Looks like Slate has a decent writer, Nitish Pahwa, following this long story and he looks at how things settled down last night. Will we have bank runs all over America in a big way as so many VCs have been warning? Doesn’t feel like this will happen at this moment, but then if Ackman, Calcannis, Thiel, Chamath, and other Master of the Universe crybabies get extended mic time on CNBC, it could all go sideways again.
Keeping an eye on $FRC and $SBNY today.
Sentiment on Twitter is that the Fed will slow down its raise on rates.
However, we’re seeing several regional banks hammered in pre-market too.,
See the tweet about $FRC which I will give its own OP next.
How the Weekend-Long Freakout Over Silicon Valley Bank Ended
First, let’s revisit the everlasting trauma of the financial crisis. After big-bank speculation threw the global economy into chaos, the U.S. government made two particularly important moves: imposing new financial regulations through the Dodd-Frank Act, and flattening interest rates in order to rejuvenate economy activity. The former granted beefed-up powers to oversight agencies like the Fed and the Federal Deposit Insurance Corporation, while the latter allowed for a boom in business investment and innovation that helped to repair the battered U.S. economy over the course of the Obama presidency. While both the bill and the rate drops were necessary boons, they became more controversial as the Great Recession faded: Executives of regional banks—including, funny enough, Silicon Valley Bank CEO Greg Becker—decried the burdens of certain Dodd-Frank restrictions, and economists warned that persistently low interest rates would overheat the economy to detrimental effect. In 2018, a bipartisan group of lawmakers passed a new bill that curbed some of Dodd-Frank’s measures, like the financial threshold for how many funds a region-focused bank would need to hold in order to come under harsher regulatory scrutiny—and in fact, Silicon Valley Bank lobbied for this change. Four years later, as pandemic recovery and war in Europe spurred global inflation, the Fed began to ramp up rates in order to press the brakes on the economy, reduce spending, and drive down prices for consumer goods.
The interest-rate surges really walloped the tech industry, which dominated the 2010s thanks in large part to free money supply and plentiful loans. Every relevant sector—from digital media to cryptocurrency to e-payment services to solar energy—shed stock values and employees, dragging down Silicon Valley Bank’s portfolio in the process. The hiked interest rates also affected SVB’s outward investments: As the Wall Street Journal pointed out in November, plenty of big banks like SVB and Wells Fargo had used client money to invest in 10-year Treasury bonds, mainly mortgage-backed securities. Higher rates depress the value of non-fixed-rate bonds, which, are worth more when interest rates are low.
So, going into the new year, SVB could operate with relatively little oversight thanks to its status as a “regional bank.” It was thus able to get away with holding a ton of government-issued mortgage bonds, even while it was losing money on those bonds in the short term thanks to higher interest rates. On top of that, the industry SVB was most tied up with in happened to be one of the most vulnerable to the new Fed stance, suffering far more than the rest of the economy as monetary policy tightened. And most SVB customers had more than the $250,000 that the FDIC covers in case of a bank failure.
Silicon Valley Bank was already in a dangerous spot by the end of 2022. It would take a few more actors to sign off on its death warrant, however.
p.s. One thing I learned here: Thiel ran his mouth to other VCs on Wednesday and told them to take their money out of $SIVB. I had that wrong. I thought it was overnight, Thursday morning.
As someone on this board posited this past weekend: what if Thiel and loads of other Silicon Valley Bros went short $SIVB? I will bet the SF office of the SEC is going over all last week’s options trades in $SIVB.
Crypto is turning red again in just this past hour, so I wonder if more news about “exposure” is leaking this morning?
