The US government’s reaction to the collapse of Silicon Valley Bank (SVB) could spark a dramatic crisis.
Finance analysts are warning that while the intervention may have prevented an immediate problem, it could wreak havoc in the future.
SVB’s collapse last week was caused by a bank run — a situation where depositors rush to withdraw their money, putting huge pressure on the bank.
The problem for SVB was that its bond portfolio was locked in at low yields. It needed to sell those bonds at huge losses to meet the $42 billion in withdrawal requests in just one day.
In layman’s terms, the bank did not have their depositors’ money on hand and had to rush to sell assets.
The government intervened to prevent the crisis from worsening as, without any intervention, there could have been hundreds of bank runs, leading to dozens of banks collapsing.
The Federal Reserve opened swap lines to prevent these problems from repeating with other banks, essentially replacing the Federal Deposit Insurance Corporation (FDIC).
Instead of insuring to a maximum of $250,000 per account, the Fed is now insuring every single deposit, effectively making the insurance limit “infinity”, according to analyst and Grit Capital CEO Genevieve Roch-Decter.
She said under the new framework, authorities were liable to cover an estimated $19 trillion in bank deposits in the event of a countrywide bank run.
“This potentially gives banks the go-ahead to take greater risks with our capital, knowing that the government will likely foot the bill in the end,” Ms Roch-Decter wrote.
According to Ms Roch-Decter, numerous banks face the same problem as SVB, and are sitting on huge unrealised losses from assets that have decreased in value as interest rates have increased.
If withdrawals accelerate, banks have to sell those positions and realise the losses. But if withdrawals slow down, banks can wait out the duration of the bonds and never realise the losses because they can redeem the bonds for the par value at the end of the bond’s duration.
The Fed is hoping this will increase confidence and put a stopper on withdrawals to avert an immediate crisis.
However, if withdrawals continue at the same pace, the government will be on the hook for more potential losses than they would otherwise have been.
But President Joe Biden has assured taxpayers the losses would not be covered by the public purse.
Ken Griffin, the maverick founder of hedge fund Citadel, stated the recent bailout was a sign of the downfall of American capitalism. He insisted that banks should be allowed to fail if their poor investment choices sparked a collapse.
Mr Griffin railed against the US government’s intervention to protect all SVB depositors, claiming it was a blatant disregard for the principles of capitalism and a sign of incoming turmoil for the world’s richest nation.
“The US is supposed to be a capitalist economy, and that‘s breaking down before our eyes,” Mr Griffin said in Financial Times interview.
“The regulator was the definition of being asleep at the wheel. It would have been a great lesson in moral hazard. Losses to depositors would have been immaterial, and it would have driven home the point that risk management is essential.”
Former member of Congress John Delaney blamed the crash on poor risk assessment following an influx of disaster payments made to the tech sector throughout the Covid-19 pandemic.
“SVB is the story of lazy Covid money. During Covid, cash piled into tech companies and VCs & they imprudently allowed it to pile up in SVB, uninsured,” he said in a tweet on Wednesday.
“SVB used all this cash to acquire unhedged, long duration securities thinking rates would never rise. No one considered the risks.”
Reporter at Jacobin, Branko Marcetic, echoed those sentiments, describing the crisis as “a perfect storm of everything wrong with our era, from corruption and financial recklessness, to bad political decision-making and corporate entitlement”.
According to a report from The Wall Street Journal, Silicon Valley Bank’s collapse has triggered investigations by both the Securities and Exchange Commission and the Justice Department, with a focus on how it became the second-largest bank failure in US history.
The probes are still in their early stages, but are said to involve an examination of stock sales made by SVB executives prior to the bank’s downfall. Specifically, regulatory filings indicate that on February 27, CFO Daniel Beck sold 2000 shares of SVB Financial, while CEO Gregory Becker exercised options on 12,451 shares and sold them on the same day.
These sales were made in accordance with prearranged trading plans known as 10b5-1 plans.
Additionally, the probes will focus on why the bank did not have a chief risk officer from April to December 2022.
Later on Tuesday, SVB Financial Group announced that Goldman Sachs Group Inc was the buyer of the bond portfolio that caused the $1.8 billion loss and led to the bank’s failure.
The loss taken on was more than the net income of the entire company in 2021 ($1.5 billion).
SVB, a technology-focused lender widely known as Silicon Valley Bank, had attempted a $2.25 billion stock sale last week using Goldman Sachs as an advisor, but it was unsuccessful as depositors fled and investors worried that SVB would require even more capital.
The bond portfolio that SVB sold to Goldman Sachs on March 8 mainly comprised US Treasuries and had a book value of $23.97 billion, according to SVB. The transaction was executed at “negotiated prices,” and SVB received $21.45 billion in proceeds.
According to Reuters, Goldman Sachs’ purchase of the bond portfolio was carried out by a separate division from the one that managed SVB’s stock sale.
All figures have been represented in USD.
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