An Anatomy of a Banking Crisis

The abrupt collapse of the nation's 16th largest bank sent shudders throughout the industry.  Fears escalated after the crisis spread to other institutions, raising the specter of a banking contagion.  The instability is raising questions about the safety and liquidity of all banks, both in the U.S. and overseas.

The chain reaction began after Silicon Valley Bank received a visit from Moody's Investors Service on March 2.   Moody's team informed the bank it was considering downgrading the bank's rating.  SVB moved quickly, announcing it was raising $1.75 billion in capital on March 8.

The news sent the bank's stock in a tailspin as investors worried about the institution's solvency. Panicked customers began withdrawing deposits at lightning speed. In a last ditch effort to save the bank, executives sold $21 billion worth of long-term securities at steep discounts.

Less than two weeks before the looming failure, SVB executives sold millions of dollars in company stock, according to filings. Chief Executive Officer Greg Becker unloaded $3.5 million in SVB stock.  He wasn't the only top brass to act. Chief Financial Officer Daniel Beck dumped $575,180 in shares.

Insiders knew the bank was doomed. Likely, bank chatter leaked to major depositors who spurred the run.  On a single day, March 9, clients withdrew $42 billion in deposits.  When SVB ran out of funds, regulators stepped in and shuttered the 40-year old bank, making it the largest bank failure since the 2008 financial upheaval.    

Silicon Valley, a darling of the tech start-ups, catered to venture capitalists, entrepreneurs and the wealthy. Newly minted businesses looking for investors ran into the welcoming arms of SVB bankers. The bank featured a blue-ribbon board, many with political connections to Democrats.

Unlike traditional commercial banks, nearly 95% of SVB clients had deposits of more than the $250,000 limit guaranteed by the Federal Deposit Insurance Corporation (FDIC).  The bank's dependence on outsized, uninsured deposits meant a turbulent run would put the institution in jeopardy faster than most banks. 

After regulators assumed control of the bank, it became clear mismanagement wrecked the institution.  Executives stowed deposits in long-term assets, including U.S, Treasury notes and bonds.  Asset values plummeted as interest rates rose. The sinking values created a classic asset-liability mismatch.

Bank executives failed to hedge the risks inherent in their low yielding asset holdings.  This would have given the bank some protection on its bond portfolio.  But the bank's chief risk officer, who presided over the bond-buying spree, left in 2022 with a $7.1 million severance package, according to SEC filings.

For eight months, the bank operated without a risk officer, whose responsibility includes analyzing the institution's exposure to portfolio risks and assessing the bank's ability to weather adverse scenarios. As current market value of the bank's bond portfolio dipped, executives should have acted quicker to bolster capital. 

The FDIC swooped in and announced it would guarantee clients deposits, including those that exceded the government insured $250,000 limit.  This was good news for large tech clients, such as Etsy, Rocket Labs and Roku.  However, bailing out uninsured deposits set a worrisome precedent. 

Following the SVB demise, Signature Bank in New York crumbled. At the time, the FDIC had a total of $128 billion in its insurance fund. Those reserves could not accommodate many more bank hiccups.  

Treasury Secretary Janet Yellen hoped the bailout of depositors at both institutions would stem the banking turbulence. She stepped into the breach, assuring the country the banking system was safe.  Yellen appeared to signal the FDIC would continue to bailout uninsured deposits before later hedging.    

As bank stocks and the overall markets nosedived, President Biden tried to soothe the public's growing fears about banks. Then Silvergate Bank, a crypto friendly institution, succumbed.  Panic soon ensnared regional banks, including First Republic Bank.  Eight banking behemoths, led by JP Morgan Chase, shipped $30 billion in cash to avoid a liquidity catastrophe at First Republic. 

Republic's upheaval triggered anxiety among customers of regional and community banks. Federal Reserve data shows that deposits at small banks--defined as those smaller than the biggest 25--dropped $119 billion. Meanwhile, deposits at large institutions soared $67 billion in the week ended March 15.  

Fleeing clients forced Charles Schwab, which operates the nation's tenth largest bank, to reassure its client base.  The move was critical after Schwab  disclosed it had $11 billion in unrealized losses on its bond portfolio. It was a sign that size no longer matters when 20% of your customers yank deposits. 

Frantic bank customers plowed $5.4 trillion in deposits into money-market mutual funds, the fastest pace since the start of the pandemic.  As deposits dwindled at a rapid clip, a stampede of banks borrowed an average of $117 billion each day for a week from the Federal Reserve's discount window. 

