Silicon Valley Bank Undergoes the Second-Biggest Bank Collapse in U.S. History
“First Republic Bank and PacWest Bancorp both plunged Friday as the upheaval at SVB Financial Group spread to other lenders.”
Within a 48-hour period, Silicon Valley Bank (SVB) went from being the “Bank of Venture-Backed Tech Startups” to making history as the second biggest bank collapse in U.S. history.
Now the feds have shuttered the bank.
Financial regulators have closed Silicon Valley Bank and taken control of its deposits, the Federal Deposit Insurance Corp. announced Friday, in what is the largest U.S. bank failure since the global financial crisis more than a decade ago.
The collapse of SVB, a key player in the tech and venture capital community, leaves companies and wealthy individuals largely unsure of what will happen to their money.
According to press releases from regulators, the California Department of Financial Protection and Innovation closed SVB and named the FDIC as the receiver. The FDIC in turn has created the Deposit Insurance National Bank of Santa Clara, which now holds the insured deposits from SVB.
The FDIC said in the announcement that insured depositors will have access to their deposits no later than Monday morning. SVB’s branch offices will also reopen at that time, under the control of the regulator.
According to the press release, SVB’s official checks will continue to clear.
This collapse occurred after a great deal of fiscal drama, including a call to police when some investors went to the bank to pull out their cash.
…[T]he bank’s parent SVB Financial had reportedly tapped outside advisers to facilitate a potential sale. “Large financial institutions” were exploring a potential acquisition of SVB Financial, CNBC reported, citing sources familiar with the matter.
Earlier in the morning, building managers at Silicon Valley Bank’s Manhattan branch reportedly called the police after a group of tech founders showed up and attempted to pull out their cash.
What happened? It appears the root cause of this bank collapse stems from federal requirements to begin with. After the last financial crisis of 2008, regulators required banks to hold more capital. So, banks opted to hold Treasuries and Mortgage Securities and apparently treated them as if they had no risk.
However, it turns out pumping billions of dollars into the economy in the name of “science” and “equity” actually had consequences.
Matt Levine, a Bloomberg opinion columnist covering finance as a former editor of Dealbreaker and former investment banker at Goldman Sachs, provides a great review of what happened when the Fed started to play with interest rates to stem inflation.
….[I]n traditional banking, you make your money in part by taking credit risk: You get to know your customers, you try to get good at knowing which of them will be able to pay back loans, and then you make loans to those good customers. In the Bank of Startups, in 2021, you couldn’t really make money by taking credit risk: Your customers just didn’t need enough credit to give you the credit risk that you needed to make money on all those deposits. So you had to make your money by taking interest-rate risk: Instead of making loans to risky corporate borrowers, you bought long-term bonds backed by the US government.
The result of this is that, as the Bank of Startups, you were unusually exposed to interest-rate risk. Most banks, when interest rates go up, have to pay more interest on deposits, but get paid more interest on their loans, and end up profiting from rising interest rates. But you, as the Bank of Startups, own a lot of long-duration bonds, and their market value goes down as rates go up. Every bank has some mix of this — every bank borrows short to lend long; that’s what banking is — but many banks end up a bit more balanced than the Bank of Startups.
Despite the FDIC intervention, other banks’ stocks are being hit as worry and concern about the industry spread.
First Republic Bank and PacWest Bancorp both plunged Friday as the upheaval at SVB Financial Group spread to other lenders.
Shares of First Republic tumbled 51% to $47.25 at 9:49 a.m. in New York, while PacWest dropped 37%, triggering trading halts for both.SVB, the parent of Silicon Valley Bank, plunged as much as 69% ahead of the US market open, before trading in the stock was halted pending news. On Thursday, the shares plummeted 60%, fueling a 7.7% drop in the KBW Bank Index, while First Republic and PacWest also posted record one-day declines.
“The funding pressures facing SIVB are highly idiosyncratic and should not be viewed as a read-across to other regional banks,” Morgan Stanley analysts led by Manan Gosalia said in a note Friday. “That said, we have always believed that SIVB has more than enough liquidity to fund deposit outflows related to venture capital client cash burn.”
Finance experts indicate that the FDIC will work quickly to avoid panic.
For the FDIC, the immediate goal is to quell fears of systemic risk to the banking system, said Mark Wiliams, who teaches finance at Boston University. Williams is quite familiar with the topic as well as the history of SVB. He used to work as a bank regulator in San Francisco.
