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PostSilicon Valley Bank Collapse: Capitalism and Its Discontents (Paul Levine, Denmark, 03/14/23 3:24 am)
This is the 383rd day of Russia's brutal invasion of Ukraine. As the death toll in the battle for Bakhmut rises,
Americans are distracted from the war by the collapse of a California bank, the Silicon Valley Bank.
SVB went bankrupt, creating a new crisis in the American banking system. Since SVB served a large number
of Silicon Valley startups, the bank failure has forced the US government to step in and save the California
startup industries. Government intervention raises memories of the infamous "bank bailout" of a decade ago.
There are several ironies here:
1) Silicon Valley entrepreneurs are famous for their libertarian views opposing large government interventions
in the economic system. But now they are urging Biden to bail out the bank and its endangered startups.
2) Silicon Valley's old motto announced by Mark Zuckerberg is: "Move fast and break things."
Apparently, the corollary is: you don't have to pay for things you break if you're a Silicon Valley entrepreneur.
3) The current Silicon Valley motto is: "Fake it until you make it," which was made famous by the Stanford
dropout and Theranos CEO, Elizabeth Holmes, who was convicted recently of multiple counts of fraud.
In other words, it's OK to lie, misrepresent and falsify your product as long as you succeed in the end.
Evidently, this was the motto of the Silicon Valley Bank as well since it lobbied for fewer government
restrictions on its lending practices. Will the SVB CEO and Board be held accountable for this fiasco?
Is it any wonder that some have pointed to a crisis in modern Capitalism?
JE comments: As Tor Guimaraes phrased it many times, it's all about the "privatization of profits and the socialization of risk." Hadn't the banks been sufficiently regulated on minimum reserves, etc., the last time? Well, I guess not.
I invite a WAISer (Michael Frank? Bert Westbrook?) to walk us through the relationship between SVB and crypto currency. Did the latter have a role in the collapse of the former? One thing I cannot understand: Bitcoin actually spiked upward yesterday on the news.
SVB Is Not to Blame
(Istvan Simon, USA
03/16/23 3:12 AM)
I am grateful to Paul Levine for bringing up the subject of the Silicon Valley Bank collapse. I meant to write about it myself, but have been even more busy than usual these days.
The Wall Street Journal has several excellent articles on the failure of SVB. I thought when I heard about it that it was under-capitalized. I was wrong. SVB did everything right, and did not deserve to fail. It failed, because there was a run on its deposits: clients withdrew their money en masse. No bank can survive a run on its deposits.
The US government is right in stepping in to save SVB, which was already acquired by another bank. Crypto had absolutely nothing to do with SVB's failure. SVB was founded by a Chinese businessman to fund startups in Silicon Valley. It was extremely successful in attracting depositors in the high-tech sector from venture capitalist firms, to the startups themselves. It took him 40 years to build SVB into one of the biggest banking successes in the United States.
Who is responsible for the failure of SVB? The very depositors who benefited so much from its existence. In my opinion, the US government ought to assess a special tax on these companies, to pay for the bailout of SVB. Mark Zuckenberg, Jeff Bezos, etc... and their companies need to fund the cost of their irresponsible behavior. The tax ought to be assessed irrespective of whether they participated in the run on the assets of SVB. Rather, it needs to be assessed broadly on the high-tech industry as a whole.
I disagree with Tor Guimaraes. This has nothing at all to do with privatizing profits and socializing losses. Zero, zilch, nada.
JE comments: I was merely suggesting what Tor Guimaraes might have said about SVB. Tor has not posted on WAIS in quite some time. How are SVB's losses not being socialized? Aren't we the ones making good on the deposits?
And SVB did "everything right"? I'm not a finance guy, but don't the events of last week speak for themselves?
One curiosity I haven't seen addressed: What was so attractive about SVB in the first place? What advantages did they offer to Silicon Valley types that weren't available from the more established, "legacy" banks?
SVB Again: They Had No Risk Officer (from Ric Mauricio)
(John Eipper, USA
03/16/23 1:19 PM)
Ric Mauricio writes:
Wow! "SVB did everything right"? (See Istvan Simon, March 16th.)
