March 10, 2023 - The Next Black Date in Economics?

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honorentheos
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March 10, 2023 - The Next Black Date in Economics?

Post by honorentheos »

The collapse of Silicone Valley Bank and entering receivership on Friday is a topic we’d be remise to not have active on the forum. A bank run resulting in a bank collapse hasn’t happened in the US since the 2008 financial crisis. That it happened on a Friday is fortuitous given the weekend forced an airgap between panicked responses and the ability of financial institutions, regulators, and the government to prepare for Monday. But Monday is coming.

For discussion I’ve copied out portions of an article from The Atlantic on Friday that does a good job laying out the concerns:

https://www.theatlantic.com/ideas/archi ... er/673360/

In the past few days, SVB came to experience a classic It’s a Wonderful Life–type bank run. On Wednesday, the bank’s publicly traded parent company announced that it had sold some securities at a loss and was trying to raise cash by selling its own shares. This stoked fears that the bank did not have enough cash to cover withdrawals, leading depositor companies to pull their funds, which then led to a solvency crisis.

The underlying problem was a straightforward lack of diversification, as Bloomberg’s Matt Levine has noted. SVB’s clientele is heavily concentrated in the tech industry, which boomed during the pandemic. That led to a dramatic increase in SVB’s books: The bank went from having $60 billion in deposits in 2020 to more than $200 billion in 2022. Normally, banks take such deposits and lend them out, charging borrowers different interest rates depending on their creditworthiness. But relatively few firms and individuals were seeking such bank loans in the Bay Area at the time, because the whole ecosystem was so flush with cash.

SVB parked the money in perfectly safe government-issued or government-backed long-term securities, as Telis Demos of The Wall Street Journal explained today—so safe, it seems, that the firm failed to hedge against the risk that those bonds might lose value as interest rates went up. Which is exactly what happened. This meant that if SVB had to sell the bonds to use the cash to cover deposit outflows, it would have to sell them at a loss. Which is exactly what happened. That would not be a problem, unless a large share of SVB’s account holders decided to withdraw their funds. Which is exactly what happened.

To be clear, this was mismanagement on SVB’s part. “What happens if interest rates go up?” is not an arcane question for a bank to have to answer, nor is “Are we adequately diversified?” But the Federal Reserve’s sharp and decisive interest-rate hikes played a role in a few ways: They reduced the value of the bonds on SVB’s books and spurred depositors to withdraw money from the institution as the tech industry cooled. The venture capitalists who made SVB such a big deal in the first place also played a role by egging start-ups to pull their funds from the institution.

“SVB’s condition deteriorated so quickly that it couldn’t last just five more hours today so that the FDIC could take it over on the weekend for an orderly resolution,” Dennis Kelleher, the CEO of the nonprofit Better Markets, said in a statement. “Its depositors were withdrawing their money so fast that the bank was insolvent, and an intraday closure was unavoidable.”

This bank failure is proving to be a spectacular mess. In many cases, a large share of a bank’s account holders are fully covered by FDIC deposit insurance, because relatively few people keep more than $250,000 in their accounts. But most of SVB’s account holders had more than $250,000 on hand, given that the bank caters to start-ups, venture capitalists, and Silicon Valley elites. Thus, thousands of people have their money frozen while the government figures out whether and how to merge the bank with another institution, sell off SVB’s assets to get people their money back, or grant protection to deposits of more than $250,000.

Why not just let the capitalists eat the losses? Because a lot of account holders are companies that are trying to keep the lights on and ensure that their employees get paid, and because of the risk of financial contagion. “I’m working with my [California] colleagues to address the Silicon Valley Bank crisis,” Representative Eric Swalwell, whose district covers much of the East Bay, wrote on Twitter. “We must make sure all deposits exceeding the FDIC $250k limit are honored. Banking is about confidence. If depositors lose confidence [in] the safety of their deposits over 250k then we are in trouble.”

That might be the right call in this case. But it might also be the decision that the government ends up making in all cases where a bank needs a bailout and cannot find a buyer; the taxpayer will forever be called upon to make losses public while profits stay private. The financial system is much better capitalized than it was in 2007, yet the collapse of a bank such as SVB still seems like too much chaos for the financial system to handle and for the real economy to bear.

This is Silicon Valley Bank’s fault. And now it’s everybody’s problem.


