For anyone who thinks “the way of SVB“…..
…..is but a “regional bank” issue:
Being a broker-dealer and asset management platform…..
Charles Schwab is not a “pure” bank…..
But with its banking services side…..
…..which supports, and is inseparable from, the business…..
…..(however it’s organized, I don’t care)…..
…..it is effectively among the TEN (!!!) largest U.S. banks…..
…..by assets.
Schwab has a SIMILAR problem to the defunct SVB.
For reasons unknown to medical science…..
SVB bit the bullet…..
…..and disclosed a write-down in its bond portfolio…..
Causing a panic, a run on the bank.
On the other hand…..
Schwab just plays (legal) accounting tricks…..
…..to minimize its visible losses.
(And no doubt, it’s NOT the only one.)
Backing up a bit…..
Relative to its total assets…..
Schwab has NOT made a lot of loans.
(Schwab’s bank seems to exist to service the broker-dealer and asset management side, not sell you a mortgage.)
Thus, it is MUCH more at risk…..
…..(than your “ideal” bank)…..
…..from price fluctuations…..
…..in its bond portfolio.
This was PRECISELY the situation…..
…..with SVB.
(Also, Schwab has, proportionately, more invested in mortgage bonds, than SVB did. This is, now, no good. Mortgage bonds—especially in a rising-yields environment—are of higher average duration. Schwab responded by cutting its overall portfolio duration in 2022. “Hello” to all the “SVB should have had longer duration” dummies. No, you DON’T want long duration now. But, ultimately, the main problem is being “underweight” in loans, not the duration.)
Moving on…..
At year-end 2021…..
Schwab had 100 percent of its bond assets…..
…..classified as “available for trading.”
Meaning, that they were booked at “market” value.
By year-end 2022…..
…..over 50 percent of Schwab’s bond assets…..
…..were classified as “held to maturity.”
Meaning, they were booked at the purchase value.
In the last quarter of 2022 alone…..
Schwab appears to have RECLASSIFIED…..
…..roughly $77 billion of bonds…..
…..from “available for trading” to “held to maturity.”
Now, declining bond prices in 2022…..
Substantially (perhaps almost wholly) contributed…..
…..to a $21.5 billion fall…..
…..in the unrealized income component…..
…..(in this case, unrealized losses)…..
…..of Schwab’s equity, that year.
(Presently, for what’s essentially a “top ten” bank, Schwab has a VERY low equity-to-assets ratio, a.k.a. it is “undercapitalized”… and, the ratio is LOWER (!!!) even than SVB’s before the crash.)
HOWEVER…..
Once the assets are reclassified…..
All further “mark to market” losses… STOP.
That “red ink” STOPS…..
There’s no further attention to continued real losses…..
Because there ARE NO reported losses.
Now, if yields go sideways this year…..
There may be… no more losses.
But if “the Fed” keeps “hiking“…..
And Schwab (and whoever else has done the same)…..
…..is now a BLACK BOX, assets-wise…..
What does that do…..
…..to “confidence“?
Yes, that’s right…..
In this case…..
The U.S. banking sector is TOAST.
Now, did Schwab really go…..
…..from 0% “held to maturity”…..
…..to over 50% “held to maturity”…..
…..in one year…..
…..with the GENUINE intent…..
…..(as represented to its auditor)…..
…..of holding those assets to maturity?
Or did they mislead the market…..
…..(certainly, some kind of violation)…..
…..by simply looking to freeze…..
…..their realized/reported losses…..
…..until the trading climate is more favorable?
Well, I don’t know for sure…..
But Schwab’s stock price has taken a beating.
Which means…..
SOMEONE is concerned.
HOWEVER….
You obviously don’t hear…..
…..about the problems covered here…..
On the TV or radio.
The problem is NOT just some regional banks.
The problem could be ANYWHERE.
The problem is the Fed.
The problem is everything.
The problem is that, we now have a situation…..
In which the problem is no longer, about handing out crummy loans…..
But about not having loaned enough…..
And instead…..
Having bought too many quality bonds.
Crazy!
What about the insurance companies?
They are filled to the gills with bonds!
Anyhow…..
If I have time…..
I will review other “top ten” banks in more detail…..
And let you know what else I find.
(Please note, I’m NOT telling anyone to get their money out of anywhere. As I indicated in my last piece, in my opinion, the way things are going, that’s just not a concern anymore, because I think “they” will freeze or guarantee everything, one way or another. Also, I’m NOT a professional financial analyst, I’m just a blogger. I’m not shorting Schwab, and neither should you. Yes, the trend is down, but if you can’t handle volatility, don’t play. I don’t short individual company stocks, I go for inverse ETF’s.)
If you enjoyed this material…..
Please give me some money.
Or at least…..
Follow and like all my Twittering.
