Daily Balajisms – Uncle Sam Bankman-Fried
Fed lied, banks died.
In a recent tweet, Balaji Srinivasan likened the Fed to FTX, creating a meme of Uncle Sam Bankman-Fried. While SBF reassured clients that “FTX is fine, assets are fine”, the reality was that when money began to leave FTX en masse, there were no assets to cover withdrawals. This exposed the accounting tricks, mismanagement, and outright fraud within the company.
The value of long-term US treasuries fell after rapid rate hikes, causing a hole in the balance sheet of most banks in the US and worldwide. Small community banks in the US had received record amounts of fresh deposits from “stimmie” checks during the Covid pandemic, which they invested in long-term US treasuries. Nobody expected such rapid rate hikes, and thus all banks were whiplashed by the Covid stimulus creating a surge in deposits, followed by mercenary behavior of depositors who started chasing higher returns in money market funds.
Thus, deposits began to leave banks a few months before the first casualties appeared - in the form of Silvergate Bank and Silicon Valley Bank experiencing digital death. Balaji notes that just like in 2008, bankers lied, but this time it was central bankers and regulators who lied to all US dollar holders around the world.
They knew in 2022 that banks were becoming insolvent, but they didn’t notify the clients and citizens. Such vital information was hidden in footnotes or obscure reports, while every time you visit a website, you get hit in the face with the EU’s cookie banner.
Within six months, the number of community banks with tangible equity capital went from four at the end of 2021 to 333 in June 2022. The Fed estimated unrealized losses from US Treasuries at US banks to be around $620B. According to researchers at NYU, if mortgage-backed securities are included, the number jumps to $1.7T, which is very close to total equity at US Banks of $2.1T:
“The estimated losses on securities are only part of the total unrealized losses banks suffered from the rise in interest rates. Loans, like securities, also lose value when interest rates go up. Total loans plus securities as of December 2022 was $17.5 trillion. Applying the average duration of loans and securities (3.9 years), the total unrealized losses on total bank credit as of December 2022 is $17.5 × 3.9 × 2.5% = $1.7 trillion. This is only slightly less than total bank equity capital of $2.1 trillion in 2022. Hence, the losses from the interest rate increase are comparable to the total equity in the entire banking system.”
So when Balaji said early on that “the money is gone” – he was very close to the harsh truth that the whole US banking system was broken and broke. The trust is gone, and Balaji stresses that unlike in the Global Financial Crisis of 2008, this is a consumer-facing crisis.
This Financial Crisis 2.0 cannot be easily ameliorated with the new Bank Term Funding Program because the underlying issue of bank deposits leaving for higher returns at money market funds remains unresolved. On top of this trend, consumers got scared that their money was not secure. Balaji mentions Indian founders trusting now Indian banks more than US banks. People are buying gold and bitcoin.
With his BitSignal meme, Balaji is trying to raise an alarm on the internet and get as many people on the bitcoin lifeboat as possible before the fiat-to-crypto bridges are burned. His advice for these days is to buy bitcoin, get it off exchanges, and move to a crypto-friendly jurisdiction.