The “March Madness” phrase has taken on a whole new meaning within just the first few weeks of March 2023 besides just the best college basketball tournament around. The turmoil and chaos that we saw in the financial markets was a bit reminiscent of the Bank Panic of 1907 when trusts like Knickerbocker collapsed; the Great Depression with bank runs that happened more online than in actual long lines outside of banks like during the peak 1933 bank run years; the Savings and Loan Crisis with rapidly rising rates; the Credit Crisis or Great Recession (2007 onward); and the first few months of the start of the pandemic declaration especially during March and April 2020 when the Dow Jones stock index was rising and falling by 1,000 or almost 3,000 points at a time by the end of some trading days. It was truly financial market madness like never seen before!
Some of the financial market Madness of March 2023:
- Stock markets lost $2 trillion in five days.
- The cryptocurrency market lost $100 billion in two days.
- U.S. banks lost $100 billion in stock value in two days.
- Silicon Valley Bank failed with more than $200 billion in deposits in just 24 hours.
Between 1980, when the US Prime Rate for the most creditworthy borrowers peaked at 21.5% by December 1980, and 1995, more than 1,600 banks, thrifts, or savings and loans either collapsed or received government financial bailout funds. By comparison, there have only been two U.S. financial institutions (Silicon Valley Bank and Signature Bank) in 2023 that have collapsed so far.
2023 vs. 2008: Which year ends up more chaotic?
We’re just three months into the start of 2023. None of us have a crystal ball and can accurately forecast what may happen in the second, third, and fourth quarters of 2023. Will the financial markets and asset prices start to stabilize or move higher as rates either stabilize or fall? Or will we see an increasing number of financial institutions go out of business and asset prices come crashing down? Either way with a boom or bust cycle, there’s opportunity for investors who are prepared and ready to take action.
Will 2023 later be remembered as being the start of the next financial crisis or will we see the “soft landing” that Jerome Powell has been aiming for?
In 2008, the Credit Crisis default risks became more readily apparent as these financial institutions and government entities collapsed or were bailed out:
- Bear Stearns (the fifth largest investment firm in the world at the time)
- Lehman Brothers (the biggest bankruptcy ever involving $600 billion)
- Washington Mutual (WAMU – #1 bank collapse ever with $328 billion in assets)
- FDIC (silently bailed out after WAMU)
- Countrywide Mortgage (once America’s largest mortgage lender)
- Downey Savings
- World Savings
- American International Group (AIG – the world’s largest insurance company)
- Merrill Lynch (the world’s largest stock brokerage firm)
Top Five Regional Banks by Uninsured Deposits (through March 2023)
1. First Republic: $119.5 billion
2. Comerica Bank: $45.5 billion
3. Zions Bank: $37.6 billion
4. Western Alliance: $31.1 billion
5. Synovus Bank: $25.1 billion
Biggest Bank Failures in US History (as of March 22, 2023)
1. $307 Billion: Washington Mutual (2008)
2. $209 Billion: Silicon Valley Bank (2023)
3. $110 Billion: Signature Bank (2023)
4. $40.0 Billion: Continental Illinois Bank (1984)
5. $32.5 Billion: First Republic Bank* (1988)
6. $32 Billion: IndyMac (2008)
What’s truly ironic about the Signature Bank collapse in New York is that Barney Frank sits on their board as a director. He’s the former Congressman from Massachusetts who is the “Frank” in the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. It was the legislation passed following the 2008 financial meltdown, aimed at reforming the financial industry.
The very first line in the Dodd-Frank Act reads as follows:
“To promote the financial stability of the United States by improving accountability and transparency in the financial system, to end “too big to fail”, to protect the American taxpayer by ending bailouts, to protect consumers from abusive financial services practices, and for other purposes.”
Sadly, Mr. Frank couldn’t even save his own bank from future bailouts here during the Madness of March 2023.