Williams said the FDIC has always tried to work swiftly and to make depositors whole, even if when the money is uninsured. And according to SVB’s audited financials, the bank has the cash available — its assets are greater than its liabilities — so there’s no apparent reason why clients shouldn’t be able to retrieve the bulk of their funds, he said.
“Bank regulators understand not moving quickly to make SVB’s uninsured depositors whole would unleash significant contagion risk to the broader banking system,” Williams said.
Bob Elliot is the Chief Information Officer for Unlimited Funds and a CNBC contributor. He indicates that a great deal of work will be done ahead of Monday’s stock market open.
Odds are we will all learn a lot more over the weekend. The fed and fdic will want to instill confidence in the market and limit knock on impacts before the futures open on Sunday night. It’ll be a long weekend.
— Bob Elliott (@BobEUnlimited) March 10, 2023
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Comments
“So, banks opted to hold Treasuries and Mortgage Securities and apparently treated them as if they had no risk.”
If they’re classified as Hold To Maturity, the balance sheet doesn’t require marking to market. If you need cash in the meantime though, you have to sell them and that marks them to market.
It was probably an expert causing a bank run taking the balance sheet as not HTM, which itself produced the crisis.
This points to very bad management by SVB. They need to management their portfolios to protect against rising interest rates. They didn’t. they were so used to zero percent interest that were caught asleep despite warning by the Fed.
It’s not like the collapse just suddenly jumped out of hiding and bit them in the ass. They have accountants, internal auditors and in-house investment specialists tracking their investments and issuing almost daily reports to management. They are also reporting their financial condition to the Fed and other regulators. How did everyone get caught by surprise?
I believe what happened is that management simply ignored their internal reports and until interest rates started rising. Then they probably started playing the guessing game of disbelief that the Fed would not raise rates and waiting for the problem to go away. When it didn’t, the big banks could figure it out because people who knew, particularly the auditors, were talking and it got out. Eventually, their clients got wind of it and at the prodding of banks like JP Morgan, started pulling their money out. That escalated quickly into a panicked bank run.
Now we are hearing the politicians blaming Powell for raising interest rates. Yes, raising rates triggered the tide to recede exposing those who were swimming naked. That is the whole point of raising rates and forcing the markets to adjust. Those who can’t, referred to as zombie companies, perish. That is what is supposed to happen. Efficient allocation of capital is the main point of having free markets in the first place. The weak, inefficient, mismanaged companies perish and the more efficient, well=managed companies eat the up.
Our government has been bailing out the zombies for so long that they have become too big. If this leads to a deep recession, it was because of too much government interference, too much central planning and too much concern our stakeholders vs shareholders. It’s time to go on a diet and suffer through the cure. The mature grown ups who know how to run things have to be re-instated.
The first step in solving the “contagion” if that is coming is to slash government spending, I don’t mean the phony GOP solution that they never act on anyway where “cutting” means slowing down out-of-control spending and borrowing. I am talking about SLASHING spending by eliminating entire government departments like education, IRS, the interior, and so many more. Slash tax rates, trim back the bureaucracy until it is efficient and redirect tax revenues to pay off the debt.
Good luck! Don’t hold your breath.
What a con job.
Require more capital
Get gullible banks to buy treasury bonds
Spend like crazy and create inflation
Reserve Banks raise interest rates makeing your bonds worth less
You start losing money
Investors and customers make run on banks
Bank defaults
More regulations
Suckers
It might be worth checking who had shorted the stock.
No need to look that far: CEO sold $3.6m worth of the stock, one week prior to liquidation. I’m sure the FTC/SEC have strongly worded letters ready for him. But no actual penalties. Hey, most of the customers will go broke, why should he?
They’d be at worst trying to minimize a loss. If somebody shorted the stock and then sounded the alarm (“if there’s a run on the bank they’ll go under”) to put them other, he’s after a profit.
And he wasn’t the only one. Something like 70-75% of their deposits were uninsured. Poorly managed bank. Let’s see how many more there are out there. The big banks are very well capitalized this time around. This isn’t a replay of Lehman Brothers/Bear Stearns 2007-8. This is more like FTX. One of their largest clients was a crypto company to boot. This is certainly going to cripple Silicon Valley start ups for a while and some start-ups who had significant deposits at SVB might go bankrupt quickly. There is no rescue money out there this time but plenty of big vultures waiting to grab some assets on the cheap. The worst thing would be for Congress or the Fed/Treasury to bail them out. Let these zombies die.
