Category Archives: Debt

Silicon Valley Bank Crisis: The Liquidity Crunch We Predicted Has Now Begun, by Brandon Smith

Posted on March 14, 2023 | Leave a comment

Liquidity crises have a way of soon turning into solvency crises. From Brandon Smith at alt-market.com:

By Brandon Smith

There has been an avalanche of information and numerous theories circulating the past few days about the fate of a bank in California know as SVB (Silicon Valley Bank). SVB was the 16th largest bank in the US until it abruptly failed and went into insolvency on March 10th. The impetus for the collapse of the bank is tied to a $2 billion liquidity loss on bond sales which caused the institution’s stock value to plummet over 60%, triggering a bank run by customers fearful of losing some or most of their deposits.

There are many fine articles out there covering the details of the SVB situation, but what I want to talk about more is the root of it all. The bank’s shortfalls are not really the cause of the crisis, they are a symptom of a wider liquidity drought that I predicted here at Alt-Market months ago, including the timing of the event.

First, though, let’s discuss the core issue, which is fiscal tightening and the Federal Reserve. In my article ‘The Fed’s Catch-22 Taper Is A Weapon, Not A Policy Error’, published in December of 2021, I noted that the Fed was on a clear path towards tightening into economic weakness, very similar to what they did in the early 1980s during the stagflation era and also somewhat similar to what they did at the onset of the Great Depression. Former Fed Chairman Ben Bernanke even openly admitted that the Fed caused the depression to spiral out of control due to their tightening policies.

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Bank Runs. The First Sign The Fed “Broke Something.” By Lance Roberts

Posted on March 14, 2023 | Leave a comment

Bank runs are an ever lurking possibility in a fractional reserve banking system. From Lance Roberts at realinvestmentadvice.com:

With the collapse of Silicon Valley Bank, questions of potential “bank runs” spread among regional banks.

“Bank runs” are problematic in today’s financial system due to fractional reserve banking. Under this system, only a fraction of a bank’s deposits must be available for withdrawal. In this system, banks only keep a specific amount of cash on hand and create loans from deposits it receives.

Reserve banking is not problematic as long as everyone remains calm. As I noted in the “Stability Instability Paradox:”

The “stability/instability paradox” assumes that all players are rational and such rationality implies an avoidance of complete destruction. In other words, all players will act rationally, and no one will push “the big red button.“

In this case, the “big red button” is a “bank run.”

Banks have a continual inflow of deposits which it then creates loans against. The bank monitors its assets, deposits, and liabilities closely to maintain solvency and meet Federal capital and reserve requirements. Banks have minimal risk of insolvency in a normal environment as there are always enough deposit flows to cover withdrawal requests.

However, in a “bank run,” many customers of a bank or other financial institution withdraw their deposits simultaneously over concerns about the bank’s solvency. As more people withdraw their funds, the probability of default increases, prompting a further withdrawal of deposits. Eventually, the bank’s reserves are insufficient to cover the withdrawals leading to failure.

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Money Troubles, by James Howard Kunster

Posted on March 13, 2023 | Leave a comment

Two from James Howard Kunstler tonight. From Kunstler at kunstler.com:

“As for the evil: It lurks in the interstices of our bureaucratic institutions, which, as they have grown in size and complexity since the nineteenth century, behave in ways that are increasingly impossible to understand and contrary to human flourishing.” — Eugyppius on Substack

       Money is all theoretical… until it’s not. Paper money is bad enough, as France learned under the tutelage of the rascal John Law in the early 1700s. The nation was broke, exhausted by foolish wars, and heaped under unbearable debt. Monsieur Law, a Scottish genius-wizard (the Jerry Lewis of political economy), landed in Paris, cast a spell on the regent Duc d’Orléans, set up a magic credit engine fueled by dreams of untold riches-to-come burgeoning out of the vast, new-found lands called Louisiana up the Mississippi River, and modern finance was born!

       The stock-and-money schemes known as the Mississippi Bubble soon ruined France and put finance in such a bad odor that the word “banque” could not be used in polite society there for a century to come. Monetary inflation became a thing for the first time since Roman days — a much easier trick with printed paper banknotes than with silver coins — but the effect was the same: the evaporation of “wealth” (which is what money supposedly represents). At the height of the crisis, trading in gold was criminalized, though that was so easily worked-around due to sheer custom and habit that the Crown had to re-legalize it. The frenzy from start to finish lasted only a few years, but the nation was set on the path that would eventually lead to revolution. Law ended his days dolefully running card games in Venice.

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Silicon Valley Bank Followed Exactly What Regulation Recommended, by Daniel Lacalle

Posted on March 13, 2023 | 1 comment

That’ll teach them to believe the regulators. From Daniel Lacalle at dlacalle.com:

The second largest collapse of a bank in recent history could have been prevented. Now, the impact is too large, and the contagion risk is difficult to measure.

The demise of the Silicon Valley Bank (SVB) is a classic bank run driven by a liquidity event, but the important lesson for everyone is that the enormity of the unrealized losses and financial hole in the bank’s accounts would have not existed if it were not for ultra-loose monetary policy.