“Disclaimer”
Folks, my blogging platform and/or mass mailing plugin…..
…..went haywire…..
…..and sent my last two posts…..
…..to many who had unsubscribed.
(Why was it even retaining those email addresses??? No idea.)
Thanks 100% to Manny, the man, the legend…..
I think this is under control now.
I take unsubscribing seriously.
I had, and have, NO INTENT to spam people.
In the UNLIKELY event…..
…..that you are STILL, today, on my mailing list…..
…..after having unsubscribed…..
Please unsubscribe again…..
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Lieutenant Calley
Folks, I’m sorry, I was wrong.
I wrote that Lieutenant Calley…..
…..spent about six years in jail…..
…..for ordering his army company…..
…..to exterminate My Lai village.
(Body count, close to 500, including close to 200 under-18’s.)
I thought it was about six years…..
…..as his on-and-off legal process…..
…..lasted a total of about seven years.
And I assumed he was in jail, for most of that time.
IN FACT…..
Calley spent some months…..
…..(perhaps a year)…..
…..in jail, pending his trial…..
Before becoming such a celebrity and folk hero…..
…..(Among other things… “The Battle Hymn of Lt. Calley”, a “spoken word” record featuring a fictitious account of Calley’s unit being attacked from My Lai, sold 2.3 million copies)…..
…..that Nixon let him out…..
……and put him on “house arrest.“
Calley then spent a total of three years…..
…..on house arrest.
I can’t ascertain that he ever went back to jail.
Not even for one day.
If someone knows better…..
Please leave a comment.
He was a free man, no more legal troubles, in 1976…..
About seven years…..
…..after first being investigated…..
…..for ordering the massacre.
In fairness to the army lawyers…..
As far as I can tell…..
They TRIED to put him away, for a long time.
But resistance from others in the Army…..
…..and virulent public support…..
…..among the “patriot” crowd at the time…..
…..(which likely had some influence, on some witnesses)…..
…..made that a tall order.
If you have anything to add or correct…..
Please leave a comment.
It’s an interesting story, I’d love to know more.
Permanent Feature
I will repeat this in every post…..
…..(except “headline only“, quickie posts)…..
…..until it’s no longer relevant…..
…..and/or we’re no longer here.
Assuming we make it to 2024…..
…..and have an election…..
The wonderful governor of Florida…..
Ron DeSantis…..
If elected President of the USA…..
Won’t do much of shit…..
…..other than get us into a war…..
…..with our supplier of everything.
That is, China.
Because that’s the track we’re on.
Trump tried to take the rivalry in an exclusively economic direction…..
But he was removed.
And now… THE CAKE IS BAKED.
Yes, I’m waiting for another pann-de-mmick…..
But the only strictly “political” issue now that matters…..
…..is how hard the U.S. will fight…..
…..and risk everything…..
…..(including, me and my family)…..
….to hold on to its Hegemony.
And… the “public” has no say in that.
Will NEVER have a say.
I can’t remember the last time the “public” had a say…..
…..on anything that really mattered.
Because we don’t fucking matter.
Anyone who plans to keep voting…..
…..(above the local/state level)…..
…..and legitimize U.S. Federal politics…..
…..and the destruction of their own country…..
…..and perhaps the world…..
…..is a “battered wife“…..
…..or just a FUCKING IDIOT.
(However, even if you’re an idiot, you should still give me money, for all the work I put into this blog. Or, at least, follow me on Twitter, and be sure to “like” everything, even the old stuff.)
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While Calley became a hero to way too many Americanos. At least one of his primary accusers received numerous death threats, social ostracism and found dead animals tossed on his front porch. Even Sy Hersh became a bit of a recluse because of death threats. The Calley business coupled with reading Harrison Salisbury’s “Behind the Lines” debunking the “precision bombing” mythology, ended my love affair with the “American Dream”. On to Odessa.
Yeah, Calley was under “house arrest” for some 3 years and then released.
There must be ghosts of executed WWII war criminals demanding posthumous rehabilitation.
Holy C___! Straight from the latest10-K: “In January and November 2022, the Company transferred $108.8 billion and $79.8 billion, respectively, of its investment securities from the [Assets For Sale] category to… held to maturity”
If all of that is in mortgages………they can kiss their schwab goodbye!
Also, straight off their latest 10-K: Bank deposits $366,724 (Yr End 2022) $443,778 (Yr End 2021)
Jacob: I trust your financial acumen in a lot of what you post.
However–I just bought a SCHW structured note w/ 50% principal protection that pays 16%.
Why? Simple: The volitility trade in banks these days is no different than mad cow scare + McDonalds stock some decades ago. I made a pile off that trade twice and I’ll prevail this time as well.