Uninsured deposits accounted for 90-93% of all deposits!
https://www.breitbart.com/economy/2023/03/11/pinkerton-green-woke-and-now-broke-how-svb-became-the-2nd-biggest-bank-failure-in-u-s-history/
How dumb ARE these people?
Let’s see the Uniparty lie, bully and weasel their way out of THIS mess. Janet Yellen was just arguing for MORE and FASTER wokeness. Perfect timing by the female Buttigieg running the Treasury.
}}} Something like 70-75% of their deposits were uninsured. Poorly managed bank
Pretty stupid depositors, is more like it. I know this, and my total liquid assets aren’t even close to those limits. If you’re putting more into the bank than the FSIC covers, YOU are the one taking the stupid risk, not the bank.
“Bank regulators understand not moving quickly to make SVB’s uninsured depositors whole…”
… will teach them a lesson in reality. It’s a harsh and cruel world and the deposits are UNINSURED for a reason folks.
If those were programmed sales the SEC won’t do anything.
So if I understand- did they invest deposits in low rate instruments.
Then when high rate instruments became available- they couldn’t invest in those- so depositors likely fled. Then they fell below the required cash for deposit levels as people with cash went directly to fed notes rather than hold?
If so- this could be a bigger trend.
We run our house on a 6-12 month budget and I keep that in cash- However I could easily put the back end cash in notes/bonds/bills rather than the credit union. I haven’t because I don’t have time to screw with it.
When FTBill rates went up, cash was vacuumed form SIVB’s account, which were paying nearly 0% like everywhere else. Once SLVB could not access funds for free, its “business model” collapsed.
Tell me this isn’t widespread.
“The collapse of SVB, a key player in the tech and venture capital community, leaves companies and wealthy individuals largely unsure of what will happen to their money.”
Oh, noes! Rich Democrats are drowning!
This is the sharp end of a coming nationwide bank failure. You can check out this article and video, or you can just Google: bail-in fdic. You can consider it a “crap website,” but a video (of FDIC solons discussing an “inevitable” bail-in) is a video, and there is no shortage of websites discussing this issue.
I have been around LI for a long time (Trevon Martin brought me here), and I have seen a lot of commenters come and go. I recognize some names as people I “trust”, some I may disagree with, but in general find their comments to be thought-provoking. I just want you to know, I trust your recommendation of articles to check out – “crap website” or no.
As with you, I came to LI during the Trayvon Martin case and stayed for so much more. This could be considered a “professional” site considering the level of discourse. The respect for the intrinsic value of money is gone. I would put the start with the Federal Reserve, on to FDR and gold, advance to Nixon with gold and then the 2008 and on plunge into oblivion. The destruction of money isn’t really about money but the irreversible loss of labor spent earning wealth. Here there is “equity” as everyone is losing the same percentage of time…. while some will point out the amount of money… working life spans are finite.
Came for the bakery case.
This may be the beginning or a nationwide bank failure but it doesn’t have to be. What we are witnessing now is the “sell now and figure it out later” effect. It doesn’t help that so many people focus investing in index ETFs so that entire sectors go down as the asset allocation-diversification-rebalancing advisors rebalance their portfolios. This really exacerbates that mentality.
I believe the bail-in will happen too because this is global right now and the globalists will not admit they are wrong and risk surrendering power. So they will just magnify the problems that got us into this mess in the first place. The reason always cited when communism fail is because they weren’t communist enough. That rule applies to all centralized dictatorships. MORE POWER!.
So, I’m dumb and don’t understand banking stuff.
This bank has the cash to pay back all of the deposits? How are they closing, then?
They are only required to keep enough money to cover short term demand. Most of the rest if “illiquid”… still of value but difficult to turn into cash as the money is in loans and such. Illiquid is not the same as insolvent where there is nothing (which also may be the case) left.
So, they have the value in something, but not enough cash. They need the cash and can’t convert the something into cash fast enough. Therefore, people wanted their money out and the bank couldn’t do it so the stock collapsed at the same time they already didn’t have the cash they need.
