Thread by @porterstansb

Why is silver soaring? The banks are in trouble. These details are public: Berkshire (BRK) sold 260 million shares of $BAC at $41, for proceeds of $10.6B. But Berkshire still owns more than $30 billion worth of $BAC. But probably not for long: here's what's not public, yet.

Berkshire has also sold all of its commercial banks, except Citi, since early 2020. Sold 100% of its 346 million shares in $WFC; Sold 100% of its 150 million shares in $USB; Sold 100% of its 60 million shares in $JPM; Sold 100% of its 12 million shares in $GS.

And Buffett isn' the only well-connected asset manager to dump every American bank. Dalio's Bridgewater (the largest hedge fund in the world) dumped over $100 million of Bank of America and virtually every bank stock too, including: JP Morgan (JPM), Bank of America (BAC), Wells Fargo (WFC), Goldman Sachs (GS), Morgan Stanley (MS), Bank of Hawaii (BOH), PNC Financial (PNC), Citizens Financial (CFG), and Capital One Financial (COF). Why?

The reason: there's a $1 trillion+ hole in the commercial banks' balance sheets. No one currently at the Fed Reserve is willing to talk about these issues, but here's what Thomas Hoenig, former vice chairman of the Federal Reserve, said:

"Guys, I only want to know one question, how long before you fail? Not how complicated you can make the formula to confuse me and certainly confuse the public."

Hoenig is not just any central banker. He was the head of the St. Louis Fed for 20 years ('91-2011) and has long been among the 2-3 most respected central bankers, ever, at the Fed. What Hoenig warned about is: current regulations do not match economic reality.

"Risk-weighted capital flat-out misleads, the only thing a real bank investor wants to know is how much real equity capital is there. That tells the investor how prepared the bank is to absorb a shock, no matter where it comes from on the balance sheet."

Buffett is a “real” bank investor. So is Dalio. But, as you can tell by $BAC's share price, which is trading at near all-time high multiples, most of the public is not. In fact, NOBODY in the mainstream media has bothered to tell the public anything about the truly enormous scope of these problems. I wonder why...

How bad is it? Quoting from the St. Louis Fed's Bank Capital Analysis report of June 30, 2022: Since 2019, banks increased securities holdings by $2.0 trillion, increasing the share of securities as a percentage of total assets to 33.7% in the second quarter of 2022 from 17.8%

Let me make sure you understand what that means. It means that fully one-third of the reserves of our biggest banks are deeply “underwater.” That's because they bought $2 trillion worth of long-term bonds (and mortgages) at interest rates around 1%.

The real market value of these assets has plummeted because of rising interest rates. It was soaring losses on these assets, which led to the run on deposits in the spring of 2023 at Silicon Valley Bank, Signature Bank, and First Republic Bank.

These banks didn't fail because they made bad loans. They failed because they owned long-dated Treasury bonds. Total losses on those bank failures were $40 billion. How in the hell did this happen? Mr. Hoenig explained:

"It's a political process. It's not a market process. The market no longer determines capital in the financial, especially in the banking industry. It's now politicians, lobbyists, and the regulators who have to battle it out among themselves."

"Therefore, you get these non-market solutions like risk-weighted capital. And banks are incentivized to increasingly leverage their balance sheets. And, thanks to the ‘financial repression' of the COVID era, when the Fed's bond buying binges took long term rates to below 1%, there was an enormous amount of interest rate risk in the U.S. bond market back in the summer of 2020."

To stem the run on the banking system, which threatened to spread and could have easily de-stabilized the entire system, the Federal Reserve created a new lending program, The Bank Term Funding Program, which offered loans of up to one year, against the banks bond holdings.

Key to the program: the loans were made against the face value of the collateral, not the market value. This made sure that the banks could meet redemption demands from depositors.

Loans under that program soared throughout 2023 and peaked in the spring of 2024, at over $160 billion. With the Feds handing out money, none of the big banks bothered to raise new equity to plug the holes in their balance sheets.

This was a "kick the can down the road" solution. Fingers crossed that interest rates will go back down and the banks balance sheets will be saved. But that didn't happen. In fact, when the Fed began to cut interest rates, long-term rates went higher!

And then there's this: in March of this year, the Fed announced that no more loans would be made under the program. As these 1-year loans expire, they most be repaid. The outstanding balances on the program are plummeting, down to $66 billion currently.

And interest rates keep rising, pushing the value of those 2020 bonds down. Of all the banks that took on interest rate risk in the summer of 2020, nobody took more risk than Bank of America, which purchased more than $500 billion (!) of long-dated bonds in 2020.

Today, Bank of America reports it has $86 billion in unrecognized “mark to market” losses on that bond portfolio. The bank has tangible equity (that is, real equity) of $200 billion. If rates go above 5%, I believe Bank of America's tangible equity would be wiped out.

It' not just $BAC either. The end of the Fed's BTFP will lead several major banks to raise more capital. But, if interest rates continue to rise, the bank runs we saw in the spring of 2023 will return – with Bank of America most at risk.

With $2 trillion in deposits, Bank of America's shareholders would, most likely, not survive a run on its deposits. Right now, the stock is trading at 15x earnings, which is in the top of its valuation range. And Buffett is dumping. ETF bag-holders unite!

If you want to learn more about why much higher interest rates are a virtual certainty (because of soaring Treasury issuance) please watch the Breaking Point video with @peterstongeph_d : porterandcompanyresearch.co/tbsew-rt3

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