Kinda reminds me of the time I was a stockbroker and I was in my cubicle talking to my client, when another broker came rushing in, apologizing for barging in but needed an answer to why bond values go up and down. I always thought of myself as a mentor to my clients, and my client asked if he could explain it to him.
You see, bond price and bond yield are inversely related. As the yield of a bond goes up, the price decreases. As the yield of a bond goes down, the price increases. This is because the coupon rate of the bond remains fixed, so the price in secondary markets often fluctuates to align with prevailing market rates.
For example, let's say I have a bond that is paying 5% interest at par (this is expressed as 100, think of the bond requiring a $100 investment). So, I am earning $5. But let's say our friend Jerome raises the interest rate where bonds of this duration now pay $6 or 6%. Ah, now that bond that you had invested in at $100 and paying $5 would now be priced lower to a potential buyer who would want the prevailing rate of 6%. In other words, he would pay you $83.33 for your bond so that he can earn his 6%. Thus, the value of your bond has decreased by around 17%.
Of course, if this was a short-duration bond going out 6 months or a year, you can wait it out, and collect the par value of your bond at 100. However, if they are long-duration bonds, it may be challenging to hold on for let's say, 10 years, because of the time value of money. But banks, who hold millions of these bonds, have to mark-to-market these bonds on their balance sheets and show that they, on a given day, can handle an outflow of funds from customers withdrawing funds not only for everyday expenses, but capital expenditures.
Thus, the need for a Chief Risk Officer, of which SVB did not have one for 9 months. I guess Becker felt he didn't really need one. Reminds me of executives that I've worked with who scream, "Leave me alone, I know what I'm doing." And true to the Pareto Principle, 80% do not know what they're doing. Scary.
I knew there was a reason I grew uncomfortable with the bank.
Now Istvan calls for the likes of Zuckerberg and Bezos to bail out SVB. As far as I can tell, Meta and Amazon do not have significant deposits at SVB, so why should they be asked to bail out SVB?
However, SVB was the bank to over 2,500 venture capital firms which includes the likes of Lightspeed, Bain Capital and Insight Partners, as per The New York Times. SVB also managed the personal wealth of several tech executives. Peter Thiel was probably the most visible VC guy to pull money out. But do you blame him? I would have done the same thing. I am not risking my companies, due to the stupidity of a bank executive.
Companies who are known to have money deposited with the bank include:
- Video-streaming giant Roku
- Workplace safety analytics startup CompScience
- Semiconductor firm Ambarella
- Digital gaming platform Roblox
- Financial services company LendingClub
- Solar firms Sunnova and Sunrun
- Space company Rocket Lab
- Video platform Vimeo
- AI company Stem
- Several pharmaceutical firms, including Sangamo Therapeutics, Repare Therapeutics, X4 Pharmaceuticals, Protagonist Therapeutics, Eiger Biopharmaceuticals, Oncorus.
- Numerous cryptocurrency firms including BlockFi, Circle, Pantera, Avalanche, Yuga Labs, Proof, Nova Labs
I really doubt that those individual companies can afford to bail out SVB.
By the way, to answer John E.'s question on whether the CEO of SVB, with his most opportune sale of SVB stock ($3.6M), should be prosecuted for insider trading, I think there may be a strong case. But a bigger question is, can the government recover those funds? I'm sure those funds are long gone, perhaps to the sunny Caribbean. If found guilty, Becker will not go to Camp Cupcake (Alderson Federal Prison Camp) where Martha Stewart served. Camp Cupcake had tennis courts and a swimming pool. Nice. No, he would go to Federal Correctional Institution at Pleasanton, CA. I think they have the same amenities. That's where Michael Milken served his prison term for 2 out of 10 years and was pardoned by Trump. So, he would likely hope that Trump gets reelected.
No to turn to John E's question as to why SVB: they treated us well. And when they didn't have the answers, they researched and found the answers. This was unlike the Bank of Americas, Wells Fargos, and other mega banks. I bank with Chase but found the people at my local branch were not the brightest of people, so I go to another branch. But again, these banks were not of the same caliber of SVB. Too bad.