Why? SCHW does NOT have solvency issues like the kind that SVB had. You hinted at this but didn’t follow through. I have a nice pile from having done this for over 30 years.
Hello! SVB had no more or less solvency issues than does Schwab. They were merely the first (so far, perhaps, only) bank to take a write-down on their bonds. It was a $2.1 billion write-down, if I recall. Given their size, not a killer. But, they raised their heads and got hit with a panic. As you indicated, all of this is partly psychological. But, banking and finance are human constructs, not natural phenomena.
I wonder if the holders of Lehman Brothers structured notes in 2008 would be as comfortable today as you seem to be. They lost everything. I guess it’s a matter of risk tolerance.
“This largely unnoticed development may seem counterintuitive, since public debt has increased by roughly $5 trillion over the same period. But at the same time, the market value of U.S. Treasury securities has gone from a high of 108% of the economy to its current value of 85%. This is one of the fastest declines in the U.S. debt burden and puts its value close to the prepandemic level.”
Thanks to double entry bookkeeping, unrealized losses tend to show up elsewhere as unrealized gains on shrinking liabilities. https://www.barrons.com/articles/the-fed-bondholders-taxpayers-economy-dbedafb6
Agree with your larger point that the Federal Government will bail out everything. The Federal Government collects (and then spends) 20% of the GDP, so they are bailing themselves out. If Government spending wasn’t constrained by the larger economy, god knows what they would do. The limited experiment with MMT is over, with anticipated results.
Wow. Barrons magazine. Dumbest thing I’ve read all week. The headline is a riot.
Uncle Sam pays the coupon (fixed interest) and then returns the principal on the bonds. Changes in market value of outstanding bonds, make no difference to Uncle Sam. He won’t be buying those bonds back in advance. He doesn’t have the money. The Fed can, if it wants to, but they can do anything, and that’s not a “taxpayer” matter; the Fed doesn’t collect taxes, it simply invents money. Also, higher yields mean Uncle Sam earns less money on new bonds that he sells.
I don’t understand how an “economist” can write this crap.
I am by no means financially literate, but one thing I don’t understand is the role of the current commercial banks (particularly the big ones like Chase and Citi) if/when we go to CBDC and a central bank. In my naïveté, from what I ‘understand’ a central bank where all transactions must occur, basically puts all current commercial banks out of business. Is this correct? And if so, how or why will the heads of those banks, their directors, stockholders, etc., find that acceptable???
All correct, very good reasoning. It won’t happen, at least, not in this country. So, what gave you the CBDC idea, in the first place? Perhaps, stop listening to crap artists such as Tom Luongo?
Jacob, I have not seen anything in your posts that I fundamentally disagree with even though I don’t share your opinion on various issues. Your analysis of geopolitical events i.e. Ukraine sounds like you’re actually there or at least “in the room” where the nutcase neocons are playing spin the bottle with nuclear missiles. Your assessment of the banking system (industry) is, to my thinking, spot on as well. I’m not sure exactly what you mean in your comment policy where you say no Marxist comments though. What has become clear to me over the years is that banking, like running water, is an absolute necessity for everyone alive in America (at least) and therefore should be treated as a public utility rather than a government sanctioned private monopoly whose only purpose is to transfer as much money as possible from those who work for it to those who don’t. The only solution to the crisis is to nationalize the entire banking system. Little regulatory reforms here and there will never solve the problem. I would suggest that the people currently running the system be given a nice long vacation at a resort in sunny southeastern Cuba. I hear it’s not so crowded with those middle eastern men who were also given the VIP treatment by our wonderful neocon “leaders”.
Seymour Hersh talks more about the My Lai story in his autobiography. It was remarkable the lengths Hersh went to in finding Calley.
Unintended consequences- like bank failures = I failed to consider second or third order results of my decisions. Unless the fed is deliberately causing banks to fail, lol, how in earth could these guys have not realized the effects of rapidly raising interest rates on bank assets valuations? I mean, they know the banks’ exposure to bonds.
Further, watching the shitshow that is the Biden “administration “, I really wonder about the intelligence of our ruling class. They seem programmed and unable to think about evolving situations, or much of anything really.
Anyhow, massive asset bubbles deflating, keeping my powder dry for panic selling creating opportunities.
If my memory still serves me (an open question, but I endeavor to persevere) there was evidence that Lt. Calley was acting under orders from above. However no officers of higher rank were ever held accountable. I forget where I read this. It may have been in Rolling Stone, back when it was a window into shenanigans (the days of Hunter S. Thompson and co.) instead of another MSM propaganda pusher. It could have been in one of several books I read about the Vietnam war. I turned 18 in 1970 and had to register for the draft–I was terrified. Tet had happened two years before, Brian Jones, Janice Joplin, Jimi Hendrix were dead; The Rolling Stones had the anti-Woodstock Altamont fiasco; the world was closing in; and in the 80s and 90s several books were written by people who had been there. I read all I could find. It was one of the largest traumas in my life. I used to argue with my dad about it. It still hurts. And the worst thing is that the USA learned nothing from it. Well O fucking well!
