Banking crisis: 'Serious contagion' worries Wall Street, Washington and potentially Main Street

Still, the U.S. stock market slumped mightily Friday with the Dow Jones Industrial Average dropping 384.57 points closing at 31,861.98 culminating a rough week for investors.

That came after 11 large U.S. banks — including JPMorgan Chase, Goldman Sachs, Bank of America, Wells Fargo and Morgan Stanley — pumped $30 billion in deposits into troubled First Republic Bank.

Jim Herbert, founder and executive chairman, and Mike Roffler, CEO and president, of First Republic, welcomed the infusion from their banking brethren including U.S. Bank, PNC Bank, Truist, State Street and Bank of New York Mellon.

“Their collective support strengthens our liquidity position, reflects the ongoing quality of our business, and is a vote of confidence for the entire banking system. In addition, we want to share our sincerest thanks to our colleagues, clients, and communities for their continued and overwhelming support during this period,” they said.

U.S. financial chiefs — including Federal Reserve Chairman Jerome Powell, U.S. Treasury Secretary Janet Yellen and FDIC Chairman Martin Gruenberg, also backed the $30 billion First Republic rescue which came after the Swiss National Bank extended a $54 billion liquidity lifeline to troubled European financial giant Credit Suisse Thursday morning.

Big drop and more trouble?

Still, San Francisco-based First Republic, which caters to wealthy clients in Manhattan, Palm Beach, Florida, Beverly Hills, Boston and other high-income enclaves, saw its stock fall 32.8% on Friday as regional banks continue to take it on the chin.

The rough end to a rough week on Wall Street came after U.S. Treasury Secretary Janet Yellen said Thursday during a Senate hearing deposit accounts at community and other smaller banks might not be covered above the $250,000 conventional Federal Deposit Insurance Corp. coverage threshold.

That came after the FDIC and Biden administration promised to make whole deposit accounts for wealthy individuals and

businesses, many of them tech companies,

above the $250,000 threshold at California-based Silicon Valley Bank and New York Signature Bank after their respective failures on Friday, March 10 and Sunday, March 12.

President Joe Biden promised to cover all accounts at those banks on Monday, March 13, before nervous U.S. stock markets opened. Financial markets remained nervous throughout the week and into an uncertain weekend.

The federal move came after venture capitalists and tech investors, including Bill Ackman, CEO of Pershing Square Capital Management, warned of Great Depression-like bank runs on regional banks.

Mario Nawfal, CEO of International Blockchain Consulting (IBC) Group, said Friday there could be as many as 186 banks facing similar peril as SVB if uninsured depositors pull their money out in en masse.

But Yellen said Thursday before the Senate Finance Committee community bank deposits might not get full FDIC insurance after all SVB and Signatures accounts were made whole.

“A bank only gets that treatment if a majority of the FDIC board, a supermajority, a supermajority of the Fed Board and I, in consultation with the president, determine that the failure to protect uninsured depositors would create systematic risk and significant economic and financial consequences,” Yellen said when pressed on the issue Thursday by U.S. Sen. James Lankford, R-Oklahoma.

Yellen acknowledged some depositors are moving money from smaller community and regional banks to big banks.

Silicon Valley Bank lost $42 billion in deposits in one day, March 9, the largest bank run in U.S. history.

Lankford worries more money from the wealthy and businesses will be shifted to “preferred” big banks which are likely to enjoy full FDIC insurance. The largest U.S. banks also go through more significant stress tests and enjoy a ‘too big to fail status.’

“We felt there was serious risk of contagion that could have brought down and triggers runs on many banks,” said Yellen who stressed the U.S. banking system needs to be viewed as “safe and sound” by depositors.

Big banks getting bigger?

There were reports Friday from the Financial Times that UBS Group AG could buy Credit Suisse and from the New York Times that First Republic could look to raise funds by selling private shares.

Ackman said Friday Bank of America could potentially acquire Signature. The FDIC continues to look for potential buyer for SVB with potential major consolidations on the horizon.

“Unless and until we can protect uninsured deposits, the cost of capital is going to rise for smaller banks pushing them to merge or be acquired by the SIBs. I don’t think this is good for America,” Ackman said Friday in a social media post.

Biden on Friday also called for new FDIC rules on bank executives who run failed banks.

The White House wants the FDIC to have more ability to clawback pay and bonuses from bank executives after that fail, to file civil lawsuits against bank CEOs and to bar them from future jobs in the industry.

Biden has stressed the SVB and Signature deposit coverage will come from FDIC insurance fees paid by banks and not directly from taxpayers. Allies of the U.S. administration support the SVB and Signature actions.

“The administration’s actions should give all Delawareans confidence that their federally insured deposits are safe and that our banking system is resilient,” said U.S. Sen. Chris Coons, D-Delaware, a longtime ally of Biden.

A ‘big club’

Not everyone is on board.

Vivek Ramaswamy, a Republican presidential candidate who has headed investment and biotechnology firms, criticized the actions calling them bailouts and faulted technology interests who he says stoked fears of 1929-era bank runs.

“This is absolutely a bailout of tech startups in Silicon Valley,” Ramaswamy told CNBC March 15.

On the opposite end of the political spectrum, U.S. Sen. Bernie Sanders, I-Vermont, channeled the old George Carlin line on wealth and power:“It’s a big club and you ain’t in it.”

“In America, if you’re a wealthy vulture capitalist with over $250,000 in uninsured deposits at a loosely regulated bank the federal government will guarantee that your money is safe in a weekend. If you have no health insurance and get cancer, you’re on your own. Unacceptable,” Sanders said in a statement.

The banking sector has more than $620 billion in unrealized losses in financial and securities assets whose value has gone down after the Federal Reserve’s interest rate hikes to battle 40-year highs with inflation after the fiscal and central bank monetary infusions during the shutdowns of the coronavirus pandemic.

There are more than $1 trillion in uninsured deposits at U.S. banks, according Indiana University economics professor Vidhura Tennekoon, in a March 13 analysis

The Fed is considering another quarter-point interest rate hike at its meetings on March 21 and 22. The European Central Bank issued a half point interest rate hike Friday foreshadowing another rate hike from Powell and the U.S. central bank faulted for first not addressing high inflation sooner and now putting banks (and U.S. jobs) in peril with higher rates.