So no, I do not agree that SVB is not to blame. The non-existent Chief Risk Officer could have averted the disaster. Maybe.
JE comments: Thank you, Ric! When time allows, could you walk us through the daily life of a Chief Risk Officer? It must be a challenge to play the role of Chicken Little in the free-wheeling world of finance. Or else you can quit just before the sky falls. Is this what happened to SVB's previous CRO?
SVB's "Held to Maturity" Treasuries Did Them In (from Michael Frank)
(John Eipper, USA
03/18/23 3:48 AM)
Michael Frank writes:
A few fine points in response to Ric Mauricio's post regarding bonds, interest rates and banks (March 16th).
Ric wrote: "But let's say our friend Jerome raises the interest rate where bonds of this duration now pay $6 or 6%."
The interesting thing about the way the Fed operates is that it really only sets one interest rate, and it's not even the one in the headlines. It's the discount rate, which is the rate it charges when it lends money directly to member banks. The Fed funds rate, which is the rate charged between member banks, develops from the discount rate. Both rates are overnight rates. Changing rates at the low end has a limited influence on debt with longer maturities. The Fed can use its formidable bond portfolio to directly affect rates up and down the maturity curve by buying or selling bonds. This is called open-market operations. But although the Fed's bond holdings would give them the ability to manipulate rates for any maturity, they usually concentrate on short-term rates.
So how does this work with the Fed in inflation-fighting mode? Because the Fed is manipulating primarily short-term rates, the long end tends to be relatively stagnant, reacting only to changes in market demand. At some point (like now), short-term yields will move higher than long-term yields. This is called inverting the yield curve. It becomes more expensive to borrow. At the same time it creates an incentive for investors to add to save rather than spend, because they can get a better return without the risk of a long-term commitment. The economy begins to slow and inflation eases.
It's important to remember that in most cases, the interest paid by any given bond doesn't change. So when interest rates go up, the current market value of old bonds will go down. This is the crux of the perceived problem at SVB: their capital was placed in bonds at lower interest rates than prevail today. So the value of that portfolio would be impaired if they had to cash out. This is not unique to one bank, it's true in the case of any bank you can name. Core capital has to be kept in assets that have a guaranteed maturity value, and that means government or agency bonds. When these bonds are held to maturity, their capital will be returned intact. But if the bank has to sell early, they will gain or lose money, depending on the prevailing rates.
As I mentioned, long-term rates are move relatively slowly, more a function of expected future inflation rates than a direct response to Fed action. To compare: over the last 12 months, the Fed Funds rate has jumped from zero to 4.5%. Meanwhile, 30-year yields have only increased from 2.3% last year to 3.7% today. Longer-term rates actually peaked last October, and have recently been easing. So banks and insurance companies that have to maintain regulatory capital in a bond portfolio haven't been totally gutted (so far) by aggressive Fed action.
Ric wrote: "Of course, if this was a short-duration bond going out 6 months or a year, you can wait it out, and collect the par value of your bond at 100. However, if they are long-duration bonds, it may be challenging to hold on for let's say, 10 years, because of the time value of money. But banks, who hold millions of these bonds, have to mark-to-market these bonds on their balance sheets and show that they, on a given day, can handle an outflow of funds from customers withdrawing funds not only for everyday expenses, but capital expenditures."
This is not correct, and this misunderstanding may be the root cause of the run. Banks don't have to mark their entire bond portfolio to market. A bank's securities portfolio will be held in three buckets: "held to maturity," "held for trade," or "available for sale." The latter two portfolios are changeable, and so they are marked to market for balance-sheet purposes. "Held to maturity" bonds are the bank's core capital, money that won't ever be needed under normal operating circumstances. The bank is not required to mark to market this part of their portfolio for balance-sheet reporting. However, their quarterly reports should have a table or footnote somewhere which reflects the fair value. The reason this is allowed is in the name: the bonds are held to maturity. So thirty years from now, the capital the bank put into bonds will be returned, 100% whole and intact. Between now and then, it's Schrodinger's bond: neither worth more nor less than face value. SVB held $91.3 billion in "held for maturity" securities on its balance sheet. As of 12/31, the fair value of that portfolio was $76.1 billion. And this brings us back to the risk manager, and the question of what really happened at SVB.