Eleven banks and other financial institutions recently pooled $30 billion in funds to bail out First Republic Bank in mid-March. A JPMorgan spokesperson also claimed that the Fed was putting together upwards of $2 trillion to support numerous other financial institutions at the same time.
More people are pulling funds from banks and placing them in short- or long-term Treasury bills or bonds which, in turn, is driving down yields because bond prices and yields are inverse to one another like a seesaw. As demand goes up for bond purchases, the yields go down (and vice versa). The 30-year fixed mortgage rate is tied directly to the 10-year Treasury yield directional trends.
There's been a bidding war for your cash between the Treasury and banks which is partly why many banks have recently increased their savings account rates in an attempt to match the Treasury's 3.5% to 5%+ returns being offered.
Derivatives, Bailouts, and Opportunities
Derivatives are a complex financial and insurance instrument that’s somewhat akin to a glorified bet on the future trend of an underlying contract like LIBOR (London Interbank Offered Rate). Some of the alleged “too big to fail” banks like JPMorgan Chase reportedly hold $3.3 trillion dollars’ worth of assets which include customer deposits and $55 trillion worth of derivatives. Other banks like Wells Fargo are claimed to hold $1.7 trillion in assets and $12 trillion worth of derivatives. If the risky derivatives fall in value significantly, then how will it impact their overall financial stability?
Few people are certain of the actual size of the global derivatives marketplace because so many of the derivatives may be kept off of a bank’s accounting books and not published. Some people claim a low of $1,000 trillion for derivatives while others claim that the true number may be closer to $3,000 or on pace to reach possibly $4,000 trillion within a few years.
Let’s compare the size of derivatives with other asset categories to better understand how massive derivatives are these days whether they’re $1,000, $2,000, $3,000, or almost $4,000 trillion dollars:
As of October 2022:
Global Derivatives: $1,000 to $3,000+ trillion
Forex* (Foreign Exchange Currency Market): $1,934 trillion
US bond market cap: $46 trillion
US stock market cap: $40.5 trillion (as of 12/31/22)
All US mortgage debt combined: $18.7 trillion
* “Turnover in global foreign exchange (FX) markets reached $7.5 trillion per day in April 2022, a volume that is 30 times greater than daily global GDP.” – Bank for International Settlements
The Federal Reserve and US Treasury announced multiple bailout plans last week like the new Bank Term Funding Program (BTFP) program, which seems to be an updated version of TARP (Troubled Asset Relief Program) that was used to bail out financial institutions in 2008 starting with $700 billion. Short term, this may be positive news to protect consumers' deposits, struggling banks, and other financial institutions. Long term, our budget deficit will just keep growing and compounding.
In just five business days between Monday, March 13 and Friday, March 17, 2023, the Federal Reserve threw more than $300 billion dollars to their member banks partly by way of their Discount Window to boost bank’s rapidly declining short-term liquidity needs. It’s believed to be the most bailout money ever shared by the Federal Reserve with member banks within the same week.
By March 19th, Credit Suisse was gobbled up for a fraction of its recent peak high value by UBS while bondholders were wiped out down to zero in a massive hybrid bail-in and bailout deal combined. Some analysts say that the true purchase price paid for Credit Suisse was $3.2 billion while others claim that the actual purchase price was akin to more than – $12 billion dollars. Credit Suisse was highly leveraged with derivatives, so it was made a priority by government agencies to save. The new UBS/Credit Suisse merged conglomerate makes them the fourth largest commercial real estate lender in the world.
The potential good news for real estate investors is that the Federal Reserve may soon be forced to either stop raising rates or pivot and enact rate cuts again while boosting Quantitative Easing to shore up real estate, stock, bond, and mortgage prices in an attempt to prevent asset deflation. Additionally, small to large banks may start selling off prime residential and commercial property assets at a fraction of their market value like they did during the Savings and Loan Crisis. There will likely be tremendous buying opportunities for patient real estate investors who clearly see the bargain deals. If so, it should be akin to a slam dunk for victorious investors to make profits and create generational wealth gains!
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