If I remember correctly, Schwab bought TD Ameritrade which is my broker. I also had an auto loan with TD Auto but apparently you can only get those via certain dealers, i.e., an individual can’t just call up TD Auto and get a loan. Weird but whatever.
I have most of my 401K self-directed brokerage in TD Ameritrade. I hope that is relatively safe!
Yay it’s Friday! Another bank failure week-end to look forward to and let’s see how they rearrange the deck chairs this time.
After Schwab, by the way, make BAAC. That will be great regional fun.
About Calley and My Lai. Everything is in here: https://www.youtube.com/watch?v=QcDa5IIFSMQ And here: https://www.youtube.com/watch?v=eN_gEAAGwfw
It is worth watching.
The guy only spent three days in prison. Three. And he apologized for his role in My Lai massacre…on 2009. 🤡
Cautionary tale, they say.
Don’t bother looking me up on your golden list. I’m one of those unpecunious subscribers of yours.
I only know one thing and is that, I don’t know what’s going on anywhere anymore. I agree on the Tom Luongo thing, i listened to him a couple of times and I ended up more confused.
After factoring in hold-to-maturity unrealized losses, It looks like Schwab may have already been functionally insolvent at year-end 2022 on a liquidation basis. This presumes accounting assets like “customer relationships” are worth nothing during a bank run. I would expect a bigger hole now, as interest rates have continued to increase since then.
Schwab had 21% reduction in deposits throughout 2022, which is more extreme than the 13% at SVB during same period. The fact pattern does look similar, despite Schwab not being a “regional bank”.
I noticed on Schwab website, “Schwab has eliminated sweep money market funds as a cash feature for most new and existing accounts.”
I’m guessing the likely bank run scenario for Schwab would be more gradual as brokerage clients start allocating excess cash to higher yielding cash equivalents than automatic sweeps to Schwab bank that yield next to 0.
Big picture: someone has to take the loss. If not banks, then someone else. Everyone seemed fine with the new life that came with QE and concomitant credit expansion. Somehow, there is a general inability to accept the death that comes with QT and credit destruction. It’s like the loss aversion bias in human nature is manifest in the Fed.
Whoops… 21% / 13% were Schwab/SVB deposit reductions in the 9 months of 2022 since the Fed started rate hikes and not whole year.
I hear SVB was taken down by the Fed and NYC banks (e.g. JP Morgan) who provoked SVB depositors to start a run. Because SVB is (was) in bed with the WEF/Davos/ECB who are enemies of the Fed and NYC banks (e.g. JP Morgan). It’s just business.
Total nonsense. Sounds like some Tom Luongo type BS.
Hahaha! I was listening to Tom Luongo yesterday on The Duran and couldn’t make out a thing he was saying; Alex Jones makes more sense than Luongo
LOL. Luongo is the crap artist to end all crap artists. He’s like Walensky in “Dark City”, frantically scribbling circles inside circles on the wall. Only, Walensky was on to something.
One of several marks against TheDuran is their acceptance of the COSMICALLY STUPID “tHe wEF cOnTrOLs eVeRYtHiNG” bullsh*t that is mandatory dogma among Q-tard boomers and terminal Bitchute watchers(about 50% of their audience btw). Having that ret@rd Luongo on was what finally made me unsub from their channel. That guy has less than no self awareness and he’s become blackout drunk from years of swilling his own sophistic home brew.
Jacob, one thing I don’t quite understand is how they plan to keep this ship sailing long-term, economically speaking. I’ve had to face the reality that on most fronts there is no “plan”, and we are often just coasting downhill. I genuinely can’t wrap my mind around how short-sighted everyone in power is but that’s probably just the remaining Pollyanna-esque American naivety coloring my perception.
Forgive the annoying question if you’ve answered elsewhere, but are you going to do the podcast again(w/your webmaster), as I quite enjoyed it, and is there a way to donate outside Buymeacoffee(PayPal etc)?
Yes, it was an hour and a half of evidence free assertions. In fact the only bit of evidence offered was that, like Jackson Hinkle, Powell’s family came over on the Mayflower and this is his quest to free Wall St. from the City of London.
NGL that sounds like an awesome movie but it’s just that: a fantasy.
Watched him one time on the Greek Salad and when he started to babble something I realised that Tom Luongo is fos. And I am embarassed to admit that it took me more than 5 seconds.
The guy is like a drawer with a lot of stuff in it, somehow you think that some of the junk might be useful, but the right thing to do would be to dispose of it.