Ric: "Thus, the need for a Chief Risk Officer, of which SVB did not have one for 9 months. I guess Becker felt he didn't really need one. Reminds me of executives that I've worked with who scream, 'Leave me alone, I know what I'm doing.' And true to the Pareto Principle, 80% do not know what they're doing. Scary."
A chief risk officer would have been paying attention to the realities of the "held to maturity" portfolio, and may or may not have had useful input into how it should be managed. Whether or not the absence of a CRO had any material effect on the outcome is something that will be questioned in coming weeks. But the more important fact may be that as early as September of last year, "influencers" on social media had discovered the bank's held-to-maturity exposure. Short interest in SVB wasn't huge, but it was high for a major bank. That reflects that there had been a "buzz" going on for a while. It's likely that the circulation of rumors on social media and not the actual condition of the bank was what started the run. The result of the run was likely unavoidable. This is because the "held to maturity" portfolio had to be partially liquidated. After the securities were sold, they were no longer Shrodinger's bonds. Losses were realized and had to be reflected on the income statement and balance sheet. If they had managed to sell additional equity quickly enough to plug the hole, they would have been fine. But the rumor of their weakness preceded them to market, and no equity investors were forthcoming.
Will anyone be prosecuted or clawed back? I don't doubt it, as the public demands vengeance. But some of the questions being asked are almost comical. Like whether management was incompetent for keeping their capital in safe assets. There may be a question of whether the portfolio was duration matched to their withdrawals. Which may or may not have been helped by a CRO. But once again, no capital plan can survive a run. So the question that should be asked is chicken or egg: Did the rumors cause the capital plan to unwind or did the interest rate environment make the run inevitable?
Finally, Ric wrote: "Now to turn to John E's question as to why SVB [was so attractive to the Silicon Valley crowd]. They treated us well. And when they didn't have the answers, they researched and found the answers. This was unlike the Bank of Americas, Wells Fargos, and other mega banks. I bank with Chase but found the people at my local branch were not the brightest of people, so I go to another branch. But again, these banks were not of the same caliber of SVB. Too bad."
I don't think caliber is the right word. Traditional banks serve traditional customers. If you wanted an auto loan, savings account, or SBA loan, go to Chase and it will be handled competently and expeditiously, with standard products. It sounds like SVB operated almost like a business advisory firm, with the twist of being a licensed commercial bank. That's a very different business model from the Big Four.
The next move now lies with the Fed, which has been unusually quiet through all of this. They still have an inflation problem to fix, and they aren't giving forward guidance. As I've tried to point out, the perceived problem here is erosion of bank capital, which is a function of long-term interest rates, which are a function of inflation expectations. So in a perfect world, the Fed's inflation-fighting program would restore bank balance sheets in real terms and everyone would be happy. But any hint of a rate increase will spook the markets. So stay tuned for next week's thrilling adventure.
JE comments: The more we dissect the SVB meltdown, the more it looks like an old-fashioned "panic." Originally I assumed the collapse had something to do with crypto or other postmodern shenanigans. But no: SVB had "buried" its talents as in the Biblical parable, their value started to tank, and depositors simply scrambled for the lifeboats. The only twist from, say, 1873 or 1907 is the panic-inducing power of social media.
On SVB's lack of a CRO, Ric Mauricio (next) explains.
- $42 Billion in 44 Hours: SVB Bank Run (from Ric Mauricio) (John Eipper, USA 03/18/23 6:48 AM)
Ric Mauricio writes:
Laura Izurieta stepped down from her role as chief risk officer at SVB in April 2022, leaving the company without someone in that position until January, when the company announced it had hired Kim Olson, a former CRO for Sumitomo Mitsui Banking Corp.
