American Bank Bail-Ins Almost Inevitable.

First off, let's start with a truism: Treasury, The Federal Reserve and FDIC simply don't have the reserves to make all depositors whole across every bank that gets into trouble as the contagion continues to spread. Hence, talks are ongoing with Warren Buffett, who in previous incarnations bailed out Bank of America and Goldman Sachs. Sound familiar? And now, Buffett supposedly will backstop some regional banks, but can the contagion be limited to that bank category? I doubt it.

You can thank the Trump Administration for a lot of this: the Federal Reserve eliminated all reserve requirements for depositary institutions in March 2020. Bingo. Before that, large banks had to have reserves of 10% and medium-sized banks 3%. Good going! Thanks to those idiots, there no longer is a fractional reserve requirement. Translation: when there's a run on a bank, there is no money there set aside by the banks to deal with it. 

Banking is all about depositors and their confidence that when push comes to shove that the money will be there to make them whole for each account they have in a bank to the tune of $250,000 USD. But if bank runs multiply like rabbits, then the system eventually goes under. For now, people are moving their money up the food chain, likely leading to more small and regional bank failures. But don't expect the fun to stop there: once people realize that the so-called Too Big To Fail Banks have no fractional reserves either, then it's all over. 

Biden doesn't want to go there. In fact, they've chickened out at least for now on bank bail-ins, but that can't last. That's why the FDIC has seized SVB's 2 billion. They want to give it to depositors to lessen the burden on FDIC. Will a bankruptcy court judge go for that? Probably. So what does that do to the concept of banking when bondholders end up holding the bag? Not good. 

Look at Credit Suisse, where AT1 bondholders get zip after UBS buys Credit Suisse. So, that in effect is a bank bail-in for bondholders. An ominous trend for the future.

But back to American banks: if the contagion takes on a life of its own, which could very well happen, then the gloves will almost inevitably come off about bank bail-ins in the United States. It will be either that or watch potentially a TBTF bank go down. Think back to 2008 when the TBTF banks ended up being bailed out by Uncle Sam. Otherwise, it was bye, bye.

These are exceedingly dangerous times. Perhaps Churchill put it best when he said: "It is not even the beginning of the end. But it is, perhaps, the end of the beginning."