When People Line Up to Buy Gold and Silver

Beware the next round of big bank loses!

America’s biggest banks are sitting on mountains of distressed and non-performing commercial real estate loans.  They have squeezed their eyes tightly shut, hoping the problem will somehow just go away, a strategy called “extend and pretend.”

A report inside the Federal Reserve describes this practice of delaying the recognition of losses as a buildup of “financial fragility.”

From the report Extend-and-Pretend in the U.S. CRE Market:

The post-pandemic period is characterized by a deterioration of CRE valuations and monetary tightening. In this environment, banks have to manage their CRE loan portfolio while seeing their marked-to-market capital being eroded by losses on securities. 

We document that, since 2022: Q1, banks have extended the maturity of their distressed CRE mortgages coming due and pretended that such credit provision was not as risky to avoid further depleting their capital.  

Consistent with this interpretation, we find that this extend-and-pretend behavior is driven by banks with weak marked-to-market capitalization, is absent before 2022:Q1, and is also present in bank lending to REITs that hold large CRE portfolios.

Or, stated more succinctly, “The delayed recognition of losses exposes banks (and all other holders of CRE debt) to sudden large losses which can be exacerbated by fire sales dynamics and bankruptcy courts congestion.”  [Empasis ours.]

Fire sales.  Bankruptcy courts.  When people start to notice the cracks in banking, some make cash withdrawals, others close their accounts completely.  

The farsighted line up to protect themselves with gold and silver.   

We’ve seen it before.  In March ’23, Silicon Valley Bank went under just 14 days after the Big Four accounting firm KMPG gave the bank a clean bill of health.  During the spate of bank closures, our offices were crowded early to late day after day with people taking steps to protect themselves with gold and silver.

They were doing the right thing.  Gold is up about 45 percent since then; silver has soared, too, up 50 percent.

Now the Fed’s own report “Extend and Pretend” (or as we like to call it, kicking the can down the road in the hope that something will magically solve their problem) has us on high alert.  Warren Buffett may be another leading indicator of bank troubles brewing.  At our last check Buffett had sold more than 266 million shares of Bank of America stock just since July.

Avoid the rush.  Come see us at Republic Monetary Exchange today.