Kevin O’Leary, renowned businessman and Shark Tank host, is warning against investing in bank stocks. The recent decision by the federal government to guarantee all deposits in failed banks, even deposits exceeding the FDIC-insured threshold of $250,000, means that banks are no longer risky or private, according to O’Leary. He believes that this move marks a fundamental change in the U.S. banking system and suggests that the banking system has now been “nationalized.” O’Leary insists that investors should consider the banking system and financial services as nothing more than highly regulated utilities and that owning bank stocks or bonds is no longer a good option.
Important Details about Kevin O'Leary Has a Warning for Depositors, Investors –
– Kevin O’Leary is no longer interested in investing in bank stocks.
– The government’s decision to backstop all deposits in failed banks marks a fundamental change in the U.S. banking system, according to O’Leary.
– The banking system will “never go back to normal” after the Treasury Department, Federal Reserve, and FDIC said they would insure all deposits at SVB and Signature.
– Accounts with more than $250,000 are either business accounts or sophisticated investors.
– The banking system has now been “nationalized” and should be considered as highly regulated utilities.
– O’Leary advises changing your mind about investing in bank stocks forever and never owning bank bonds.
Kevin O’Leary is Swearing off Bank Stocks
The federal government’s decision to backstop all the deposits in failed banks, Silicon Valley and Signature Bank, marked a fundamental change in the U.S. banking system, according to Kevin O’Leary. The decision has made it no longer a risk and private, in any sense, making it backstopped by the government and, ultimately, the taxpayer. Therefore, it doesn’t matter how bad a banker is, his deposits are assured by the government.
As a result, O’Leary is swearing off bank stocks. He suggests considering the banking system and financial services as nothing more than highly regulated utilities. The decision by the Treasury Department, Federal Reserve, and Federal Deposit Insurance Corporation to insure all deposits at SVB and Signature has, according to O’Leary, permanently changed the banking system, and it will “never go back to normal.”
Accounts with over $250,000 are either sophisticated investors or business accounts. If a bank goes bankrupt like SVB, the account holders who knew the risks involved would be wiped out, but now taxpayers will have to bear that burden. O’Leary highlights that the banking system has now been “nationalized” after the government’s decision to backstop all deposits in failed banks.
The Decision to Insure all Deposits
The U.S. banking system takes pride in its ability to make rational and sound decisions to avoid destabilizing the economy. The depression of the 1930s, however, was a wake-up call to the industry, and the government created the Federal Deposit Insurance Corporation (FDIC) to protect depositors.
The FDIC is responsible for insuring $250,000 of an individual’s or business’s deposits. As a result, small depositors felt relatively safe under FDIC protection. The assumption was that the FDIC could not carry the burden of protecting massive deposits placed by big corporations and wealthy individuals. Despite its prime directive, the FDIC was made to decide on deposit insurance for those with more than the guaranteed $250,000.
Silicon Valley Bank’s failure was the FDIC’s first significant test involving deposits larger than the federally insured limit. The FDIC chose to guarantee SVB’s $500 million in deposits to avoid a panic that could have a significant impact on the economy. The decision paved the way for similar guarantees supporting deposits of wealthy individuals and corporations and significantly expanded the FDIC’s role.
Secondly, the government’s decision to backstop all the deposits in failed banks has been deemed as socializing bank losses because the government will bear the burden of bank failure losses. Besides, banks will now put more money into higher-yield but more volatile investments, eroding the quality of loans they hold. This condition will increase the risk of banks failing and transfer those risks to the taxpayers.
A Return to Glass-Steagall
The 1933 Glass-Steagall Act separated commercial and investment banking in the United States. The Act prevented deposit-taking commercial banks from engaging in risky investment activities like trading and was expected to prevent the sort of market instability that led to the Great Depression.
However, in 1999, Glass-Steagall was repealed under the Clinton administration. Banks were allowed to combine commercial and investment banking activities. This move paved the way for many of the banking activities that nearly brought down the global financial system in 2008.
More recently, Elizabeth Warren and John McCain generated co-sponsorship support for the 21st Century Glass-Steagall Act. The law aimed to rebuild the barriers preventing commercial banks from taking risky investment actions.
Many would argue that reenacting Glass-Steagall could increase economic stability, decrease risk, and prevent the government from socializing bank losses.
The Fragility of the Banking System
Despite the 2008 global financial crisis and a horde of regulations meant to control banks, the banking system remains fragile. The collapse of Silicon Valley Bank and Signature Bank exposed a systemic problem. The decision to insure all bank deposits, thus making them risk-free, created a moral hazard in the banking system. Banks have no incentive to manage risk prudently if they have no fear of bankruptcy. Therefore, the decision increases the likelihood that banks will look for higher returns by investing in higher-risk ventures that can lead to wider economic instability.
Furthermore, the decision represents a large transfer of wealth from taxpayers to banks because they no longer bear the risk of bankruptcy. Therefore, taxpayers will have to bear the burden of the losses through socializing bank losses.
The government’s decision to backstop all deposits in failed banks is a fundamental change in the U.S. banking system. The decision makes it clear that banks no longer operate on value systems, but instead they function like predatory lenders ready to make risky bets knowing that the government will also bear the burden of their losses.
Therefore, it is essential to consider the banking system and financial services as nothing more than highly regulated utilities because banks have become too big, too crooked, and they extort taxpayers looking for bailouts.
The system has now been nationalized, and taxpayers will bear the burden going forward. As a community, instead of directing our investments to these corrupt institutions, we must focus the research and development of sustainable and equitable alternatives. In conclusion, O’Leary’s advice to reconsider the banking system and financial services as “nothing more than highly regulated utilities” can be deemed prudent advice.