When the crisis spread overseas to 167-year-old Credit Suisse Bank, Switzerland, and Germany's largest bank, Duetch Bank, it heightened concerns of a full-blown global banking pandemic.  Reassurances are being drowned out by the realities of banks failure to adjust for portfolio risks.

Jittery Americans with bank deposits began to wonder aloud: "Could this contamination spread to my bank?"

"No bank is immune from a deposit run.  I can say that unequivocally," says Howard Manning, a former Federal Reserve bank examiner whose career in the banking industry spans five decades.  "Banks cannot turn illiquid assets fast enough regardless of size.  We're going to see more turmoil."

Some in Congress, most notably Massachusetts Senator Elizabeth Warren, are blaming the bank debacle on Federal Reserve Chairman Jerome Powell, who has overseen a regime of steady interest rate hikes.  Manning calls the senator's criticism disingenuous, since Warren voted for trillions in federal spending, fueling runaway inflation,

"The Fed signaled in 2022 that it would have to begin raising interest rates," Manning reminds. "From that point onward, banks and financial institutions should have been hedging their long term assets.  Bankers should have written down the value of bonds as interest rates rose.  It was total mismanagement."

Whether you agree with the pace and timing of Powell's interest rate hikes, the Fed can hardly be blamed for addressing blazing inflation. Trillions of dollars in federal spending forced the Fed's hand. All that money sloshing around the economy triggered too many dollars chasing too few goods.

The fallout of the banking plague will hit every American.  With FDIC reserves dwindling, banks will be on the hook for higher insurance premiums.  Institutions will pass along those costs in the form of increased fees to customers. You will be paying for the bailouts, irregardless of the claims to the contrary by Yellen and Biden.

Americans, especially small businesses and entrepreneurs, will find it more difficult to secure bank loans on favorable terms.  Banks inevitably will implement more stringent lending standards to protect capital.  The result will be a slowing of an already wobbly economy.

Management mistakes usually are the culprit when financial institutions go belly up. Blaming the Federal Reserve is a cop out. Bank examiners, especially those at the San Francisco Fed, also are accountable for not raising alarms sooner.  But the financial system is showing some cracks.    

Biden's Bloated Budget and Massive Tax Grab

• Biden's fiscal 2024 budget will increase deficits and hike the national debt
• His tax proposals for business will result in offshoring of operations
• The president's plan targets energy production which will drive up prices
• The tax scheme includes a dubious effort to tax phantom income 

The most shameless political gimmick is to shriek: "Tax the rich!" Pandering politicians know few Americans will argue with the logic. Taxpayers dream soaking the wealthy will lower their own taxes. It never does. Still bashing billionaires is a sure-fire re-election gambit.

President Biden recently unveiled his massive $4.7 trillion tax plan with an eye toward his 2024 campaign. His complex proposals are designed to roll back President Donald Trump's tax cuts while daring Republicans to oppose a tax blood-letting of big businesses and billionaires

The president's strategists are counting on Americans tax illiteracy. The top one percent of America's wealthiest earners paid 42.3% of all federal income taxes, according to the most recent data.  The top 50% paid 97.7% of federal individual income taxes.  The bottom half paid 2.3%. Facts matter. 

Despite Biden's rhetoric, America's most prosperous are paying their fair share.  It is disingenuous and not factual to claim otherwise.  If the president was honest with Americans, he would simply admit his   massive tax hikes are needed to fund his deficit-busting $6.5 trillion federal budget for fiscal year 2024. 

Biden's claims his budget will cut deficits is a sham. The non-partisan Congressional Budget Office projects deficits will average $2 trillion per year from 2024 to 2033. Since his first budget, Biden's spending will increase the nation's public debt to $50.7 trillion by 2033, nearly 106.3% of GDP.

Under the Biden tax plan, American businesses and high-earners would pay among the highest taxes in the developed world.  Although the president tosses word salads about going after those filthy rich billionaires, his tax increases are aimed at Americans earning $400,000 and up.   

The non-profit, independent Tax Foundation weighed the impact of the proposals against tax rates of member countries in the Organization for Economic Co-operation and Development. The comparisons underscore the titanic nature of Biden's tax regime. 

America's corporate marginal rate on corporate income would increase from 25.7% to 32.2%. The OECD average, excluding the U.S. is 22.8%.  The combined integrated rate on corporate income would climb from 47.3% to 66.9%, compared to the OECD average of 41.%.