That right enough?
Pretty damn close actually.
Banks generally accept deposits then lend them. They were paying next to nothing on deposits but getting 4+% on mortgage loans as a simple example. The 08/09 financial crisis caused bank regulators to increase the amount of deposits kept on reserve. Then Covid happened and the reserve requirements were waived. Many banks, not just this one, have practically no ‘cash’ on hand.
So this bank had lots of low yield Treasury instruments on the books but little available ‘cash’ on hand. They had some depositors ask for withdrawals then some more. Suddenly they were out of cash on hand. The value of their low yield Treasury portfolio had decreased b/c newer issued Treasury instruments pay a much higher yield.
Wouldn’t be a problem normally if they held to maturity. They couldn’t here so when they sold to raise cash to facilitate withdrawal of deposits they took losses. Rumors began, more depositors wanted their own money. They tried to raise outside financing via stock offering but no luck. FDIC stepped in and took over.
This bank was the primary bank in Silicon Valley. Many small companies had all their banking with this bank. FDIC guarantees accounts up to $250K, over that amount you can pound sand. Many of the companies dependent on this bank won’t make payroll. Snowball effect begins. The question is how big. The next question is what other banking institutions are vulnerable and how many go down if a mild panic begins as folks act prudently to withdraw funds below the FDIC deposit guarantee threshold of $250K.
Serious questions:
I see lots of people talking about the FDIC guarantee and I get the basics. But I’m cynical in this day and age.
Has the FDIC guarantee ever actually been used on any large scale bank failures?
Does the FDIC have enough to cover multiple banks if this snowballs?
What would the timeframe be on getting your money? Instantly? Days? Weeks? Months?
In other words, what is the likelihood that these people will actually get at least some of their money?
What is the likelihood this is contained vs snowballing?
Thanks, CC, good explanation. I’m allegedly a “smart guy”, have a master’s in engineering and worked for decades at a rocket-scienecy job that most people could barely understand. But when it comes to these financial dealings, especially the process of these “meltdowns” I am lost. And I’m from the group that are all supposed to be financial wizards (Rothschild, Goldman-Sachs, you get the picture …)!
Silicon Valley is the epicenter for the financial stability of California tech-wise. This will ripple as the state (bless their little socialist hearts) have been living high off of their perception of the future and the glorious Worker’s Paradise. All it takes is higher taxes to solve their problem even when there are no businesses for the workers (/s). The poor are subsidized, the uber rich have put their money elsewhere and the middle is now hammered more.
irishgladiator63,
FDIC was heavily used in early ’80s. Reagan admin deregulation exposed some zombie mismanaged, complacent banks and they went under due to increased competition.
The timeframe for a depositor getting their money back, up to the $250K limit, once the bank is in receivership is more like weeks than days. Eventually they will get it but in the meantime if their own creditors refuse to work with them it gets unpleasant for sure. It’s not like the FDIC has a vault full of cash, they more or less purchase insurance with the 20 cents on $100 each bank sends them. (Way oversimplified but close enough)
As for a snowball if I could pinpoint it I wouldn’t tell anyone, I’d just make trades to maximize my own profit. Since I can’t I will offer a totally unreliable prediction.
Probably not gonna be a systemic meltdown. More likely is the economic impact among those who do relied on this bank. Payrolls won’t be met by employers until this gets sorted. That means employees don’t pay their creditors. Which means all those folks need to dip into their savings to tide them over.
That’s the more likely impact; localized. That’s an issue b/c many of these folks are smaller and start up tech companies. They either get emergency financing from somewhere or they shut down or more likely a bigger, more capitalized company buys them and their innovation on the cheap. Then fire ‘redundant’ workers which has knock on impacts of its own.
There are two other system risks IMO, first is for the counter party banks and the correspondent banks of SVB. Whatever capital they have tied up is also in receivership and unavailable for them to give to their own depositors which is how we got here. As long as folks don’t panic probably no real big worries.
The second risk is folks nationwide freaking out and going to the bank on Monday to demand their deposits. That creates its own problem that doesn’t really exist. Sort of creating a crisis when one didn’t exist. It feeds on itself b/c no one wants to be behind the last person who got their deposits before the branch closes…..
