by Michael Hudson, The Unz Review:
BEN NORTON: Hi, everyone. I’m Ben Norton, and this is Geopolitical Economy Report. Today, I have the pleasure of being joined by Michael Hudson, the brilliant economist and author of many books.
Michael is also the co-host of a program here, Geopolitical Economy Hour, that he does every two weeks with friend of the show Radhika Desai. I will link to that show in the description below.
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I had Michael on in March to discuss the collapse of three U.S. banks in just one week. That was Silicon Valley Bank, Signature Bank and Silvergate Bank. And yet the crisis has continued since then.
And I knew I needed to bring back Michael to talk about the latest developments.
In just two months, four banks in the United States have collapsed. And we now see the latest example this May is First Republic Bank, which is the second biggest bank in U.S. history to collapse, went down and was taken over by J.P. Morgan.
And this is the biggest bank to collapse since 2008 when Washington Mutual collapsed. Although, as Michael has often pointed out, what we should be saying is, the biggest bank in the U.S. that was “allowed” to collapse because he pointed out that many banks were actually insolvent but weren’t allowed to collapse.
Now, First Republic Bank had $207 billion in assets. And there are similarities between this collapse and the previous collapses.
Like those banks, a similarity with First Republic is that the majority of its deposits were uninsured. About 68% of its deposits were above the federally insured limit of $250,000. So that means that there are $120 billion worth of uninsured deposits.
And what’s interesting about First Republic compared to other banks is it had very wealthy clients and many of them had long-term low interest mortgage loans. So as an example, the CEO of Facebook, Mark Zuckerberg, had a $6 million mortgage with First Republic Bank, and that was at 1% interest. So very low interest.
Now, when I had Michael on last time, he explained how one of the reasons that Silicon Valley Bank collapsed is because it had invested a lot in long-term bonds. And because the Federal Reserve has been aggressively raising interest rates, the value of those bonds has significantly decreased.
So when there was a run on the bank, the bank had to sell those bonds that had lost value and use that to try to pay the depositors. But it didn’t simply have enough at the end and it collapsed.
Now, in the case of First Republic Bank, it wasn’t too exposed to bonds like Silicon Valley Bank was, but it did have a lot of long-term mortgages, about $100 billion worth.
So now we see that JPMorgan is taking over First Republic Bank and JPMorgan has been given a sweetheart deal. In fact, JPMorgan reported that it expects to make $2.6 billion off of this deal.
As part of the agreement, JPMorgan does not have to pay First Republic Bank’s corporate debt. And the Federal Deposit Insurance Corporation (FDIC), the U.S. government backed company, has agreed to a loss-sharing agreement.
So if because of some of the long term mortgages that have lost value, if JPMorgan ends up losing some of the value on mortgages and commercial loans, the FDIC agreed to bear 80% of the credit losses.
Meanwhile, the FDIC is estimating this is going to cost $13 billion to its deposit insurance fund.
And that means that in just two months, since the beginning of March, the FDIC’s deposit insurance fund has paid out around $35 billion to save Silicon Valley Bank, Signature Bank and now First Republic Bank.
So, Michael, those are the basic facts.
Now, that doesn’t explain what’s happening at a macro scale on the economy, but it does show it’s another example of how these private banks are getting bailed out by the government when large banks like JPMorgan, the largest bank in the United States, is given a sweetheart deal where it’s going to make billions of dollars.
The FDIC is bearing the cost. And this is despite the fact that, as Pam Martens and Russ Martens pointed out at Wall Street on Parade, JPMorgan is actually ranked by regulators as the riskiest bank in the United States.
So giving JPMorgan Chase control over this bank that already had finance issues makes it even riskier for the U.S. financial system.
So I talk about a lot of things there, but those are the basic points.
I want to get your analysis, Michael, and especially in response to the JPMorgan takeover and the increasing concentration of these large banks, the sweetheart deal it got, and the FDIC bailout.
What do you think about all of that?
MICHAEL HUDSON: Well, the entire U.S. banking system is just as insolvent as the banks that you’ve just mentioned.
What’s amazing is that all of this is treated as if somehow it was unforeseeable. And people are saying, like Queen Elizabeth said in 2008, did nobody see this?
Well, I’ve been writing about this, exactly how this would occur for the last 15 years, ever since I wrote Killing the Host.
And the reason the banks are insolvent now is because of President Obama’s program and his Secretary of the Treasury, Tim Geithner, who appointed the current Federal Reserve President, Powell.
When President Obama decided to bail out the banks, instead of writing down the bank loans to what would have been reasonable levels, instead of saving the junk mortgage victims from their houses, he decided to go along with his boss, Robert Rubin, the former Treasury Secretary under Bill Clinton, and save Citibank and the other big banks that were the most troubled banks of all.