This means U.S. firms will be at a competitive disadvantage with companies in other countries.  As past history shows, American corporations will be incentivized to move operations offshore where taxes are lower.  The result will be job losses in the U.S. at a time when companies are already cutting payrolls.

The plan raises the current top marginal rate on individual income to 45.4%, compared to the OECD average of 42.6%.  Many households earning $400,000 and over will face top tax rates of 50% when the federal rate is combined with state income taxes. 

The marginal tax rate is the amount of additional tax paid for every additional dollar of income. As an example, a 10% marginal rate means that 10 cents of every additional dollar earned is confiscated by the government.  An average tax rate is the total tax paid divided by the total income earned.  

The Biden tax scheme includes nearly doubling the tax on capital gains income from 29.1% to 49.8%.    Americans who sells stocks, bonds, real estate or other investments will have to give Uncle Sam almost one-half of any gains.  That will discourage individual investments in stocks. 

Perhaps, the most odious part of the Biden blueprint is a tax on phantom income.  This contrivance calls for taxing unrealized capital gains with a 25% minimum tax.  What this means is that if you hold investments that have increased in value, that amount will be taxed even though you haven't sold any.

Biden's daft plan also punishes the oil, gas and coal production sectors with $100 billion in tax increases. For example, his deal with the tax Devil includes repeal of expensing tangible drilling costs for labor, equipment, surveys and other items.

Those are just the highlights.  There are a myriad of other taxes aimed at businesses, the economic engine of the American economy.  Higher taxes on business are always paid by the corporation's customers through higher prices on products and services. 

The gross (pardon the pun) total of all those tax increases is $4.7 trillion.  That is the largest tax hike in history in terms of dollars.  Media fact-checkers are trying their best to cover up for Biden by claiming it is not the largest if you compare the new taxes as a percentage of GDP.  

However, even if you accept the fact-checkers skewed logic, the only plan that ranks higher as a percentage of GDP is the Revenue Act of 1942.  Those taxes were needed to pay for the military buildup after the U.S. declared war on Japan and Germany.  That makes the comparison unreasonable.

If President Biden is serious about tax fairness, he should offer a plan to simplify taxes. His reform does the opposite. Even worse, the tax hikes on businesses will cripple economic growth, encourage U.S firms to ship jobs overseas, raise energy prices and burden consumers with even higher prices.

The president's political budget and tax stunt deserve an ignominious burial in the halls of Congress.  Then serious work can begin on a bipartisan fiscal budget that maintains tax equity, reduces deficits and supports a prosperous economy for all Americans.  

Time to Declare War on Mexican Drug Cartels

• Powerful cartels operate on both sides of the U.S-Mexico border
• Cartels rake in $52 billion from smuggling humans and drugs
• Two large cartels export most of the deadly fentanyl into America
• Seizures of fentanyl at the border are at historic levels 

The killings of two Americans in Mexico are a grim reminder that drug cartels are an imminent threat to Americans. Cartels operate with impunity, smuggling immigrants and illicit drugs into the country. These powerful gangs are responsible for lawlessness that permeates the southern border.

Mexico has for too long turned a blind eye to the drug cartels. Criminal organizations control wide swaths of Mexico, free from police interference.  Violent wars between the cartels often leave a bloody trail of bodies, which sparks a short-lived response from the Mexican army. 

With few exceptions, Mexican government officials at every level are on cartel payrolls, former Attorney General Anthony Barr said in a recent interview.  Over the years, the U.S. government has forked over billions of dollars to Mexico for beefed up security with no discernible impact on crime. 

The Sinaloa Cartel, a transnational syndicate, is the the largest and most powerful in Mexico,  Heavily armed Sinola criminals operate in 22 of the 31 Mexican states.  An emerging rival is the Cartel Jalisco Nueva Generacion (CJNC), which has a presence in two-thirds of the country.  

These two cartels along with smaller gangs dominate the human smuggling and distribution of drugs into America.  Illicit drugs produced by the cartels include fentanyl, cocaine and methamphetamine. These drugs are fueling a devastating rise in overdose deaths in the U.S.  

One reason the cartels remain untouchable in Mexico is that the organizations generate more revenue than most legitimate businesses in that country.  The U.S. cannot rely on Mexico's narco state government because its economy benefits from the flow of American dollars from cartel activities. 