Its risk committee more than doubled its meetings to 18, suggesting growing concern with the bank's position, according to the company's 2023 proxy statement.
Depositors, advised by venture capital firms to pull their money after the company sought a $2.25 billion capital raise to shore up its equity position, withdrew some $42 billion in cash over 44 hours, creating the liquidity crisis that led the FDIC to take over the bank on Sunday.
The 40-year-old bank's rise is tied to Silicon Valley's storied technology boom, but, as some analysts believe, it kept too much money in long-term bonds at a time when interest rates were going up, forcing it to liquidate investments at a loss when depositors started withdrawing their money.
"This is a classic asset-liability mismatch, triggered by higher rates, and compounded by leverage," Jurrien Timmer, director of global macro at Fidelity, said in an analysis.
The Fidelity analysis says the bank was poorly positioned as the Federal Reserve increased rates. "SVB bought bonds in prior years when it was cash rich," it said. "But that was before the Fed began aggressively hiking rates and the venture capital market experienced some turbulence."
"Kim's deep and multi-faceted financial services experience as a senior risk leader and former regulator and bank supervisor positions her perfectly to actively manage SVB's financial and non-financial risks and to build and scale the firm's risk management capabilities through our next phase of growth," Greg Becker, SVB president and CEO, said in the announcement.
When Izurieta left her role, she signed a separation (without cause) agreement and stayed on for another six months in a non-executive role to provide transition stability while the company looked for her replacement. Poor Kim Olson, she was left holding the bag. But yes, and John said, the job of CRO is quite challenging, with a lot of moving parts. You have to keep polishing the crystal ball, but even that may not work. I am continuously assessing the risks involved in investing, but one must realize that even the greatest investors get it wrong. It's just that your batting average has to be better than average.
The Fed started raising interest rates exactly a year ago, March 17, 2022, moving the rate from 0.25% to today's 4.75%. That is a tremendous move. Since Ms. Izurieta left her role in April, there had been no crises then, since the move in that time period was only 0.25%, a manageable move. But moving on during the year, then it became a money management nightmare. You see, if one were to sell millions of dollars' worth of bonds on the market, it would only exacerbate the move, pushing bond prices down even further. Perhaps Ms. Izurieta was clairvoyant. This would be a CRO's worst nightmare. In fact, to avoid something like this, you would have to be clairvoyant. So maybe Istvan Simon is correct, it wasn't SVB's fault. It was the Federal Reserve's for raising interest rates so quickly. But wait, their rationale for raising rates so quickly was to quell inflation.
And whose fault is that? Ah, the Treasury (or Treasuries, since Central Banks in other countries also are involved) prints money like crazy. But wait, is it their fault? No, they have to fund the government. Oh wait, the government keeps spending more and more. It's their fault. Oh, but does the government spend more money to satisfy their constituents? Ah, it's the people's fault.
So, the people should pay for this since it's their fault; through taxes, higher prices, and lower value of the dollar (or other currencies).
So, is the world falling apart (Credit Suisse is an even bigger problem)? Or as Chicken Little would say, "the sky is falling."
In answer to another WAISer's question, it is like The Truman Show, where the dark rain cloud keeps moving with Jim Carrey's character. Eventually, the show ends, and sunny skies will bring us warmth.
In other words, it is time to invest in good strong companies.
JE comments: Yes, at a billion bucks per hour, something is going to give out. Or give up. Ric, you are right that blaming fingers are pointing in every direction. Care to give us a preview of what's going on at Credit Suisse?
End of Credit Suisse; Peter Schiff's Investment Performance (from Ric Mauricio)
(John Eipper, USA
03/21/23 3:22 AM)
Ric Mauricio writes:
John E asked for my appraisal of the troubles at Credit Suisse.
Credit Suisse has been plagued by a series of missteps and compliance failures in recent years that cost it billions and led to several overhauls of top management. And over the past decade, the Swiss bank has been hit with fines and penalties related to tax evasion, misplaced bets and other issues.