Let us explain why.

As of December 31, 2022, Silicon Valley Bank had approximately $209.0 billion in total assets and about $175.4 billion in total deposits, according to their public accounts. Their top shareholders are Vanguard Group (11.3%), BlackRock (8.1%), StateStreet (5.2%) and the Swedish pension fund Alecta (4.5%).

The incredible growth and success of SVB could not have happened without negative rates, ultra-loose monetary policy, and the tech bubble that burst in 2022. Furthermore, the bank’s liquidity event could not have happened without the regulatory and monetary policy incentives to accumulate sovereign debt and mortgage-backed securities.

The asset base of Silicon SVB read like the clearest example of the old mantra: “Don’t fight the Fed”.

SVB made one big mistake: Follow exactly the incentives created by loose monetary policy and regulation.

What happened in 2021? Massive success that, unfortunately, was also the first step to its demise. The bank’s deposits nearly doubled with the tech boom. Everyone wanted a piece of the unstoppable new tech paradigm. SVB’s assets also rose and almost doubled.

The bank’s assets rose in value. More than 40% were long-dated Treasuries and mortgage-backed securities (MBS). The rest were seemingly world-conquering new tech and venture capital investments.

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The Collapse of SVB Portends Real Dangers, by Jeffrey A. Tucker

Posted on March 12, 2023 | 1 comment

The real danger is a world that has between debt, unfunded liabilities, and derivatives at least 12 times its GDP. The world has never been more indebted, and the blame lies with fiat currencies and fiat debt. It’s immaterial whether SVB or something else sets off the chain reaction; the chain reaction and resultant debt explosion are inevitable. From Jeffrey A. Tucker at The Epoch Times via zerohedge.com:

Thus far in this 3-year fiasco of mismanagement and corruption, we’ve avoided a financial crisis. That’s for specific reasons. We just had not traveled there in the trajectory of the inevitable. Are we there yet? Maybe. In any case, the speed of change is accelerating. All that awaits is to observe the extent of the contagion.

The failure of the Silicon Valley Bank (SVB), $212 billion in assets until only recently, is a huge mess and a possible foreshadowing. Its fixed-rate bond holdings declined rapidly in market valuation due to changed market conditions. Its portfolio crashed further due to a depositor run. And it all happened in less than a few days.

It’s all an extension of Fed policy to curb inflation, reversing a 13-year zero-rate policy. This of course pushed up rates in the middle and right side of the yield curve, devaluing existing bond holdings locked into older rate patterns. Investors noticed and then depositors too. The high-flying institution that specialized in providing liquidity in industries that have lost their luster suddenly found itself very vulnerable.

In addition, the bank was exposed with a portfolio of collateralized mortgage obligations and mortgage-backed securities. But with rates rising, those are coming under stress too as high leverage in housing and real estate become untenable amidst falling valuations. Borrowers are finding themselves under water and that in turn adds to stress on lenders.

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What Will Happen When Banks Go Bust? Bank Runs, Bail-Ins and Systemic Risk, by Ellen Brown

Posted on March 11, 2023 | Leave a comment

When there’s not enough money to go around, how the pain is shared. From Ellen Brown at unz.com:

Financial podcasts have been featuring ominous headlines lately along the lines of “Your Bank Can Legally Seize Your Money” and “Banks Can STEAL Your Money?! Here’s How!” The reference is to “bail-ins:” the provision under the 2010 Dodd-Frank Act allowing Systemically Important Financial Institutions (SIFIs, basically the biggest banks) to bail in or expropriate their creditors’ money in the event of insolvency. The problem is that depositors are classed as “creditors.” So how big is the risk to your deposit account? Part I of this two part article will review the bail-in issue. Part II will look at the derivatives risk that could trigger the next global financial crisis.

From Bailouts to Bail-Ins

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 states in its preamble that it will “protect the American taxpayer by ending bailouts.” But it does this under Title II by imposing the losses of insolvent financial companies on their common and preferred stockholders, debtholders, and other unsecured creditors, through an “orderly resolution” plan known as a “bail-in.”

The point of an orderly resolution under the Act is not to make depositors and other creditors whole. It is to prevent a systemwide disorderly resolution of the sort that followed the Lehman Brothers bankruptcy in 2008. Under the old liquidation rules, an insolvent bank was actually “liquidated”—its assets were sold off to repay depositors and creditors.

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RIP Silicon Valley Bank: Shut Down by California Regulator, Taken Over by FDIC, Shareholders Bailed In, Insured Depositors to Get their Cash by Monday, by Wolf Richter

Posted on March 11, 2023 | Leave a comment

Two things to be aware of about banking. When you deposit your money, you become an unsecured creditor of the bank. And if the bank fails, if you’re over the FDIC limit ($250,000) you’ll split up what’s left with all the other unsecured creditors, and you’re all at the bottom of the pile. From Wolf Richter at wolfstreet.com:

The bank survived the Dotcom Bust. But this bust is far bigger because the Free-Money bubble was far bigger. FDIC may not have a loss on this deal.

