BANKS JUST GOT UNLIMITED MONEY (Major Bailout Explained)

This morning, the government is deploying emergency measures to stop a potential banking crisis. In the last hour, trading in several regional banks has been halted. Some regional banks have cratered, losing 60, 70, even 80 percent of their value.

"What's up, guys? It's Graham here!" So we have just witnessed the largest banking bailout since the Great Financial Crisis, with a new plan that would completely backstop losses and provide infinite money to banks in need. Although for some, this still might be too little, too late. After all, regional bank stocks have already just taken their largest single-day loss ever in history, with customers continuing to take their money out. Lawsuits are beginning to emerge throughout the banking industry, and rumors are circulating that the FED may have no other choice other than to pause the rate hikes on March 22nd in an effort to restore faith in the economy.

That's why we really have to talk about the latest updates in terms of exactly what's happening, how these new policies are expected to change the entire banking system, and what this means for you watching. There are some serious changes that are about to go into effect over these next few days. Although before we start, if you appreciate the information, it does help out tremendously if you subscribe. If you want to be kept up to date on this information before I'm able to make a full video on it, I'll link to my newsletter down below in the description. Again, it's totally free, and I post all my research on there. So thank you guys so much if you want to be a part of it.

And now, with that said, let's begin. All right, so first, we gotta talk about Silicon Valley Bank. For those unaware, this was the 16th largest bank in the United States, with over 200 billion dollars under deposit. Essentially, this was the bank for venture capital throughout the tech industry and served as a hub for thousands of businesses around the country. However, banks don't just take your money and throw it under a mattress; instead, they invest it.

In this case, about a year ago, Silicon Valley Bank took a hundred billion dollars and invested that throughout government-backed bonds, with a significant portion locked away for three to four years at an interest rate of just 1.79. Essentially, this meant that Silicon Valley Bank had all of their customers' money, but it was illiquid in the event that all of them wanted their money back at the exact same time, which was exactly what happened. With venture capital slowing down, more and more of their bank's customers were drawing on their deposits, forcing them to begin selling off their assets at a loss. This worried customers that the bank could potentially be facing insolvency, which caused even more people to begin withdrawing their money from the bank.

Until eventually, the bank shut down and was overtaken by the FDIC. In fact, more than 42 billion dollars of withdrawals were initiated in just one day, which the bank obviously didn't have on hand. Normally, FDIC insurance would cover customer deposits up to 250,000 available the next day. However, what made this so unique is that Silicon Valley Bank focused on businesses, and more than 97 percent of them held more than the FDIC limit, meaning they were not guaranteed to get their money back.

Now, here's the thing: fortunately, the bank has all of the money. It's not like it was completely lost, stolen, or entirely mismanaged. But that money was tied up in assets that can't quickly be sold off without taking a huge loss, and that was a problem on short notice. After all, it would be kind of like telling a millionaire to give you a million dollars. They have it on paper, but it would take time to sell the house, sell the car, liquidate the stocks, and actually give you a million dollars in cash.

That's why initially, the FDIC devised a plan to immediately return the first two hundred and fifty thousand dollars, and then short the after account holders would receive an advanced dividend of roughly half their account value, with the rest being returned in scheduled installments as bank assets are sold off. Essentially, this would allow their customers to recoup most, if not all, of their money within a relatively short period of time. But that was not enough to satisfy people's concerns if a complete banking fallout occurred over the weekend.

So a final bailout was created on Sunday night. A statement issued by the U.S. Treasury said that depositors will have access to all of their money starting Monday, March 13th. No losses associated with the resolution of Silicon Valley Bank will be borne by the taxpayer. Now, if you're curious about exactly how this is going to work and exactly who is going to pay for the losses, all of it starts with what's called the FDIC. This is insurance that banks pay into that acts almost like a savings account in the event that the FDIC has to pay out.

In this case, the FDIC is able to use those reserves to bridge the gap between the bank and the customer, and any additional losses will be recovered by a special assessment on the banks as required by law. This basically means the banks will have to pay an additional premium on their insurance. Silicon Valley Bank's assets will be liquidated, and the net loss over time is probably not going to be that severe. Remember, the bank has all of the money; it's just temporarily locked away in really bad investments. So this would prove to be a solution where no customers are harmed in the process.

In addition to that, the Federal Reserve Board announced that it will make available additional funding to eligible depository institutions to help assure that banks have the ability to meet the needs of all of their depositors. Under these conditions, banks would be able to receive a loan for up to a year, as long as they promise to pledge those assets against treasuries, agency debt, mortgage-backed securities, and other qualifying assets. Basically, this means that banks will have unrestricted access to as much money as they need to if people want to withdraw it from the bank.

And that's what brings us to today. Despite the Federal Reserve's best attempts to calm the market, many regional bank stocks are in free fall, with many of them halted under what's known as a circuit breaker. This is a rule that was initially put in place after the infamous Black Monday of 1987, where the stock market plummeted over 22 percent in a single day. To prevent this from happening again, circuit breakers were put in place that would temporarily pause the stock market for a period of 15 minutes if certain thresholds were met.