In 2014, Credit Suisse pled guilty to federal charges that it illegally allowed some US clients to evade their taxes. The bank paid a total of $2.6 billion to the federal government and New York financial regulators as part of the settlement.
The bank's reputation was damaged by an accounting scandal at Luckin Coffee. Credit Suisse acted as an underwriter when the company went public on the Nasdaq in 2019. The Chinese firm was pulled off the US exchange after it fraudulently inflated sales.
In 2020, Credit Suisse CEO Tidjane Thiam resigned after two high-profile spying scandals involving top bank officials.
A year later, the collapse of the US hedge fund Archegos Capital cost Credit Suisse $5.5 billion and damaged the bank. An independent external investigation later found that Credit Suisse allowed Archegos Capital to take "voracious" and "potentially catastrophic" risks that culminated in the US hedge fund's spectacular collapse.
Need I say more? I had a client statement once where Credit Suisse did not detail what was happening in the account. It just said, "this is what you sold." Nothing about what they had bought it for (yes, it was purchased in the same account), or the loss or the fees involved.
Now onto Enrique Torner's post of an economist's prognosis on the economy and/or the markets. Ever since I took an economics class in college, and my professor taught that you cannot have a recession and inflation at the same time, I've been wary of what economists say. As a fun exercise, I keep track of what economists say in the media. I've found that economists do not make accurate prognosis of markets/economies 90% of the time and the one economist who did get it right goes onto to become one of the other nine the next year. This is worse than the Pareto Principle. So, I tend to discount these prognostications. The best economist I found is Muhammed El-Erian. But he practices with a nuance quite different from other economists.
There's a joke on Quota about a bunch of investment bankers who ask an economics professor why he isn't rich if he's so smart. He in turn asks them why they aren't smart if they're so rich. Devotion to the efficient market hypothesis, which assumes that prices reflect all available information, discourages economists from trying to beat the market, and that's why they never get rich. There's a joke about a young economist who stoops to pick up a $20 bill he sees on the sidewalk. An older colleague tells him not to bother because if there were really a $20 bill there, someone would have picked it up already. In fact, I found that because economists are discouraged from beating the market, they don't even invest in the market.
John E mentioned that he is not familiar with Peter Schiff's track record. Unfortunately (or fortunately), I am. Just like I'm familiar with Robert Prechter, Howard Ruff, and Elaine Garzarelli. Peter Schiff announced in late 2008 that China was going to destroy the US dollar through debt reclamations. Didn't happen. Ten years ago, he predicted an intense bear market during which time gold prices would rise to $5,000. It was around $1,600 ten years ago. It's a little less than $2,000 today or a total return of 1.78% per year. That doesn't even keep up with the average inflation of the last ten years at around 2.5%.
But he's rich, you say. Yes, he is. But not for his investment astuteness. He's the owner of Euro-Pacific Capital, which runs several mutual funds. But beware the snake. Euro-Pacific's mutual funds carry an anachronistic front-end load of 4.5%. That means that for every $1,000 you invest, only $955 is put to work. Even full-service brokerage firms have moved away from those, since it already means you lose 4.5% of your investment before you even start. They instead levy a declining back-end fee to encourage long-term investing. And these brokerage firms also charge a .25 annual fee. But wait, so does Euro-Pacific. Euro-Pacific average expense fee for their equity funds is 1.6%. Compare that to the S&P 500 index ETF at .095%. That's almost twice as much. Plus, remember, you are working with 4.5% less capital.
Oh, you say, since Peter Schiff is such a great investor, it surely overcomes the fees. Their emerging markets fund over ten years has averaged a 0.81% total return. Their international value fund over ten years has averaged 0.79% total return. The S&P 500 ETF averaged 11.66% total return over the same period. Uh, OK. What about their gold fund? It has averaged 5.74% total return over five years (that's as far back as the record goes). In the meantime, the unmanaged Gold ETF averaged 8.08% total return over the same period. What about their international dividend income fund? It has averaged a 4.09% total return over five years. A dividend income ETF averaged 7.94% over the same period. Yes, Peter Schiff, you are one great...
