Despite bank regulations preventing another financial meltdown, Silicon Valley BankThe country’s 17th largest bank, went up in flames last week. It was the second largest bank failure in US history and prompted many finger-pointing.
Management messed up by not addressing the severe cash crunch until it was too late. Some blame Peter Thiel, saying the venture capital investor’s call for smaller tech firms to withdraw deposits from SVB accelerated his downfall. others are critical Goldman Sachs, advisor to SVB who signed off on their erroneous decision to try to sell equity, thus alerting investors to their lack of capital.
There’s plenty of blame to go around, but when a financial institution goes down, you have to wonder: where were the regulators? After all, there were more red flags than you see at a CCP convention.
Treasury, Federal Reserve, FDIC Release Joint Statement Mapping Out Approach to Silicon Valley Bank Collapse
Last year was a year for the record books, and not in a good way. In response to the worst inflation in 40 years, federal Reserve Took one of the most aggressive rate hiking programs in history. In response, American investors sold off stocks, and especially high-multiple tech stocks. The S&P 500 Was Off 18% In 2022; The NASDAQ dropped 33%.
Besides, last year was the worst year ever recorded for US bonds. The Total Bond Index, which tracks high-quality US corporate and government debt, lost more than 13% in 2022.
Yellen says no bailout for Silicon Valley Bank: ‘We’re not going to do that again’
Thanks to trillions of dollars in government spending during and after the pandemic and massive money printing by the Federal Reserve, banks nationwide enjoyed a massive deposit surge in early 2020. Most, including Silicon Valley banks, invested that money in Treasury bonds and other fixed-income securities that fell when rates rose. Federal Depository Insurance Company (FDIC) filings show that US banks took over $600 billion in unrealized losses last year…a major red flag.
Meanwhile, banks, including SVB, were slow to respond to rising rates, and began losing deposits last year as customers pulled money out of checking and savings accounts to invest in high-yield Treasuries or money market funds. Bloomberg reports that “commercial bank deposits last year fell for the first time since 1948 as net withdrawals reached $278 billion…”
Those issues—portfolio losses and declining deposits—caused SVB to fail, but the problems were not unique to that bank. In fact, Signature Bank had also collapsed just hours earlier for similar reasons. The officers should have been on high alert.
how the silicon valley bank burned down
They were not. Consider the Financial Stability Oversight Council, the body created in 2010 after the financial crisis to avert such a collapse. The council is chaired today by Treasury Secretary Janet Yellen and Fed Chair Jay Powell, the head of the FDIC and the Consumer Financial Protection Bureau (CFPB), along with 9 other voting members, including SEC chief Gary Gensler.
The council’s website defines its function as “identifying risks to the financial stability of the United States…”.
The last meeting of the Council was held on February 10 through video conferencing. Readouts from that meeting show the group previewed its 2023 priorities, which included “climate-related financial risks, non-bank financial intermediation, treasury market resilience and risks related to digital assets.”
Climate change, which it describes as “an emerging threat to US financial stability”, has been identified as a “key priority” in the 2022 annual report and has been among the council’s key tasks for the past two years. There has been one.
To be fair, the Council was also concerned about risks related to cryptocurrencies, non-bank financial intermediation, and the flexibility of treasury markets. These were the issues the Council was focused on, not the mounting portfolio losses and dwindling deposits.
Companies like Camp, Compass Coffee affected by the collapse of Silicon Valley Bank
This is shocking. As economist Ed Hyman has pointed out, there has never been a rate reduction cycle without some sort of financial shock, such as the failure of Long Term Capital Management in 1998 or the bursting of the dot-com bubble in 2001. that’s because Fed rate hike Intended to take excess liquidity out of the system and also to reduce overbought assets like housing in 2008 or tech stocks in 2001. Because investors move in herds, the process is rarely smooth.
When people started asking for their money last week, SVB faced liquidity crisis, His holdings had shrunk in value, so he tried to raise new capital by selling shares he liked to sell. Going to the public markets instead of private lenders was a mistake. Depositors panicked and rushed to claim their money, leading to bank runs and the shuttering of SVB.
Was anyone paying attention? As Peter Earle wrote at the American Institute for Economic Research, “As of the end of December, SVB had invested 57 percent of its total assets in investments, compared with an average of about 42 percent among 74 similar competitors. $108 billion were in US Treasuries. And agency securities – an asset class that had its worst year on record in 2022.”
Earl also reported an increase in activity earlier this year. Fed discount window, It’s unclear whether the bank’s rise in short-term lending is a sign of an industry-wide crisis or whether SVB was a participant, but it certainly was another red flag.
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What does all this mean for the average American? Regulators have made arrangements in recent hours to cover depositors of SVB and Signature Bank, which has also closed. They are also providing borrowing facilities to stabilize other financial institutions caught in the downdraft. If the authorities can limit the contagion with these steps, and if no other banks are stricken, it will most likely calm the markets and prevent an outright panic.
Although there will be losses. Fed will be more cautious Regarding increasing the rates further. While this means that car payments or mortgage rates won’t rise as fast as recently predicted, it means that inflation — worst of all taxes — will remain high for a long time.
None of this is good for stock prices, economic growth or wealth creation. Will President Biden still claim that his economic plan is working?
Liz Peake is a Fox News contributor and former partner at major brands Wall Street firm Wertheim & Company. A former columnist for the Fiscal Times, she writes for The Hill and is a frequent contributor to Fox News, the New York Sun and other publications. Visit LizPeek.com for more. follow him on twitter @LizPeek,