Hey, who changed the clocks?
I’m no financial wizard, so I’m not one to opine as an expert on the failure of Silicon Valley Bank (SVB) on Friday.
California regulators on Friday abruptly shuttered Silicon Valley Bank, closing a 40-year-old financial institution that catered to the tech industry and that was the 16th largest U.S. bank before its sudden collapse. The company’s stock tumbled 60% on Thursday and had plunged another 70% on Friday before trading of its shares was halted.
The nosedive reflected fears of a bank run, concerns that materialized as depositors — mostly technology company workers and venture capital-backed companies — rushed to withdraw money this week as anxiety over the bank’s balance sheet spread.
SVB hemorrhaging was stopped only to be followed by the seizure of Signature Bank in New York yesterday.
The New York Department of Financial Services announced Sunday that it has taken possession of Signature Bank and appointed the Federal Deposit Insurance Corporation (FDIC) as the bank’s receiver. The move comes two days after Silicon Valley Bank collapsed as depositors rushed to withdraw funds.
At more than $110 billion in assets, Signature Bank is the third-largest bank failure in U.S. history, the Associated Press reported.
The bank is FDIC-insured and had assets of around $110.36 billion, with total deposits of about $88.59 billion as of Dec. 31, 2022, DFS said in a statement. Both figures were roughly half of what SVB had at the end of 2022, according to the FDIC.
What’s going on? Billionaire investor Bill Ackman:
“SVB’s senior management made a basic mistake. They invested short-term deposits in longer-term, fixed-rate assets. Thereafter short-term rates went up and a bank run ensued. Senior management screwed up and they should lose their jobs,” Ackman wrote.
Of course, the bank blamed other factors, but they can’t escape their own culpability.
SVB, which noted that it would take a $1.8 billion loss on the bond sales, said it needed to take the steps because of higher interest rates and “elevated cash burn levels” by customers. The company also pointed to “pressured public and private markets.”
The bank’s heavy exposure to the tech sector played a part in its downfall, noted Chenxi Wang, founder and general partner of Rain Capital, in an email. Some of its tech company clients were burning through cash faster than expected in early 2023, Silicon Valley Bank said in its March 8 investor letter. That resulted in lower deposits than forecast, according to the bank.
Silicon Valley Bank’s problems were exacerbated by rapidly rising interest rates over the last year, which reduced the value of its bond holdings.
“The bank also made balance sheet management errors by putting too much money into long-term bonds, which became a problem when interest rates surged,” Wang said. That “caused non-trivial panic.”
The Wall Street Journal’s explanation of what happened:
SVB Financial is the parent company of Silicon Valley Bank, which counts many startups and venture-capital firms as clients. During the pandemic, those clients generated a ton of cash that led to a surge in deposits. SVB ended the first quarter of 2020 with just over $60 billion in total deposits. That skyrocketed to just shy of $200 billion by the end of the first quarter of 2022.
[…]
SVB Financial bought tens of billions of dollars of seemingly safe assets, primarily longer-term U.S. Treasurys and government-backed mortgage securities. SVB’s securities portfolio rose from about $27 billion in the first quarter of 2020 to around $128 billion by the end of 2021.
[…]
These securities are at virtually no risk of defaulting. But they pay fixed interest rates for many years. That isn’t necessarily a problem, unless the bank suddenly needs to sell the securities. Because market interest rates have moved so much higher, those securities are suddenly worth less on the open market than they are valued at on the bank’s books. As a result, they could only be sold at a loss.
SVB’s unrealized losses on its securities portfolio at the end of 2022—or the gap between the cost of the investments and their fair value—jumped to more than $17 billion.
SVB locked up their cash in long-term fixed rate bonds and securities. The only way to get that money back is to sell the bonds. The risk is that bonds have an inverse relationship to interest rates. When interest rates go up — say, when the Fed is fighting inflation by raising the rate you pay to borrow money — the price of bonds goes down because they’re not as attractive to investors as new bonds that have higher rates of return on them.
The only way to sell older bonds with lower interest rates is to lower the price of the bonds, which means the original bondholder loses money. And you can’t meet your financial obligations to your customers if you’re losing money on the investment you made using their money.
Fortunately (I think) the Fed is guaranteeing all deposits (paywall).
U.S. regulators took control of a second bank Sunday and announced emergency measures to ease fears depositors might pull their money from smaller lenders after the swift collapse late last week of Silicon Valley Bank.
The measures, which include guaranteeing all deposits of SVB, were designed to shore up wavering confidence in the banking system. They were jointly announced Sunday night by the Treasury Department, the Federal Reserve and the Federal Deposit Insurance Corp.
Let’s remember why the Fed has raised interest rates — because our ruling elite voted to dump trillions of dollars into the economy, driving inflation and a recession. If you give government too much power, they ruin everything they touch.