There are two maxims that I have learned over the years that have served me well.
First, from Baron Nathan Rothschild, yes, the richest family in the world (you will find only one Rothschild in Forbes 400; the family fortune is hidden very well in Switzerland and Liechtenstein): "the time to buy is when there's blood in the streets."
Second, from Sir John Templeton: "Buy when there is maximum pessimism; sell when there is maximum optimism."
JE comments: Great economist jokes, Ric! And thank you Peter Schiff's sobering report card. I've never understood why anyone gives their money to high-profile and high-fee investment folks, when they almost never outperform an index ETF. Granted, the index ETFs aren't doing very well at present either.
From yesterday, Credit Suisse has been bought by its bigger Swiss rival, UBS. They are even holding a massive "estate" sale of branded gear and souvenir gold ingots. Get yours today:
- Governor Newsom and SVB (Francisco Wong-Diaz, USA 03/18/23 10:54 AM)
I agree with Ric Mauricio and confirm his points regarding incompetence at SVB.
They should not be bailed out, but since many of its depositors are corporate Democratic supporters or politicians like Gavin Newsom himself, they will get the special treatment.
JE comments: Newsom's wineries had SVB accounts, and the bank donated $100,000 to Jennifer Siebel Newsom's charity. A cozy relationship to be sure. But Francisco, you don't think a refusal to make good on the SVB deposits would have sparked a nation- or even worldwide bank panic?
SVB Depositors Should Not Have Been Bailed Out
(Francisco Wong-Diaz, USA
03/20/23 5:34 AM)
John E asked me if failing to reimburse the SVB depositors would have had a domino effect on the entire banking system.
My answer is no. Because it was just a liquidity problem due to their failure to timely switch from long-term to midterm bonds that led to an unplanned billions of dollars sale of bonds at a huge loss. It could have been resolved in a sound manner by more competent people.
SVB and its incompetent leaders turned to the politicians for help for a quick bailout. SVB should have been allowed to fail since it is a regional, specialized bank led by incompetents.
JE comments: What if a middle ground had been taken--reimbursing depositors up to $250K as the law requires, but leaving the highest rollers with a "haircut"? My first thought would have been, "who parks that much money in a regular bank account?" Bert Westbrook answered this for us a few days back: businesses who have to make payroll.
Demise of Credit Suisse: What Might be the Fallout?
(Francisco Wong-Diaz, USA
03/22/23 2:48 AM)
My current concern is not SVB's future but the more important and impactful failure of Credit Suisse.
CS was a Tier 1 bank too big to fail. It was at par with Morgan Stanley, Bank of America, Wells Fargo... yet it sold for $1 a share!
Their failure has shaken the long bond market and its effects are global. I invite WAIS to a shift in emphasis from SVB to Credit Suisse.
Likewise we must keep a sharp eye on the realignment of major powers as the China-Russia-Iran axis tightens and acts as a unit with the common goal of destroying the USA.
JE comments: Ric Mauricio (March 21st) unpacked the shenanigans that led to the demise of CS. It has now been gobbled up by UBS at a bargain-basement price. Granted, until the dust settles, it's unclear whether UBS got a good deal or not. And with the famous secrecy of Swiss banking, we'll probably never know.
Has Switzerland's reputation as a rock-solid bastion to park one's wealth been shaken to the core? If I were a mega-zillionaire I would be looking elsewhere. But...where?
- Demise of Credit Suisse: What Might be the Fallout? (Francisco Wong-Diaz, USA 03/22/23 2:48 AM)
- Governor Newsom and SVB (Francisco Wong-Diaz, USA 03/18/23 10:54 AM)
- $42 Billion in 44 Hours: SVB Bank Run (from Ric Mauricio) (John Eipper, USA 03/18/23 6:48 AM)
- SVB's "Held to Maturity" Treasuries Did Them In (from Michael Frank) (John Eipper, USA 03/18/23 3:48 AM)
- SVB Again: They Had No Risk Officer (from Ric Mauricio) (John Eipper, USA 03/16/23 1:19 PM)