So the politics of the day are quite interesting!
Silicon Valley Bank collapsed and several others as well. Its creating massive liquidity crisis and of course the FDIC and Fed are creating an emergency slush fund to cover the banks from a collapse of their own design.
Friends, this is not 2008 and please do not believe the talking heads when they use that as a data point of similarity. Nope, in 2008 the system was brought down by mortgage derivatives that were extremely speculative, had no oversight, and were irrational big bets by a few players.
This time its different. Silicon Valley Bank had lots of reserves and they invested those reserves in "stable" (air quotes) assets: Technology firms with promising futures, Long-term treasuries, other long-term sovereign debt (gov bonds), and quality mortgage backed securities. (E.g. Fannie/Freddie Conforming Loan bundles)
Literally, SVB is the poster child for Keynesian economics, "not fighting the Fed", and investing in what the Fed and Treasury considered the most stable, reliable, and low-risk of investment classes. And it all blew up.
What happened?
1.) Those tech darlings didn't have any tangible assets. They are "big ideas", copyrighted software, or patented processes. For those reasons, the Tech companies could not get loans as easily as say a manufacturer, a distributor, or a land developer that has a tangible asset to pledge as collateral. When interest rates rose, those loans were friggin sweet deals for the tech companies because they'd NEVER be able to get a new loan at the rates they were paying on the existing loans. Consequently, SVB couldn't sell those loans from tech companies because they wouldn't sell for anything but a loss, because who wants a higher risk unsecured or poorly secured debt that has a yield for an investor that is less than market rates today, a lot less? Answer, to sell them, you'd have to sell them below par value and the bank would literally have to pay billions to get someone to take them off their hands. Those aren't easily bundled debt trenches either, so there isn't a spot on an exchange where you can sell those by the billions in a matter of minutes. Strike one.
2.) The Treasuries and Sovereign Debt. SVB literally F'd themselves by buying products guaranteed by the full faith and credit of the US (and other) governments. Sure they pay crap interest, but the US government isn't going to default, right? Yeah, but they bought long-term (emphasis) Treasuries that had yields of 1-2% over 30 years and with recent inflation, interest rates have spiked. Again, they were stuck with toxic assets because while they could sell the bonds any day of the week instantly, they'd have to pay someone to take them off their hands since they are trading below par value. Not 5-6% bonds, but 2-29 year old Treasuries that were 2% yields. Strike two.
3.) They bought mortgage backed securities. Same scenario as #2. They owned swaths of quality Freddie/Fannie home mortgages that had 2.75%-3.5% interest rates. Current rates are 6.25%. They would have to pay someone gigantic sums to take these low yielding securities off their balance sheet. Strike three.
4.) Human nature changed. People don't watch their pennies, they watch their dollars. All these business banking customers didn't care in the least when their checking accounts were yielding them 0.33% annual interest. It was effectively zero interest, basically a nice safe mattress to put money into for a period of time. CDs and Money Market Funds were paying 1% a couple years ago and nobody bought them, what's the point and whats the difference between 0% (Effectively) returns on your checking account versus 1%? Yeah, not worth the hassle to even move the money. But now CDs and Money Market Funds are paying about 4.4% and SVB and all the other banks figured customers would remain chumps forever. Um, no. Over the past several weeks all over the nation businesses and individuals have been asking for the money from banks because the difference between a 0% interest bearing checking account and a 4.4% money market account is actually a tangible difference, and everyone wanted their money so they could make a few bucks off of it. No bank kept up with this by offering a competitive savings interest rate so customers would keep their money in their banks. Strike four.
So by following all the advice of the Fed and Treasury and investing in companies with a solid future in tech, plus very conservative investments like MBS and Treasuries, SVD killed themselves.
SVD died not because they were insolvent, but because they were illiquid. They couldn't get people their money instantly because doing so would require them to sell stable investments for billions less than face value due to the climbing interest rates.
This is why inflation matters and this is why the current go-around is NOT 2008 all over again. It's worse by far. The banks getting crushed are the ones that were conservative in their investments, followed Fed instructions, and followed the modern rule change of zero cash reserves.
This is a bubble due to inflation which has pushed up yields tremendously. The Fed and FDIC's corrective action (inventing money out of thin air this weekend to protect the banking system) is literally creating another bubble to save the current bubble. That never works out well in the end.
"The
Bank Term Funding Program (BTFP) will offer loans of up to one year in length to banks, savings associations, credit unions, and other eligible depository institutions pledging US Treasuries, agency debt and mortgage-backed securities, and other qualifying assets as collateral. Banks will be able to borrow against their assets “at par” (face value)."
