsured deposits.

On March 9, the FDIC said that indeed the excess deposits were uninsured, and depositors would get “receivership certificates” of uncertain value and zero liquidity instead.

By March 11, the FDIC reversed course and said all deposits would be insured. The Federal Reserve intervened and said they would take any U.S. Treasury securities from member banks in exchange for par value in cash even if the bonds were only worth 80% of par (which most were).

The Mother of All Bailouts

That Sunday night they also closed Signature Bank, a New York-based bank with crypto links. The damage wasn’t done. On March 19, the Swiss National Bank forced a merge of UBS and Credit Suisse, one of the largest banks in the world. Credit Suisse was on the edge of insolvency.

Finally, on May 1, First Republic Bank, with over $225 billion in assets, was ordered closed by the government and sold to JPMorgan.

It was the mother of all bailouts and seemed to leave stock market investors unfazed. The issue was, and is: Once you’ve guaranteed every deposit and agreed to finance every bond at par value, what’s left in your bag of tricks? What can you do in the next crisis that you haven’t already done — except nationalize the banks?

After five bank failures in two months and a trillion-dollar bailout by the government, the crisis seemed over. But that was false comfort. I wrote at the time that the crisis wasn’t over, that it was just halftime.

Investors are relaxed because they believe the banking crisis is over. That’s a huge mistake. History shows that major financial crises unfold in stages and have a quiet period between the initial stage and the critical stage.

When Slow-Motion Crisis Turns Real-Time

This happened in 1994 when the spring bond market massacre seemed contained in the summer only to explode into the Mexican Tequila Crisis in December.

It happened in 1997–98 when the Asian financial crisis calmed down in the winter of 1998 only to explode into the Russia-LTCM crisis the following August and September.

It happened during the Global Financial Crisis when the original distress in August 2007 that seemed contained was followed by the failures of Bear Stearns, Fannie Mae, Freddie Mac and Lehman Bros. from March to September 2008.

The average duration of these financial crises is about 20 months. This new crisis began 15 months ago. It could have five more months to run, if not longer.

On the other hand, this crisis could reach the acute stage faster. That’s because of technology that makes a bank run move at the speed of light. With an iPhone you can initiate a $1 billion wire transfer from a failing bank while you’re waiting in line at McDonald’s. No need to line up around the block in the rain waiting your turn.

In other words, the second stage of the crisis could erupt in even more dramatic fashion sooner than later. This slow-motion crisis can become a real-time crisis very quickly.

The Dollar Itself Is at Stake

In addition, the regulatory response is faster because they’ve seen this movie before. That begs the question of whether regulators are out of bullets because they’ve already guaranteed almost everything so they don’t have more rabbits to pull out of the hat.

This could be the crisis where the panic moves from the banks to the dollar itself. If savers lose confidence in the Fed (we’re almost there) not only will the banks collapse, but the dollar will collapse also. At that point, the only solution is gold bullion.

It’s also important to distinguish between individual bank failures and a systemic banking crisis. When individual banks fail, the depositors and creditors are usually protected but stockholders can get wiped out.

In a systemic banking crisis, the contagion goes from bank to bank quickly, and the entire system has to be rescued with some combination of blanket deposit guarantees and unlimited QE.

In the worst case, you either have to shut the banks (which FDR did in 1933) or nationalize them which some countries have done from time to time.

Is Stage II Here?

Either a single bank failure or a systemic crisis could happen at any moment. The actual trigger is . . .

[SNIP]