The stunning bellyflop of Silicon Valley Bank turned some of the boldest risk takers in the world into fleeing fraidycats. Instantly, both political parties started the blame game.
The Democrats blamed President Trump — always their first resort — for deregulation in 2018. Sen. Elizabeth Warren, who built her reputation on bashing banks, said in an op-ed in The New York Times: "These recent bank failures are the direct result of leaders in Washington weakening the financial rules."
This is false: stick around and I’ll show you why.
The Republicans blamed the bank’s fatuously woke culture, amid reports by the New York Post and Fox Business that it had handed out $73 million to groups that supported causes similar to those of Black Lives Matter.
You can read more on this angle, here.
On March 12, Gov. Ron DeSantis, R-Fla., said on Fox News’s "Sunday Morning Futures", "I mean, this bank, they're so concerned with D&I [Diversity and Inclusion] politics and all kinds of stuff, I think that really diverted from them focusing on their core mission."
A day later, President Trump tweeted on Truth Social: "Woke banks will fail. Woke people will fail. Woke schools will fail … Everything woke turns to sh**."
Eloquently put, but this, too, is a false cause: other forces took down SVB.
Republican presidential candidate Nikki Haley called it a "Biden bailout," and a rival, Vivek Ramaswamy, wrote in an op ed in the Wall Street Journal that "SVB Doesn’t Deserve a Taxpayer Bailout."
This also is off-target.
This was a bank seizure rather than a bailout: regulators seized control, SVB shareholders suffered huge losses, and its assets may be chopped up and sold off in pieces. Rather than taxpayer funds, bank-paid fees will cover any resulting costs.
Only depositors in Silicon Valley Bank are getting something, a simple federal guarantee that they will get back the cash they had put into SVB, a top-20 bank that invested in safe government bonds.
This funds startups that could close up shop if they fail to meet payroll.
Here is what really went wrong.
On Tuesday, March 7, the day before the crisis erupted, the CEO of Silicon Valley Bank was asked in a friendly onstage interview what he does to de-stress.
Cycling, he advised, as Marc Rubenstein wrote on Substack.
On Wednesday, March 8, six minutes after the close of stock market trading, SVB put out an obtuse press release whose first paragraph ran on endlessly for seven sentences and 224 words of dense jargon.
This masked the surprise that it was seeking to raise $2.5 billion.
Buried in the second paragraph, as an afterthought, was a bigger shock," Additionally, earlier today, SVB completed the sale of substantially [all] of its available for sale securities portfolio.
SVB sold approximately $21 billion of securities, which will result in an after tax loss of approximately $1.8 billion in the first quarter of 2023."
Next graf: "Goldman Sachs & Co. LLC and SVB Securities will act as book-running managers for each offer." As if to say, so, anyway . . .
The loss, at less than 1% of the bank’s more than $200 billion in assets, should have been survivable. It also was entirely avoidable, and it stemmed from supposedly safe government bonds rather than wild bets on exotic, risky instruments.
After the badly botched press release came out, SVB shares plunged 60%, down from $267 to $106 (it was at an all-time high of $725 in November 2021). This freefall helped spark the run on the bank.
SVB had put more than $20 billion into 10-year U.S bonds that paid only 1.5% interest. Then the Federal Reserve abruptly raised rates from a quarter-point to 5% in less than a year, a 20-fold increase, and, suddenly, SVB’s long-term bonds were worth a lot less.
Because of the Fed’s rapid rate hikes, banks have more than $600 billion in "unrealized losses" on these older bonds.
They can avoid taking these losses by holding the bonds till they mature, but SVB had to sell its older bonds to raise cash to fund depositors’ withdrawals.
SVB could have hedged this long-term risk by buying a "put-spread option," trader Jim Iuorio points out on my pod, "What’s Bugging Me," here. Or SVB could have humbled itself and asked the Fed’s "discount window" program to buy the old bonds at their original value.
Neither thing happened — and nobody is asking why. Federal officials and Congress will pretty much ignore looking into the Fed’s erratic rate rises, why the discount-window option never was offered, and why the FDIC raised zero alarms.
Instead, their focus will be confined to the bank.
Because government can do no wrong.
Dennis Kneale is a writer and media strategist in New York and host of the podcast, "What's Bugging Me." Previously, he was an anchor at CNBC and at Fox Business Network, after serving as a senior editor at The Wall Street Journal and managing editor of Forbes. Read Dennis Kneale's reports — More Here.
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