Ex-Lehman Exec Warns 50 More Bank Failures May Hit US If Structural Problems Not Fixed
05:03 GMT 22.03.2023 (Updated: 07:25 GMT 22.03.2023)
© AP Photo / Jeff ChiuA property managment representative gestures while asking reporters to clear the entrance area to Silicon Valley Bank in Santa Clara, Calif.
© AP Photo / Jeff Chiu
WASHINGTON (Sputnik) - Another 50 bank failures may engulf America if the US government does not take appropriate action to iron out structural issues, former Lehman Brothers executive Lawrence McDonald told Sputnik.
Earlier in March, the US saw the second and third largest bank failures in the country’s history, forcing the federal government to take emergency measures and guarantee deposits. Many attribute the collapse of Silicon Valley Bank (SVB) and New York's Signature Bank to soaring interest rates, which the Federal Reserve is widely expected to raise for the ninth time later on Wednesday.
"Yeah, because it's just after the financial crisis, and this all goes back to Lehman," McDonald said when asked if more US banks may be expected to collapse. "So Lehman failed and then it forced this too-big-to-fail system, and then, now this interest rate shock to the regional banks is moving hundreds of billions of dollars out of regional banks into the big banks... So you could have another 50 bank failures... unless they fix the structural problem."
The US banking crisis will cause further damage unless the Federal Reserve scales back on interest rate hikes and Washington bails out banks by securing deposit guarantees, McDonald also said.
"There's going to be further damage," McDonald predicted. "They have to cut rates and then they have to have a deposit guarantee, a larger one, that's what they're going to come up with... That's a bailout. That's basically the federal government taking on bank deposit risk," he specified.
He believes that the Federal Reserve and its Chairman Jerome Powell did not understand the risk of constant rate hikes for US regional banks.
"Powell was on the Hill [two weeks] ago telling us that the banking system was fine... he doesn't understand this like interest rate risk for the regional banks - and it's unconscionable," McDonald stressed. "He was either lying or didn't understand what he's done. It's one of the two," he maintained.
He added that China could not avoid being impacted by the US banking crisis given how highly exposed it is to American consumers and Europe's economy.
"China is very exposed to the European economy and the US consumer, so China doesn't avoid this at all," McDonald said.
The banker believes that Russia will benefit from the US banking crisis since it increases value of gold and Russia is a "hard asset country" that wins "from higher gold prices." However, McDonald, who served as vice president of distressed debt and convertible securities trading at Lehman Brothers, added that Washington may be forced to put forward a much larger backstop that covers deposits larger than $250,000.
The Federal Reserve is widely expected to hike interest rates for the ninth time in a year. Earlier this month, the government was forced to take emergency measures after the second and third largest bank failures in US history. Regulators shut down and took over Silicon Valley Bank (SVB) on March 10, two days before New York-based Signature Bank collapsed.