The US economy ran in an overheated state for years, and the combined zero interest rates during economic good times combined with pumped up government spending largely contributed to the inflation explosion. The Fed has been pushing rates up reactively, because we didn’t do it proactively when we should have, with a goal of cooling off spending. As interest rates went up the expectation was spending would go down, driving down prices. The lever that was expected to be pulled here that would make that happen was a decrease in spending power due to less free flowing debt pushing down demand followed by production and then jobs. Only we saw the consumer credit markets take up the slack to keep spending up, thus jobs up, and thus making it seem like the Fed needed to act more to get the results they wanted.

https://www.newyorkfed.org/newsevents/n ... 0recession.

But something did have to give eventually, and it turned out not to be the flow of credit to consumers but startups with their backing invested saved where venture and startup risk was seen as mitigated via funding through seemingly stable banking institutions. Banking is just accounting after it is all said and done. As the free flow of capital became constrained elsewhere, the startups relying on institutions like SVB began needing the rely more on the money they had borrowed and then saved in mid-sized banks like SVB. The resulting depletion of reserves strain the banks, and in the case of SVB led to financials questioning their stability, which led to increasing withdrawals, and bada bing bada boom, we saw a relic of the golden age of bank runs happen in 2023. Crazy.

Mid-sized banks like SVB also happen to be, in hindsight, where we could have guessed the system would give. They weren’t “too big to fail” and thus stress-tested for exactly this scenario to ensure they could be solvent or unwound in a contained manner if need be. This contributed to their over-investment in long-term bonds going unremarked on by regulators where the weakness lay that brought them down.

So we got this:


The company surprised investors on Wednesday with news that it needed to raise $2.25 billion to shore up its balance sheet, and that it had sold all its available-for-sale bonds at a $1.8 billion loss. Reassurances from the bank’s executives were not enough to stop a run, and depositors withdrew more than $42 billion by the end of the day Thursday, setting up the second-largest bank failure in U.S. history.

Many in the tech community blamed VCs for spurring the run, as many told their portfolio companies to put their money into safer places after SVB’s Wednesday announcement.

“This was a hysteria-induced bank run caused by VCs,” Ryan Falvey, a fintech investor at Restive Ventures, told CNBC on Friday. “This is going to go down as one of the ultimate cases of an industry cutting its nose off to spite its face.”

Observers are calling out the irony as some VCs with notoriously libertarian free-market attitudes are are now calling for a bailout. For instance, reactions to Sacks’ tweet included statements like “Excuse me, sir. Suddenly the government is the answer?!?” and “We capitalists want socialism!”

Some politicians opposed any bailout, with Rep. Matt Gaetz, R-Fla., tweeting, “If there is an effort to use taxpayer money to bail out Silicon Valley Bank, the American people can count on the fact that I will be there leading the fight against it.”

But financier and former Trump communications director Anthony Scaramucci argued, “It isn’t a political decision to bailout SVB. Don’t make the Lehman mistake. It isn’t about rich or poor of who benefits, it’s about stopping contagion and protecting the system. Make depositors whole or expect lots of tragic unintended consequences.”


So. Monday. On the one hand, confidence in the banking system is not just the glue that holds it together. It IS the banking system. Wall Street is clamoring to see the government step in and have one of the big banks acquire SVB to ensure investors with more than the $250k FDIC protected deposits still get made whole. Going back to The Atlantic:

This is a debacle, one that will reverberate throughout the Bay Area and the tech ecosystem. In the near term, the biggest risk is that start-ups doing bread-and-butter banking with SVB might not be able to make payroll in the coming days and weeks, forcing them to miss paychecks or even announce furloughs or layoffs. In the medium term, the risk is that companies holding cash in other, smaller banks might worry about their stability, withdraw funds, and spread financial contagion.

In the long term, the danger is that the government might end up bailing SVB out, proving that all banks are too big to fail in the American system.


So on the other hand what happened to SVB was caused by SVB. Professional short funds had been banking on SVBs troubles at least as far back as January. This wasn't a surprise to people who are paid to know better. The people who view government regulation as interfering should suck it up when mistakes have consequences, no? Even if those cascade out and hurt a lot of people if not the entire US economy. And by extension, the global economy. There is a reason the UK has expressed interest in helping shore up SVBs liabilities.

Monday is coming. What it holds is such a big guess I'm going to say it isn't too much of a breach of grammer rules to say folks are literally holding their breaths to see what the government does.
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Re: March 10, 2023 - The Next Black Date in Economics?

Post by honorentheos »

Oh, and in case anyone forgot, we still haven't resolved the US debt ceiling default crisis, either. Just making sure that little issue didn't drop off the board.
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Re: March 10, 2023 - The Next Black Date in Economics?