The real issue is lack of available slack in the system. The regulators reduced the amount of required deposits on hand during Covid. The banks don’t have a whole lot ‘cash’ they have it parked in loans and in Treasury instruments.Rising in test rates make those investments immediate value if sold less. It’s safe enough until too many people try and get their deposits all at once. A panicked mob will end in disaster.
If you have under $250K in a bank there isn’t a need to panic. If you have over that in one bank it might be prudent to establish an account at another bank with the excess. Frankly its a good idea anyway to have two different banks so that if one has just regular problems like their CPU system getting goofy for a day or two you can use the other bank. As happened at Wells Fargo on Friday.
James Stewart explained it clearly in “It’s a Wonderful Life!”
No bank ever has the reserves to survive a bank run. SIPC and FDIC insurance was created to assure depositors their money is safe. But when a banks are run by people this dishonest and incompetent, there is no protection. That is why we regulators. We don’t have enough regulation? We don’t need more regulation nor more regulators. We BETTER and MORE EFFICIENT regulation and far fewer regulators but people who can focus on doing their jobs. I again argue that we need to reinstate the Glass-Steagall Act and break up the Big Bank Cartel.
One thing to be said for the Islamic banking laws: they don’t operate fractionally if I understand things right.
Go watch the bank run scene in “It’s a Wonderful Life”— except in this case Potter is paying 1.07 for every share you pull from the Bailey B&L and there is no waiting period to withdraw.
Just watch “It’s a Wonderful Life”.
Well, that is the foundational source of my banking knowledge, such as it is.
Maybe SVB should have watched it …
Kramer, literally two weeks ago: “SIVB is a great bank, Hold those shares!”
Also Kramer, late ’08 (but not late enough: “Bear Sterns is solid. Hold your shares!”
I understand there is a fairly large interest in the “Short Cramer” trading strategy.
Part of the problem, as I understand it, is that the bank didn’t balance its portfolio of long-term bonds, particularly those in commercial real estate. Jeffrey Carter at Points and Figures does a good job in a series of posts explaining how SVB went wrong — it exposed itself to risks and didn’t hedge those by taking counter-balancing risks and insurance. Hedging is vital in the bank industry for precisely what happened to SVB — if the Fed raises rates and the tens of billions of dollars in bonds (in CRS and elsewhere) go down in value, you’ve hedged in the market and get most (not all) of that back. Apparently the risk managers at SVB didn’t do any of that.
SVB management is at fault here, he says, along with California regulators (SVB was a state-chartered, not federally-chartered, bank).
The key questions regarding SVB are:
Does its Board reflect ESG values?
What percentage of its Board and c-suite employees were LGBTQ+?
Did the Board meeting room have on the wall at least one picture of Mao?
Did mgmt. run important governance and financial decisions by the DEI staff for approval?
Did mgmt set aside and preserve funds for Reparations?
Were they woke enough?
The answers to these questions will determine whether they are courageous social-justice warriors, or just bricks in the crumbling capitalist wall!
Ta Da: https://instapundit.com/573860/#disqus_thread
Just what you’d expect.
She’s in the UK division, which isn’t where the problems seem to have started.
He’s not.
Our Global Diversity, Equity & Inclusion Commitment
SVB is committed to creating a more diverse, equitable, inclusive and accessible environment within SVB, within the innovation ecosystem, and in our communities. At the heart of this commitment is our effort to foster a more inclusive culture and increase racial, ethnic and gender representation within SVB.
In the broader innovation economy, we are focused on breaking down systemic barriers to entry and success, investing in opportunities that ensure more founders and investors with a range of experiences and ideas are represented in our ecosystem.
We strive to use our resources, voice and influence to help build strong communities and contribute to economic and social progress where we live and work.
Greater Community Corporate Social Responsibility Innovation & Client Ecosystem Access to Innovation Program At SVB.
Greg Becker
President and CEO, SVB
Wonder if they went full in on DEI.
I’m seeing inept people be put in charge of big things who should not and it’s causing problems with lots of zeros on the end. Very curious if this is also an instance of it playing out. When boards hire people based only on skin color, eventually there will be consequences.
I don’t see this as a problem with DEI, or wokeness, or anything except plain old-fashioned greed. “Greed is good” is a pillar of capitalism, but sometimes greed can be jut stupid.