Silicon Valley Bank, a California state-chartered bank that was uniquely exposed to the massive all-encompassing startup bubble during the Free Money era – a bubble that is now imploding spectacularly amid what is called a mass extinction event among startups – was shut down and taken over Friday morning by the California Department of Financial Protection and Innovation (DFPI). In its press release, the regulator cited “inadequate liquidity and insolvency.”

The DFPI appointed the Federal Deposit Insurance Corporation (FDIC) as receiver. The FDIC announced that it had created the “Deposit Insurance National Bank of Santa Clara (DINB)” and that the FDIC, as receiver, “immediately transferred to the DINB all insured deposits of Silicon Valley Bank” to protect insured depositors. Depositors will have access to their insured deposits on Monday, March 13.

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“Expect Mass Layoffs…” – The Real-World Impact Of SVB’s Failure

Posted on March 11, 2023 | Leave a comment

It’s never pretty when a big bank shuts its doors. From Tyler Durden at zerohedge.com:

For most people in America, the news that a ‘bank in Silicon Valley’ has failed will be forgotten quicker than a story about soaring shoplifting in their local supermarket.

It shouldn’t.

Reality is that the contagion of the shuttering of the 18th largest bank in the US are widespread.

SVB is in fact the second largest (by assets) bank failure in US history after WaMu.

First things first, there is a long line of depositors who are over the $250,000 FDIC insured limit (in fact only somewhere between 3 and 7% of total deposits are insured). The following list, while incomplete, is approximately sorted by size of exposure:

  • USDC – Crypto Stablecoin run by Circle – Silicon Valley Bank is one of six banking partners Circle uses for managing the ~25% portion of USDC reserves held in cash. While we await clarity on how the FDIC receivership of SVB will impact its depositors, Circle & USDC continue to operate normally.
  • ROKU – Roku had 26% of its cash, $487 million with Silicon Valley Bank
  • BLOCKFI – BlockFi has $227 million in “unprotected” funds in Silicon Valley Bank, according to a bankruptcy document, and may be in violation of U.S. bankruptcy law.
  • RBLX – Roblox said 5% of its $3b cash and securities balance is held at SVB.

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Buffett On Buybacks, by Lance Roberts

Posted on March 11, 2023 | Leave a comment

There is a right and a wrong way to do buybacks. From Lance Roberts at realinvestmentadvice.com:

Warren Buffett defended stock buybacks in Berkshire Hathaway’s annual letter, pushing back on those railing against the practice he believes benefits all shareholders.

“When you are told that all repurchases are harmful to shareholders or to the country, or particularly beneficial to CEOs, you are listening to either an economic illiterate or a silver-tongued demagogue (characters that are not mutually exclusive).”

The media latched on to this quote with both hands, apparently not taking the time to read what Warren Buffett actually wrote in his annual letter. (Emphasis mine.)

“The math isn’t complicated: When the share count goes down, your interest in our many businesses goes up. Every small bit helps if repurchases are made at value-accretive prices.

Just as surely, when a company overpays for repurchases, the continuing shareholders lose. At such times, gains flow only to the selling shareholders and to the friendly, but expensive, investment banker who recommended the foolish purchases.

Gains from value-accretive repurchases, it should be emphasized, benefit all owners – in every respect.”

Mr. Buffett is correct that if repurchases are done at a “value-accretive” price, they can benefit all shareholders by increasing the size of their ownership in the company. Unlike the mainstream narrative, this is NOT a “return of capital to shareholders,” but just the opposite of a shareholder dilution.

Unfortunately, while the mainstream media quickly jumped on those opposed to share repurchases, their lack of reading what Mr. Buffett stated is critically important to what is happening in the financial markets today.

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Student Debt Forgiveness Won’t Cure Higher Ed’s Disease, by Bruce Abramson

Posted on March 11, 2023 | Leave a comment

Higher education is on an insane treadmill in which the product gets worse and worse while the cost, subsidized by the government, gets increasingly outrageous. From Bruce Abramson at realclearwire.co

On February 28th, the Supreme Court heard arguments on President Biden’s plan to extinguish an estimated $400 billion in student debt. Biden deserves credit for highlighting a debilitating federal program in desperate need of reform. His proposal, however, would make the problem far worse, not better. Any serious reform would force academic institutions to take some responsibility for the education they provide—and to show some responsibility to the many young Americans they induce to go deeply into debt. 

The problems run deep. American higher education has become a hollow bubble of an industry coasting on brand equity and past glory. 

Notwithstanding pockets of world-class excellence, the industry does little well. Universities are top-heavy and inefficient. Their complex products bundle education, research, and campus life for many students who need—and can afford—only the first of the three. On campus, classrooms teach neither critical thinking nor employable skills. The return on research dollars is pitiful. Antisemitism and segregation thrive at levels unseen elsewhere in American society. Internal procedures fail to provide due process or equal protection. 

American academia is a sham suffering from disastrously flawed structures and incentive systems.

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