It’s really quite amazing to see. In the 2008/09 financial crisis, large financial players were bailed out due to their heavy exposure to toilet paper mortgage-backed securities. “Sub-prime” is a beautiful euphemism that many will remember from that time and the ten years prior, a word that encapsulates how far brazen and sometimes almost criminal white collar idiocy can become and how ludicrously they may rationalize their actions. I though remain awed at the inability of financial executives and government and central bank officials to eventually learn from the past. Pre-emptive is the ideal, but re-active and often non-active is the norm.
Of course, I’m talking about Silicon Valley Bank’s (SIVB) collapse. A large part of SIVB’s capital had been parked in admittedly liquid held-to-maturity debt-securities. The problem is that those lost radically in value due to tightening monetary policy last year. As any good story would have it, there has to be some sort of an almost unbelievable twist though. Drum roll … in 2022 into 2023, SIVB, at the time the 16th-largest US bank, actually had no risk officer for almost three-quarters of a year. SIVB went completely un-hedged against interest rate risk – a basic and fairly standard mechanism to protect bond portfolios of depository institutions. And interest rates were, mildly put, a force to be reckoned with in 2022/23.
As much as Treasury Secretary Yellen emphasized that there will be no bailout on Sunday, a quasi-bailout was introduced the next morning. Depositors will be protected by a new Fed loan facility, backstopped by $25bn from the Treasury.
According to regulators, taxpayers won’t have to foot the bill – the financial system at large will, through Deposit Insurance Funds … because, apparently bank customers who fund the fees that banks pay into these Insurance funds are not taxpayers!?
But what is truly unsettling, is that while regulatory pressures after the 08/09 credit crunch had been mounting worldwide and led to as good as all developed countries to introduce heavy regulatory burdens on the banking system, basic Basel III norms (including Liquidity Coverage- and Net Stable Funding Ratios) were forced on every bank EXCEPT AGAIN the majority of United States ones. A blatant failure to learn, sponsored by continued lobbying powers.
As always, share- and bond-holders are left holding the bag of stink, except the smart ones … senior SIVB executives sold their shares in SIVB in the preceding days of the bank run. I cannot think of a single way how they knew to time this so aptly.
A beautiful play, enacted for us by the ivory tower elites.
This comes together with almost reckless corporate risk and financial management. What were risk and treasury executives of all these companies thinking, leaving most of their money uninsured at a single banking institution? Roku has almost $500m parked at SIVB, while the FDIC only insures $250k per bank. That is one smart treasury officer.
Anyway, the mainstream media already blast appeasements and the old “no need to worry anymore” at us. We’ll see.
In parallel, more banks are undergoing liquidation, and many more will now face increasing scrutiny of held-to-maturity portfolios. Signature Bank’s & Silvergate’s demise is important for me to mention because of their effect on crypto markets. FTX and other exchange and lender collapses, due to bad exposure, mismanagement and even fraud, will lead to better scrutiny and regulation in the industry. But Silvergate and Signature were on/off ramps for fiat money and capital to access crypto market in the first place. Thus, I believe these are worse of an iron ball than the FTX collapse to the growth efforts of world of crypto.
While this is all awful to those with risk exposure, it will perhaps finally lead to a larger flush of risk-on sentiment that has still been prevalent for a while, despite a harrowing bear market in equities.