You see this as far back as Reagan, way before the DEI/woke days. Reagan was a staunch free-marketeer, but hardly had a reputation as a stickler for details. One of the hallmarks of his administration was his deregulation of banks: he didn’t think that “consumer grade” banks (savings and loans) should be barred access to the same “lucrative” (albeit riskier) types of re-investments as the big commercial banks had, so he allowed them that access. Fine, as far as it went… but at the same time, he failed to remove the “government guarantee against failure” these banks enjoyed through FSLIC.
This gave the banks a loophole windfall. They could invest in these risky assets and make two or three times as much money for themselves as previously. On the other hand, if they screwed up, they’d never lose a thing, since the government would make their depositors whole. Essentially, the new rules said they got to play roulette with somebody else’s money, and got to keep all the winnings.
A sixth-grader could have told you what would happen next. S&Ls gambled and tanked. A third of them failed outright. FSLIC was on the hook for the difference, about $160B. At the time, it was the most expensive government cock-up in history. (Now it’s only about two months of Ukraine-bound cargo.)
Silicon Valley follows the same pattern: invest in junk FTW, don’t get the W, put the government on the hook for the remainder. The FDIC can handle a handful of bank failures of this pattern, but too many more and they run out of money, like anybody else.
It’s not “greed” although it and D.I.E. may have contributed. The basic fact is that every financial instrument other than cold, hard, cash, will in some circumstance, lose value and only God knows when, how much and why.
Yet we persist in creating all of these instruments and each one of us hopes that when the music stops playing, “I” will be the one with a chair!
As long as you have fractional reserve banking, this will be true.
I myself far prefer that we give it up.
Unless the depositor makes a specific agreement for his money to be loaned out on a specific type of financial instrument, it just shouldn’t be done.
Mom and Pop businesses have no idea what these banks are doing with their money.
I would far rather have basically zero inflation as we did over a century before the federal reserve, and no interest, than to — with zero predictablility — lose 40% of the value of my money overnight.
If I want to take risk, it should be explicit and it should be specifically linked to a risk I have explicitly agreed to undertake.
Banking as practiced is a scam. The top players demand all the upside, but the downside falls on whomever is unwary, not in the top 1%, or simply not paying attention, and usually the small participants and taxpayers.
Make banking 100% reserve, and if people want to gamble with their money, let them do it with their eyes WIDE OPEN.
Okay – my mistake – cold, hard, cash will also lose value, see, e.g., U.S.Gov. diluting it with newly printed additional notes. Gold, on the other hand…. is also volatile, but normally retains its value without major crashes overnight.
Doing away with fractional reserve banking would collapse the economy. It would also stifle risk taking, even modest good risks wouldn’t get funded.
IMO, it would be better would be to make the officers and directors of the banks personally liable for mismanagement of risks. That along with more robust Reserve requirements, which were waived under the ‘Covid emergency’ and not restored.
Plus for the Fed Reserve a restoration of the gold or at least silver standard for exchange. With value of the USD pegged to the value of a basket of various commodities.
If introduced gradually, with reserve requirements increasing one percent or so per year, it would not cause a crash.
Plus, introducing requirements to have specific consent for specific investments would introduce greater awareness of risk and some lending would continue.
As for making officers and directors personally liable, the problem is most of them aren’t worth the money they end up losing.
As for the Fed, it’s a private institution with the imprimatur of the federal government, and it’s hustling us. I’m with Andrew Jackson: Be rid of it!
Just the idea of swanky former back directors and executives having their assets liquidated, homes sold, accounts and vehicles seized when their mismanagement effs up the lives of ordinary folks warms the cockles of my heart. Put them on the street and make them hustle to continue to pay it back.
According to Tucker’s recent program on the SVC collapse, (segment starting here) it seems I am off the mark. The bogey instrument that cratered the bank was plain old US government bonds. They were “encouraged” to invest in them, and the problem was that they over-invested.
According to common wisdom, US bonds is the safest, dullest, and close to the least profitable “sure investment” one can make. But apparently in Clown World, this all stands on its head, and they crash you.
