Tag Archives: Silicon Valley Bank failure

Why the Banking System Is Breaking Up, by Michael Hudson

Posted on March 14, 2023 | 1 comment

Inject enough liquidity into the financial system and you get inflation, which means rising interest rates, which means lower financial asset values. Eventually something’s got to give. From Michael Hudson at unz.com:

The collapses of Silvergate and Silicon Valley Bank are like icebergs calving off from the Antarctic glacier. The financial analogy to the global warming causing this collapse of supporting shelving is the rising temperature of interest rates, which spiked last Thursday and Friday to close at 4.60 percent for the U.S. Treasury’s two-year bonds. Bank depositors meanwhile were still being paid only 0.2 percent on their deposits. That has led to a steady withdrawal of funds from banks – and a corresponding decline in commercial bank balances with the Federal Reserve.

Most media reports reflect a prayer that the bank runs will be localized, as if there is no context or environmental cause. There is general embarrassment to explain how the breakup of banks that is now gaining momentum is the result of the way that the Obama Administration bailed out the banks in 2008 with fifteen years of Quantitative Easing to re-inflate prices for packaged bank mortgages – and with them, housing prices, along with stock and bond prices.

The Fed’s $9 trillion of QE (not counted as part of the budget deficit) fueled an asset-price inflation that made trillions of dollars for holders of financial assets – the One Percent with a generous spillover effect for the remaining members of the top Ten Percent. The cost of home ownership soared by capitalizing mortgages at falling interest rates into more highly debt-leveraged property. The U.S. economy experienced the largest bond-market boom in history as interest rates fell below 1 percent. The economy polarized between the creditor positive-net-worth class and the rest of the economy – whose analogy to environmental pollution and global warming was debt pollution.

But in serving the banks and the financial ownership class, the Fed painted itself into a corner: What would happen if and when interest rates finally rose?

Continue reading

1 Comment

Posted in Banking, Business, Debt, Economy, Financial markets, Government

Tagged ,

If SVB is insolvent, so is everyone else, by Simon Black

Posted on March 14, 2023 | Leave a comment

Financial crises stem from too much debt and too much financial interconnection. From Simon Black at sovereignman.com:

On Sunday afternoon, September 14, 2008, hundreds of employees of the financial giant Lehman Brothers walked into the bank’s headquarters at 745 Seventh Avenue in New York City to clear out their offices and desks.

Lehman was hours away from declaring bankruptcy. And its collapse the next day triggered the worst economic and financial devastation since the Great Depression.

The S&P 500 fell by roughly 50%. Unemployment soared. And more than 100 other banks failed over the subsequent 12 months. It was a total disaster.

These bank, it turned out, had been using their depositors’ money to buy up special mortgage bonds. But these bonds were so risky that they eventually became known as “toxic securities” or “toxic assets”.

These toxic assets were bundles of risky, no-money-down mortgages given to sub-prime “NINJAs”, i.e. borrowers with No Income, No Job, no Assets who had a history of NOT paying their bills.

When the economy was doing well in 2006 and 2007, banks earned record profits from their toxic assets.

But when economic conditions started to worsen in 2008, those toxic assets plunged in value… and dozens of banks got wiped out.

Now here we go again.

Fifteen years later… after countless investigations, hearings, “stress test” rules, and new banking regulations to prevent another financial meltdown, we have just witnessed two large banks collapse in the United States of America– Signature Bank, and Silicon Valley Bank (SVB).

Continue reading

Leave a comment

Posted in Banking, Business, Collapse, Debt, Economy, Financial markets, Government

Tagged ,

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.

Continue reading

Leave a comment

Posted in Banking, Debt, Economy, Financial markets, Government

Tagged ,

Silicon Valley Bank’s Uninsured Depositors Bailed Out. Crypto Signature Bank Shut Down, All Depositors Bailed Out. Senior Execs Fired. All Shareholders, Some Bondholders Bailed In, by Wolf Richter

Posted on March 13, 2023 | 1 comment

Was there ever a doubt that there would be a bailout? From Wolf Richter at wolfstreet.com:

Treasury/Fed/FDIC issue joint statement with Tough Love for investors in failed banks.

We started hearing this yesterday from “sources” cited by Bloomberg. And this morning, Secretary of the Treasury Janet Yellen got on TV and repeated the general principle, without details. Now we got it officially, in a joint announcement by Yellen, Fed Chair Jerome Powell, and FDIC Chairman Martin Gruenberg. The bailout of uninsured depositors has arrived, so now all depositors of Silicon Valley Bank and Signature Bank, which was shut down today, will be made whole, not just insured depositors. The banks that are still standing can borrow from the Fed under a new facility. But investors in failed banks are on their own.

“After receiving a recommendation from the boards of the FDIC and the Federal Reserve, and consulting with the President, Secretary Yellen approved actions enabling the FDIC to complete its resolution of Silicon Valley Bank, Santa Clara, California, in a manner that fully protects all depositors. Depositors will have access to all of their money starting Monday, March 13,” the statement said.

The Fed will pay for it at first. The Fed will print the needed funds to cover the deposits and give it to the FDIC (and the proceeds from asset sales will chip in to cover the losses). “No losses associated with the resolution of Silicon Valley Bank will be borne by the taxpayer.”

Later, the FDIC will charge other banks for those losses it incurred from bailing out uninsured depositors. And maybe the Fed will eventually get is money back from the FDIC? The statement said: “Any losses to the Deposit Insurance Fund to support uninsured depositors will be recovered by a special assessment on banks, as required by law.”

Continue reading

1 Comment

Posted in Banking, Financial markets, Government, Politics

Tagged

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.

Continue reading

1 Comment

Posted in Banking, Debt, Government

Tagged

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.

Continue reading

1 Comment

Posted in Banking, Debt, Government

Tagged

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.

Continue reading

Leave a comment

Posted in Banking, Debt, Government

Tagged

“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.

Continue reading

Leave a comment

Posted in Banking, Business, Debt, Economy, Government

Tagged