BANKS ARE FAILING...

This week saw two of the largest bank failures in history. However, before discussing why, let's address a question: Why is Jim Cramer so good at being bad at his job? Just months before these banks collapsed, he dismissed them as "too boring" to discuss. Yet, these failures have caused widespread fear and concern, with the Dow ultimately losing 345 points. Signature Bank and SBB Financial are now in the spotlight, with many worrying about the safety of their deposits. Despite his flair for language, there is one thing Cramer isn't wrong about: Fear is in the air.

Today, let's examine the recent bank collapses, the government's bailout announcement, varying reactions, and future implications. Three major US banks - Silvergate, Signature, and Silicon Valley - have failed in a short span. Silvergate had the smallest assets at around 11 billion, while Signature was a mid-sized bank and Silicon Valley Bank was the largest.

Silvergate and Signature Bank were prominent in the crypto industry, while Silicon Valley Bank had a significant presence in the tech startup world. However, these banks failed for similar reasons. They experienced a run on the banks due to an overwhelming demand for funds, which depleted their cash reserves. It's important to note that this situation is reminiscent of the crypto crash in 2022, where several crypto companies, including FTX, collapsed.

FTX and banks have differences in terms of their solvency during a bank run. FTX was insolvent while banks were illiquid, which means they had the money but some were locked up in long-term assets. It's important to note that these are not the same things, but the details can be a bit unclear. A liquidity problem during a bank run can turn into an insolvency problem if the bank has to sell their assets for cash.

Treasury bonds are considered a safe investment by many, including grandparents and banks. They provide a stable rate of return. Banks with billions of dollars in customer assets often invest in them. These bonds can earn a return of one percent per year. Banks keep some cash on hand for withdrawals and rely on the bonds for added security. However, if interest rates rise quickly, the value of the bonds may decrease.

If you bought a five-year bond with a one percent interest rate a year ago, but the government is now selling the same bond with a five percent interest rate, the value of your bond will drop on the open market. This is because it's now giving less interest than other bonds. If you try to sell it, you'll lose money. However, if you hold onto the bond until maturity, you'll still make the one percent interest and not lose anything. Banks were forced to sell long-term assets, like bonds, and took losses during the liquidity crisis. This caused a run on the banks and ultimately led to their shutdown due to insolvency.

The bank was unable to service all the withdrawals, leaving the government guarantee of bank deposits in question. The FDIC insures up to $250,000 per account, but some banks like Silicon Valley Bank had accounts with much more. This affected venture capital startups with millions in their accounts, causing financial strain and inability to meet payroll due to the bank's failure. Silicon Valley's response to recent events called for depositors to have their money guaranteed. Jason Calacanus stated that a bank run and contagion should terrify people, and all deposits up to 10 million should be guaranteed to avoid chaos. This sparked a debate on government involvement. The U.S Treasury ultimately answered by assuring depositors that they will have access to all their money.

The US government has intervened to save Silicon Valley Bank and Signature Bank due to systemic risk. Customers are advised not to panic and withdraw their money. The government aims to ensure customers' bank deposits are secure. However, some have criticized the government's selective support for certain types of banks. It may be beneficial for wealthy individuals to consider banks that are deemed too big to fail to avoid potential risks.