What you are describing is what actually happened in 1998 when Republicans pushed Congress to the repeal of the Glass-Steagall Act. This became the center piece of the bipartisan 1999 Financial Modernization Act which opened the floodgates to access to capital by the big banks to insurance company capital and commercial bank capital. I worked for CitiBank, the biggest toxic asset manufacturer of all, at that time as an investment advisor so I know what I am talking about it. I lived it. T
They then combined to manufacture (financial architecture) new investment products (later to become toxic assets) to finance the endless left-wing political mandates while passing the risks to naive investors through ALL of the advisory firms. What a deal. Liar loans and mortgages (junk) were packaged by the banks into “structured income assets” with AAA ratings from S&P and sold mostly to retail investors. There was so much demand that mortgage originators were struggling mightily to meet the demand. Then the Lehman Brothers, Bear Stearns, AIG shit hit the fan. Yet here we are today after all of the bailouts having learned nothing.
The core problem is far simpler than you are making it. Reagan wasn’t at fault in this, He suffered through the same problem Trump was faced with in that he never should have trusted all of the Bush people who eventually co-opted his administration. Greed and corruption just keep destroying this country and it started long ago. We just keep bailing out the crooks and they get bigger and bigger and more powerful. Just like communism, the solution is always to make the problem bigger to get more power.
Assets have variable value. I wonder if progressive prices affected their viability.
The lesson is don’t invest in bonds, and where does that leave so very many pension funds?
Flat broke, that’s where. You probably knew that already, but svib makes clear that the conflagration is moving ever closer.
Wrong. Invest wisely in bonds. I do this for a living. This is another fall-out from the repeal of the Glass-Steagall Act. Treasury bonds and municipal bonds are very safe investments. Interest rates go up and they go down. You just have to know how to structure your holdings to address your specific objectives and investment horizons. I’ve been laddering short-term t-bills now for over a year and just this week bot 6-month bills yielding 5.3%. I expect that portfolio will be yielding close to 6% by year end. That is a very solid base to start the year knowing you will make at least 6% just from your fixed income without any investment risk. I can now lower the volatility in my client portf0lios without an taxable events while maintaining or improving their income.
What is really needed is to restore the Glass-Steagall Act. Repealing that act opened up Wall Street to equitize EVERYTHING and ruining the orderly management of low risk capital, like for insurance companies and commercial banks. Insurance companies are the prime buyers of long-term treasuries because that is how they insure that the cash they will need for many years out based on their actuarial data will be there. That is why they don’t mark to market. They buy and hold until maturity. When interest rates go up, their costs actually go down because long term bonds become less expensive. Most conservative capital used to account for the vast majority of capital in the economy. But today, everything is equitized including mortgages, student loans, credit card debt, worn out spare tires…. That’s how we got into the toxic assets problem. Wall Street has wrecked our economy and it is time to fix that problem by again isolating risk capital by keeping insurance companies, commercial banks and investment firms separate. No more collaborations nor partnerships. Turns all capital into high-risk speculation.
If the debt ceiling isn’t raised, rolling over your Tbills may fail and it winds up in a 0% certificate of indebtedness. It doesn’t make sense (rolling over doesn’t increase debt) but it happens.
Phil,
That was an excellent post describing the problem and offering the the most straightforward solution.
Thank you. I’ve been living this nightmare almost since I entered this business and so far, I’ve been able to survive by dodging the “bullets of temptation” presented by my bank employers. I am now an independent RIA still fighting the fight against corruption. But this could be the final battle before it all ends. We know what the problem is but like everything else these days, we are too easily distracted by shiny objects to actually do anything effective about it. Very frustrating. Too many people think they KNOW things but few do and those who know and speak get crushed. We all choose to believe what we want to believe. And then reality leaps at us out of the shadows and we run around screaming with our hair and pants on fire until we the crooks calm us down and we go around the block one more time. We really need to be willing to accept some pain and suffer through the solution if we are to survive.
The math stopped working 15-20 years ago for our standard of living. But our freedoms aren’t predicated on our being wealthy. We need to take a few steps backwards and get our house in order if we are going to continue to be free people. The alternative is pray of a miracle and hope reality doesn’t happen to us or at least, not in our own lifetime.
It’s a very creepy time to be an American.
I feel you. I was stockbroker then CFP in early ’90s. I had peers trying to talk folks into ditching the 15%+ yielding Treasury they bought a decade or a earlier to invest in equities or the next ‘hot play’ or even worse pile it all into an Annuity. Gotta love the skink on Annuity products….as long you are the one selling them.
It’s tough to watch that crap and this was at regional firm with a good reputation for being conservative. Tried to gut it out but finally decided it wasn’t worth my soul and I went back into the Army.
