On Friday, Silicon Valley Bank (SVB) - a forty year institution in the tech start up business, a bank that helped companies like Cisco and Shopify get started - collapsed into federal protection. The end came with dizzying swiftness; after the bank seemed to panic sell $21 billion in US government bonds - at a loss of nearly $2 billion- and then tried to raise equity capital, an old fashioned, rumour-fuelled bank run ensued. (A bank run is when depositors all scramble to get their money out of a bank at the same time.) Several big tech funds immediately started withdrawing all their cash from the bank (the insured deposit limit is $250k, which is a drop in the bucket for a large business), and the social media cesspool
(quelle surprise!) exacerbated the bank run until the Feds had no choice but to take over the bank on March 10. The SVB failure has led to a stock sell off, with US banks in particular losing more than $100 billion in market cap in just the two days.
This is the second largest bank failure in US history, as SVB had more than $200 billion in assets. While right now there is no evidence of any fraud, it's pretty clear management screwed up badly. Banks generally borrow short-term (for example, your deposits) and lend long-term (your mortgage) and make money from the spread. The rapid rise in interest rates created an inverted yield curve - long-term rates are now below short-term rates. SVB did not seem to be at all prepared for this and seemingly took no action to hedge out the risk of rapidly rising rates. SVB does almost all its business with the start-up tech industry and so their risky book of loans to these entities suffered losses because these companies couldn't sell themselves through IPOs in the current stock market environment. Most of these same companies held their deposits at SVB and since they weren't yet profitable they always needed cash, meaning they continually drew down those deposits. To fill all these holes the bank had to sell a chunk of its safe collateral of US government bonds, but by selling them before maturity they were sold at a sizeable loss. (When rates go up, the current price of existing bonds go down because the interest rate they are paying is below the current rate. Holding the bonds to maturity eliminates this issue.)
I know this is all very boring, but it's also pretty alarming. Several questions will need to be answered.
What was the regulator doing as SVB came apart? They are supposed to be watching for signs of trouble. The conservative playbook is to understaff and handcuff regulators and then blame them when things go wrong. If the regulator has failed here, the answer is not no regulation, it's to give them the resources they need, because you can bet the farm that some bank will screw up again in the future.
Will there be contagion, meaning other banks suffer runs against deposits? Humans are funny creatures, especially when they get scared; you can read about the Prisoner's Dilemma to understand the logic behind panics and bank runs. And any panic could be further exacerbated by dishonest dirtbags using social media to spread rumours while they short the bank stocks and make a killing. Since ethics no longer seem to be a thing in this world, this would not surprise me in the least.
Will the government step in and rescue SVB and thus stop any further fallout? Will they step in at all even if more banks fail? This is a political nuclear bomb for Biden. After how badly 2008 was mishandled, neither the Right nor Left want bankers bailed out in any way, shape or form. (This jughead has already said he would try to stop any type of aid to SVB). If the government waits, the situation could get worse; more banks could fail and all sorts of economic damage could ensue. While it seems unlikely that this is a repeat of 2008, I don't think anyone sane should want to take that chance.
There is a large lesson to be learned here even if the worst doesn't come to pass. Our systems are much more fragile and tenuous than most people think. The 2008 meltdown showed it, the pandemic showed it, and now we might be seeing it again. Our economic and political systems are a dysfunctional shitshow. I probably sound like a broken record, but we need to rethink our economy and reshape our political structure. Every time we get hit with these crises, even though we recover, we are much worse off than before. And one of these days, we might not bounce back at all.
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