For example, prior to 2010, the stock market circuit breakers would go into effect when the market drops more than 10 percent in a single day, with the hopes of allowing investors enough time to reassess and reevaluate the situation. But apparently, those circuit breakers were not strict enough because on May 6, 2010, the Dow Jones dropped a thousand points and lost nine percent in a matter of a few minutes in what's called the flash crash. After that, the SEC enacted tighter regulations that would lower the circuit breaker from 10 percent down to seven percent, meaning if the market ever drops more than that in a single day, trading will be halted for 15 minutes, giving people enough time to cool down and then trading can carry on as usual afterward.

This was also expanded to individual stocks, where trading would be halted if the price moves by more than 10 percent in five minutes, and in this case, bank stocks are taking a massive hit. So why is this happening, especially when these banks are all being bailed out? Well, in a way, the entire banking system is interconnected, and no bank would be able to withstand a complete run on deposits if their customers choose to move elsewhere, especially because bank reserve requirements were reduced to zero as a stimulus measure throughout the pandemic. Essentially, this meant that banks can legally invest as much money as they want to have on hand without keeping any of it available for customers, which quickly becomes a problem when a certain number of those customers want their money back at the exact same time.

Of course, keep in mind that it's not like your bank is going and taking all of your money and investing it into AMC call options with the expectation of posting their losses on Wall Street Bets. Instead, they're buying extremely safe assets that also just so happen to be very illiquid unless they sell them immediately for a loss. That creates a problem for investors, but keep in mind that it's said that banks are currently sitting on 620 billion dollars' worth of unrealized losses, which would weaken their ability to provide liquidity as needed, and pretty much every bank falls into this category, at least to some degree.

Of course, this also presents another very interesting topic that people are only beginning to talk about, and that would be rate hikes. So here's the thing: in a way, investors are blaming the Federal Reserve for raising rates too much, too soon. After all, banks wouldn't be in trouble with failing investments had the Federal Reserve taken a slower approach to fighting inflation. So because of that, investors are now pricing in the unthinkable, and that would be a pause on rate hikes. As it stands right now, the market believes there's a 22 percent chance the FED will not raise rates at their next meeting on March 22nd, while there's a 78 percent chance of a smaller 25 basis point rate hike.

This is also backed by Goldman Sachs, who believes that this would be needed to further calm the markets and prevent even further fallout. Because of that, treasury yields have also seen their biggest three-day decline since 1987 as investors take their money from banks and buy bonds, causing their prices to go up and yields to fall accordingly, which also puts downward pressure on mortgage rates. All of the signals that investors believe we could soon be in for an interest rate reversal, with the FED having finally broken the markets to the point of catastrophe.

Now, at this point, the chance of even more bank failures is beginning to bring up another point that some people are starting to talk about, and that would be what would happen to your stock brokerage in the event of a similar failure. Would that also face the same fate? Well, here's where things get interesting. Just like FDIC insurance covers cash deposits of up to 250,000 dollars, SIPC insurance covers up to five hundred thousand dollars per brokerage account per customer for lost or missing assets of cash and/or securities from a customer's account held at the institution.

This means that even though they won't protect your stock prices from declining in value, they will protect you in the event that your shares go missing in the event of a brokerage bankruptcy. In almost all cases, the customer protection rule requires brokerages to keep client assets in a separate account from the firm's assets to avoid any confusion. This essentially means that when you go and buy shares, a brokerage only acts as the custodian of those shares, so those would transfer back to you in the event of a bankruptcy.

Now, if shares cannot be retrieved or go missing because of theft or fraud, SIPC would step in to cover the balance up to five hundred thousand dollars. Other brokerages even employ additional insurance to cover balances exceeding that amount. For example, Charles Schwab has a private insurance agreement with Lloyds of London and other English insurers to cover each client account up to 150 million dollars. FINRA also seconds this by saying that in virtually all cases, when a brokerage firm ceases to operate, customer assets are safe and typically are transferred in an orderly fashion to another registered brokerage firm. Essentially, stocks in a brokerage account are very similar to the contents of the bank's safety deposit box.

So it's not like your assets would suddenly be taken to pay off the company's debts, and from that perspective, it's just a little bit less to worry about. So overall, as far as what I think about all this in terms of Silicon Valley Bank, their bailout is good in the sense that it provides safety for customers that wouldn't otherwise have faith in the banking system. But it also sets a very scary precedent that deposits will always be safe, even if they're over the limit. Frankly, I think the Fed was just concerned about an all-out bank run throughout the entire country because no bank would have the capacity to begin with drawing more customer assets than they have cash on hand.

And from that perspective, mission accomplished. But it also somewhat excuses any behavior of wrongdoing and encourages more risky behavior, knowing that if anything bad happens, they're gonna be okay and be bailed out. This is a perfect example of why there needs to be more oversight so that customers are not caught in the crossfire, while increasing reserve requirements to ensure that banks have more cash on hand to process withdrawals. I think the emergency lending solution works fine for the time being, but at the end of the day, it's really a perfect example of a prisoner's dilemma, where if no one panics, there's no problem.

And with enough time, banks will be able to receive a hundred percent of their money back without taking any loss whatsoever. But if everybody panics, that makes the problem so much worse and will cause the FED to step in. As of now, personally, I'm not really worried, and the only risk that I see is the stockholders of smaller banks that could continue to see further withdrawals. But beyond that, it seems like the Federal Reserve is just not going to let the system fail.

So as far as what you think about all this, I want to hear your perspective down below in the comments. As I mentioned, I do my best to read as many of them as possible, and if you want to be kept up to date on all the research that I do on the back end, feel free to subscribe to my newsletter that is down below in the description.

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