Chris’ note: In the past week, three major banks have collapsed… and a fourth is showing signs of trouble. It’s easy to panic at a moment like this. But we want you to be prepared.
So, today I’m spotlighting an article from colleague Nomi Prins on how you can make sure your money is safe in the bank.
As regular readers know, Nomi used to work on Wall Street. But she walked away from a top job out of disgust with corporate corruption. And she’s written extensively on the last round of bank bailouts in 2008.
Below Nomi looks at how trusted institutions let us down… why it’s part of a long list of stupid things bankers are doing… and the No. 1 way to shield your savings.
For the past five years, Silicon Valley Bank (SVB) was voted one of the best U.S. banks.
On Friday, it collapsed.
And on Sunday, another bank went down – Signature Bank of New York.
These were the second- and third-biggest bank failures in U.S. history. All in a matter of days…
And they come 15 years, almost to the day, after global investment bank Bear Stearns failed.
I had left the firm about eight years earlier. And I remember speaking to my former colleagues when it collapsed in March 2008.
Many of them knew that Bear was buckling under the weight of its over-leveraged positions.
But few realized how fast it could unravel.
Then, six months later, another of my former employers – Lehman Brothers – failed.
It went under on September 15, 2008. And it took the financial system to the brink of collapse.
Lehman’s failure caught fewer of my former colleagues by surprise. After Bear, they had seen the writing on the wall.
Still, that 161-year-old institution unraveled fast. And as you know, the fallout caused a financial crisis, followed by a global recession.
Over the past few days, alarm bells have been going off that sound a lot like 2008. CBS News reports…
The startling collapse of Silicon Valley Bank and Signature Bank continued to ripple across the American economy even as the U.S. raced to stabilize the banking system.
And just this morning, Reuters reported…
European bank stocks slumped on Wednesday, with embattled Credit Suisse tumbling as much as 30% to another record low, on renewed investor concerns about stresses within the sector triggered by Silicon Valley Bank’s sudden collapse.
So today, I’m going to look beyond the headlines. And I’ll show you what this latest banking crisis means for you.
The Fed Did Not Have Your Back
The collapses of these banks happened under the supposedly watchful eyes of the Fed and its thousands of bank regulators.
It also happened under the eyes of thousands more Wall Street analysts and financial reporters. (CNBC’s Mad Money host, Jim Cramer, praised Silicon Valley weeks before the bank imploded.)
SVB was no ordinary bank. Most of its customers were venture-backed companies and startups. And that leads us to another stunning twist in this story…
On Sunday, the Biden administration took an extraordinary step. It guaranteed that Silicon Valley customers would be made whole… even uninsured deposits.
That flies in the face of deposit insurance for bank customers.
As my fellow history buffs will know, this came about in wake of the 1929 Crash. The Banking Act of 1933 established the Federal Deposit Insurance Corporation (FDIC).
It insures deposits of up to $250,000. But when the bank serving Silicon Valley elites collapsed, there was a problem…
Many larger tech companies used Silicon Valley as their bank, for personal and business deposits. So, depositors had a lot more than $250,000 in their accounts.
The bank’s latest annual reports showed that customers held at least $165.4 billion in uninsured deposits by the end of 2022.
So, the government bailed them out.
Problem of Trust
This gets to the heart of the problem with the financial system today.
Everything relies on us trusting a handful of powerful institutions. From issuing money to setting interest rates.
The problem is that institutions can’t always be trusted.
I had the dubious pleasure of learning about this firsthand during my 15 years working on Wall Street. That’s why I left in 2002.
By then, the banking system was involved in many questionable dealings, with companies like WorldCom and Enron. These companies went bankrupt in a cloud of fraud.
In 2004, I published a book about this, Other People’s Money. I wrote about the banks’ role in that kind of fraud, through securities called credit derivatives. And I warned that it would ultimately bring the system to the brink of disaster.
And that’s exactly what happened in 2008.
So when Silicon Valley went under last week, it brought back not-so-fond memories of my days on Wall Street.
Back then, the Street was brimming with firms that over-allocated their capital, and often over-leveraged into subpar assets.
When those started to crash, it caused a domino effect that shook the global financial system to its core.
In 2008, the government doled out $7 trillion to big banks in emergency funding, with little to no oversight.
This fueled the “Great Distortion” I’ve been writing to you about in these pages. And it destroyed any chance of bridging the gap between the markets and the real economy.
Fast forward to 2023, and the same bailouts are coming back. Once again, the government is swooping in to save the day.
Now, some may point out that the Silicon Valley bailout isn’t a traditional bailout. That’s because it bails out the depositors, not shareholders.
But this doesn’t change the fact that Congress set the $250,000 insurance limit to protect average Americans… not venture capitalists in Silicon Valley.
It also doesn’t change the fact that government regulators were asleep at the wheel during last week’s bank failures.
And here’s the part that really makes my blood boil…
By the time the story broke, some Silicon Valley executives and shareholders had already cashed out.
Most notably, CEO Greg Becker sold $3.6 million worth of his shares less than two weeks before the bank’s collapse.
What’s worse, Becker was one of the people who lobbied to deregulate his own bank.
What This Means for Your Money Today
My gut tells me there’s probably another ticking-time bomb waiting to go off in the banking sector. In fact, as I mentioned above, trouble is already spreading to Europe.
That means we can expect many investors to get burnt. Not everyone is a Silicon Valley millionaire.
But there are things you can do to protect your money. And I want you to be prepared.
The important thing is to make sure that your deposits are FDIC-insured. Not all banks are. You can find out which ones are through this directory.
You don’t need to apply for coverage. But again, you have to make sure that your bank is FDIC-insured. And that your account within that bank is, too.
Remember, the FDIC insures bank accounts up to $250,000 per person. It only covers certain financial categories. That includes things like checking and savings accounts, money market deposit accounts, and money orders.
And if you have more than $250,000 at one bank? In some cases, you can divide it into different account categories to meet FDIC limits.
For more on that, check out the FDIC’s deposit insurance FAQ page.
There, you’ll find answers to common questions, such as, “Can I have more than $250,000 of deposit insurance coverage at one FDIC-insured bank?” And “Can I check to see if my accounts are fully covered?”
Editor, Inside Wall Street with Nomi Prins