Most people just need to visualize risk and how to take prudent steps to offload or mitigate the different sorts of risks they face. Too many individual investors are far too concerned about not missing the next hot thing. They fall for the siren song of greed and it always ends up costing them.
“Earlier in the morning, building managers at Silicon Valley Bank’s Manhattan branch reportedly called the police after a group of tech founders showed up and attempted to pull out their cash.”
This is one of the key points that is not really being talked about. There are not all that many “tech founders”, i.e. new product entrepreneurs, investing in or putting together deals to start new companies and create new products. And they operate nationwide and worldwide, not just in Silicon Valley.
Not being able to get your money out of the bank, and especially being barred by the police from trying to get your money out of the bank will have an effect. By the way, many “tech founders” know or know of each other, and y’all bet dollars to doughnuts that they, and their accountants, and their R&D people are having some major discussions this weekend. Topics will likely include “Given the dependence of California on tech, and the banking failure, how much if any should we be operating in California?” and “Where is it safer to keep our money?”. The answers will include in part whether Silicon Valley heads towards being Silicon Desert.
Keeping in mind that California is on the knife edge between boom and bust, the results of those discussions are going to affect their state [and the entire Leftist agenda] a lot more than the pro-California commercials I have been seeing on TV for the last few months.
Subotai Bahadur
“There are not all that many “tech founders”, i.e. new product entrepreneurs, investing in or putting together deals to start new companies and create new products.”
The shadow may be longer than that. Apparently “mompreneurs” — home-based, self-employed niche suppliers who market through Etsy, etc. — are being screwed by this same bank failure.
It’s actually far, FAR worse.
They called the police on companies trying to pull out their cash… and that same day, before being shut down, they paid out annual BONUSES to their employees.
MBS strikes again. I’m old enough to remember the last crisis. If anyone thinks MBS was the only bank taking advantage of the Feds under Powell to run their reserves to zero and invest in stuff I have a bank to sell you.
Sorry, SVB not MBS
Per Vivek Ramswamy: “SVB was an ESB evangelist”.
https://www.breitbart.com/politics/2023/03/11/exclusive-ramaswamy-im-against-bailout-esg-evangelist-silicon-valley-bank/
I forgot to mention that. Just do a YouTube search for their ads and they are all about equity, social justice and the environment. Competence was not a factor in hiring nor in managing. They deserve what is happening to them.
The problem is, it ends up happening to ALL of us.
We can’t afford the nightmare of fractional reserve banking. The roller coaster is far too severe, hits far too randomly, and destroys otherwise very productive citizens as collateral damage.
I was onboarding with a new payroll company this week, and they’ve had to suspend some deposits and tax collections because of this. Companies all over the country use them.
Well, they were the bank for big tech.
If they were the bank for the Mob, they would have har a bar in the lobby.
It’s just business. You cater to the clients’ biases. Shmooze or you lose.
It’s now being reported that literally THE DAY they collapsed and mere hours before their accounts were frozen, SVB snuck out a whole bunch of annual BONUSES for employees.
Your bank is going bankrupt and LITERALLY the last thing you do is give out mother****ing BONUSES.
And people wonder why conservatives are coming out hard against bailing these jackasses out.
It sucks for those impacted but no one deserves guaranteed protection of their deposits above the $250K FDIC guarantee. Once this receivership is sorted the depositors will get some return on their deposits above that but not anytime soon.
Lots of pressure from the CA Congressional delegation and the usual BS arguments of ‘too big to fail’ and ‘systemic risk’. There will be lots of sob stories, many of them true, of small businesses and individual depositors who got jammed up. Sometimes a bank will require a business to run its payroll and other banking through them in order to get loans. These folks chose this bank. There are plenty of other banks one can deposit money with.
Stepping in to bail out depositors above the $250K FDIC guarantee is removing risk and personal accountability from the equation. People have to understand that they have an oversight role to play themselves to scrutinize a bank before making deposits.
From what I understand the bank officials sold off millions of their stock holdings in the bank this past month. The added mistake of funding woke and LGBQ questionable ventures helped bring it down. Then the run on the bank as over 97 % of it’s depositors had over $250k in their accounts.
Jail the bank officials and give the depositors their FDIC guaranteed amount. No bailout on the bad decisions of the bank. Another case of go woke then go broke.