THE CANARY IN THE SILICON VALLEY
Written by Peter Boykin on March 13, 2023
Shared By Peter Boykin – American Political Commentator / Citizen Journalist
THE CANARY IN THE SILICON VALLEY
Silicon Valley Bank (SVB) collapsed, becoming the second-largest bank collapse in U.S. history and stoking fears of a domino effect that could lead to a financial crisis.
What is SVB? It is [was] the 16th largest bank in the United States and essentially the go-to bank for tech start-ups, holding over $200 billion in assets. A large portion of those assets came in 2021 when the bank grew 86%.
Etsy, Coinbase, Vimeo, Vox, Roku, and many more companies you’ve heard of have deposits in SVB.
What went wrong? SVB invested a large portion of those assets into an asset class called Mortgage Backed Securities (MBS).
MBS allows investors to buy a portion of a pool of mortgages, which pays them based on the payments made by homeowners on their mortgages.
SVB bought $80 billion in MBS, which at the time was giving an average yield of 1.5%
When interest rates were near-zero, this was a solid investment. But when inflation started running out of control in the U.S., the Federal Reserve was forced to raise interest rates.
As interest rates rose, the value of SVB’s MBS holding began to fall.
Exacerbating the issue: Around the same time, the tech industry started to decline. So all the start-up investments that were getting deposited into SVB started to dry up too.
A run on the bank: SVB decided it would sell some of its stock (at a loss) so it would have more liquid cash on hand. This terrified investors and companies who banked with them. Investors and depositors ran to pull their money out of SVB.
Closed doors: The California Department of Financial Protection & Innovation shut down SVB and handed it over to the Federal Deposit Insurance Corporation (FDIC).
A second domino falls: If SVB was the first domino to fall into a potential financial crisis, Signature Bank became the second domino, as federal regulators shut down the New York-based bank, which caters to the crypto industry.
Canary in the coal line: There are fears that this all could be leading to a financial crisis, similar to 2008. The San Francisco-based First Republic bank led a decline in shares with premarket trading down 65% after losing 33% last week.
Bail out? Treasury Secretary Janet Yellen told CBS News that the government will not be “bailing out” SVB bank.
But several hours later…
The federal government stepped in: The FDIC, along with the Treasury Department and Federal Reserve made a joint announcement, stating:
“Depositors will have access to all of their money starting Monday, March 13, 2023.”
The Federal Reserve was establishing a new “Bank Term Funding Program” which will offer one-year loans to banks.
The Treasury will offer $25 billion from its “exchange-stabilization fund” to backstop those loans.
A senior Treasury official said this was not a bailout because stock and bondholders for SVB and Signature won’t be protected. Time will tell whether or not this is a bailout…
What to look out for next: There is already a massive push for a more formal Congressionally-approved bailout package. MSNBC’s Chris Hayes [of all people] put it well:
“These billionaire [investors] started a bank run on their own bank and then *immediately* pivoted to screaming for a government backstop. Incredible stuff.”
Biden will speak about this.
Let’s see what direction he takes…
[Source: WSJ, CNBC, CNBC, WSJ]
https://www.cnbc.com/2023/03/12/regulators-close-new-yorks-signature-bank-citing-systemic-risk.html
https://www.cnbc.com/2023/03/13/first-republic-drops-bank-stocks-decline.html
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