Not satisfied with operating only in Mexico, the cartels have spread tentacles into our country. The National Drug Intelligence Center estimates cartels have connections with criminals in 1,286 American cities.  In 143 of these cities, there are cartel operatives.  Cartels are no longer just a Mexican problem.

Their presence is sparking Mexican-style cartel violence. Six people, including a six-month old baby, were shot dead in California's Central Valley in January.  The county sheriff did not hesitate to connect the killings to Mexican cartels illegal drug trade.

"I think it's specifically connected to the cartel.  The level of violence...this was not your run-of-the-mill low end gang member," Sheriff Mike Boudreaux said. Biden officials were unmoved, insisting the border is secure. Homeland Security Secretary Alejandro Mayorkas appears unwilling to act.   

More than 106,000 Americans died of overdoses of illicit or prescription drugs in 2021, the most recent data available.  The fatalities include 80,411 deaths from synthetic opioids, primarily fentanyl.  Methamphetamines accounted for 53,495 deaths, reports the National Institute of Drug Abuse.

The U.S. attorney's office in San Diego in cooperation with law enforcement officials seized nearly 500,000 fake pills laced with fentanyl last year.  The  Drug Enforcement Agency (DEA) identified local couriers, stash-house managers and criminals who smuggled the proceeds to Mexico.  

During 2022, the DEA seized 50.6 million fentanyl pills and 10,500 pounds of fentanyl powder.  The agency's lab estimates these seizures add up to 379 million potential doses, enough to kill every American. No doubt tens of millions of pills were smuggled undetected into the U.S.

Those staggering figures are why the Mexican cartels collect an estimated $39 billion in drug profits. Experts figure the cartels net another $13 billion from smuggling illegal immigrants across the border.  Last year there were 2.4 million illegal immigrants encountered by U.S. Border Patrol agents. 

Each illegal paid a cartel coyote.  More than 500,000 immigrants slipped past patrol agents and are living in the shadows in cities throughout the nation. Some were ferried to their destinations by Americans who were paid by the cartel.  

Americans, except those who live in border states, appear not to care about the unprecedented influx of illegal immigrants.  Perhaps, the deaths of Americans in Matamoras will finally stir American outrage and action by the Biden Administration.  

There have been calls by Republicans to designate the Mexican cartels as terrorists and to use military action. Mexican President Andres Manuel Lopez Obrador reacted angrily, threatening to meddle in U.S. elections with a disinformation campaign against the GOP.  

If there is any lingering doubt, the Mexican president's reaction should convince the Biden Administration that the nation's chief executive will do whatever he can to protect the cartels and their main source of income, the smuggling of humans and drugs into the U.S. 

To add to the indignation, Mexican officials blame Americans for the drug smuggling.  Cartels are only servicing the drug habits of Americans, they shrug.  However, these hooligans also use illicit drugs turn Americans into addicts.  Since when is poisoning Americans acceptable, even if they want drugs?

The Biden Administration has a choice.  Ignore the fact that the U.S. is enabling the cartels by allowing human and drug smuggling at the border.  Biden's laissez faire border policy is enriching the cartels and enhancing their power and influence in Mexico and the U.S. 

The other choice is to unleash American law enforcement, intelligence agencies and the military to crush the cartels, interrupting their operations and bringing gang leaders to justice. America did it once before when it went after the cartel bosses in Columbia.  The U.S. can do it again.  

Unraveling China's COVID Origins Deception

• FBI director confirms lab leak responsible for spreading deadly Coronavirus
• China has rebuffed an open and honest probe of the origins of the virus
• Inspector General report exposes NIH lax oversight of Wuhan lab research 
• Dr. Anthony Fauci owes a full explanation for grants to Wuhan facility

The pandemic ushered in unprecedented censorship of opinions about Coronavirus origins. No one was allowed to question the official government version that the deadly virus spread from animals to humans. Now there are growing questions about the hypothesis and its leading advocate Dr. Anthony Fauci.

It is about time for a thorough investigation after the virus ravaged the globe, killing 6.87 million people, including 1.1 million Americans.

Conventional wisdom about the virus recently was upended by The Wall Street Journal, citing a classified report by the Energy Department. The document expressed the viewpoint that the virus likely leaked from the Wuhan Institute of Virology in China.   

Defensive administration officials were quick to point out the Energy Department's assessment was made with "low confidence." National Security Adviser Jake Sullivan rushed to the microphones to assure there is "no definitive answer" that the pandemic can be traced to a lab leak in China.