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https://www.cnn.com/2023/03/12/investin ... index.html

US regulators say SVB customers will be made whole as second bank fails

In an extraordinary action to restore confidence in America’s banking system, the Biden administration on Sunday guaranteed that customers of the failed Silicon Valley Bank will have access to all their money starting Monday.

In a related action, the government shut down Signature Bank, a regional bank that was teetering on the brink of collapse in recent days. Signature’s customers will receive a similar deal, ensuring that even uninsured deposits will be returned to them Monday.

In a joint statement Sunday, Treasury Secretary Janet Yellen, Federal Reserve Chair Jerome Powell and Federal Deposit Insurance Corporation Chairman Martin J. Gruenberg said the FDIC will make SVB and Signature’s customers whole. By guaranteeing all deposits – even the uninsured money that customers kept with the failed banks – the government aimed to prevent more bank runs and to help companies that deposited large sums with the banks to continue to make payroll and fund their operations.


Here we go.
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Re: March 10, 2023 - The Next Black Date in Economics?

Post by honorentheos »

https://www.wsj.com/articles/signature- ... e-a5f9e0f7

Signature Bank was closed by regulators on Sunday, the second massive bank failure in three days.

The New York-based bank faced a crisis of confidence after midsize lender SVB Financial Corp. was seized by regulators on Friday. Signature was also reeling from a bet on crypto banking that foundered after the sector imploded and banking regulators cracked down on lenders’ exposure to digital assets. The failure is the third-largest in U.S. history.

...

A joint move by the Federal Reserve and Treasury Department took the extraordinary step of designating SVB and Signature Bank as a systemic risk to the financial system, giving regulators flexibility to backstop uninsured deposits. Regulators hoped that and other moves to protect deposits would contain fallout from spooked customers elsewhere on Monday morning.
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Re: March 10, 2023 - The Next Black Date in Economics?

Post by Vēritās »

There were actually 16 bank failures between 2017 and 2020. SVB Bank is the first to collapse since Biden took office.

https://www.fdic.gov/bank/historical/bank/
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honorentheos
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Re: March 10, 2023 - The Next Black Date in Economics?

Post by honorentheos »

Vēritās wrote:
Mon Mar 13, 2023 6:10 am
There were actually 16 bank failures between 2017 and 2020. SVB Bank is the first to collapse since Biden took office.

https://www.fdic.gov/bank/historical/bank/
Bank failures and bank runs aren't synonymous. This isn't political. This is a systemic concern.

A bank run involves a collapse of trust in the ability to access ones deposits. Failures can be caused by any number of factors, usually involving another institution assuming the failed banks deposits and happen all the time with limited public awareness.
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Re: March 10, 2023 - The Next Black Date in Economics?

Post by Vēritās »

Thanks Honor, I just learned something new.
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Re: March 10, 2023 - The Next Black Date in Economics?

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Additionally, regulators shut down Signature Bank on Sunday, stating all depositors of the failed financial institution will be made whole. “[N]o losses will be borne by the taxpayer,” the statement said, per Reuters.
https://www.breitbart.com/economy/2023/ ... pen-panic/

I guess I don't understand this part of the Breitbart article. Where are all depositors getting their money from a failed bank if not from the taxpayer?
The best part about this is waiting four years to see how all the crazy apocalyptic predictions made by the fear mongering idiots in Right Wing media turned out to be painfully wrong...Gasoline would hit $10/gallon. Hyperinflation would ensue.
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Re: March 10, 2023 - The Next Black Date in Economics?

Post by Res Ipsa »

Hawkeye wrote:
Mon Mar 13, 2023 8:11 pm
Additionally, regulators shut down Signature Bank on Sunday, stating all depositors of the failed financial institution will be made whole. “[N]o losses will be borne by the taxpayer,” the statement said, per Reuters.
https://www.breitbart.com/economy/2023/ ... pen-panic/

I guess I don't understand this part of the Breitbart article. Where are all depositors getting their money from a failed bank if not from the taxpayer?
From increased fees on banks, which will be shifted to bank customers. Or, in other words, taxpayers.
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Re: March 10, 2023 - The Next Black Date in Economics?

Post by Doctor Steuss »

Looking at the FDIC information. The combined assets of the last decade's worth of failures are a fraction of what this one bank's assets are. :shock:

Combined assets of the last 122 bank failures (in millions): $35,455
Combined assets of SVB (in millions): $209,000
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