This article is an opinion piece, the biggest joke is I have to put this at the start because search engines like Google know best about Financial experts – OK then, just lik ethe clown on NBC who a couple of days ago said to invest in this bank. Brilliant
I am not a financial advisor. The ideas presented in this article are for entertainment purposes only. You (and only you) are responsible for the financial decisions that you make.
Contents
Whats happened
Silicon Valley Bank’s bankruptcy is shaking Wall Street.
The big question on everyone’s mind: is contagion to the financial system likely?
To answer that question, let’s go back to what transpired in the last few hours.
On Wednesday, March 8, 2023, Silvergate, which had happened to be in danger for some time ever since the FTX debacle, declared that it would end operations.
On Thursday, March 9, 2023, it was learned that Silicon Valley Bank was running out of money. SVB’s share price dropped by 60%.
On Friday, March 10, 2023, SVB was in bankruptcy, taken control by the FDIC. A dismal week for the banking world in America!
In the final hours, SVB attempted to build up working capital but failed. Then SVB attempted to sell itself to a larger sized bank, but without success. Right now, the FDIC will try to protect SVB’s customers’ assets.
The important thing to remember here is that many other banks are experiencing the same problem as SVB. Their bond portfolios are locked at a low rate. As depositors withdraw their money in droves, banks have to sell their bonds at huge losses to rapidly recover the cash they are short.
Whats a bank run
When a bank like SVB faces a bank run, the bank’s deficits become enormous.
SVB’s issues began when the bank reported a $1.8 B loss on the sale of its AFS (Available for Sale) bond portfolio. Rumours started to spread that SVB was in difficulty with massive interest rate risk on its $91B portfolio.
A frenzy was developed amongst SVB’s clients with a bank run that started fairly quickly. The mass withdrawals of customers fed the vicious circle SVB was in by continuing to raise its losses as the bank attempted to protect the withdrawal needs of depositors.
How did this happen
SVB was the casualty of a flawed and not fixable monetary and financial system.
According to this system, SVB theoretically had the assets to cover customer deposits as required by law. The real problem here is that these assets were not liquid enough. Furthermore, when these assets are illiquid, can they be liquidated without triggering huge losses?
The answer was no in the case of SVB and that is how it best gave rise to the second-largest bank failure in American history. The largest since Lehman Brothers in 2008!
With the Fed’s rapid rate hike, some other banks are facing the same liquidity problem as SVB. Take the example of First Republic Bank whose stock lost up to 50% when SVB scared the banking market on March 9, 2023.
However, the word contagion does not seem to apply to bond portfolio concerns. This outcome has little to do with SVB’s connection with other banks.
In fact, managing interest rate risk is an inherent challenge for every bank. SVB has failed. The fear that this induces could however impact other banks, but this would come from customers who would withdraw their deposits en masse from other commercial banks.
In the coming hours and days, investors and analysts will scrutinize all United States banks to find which ones have the same prospective weaknesses as SVB. First Republic Bank has been pinpointed. Various other bank names will come out.
This purge will be considered vital by those who say that banks with bad business practices are the only ones at risk. According to these people, banks that responsibly manage their customers’ deposits and investments are safe.
Comparisons with previous debacles
A lot of want to match up the failure of SVB to the failure of Lehman Brothers in 2008 or Bear Stearns in 2008.
Both of these banks were investment banks while SVB is a commercial bank. A commercial bank can have issues as the SVB case shows, but there is no comparison to the 31x leverage that Lehman Brothers possessed at the time of its collapse.
The situation is different, however the risk on commercial banks is very real with this rapid rise in the Fed’s key rates. The fact that this hike is not going to stop quickly as Jerome Powell said not long ago will put more burden on the United States banks.
The recession that this will induce also will be horrendous for hard working people – the previous crashes have shown this. As for the banks there will be hatred and anger for a few years and then they will
Silvergate and SVB opted for to do trade with FTX, but so did a lot of other overvalued technology companies. The crash of these companies and the FTX fiasco is currently being paid for. The problem is, as always, that it is the customers who will foot part of the bill for the mismanagement by these bankers.
The present banking system is flawed. End of story . Is the current system reparable? I have major doubt sbut then again this might be yet another excuse to push the digital currencies that many countries are peddling – almost all at the same time.
Other banks
For those who question if banks like Wells Fargo or JPMorgan are in danger, here is what Michael Barr, the Fed’s vice chair for supervision, said in the last few hours:
” There are obviously large institutions that are also exposed to these risks too, but the exposure tends to be a very small part of their balance sheet. So even if they experience the same deposit outflows, they are more insulated.”
For those who challenge that this system is moved towards collapse, I believe what is happening at this moment should give them pause. But most importantly, look for a plan B that is separate of the control of central banks and governments. A pure unit of wealth.
Opinion
I have always diversified – crypto, stocks, etfs, gold and silver and many other investments.
The issue is this will impact the less wealthy the most as it always does but this is what happens. The previous major crash, there was a chance to make an example and put in measures. This didn’t happen and that was partly the fault of the US president at the time- Barack Obama.
I’ll let you read that on your own time but the utter cheek that governments are trying to hammer Bitcoin and crypto and yet turn a blind eye to this shambles, it says a lot.
Now, I believe there were issues with what SVB invested in – I had heard that the companies met a lot of current day criteria, not necessarily whether they were sound businesses who could make money but ticked a lot of the ESG boxes. I’ll see what I can dig up
Disclaimer
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