Then FBI Director Christopher Wray dropped a bombshell that detonated the administration's attempt to preserve the natural origin thesis.  "The FBI has for quite some time now assessed that the origins of the pandemic are most likely a potential lab incident in Wuhan," the director said in a television interview. 

For three years, Dr. Fauci and the World Health Organization (WHO) have collaborated to advance the theory that the virus spread to humans from animals, likely bats, at a market in Wuhan.  China promoted this version while stiff arming an independent, scientific investigation into the origin.

WHO officials were bullied by China into accepting the Communist theory. There was a hurried probe by an international group of experts, working alongside Chinese health officials.  The controversial study published in 2021 became the official thesis under pining the Chinese version.

In June of last year the WHO recommended further investigation into the possibility of a lab leak, marking a seismic shift from its earlier stance.  Under withering criticism, the world organization admitted the original finding had been "premature," asserting it could not rule out the lab leak version. 

China slammed the world organization and withdrew its collaboration with the group. In his interview, Wray took note of China's lack of cooperation and observed the Chinese government "has been doing its best to try to thwart, and obfuscate" a legitimate investigation into the role of the Wuhan lab. 

A State Department fact-sheet on its website minces no words on in assessing the Chinese government's role in a coverup:

"...The Chinese Communist Party has systematically prevented a transparent and thorough investigation of the COVID-19 pandemic's origin, choosing instead to devote enormous resources to deceit and disinformation."

The State Department verified it had reason to believe that several researchers inside the Wuhan lab became sick with COVID in the autumn of 2019, before the first identified case of the outbreak.  This raises questions about Wuhan officials public claims there were "zero infections" among its staff.

Despite mounting evidence of a lab leak, Dr. Fauci claims there is no data to support such a thesis. He knows global health authorities have been prevented from interviewing Wuhan researchers. He also fails to mention there is no credible, independent data to support the animal to human theory either. 

Early in the pandemic a Senate Committee disclosed internal emails showing Dr. Fauci was informed by senior scientists at the National Institutes of Health (NIH) that a natural origin was "highly unlikely." Dr. Fauci was director of the National Institute of Allergy & Infectious Diseases (NIAID) at the NIH. 

Perhaps, Dr. Fauci was protecting his reputation. As NIAID director, Dr. Fauci administered  grants totaling $2.57 million to the EcoHealth Alliance, a New York based nonprofit research group.  An estimated $1.8 million wound up funding research at the Wuhan research facility.  

What is indisputable is that the Wuhan lab engaged in "gain of function" research designed to replicate a virus to increase its virulence and transmissibility to humans.  Dr. Fauci has vociferously denied that American taxpayer dollars were used for "gain of function" experiments. 

Dr. Peter Daszak, a British zoologist who runs EcoHealth, has emerged as a central figure in the "gain of function" controversy.  He has been a target of recent Congressional inquiries for his role in overseeing the funding of the Wuhan lab, while tacitly supporting the research at the government facility.  

The office of Inspector General for the Department of Homeland Security audited the grants made by NIH to EcoHealth and issued a scathing 64-page report on January 25.  The document excoriates confusing protocols, misspent funds and monitoring of the potentially risky pathogens studied. 

The inspector general's audit found that the NIH "did not refer the research to HHS (Health & Human Services) for an outside review for enhanced potential pandemic pathogens" after a grant to the Wuhan lab.  Here are three key sentences from the OIG report:

"We found that NIH was only able to conclude that research resulted in virus growth that met specified benchmarks based on a late progress report from EcoHealth that NIH failed to follow up on until nearly two years after the due date.

"Based on these finding, we conclude that the NIH missed opportunities to more effectively monitor research.  With improved oversight, NIH may have been able to take more timely corrective actions to mitigate the inherent risks associated with this type of research.

"WIV's lack of cooperation following the COVID 19 outbreak limited EcoHealth's ability to monitor" how the funds were used by the Chinese facility.

In plain language: The NIH failed to supervise the administration of taxpayer money given to EcoHealth for pathogen research at the Wuhan lab.  That may explain why Dr. Fauci has stubbornly clung to the thesis that the global plague was transmitted naturally from animals to humans. 

Past censorship allowed China to escape culpability. Now there is a moral and scientific imperative for Congress and public health authorities to determine the full extent of China's complicity in covering up the origins of one of the deadliest pandemics in modern history.