Banks are failing, and time is a flat circle
Banks are failing, and time is a flat circle
It’s March 15, 2023, and here’s the rundown:
2008, is that you?
Numbers and links
Banks are failing, and time is a flat circle
Silicon Valley Bank and two others failed in recent days. Is it 2008 all over again?
Time is a flat circle.
Banks are failing again, giving off strong 2008 vibes. Back then, Washington Mutual went bust in the largest bank failure in American history. This past week, Silicon Valley Bank went belly-up, in the second-largest bank failure in American history. It was followed by Signature Bank, as the third-largest.
Yep, feels like old times again. But it’s not. That’s important to understand. So, let’s walk through what’s going on:
Silicon Valley Bank’s failure is more about bad timing than anything. It’s kind of a weird bank. It doesn’t really have a lot of customers — like you and me — but instead mostly works with companies. Startups, specifically.
And startups were flush with VC cash for most of the previous several years. That all changed, though, when interest rates started climbing and the economy looked shakier. Investors aren’t handing out as much money, which meant that SVB wasn’t seeing as many deposits. And with the deposits that it did take in, SVB bought a whole lot of bonds — bonds that are particularly sensitive to fluctuations in interest rates.
As such, companies had been withdrawing money, but with fewer deposits coming in, and a need to sell some of those bonds (at a loss, because higher interest rates lowered their value) to fund those withdrawals. And it was left with a cash crunch.
Then, you had the bank run. Everyone started pulling their money out, just when the bank was experiencing a cash crunch. Not good. This is what ultimately led the bank to fail — there was a run on the bank ala “It’s a Wonderful Life,” and it ran out of money. Depositors couldn’t get their cash out, because it was gone.
The FDIC, which insures deposits up to $250,000, stepped in and took over. In this case, if you had less than $250,000 in the bank, you’d be covered. But again, SVB isn’t your typical bank, and many of its depositors had way more than that deposited. That’s another wrinkle to the story.
And it’s all still being sorted out. The FDIC did say that the bank is back open, albeit under their control. What happens next is anyone’s guess. The bank could be scrapped for parts, so to speak, or it could be acquired by another financial institution (many people are mentioning JP Morgan as a potential buyer, but who knows). We’ll have to wait and see how it all shakes out.
Make no mistake: This is a pretty complicated sequence of events that is still playing out. But it’s probably not going to lead to a full-on economic meltdown like what happened in 2008 and 2009. SVB was something of a unique bank in its own right, as discussed, and its unique positioning in the market may have been its downfall.
Who’s to blame?
Shareholders (yes, SVB was a publicly-traded company, and you could’ve bought its stock) are suing both the bank and its CEO and CFO for fraud. More lawsuits are likely to come, too. But for this one, Reuters reports that SVB “failed to disclose how rising interest rates would undermine its business model, and leave it worse off than banks with different client bases.”
I don’t know if that’s true, but if you’ve ever taken a look at an investment prospectus, there’s often something about risks associated with…just about everything. So, I don’t know if that lawsuit will gain much traction.
I spoke with the CEO of a regional bank somewhere in the U.S. earlier this week about SVB, and here’s what they told me: It wasn’t the interest rates or anything else that killed SVB, it was the bank run. And the run on the bank was sparked by two hedge fund guys: Bill Ackman, and Peter Thiel. This, seemingly, has been corroborated by others:
Now, I don’t know if Thiel did what he thought was the right thing in the run-up to all of this. But given what he’s been up to in recent years — bankrolling crazies and bankrupting companies he doesn’t like — I don’t really give him the benefit of the doubt.
The CEO I spoke with did say that he didn’t think there was any fraud or anything going on at SVB, just to make it clear, it was really just a matter of being in the wrong place (and invested in the wrong things) at the wrong time. There may have been, and evidently was, mismanagement, sure. Some people missed some glaring problems with the company — that much is clear. But it doesn’t look like fraud was in the mix, or a game of hot potato with toxic assets.
That’s another reason why I don’t think we’re reliving 2008 — this seems to be relegated to a certain type of bank. For now. Of course, there’s no guarantee that it can’t or won’t spread. Ratings agencies are also taking a harder look at some banks as well.
As of Tuesday, though, some of the banks that saw big declines on Monday were already starting to climb back. So, that’s good. Others, though, like Charles Schwab, appear to be experiencing issues — again, it’s all playing out right in front of us.
Bailout talk
When SVB failed, there were those calling for the government to step in and save it. Treasury Secretary Janet Yellen said it wouldn’t. But maybe they did — it depends on who you ask.
I will say that the calls for a bank bailout were…predictable. But the true irony is that Silicon Valley is full of libertarian-minded people who often scoff at the idea that the government should be involved with anything. But when their money was on the line, there they were, looking for a life raft.
President Biden even came out and said “that’s how capitalism works,” in regard to SVB’s investors looking for protection.
I’m not smart enough to know whether a bailout would be a good idea or not. But I think if you want to rail against student loan forgiveness, it’s hard to turn around and support a bank bailout. That’s a topic for another day. And to be fair, there were others who said the government shouldn’t have stepped in and rescued SVB’s investors OR depositors.
After 2008 and 2009, we passed banking reform laws (Dodd-Frank), which were weakened by (you guessed it) the Trump administration. I’m not sure if those regulations played much of a role in this case (maybe they did?), but those rules were put in place to prevent another 2008-style meltdown. I don’t know that we should be looking to weaken those rules.
The government’s role, though, is to prevent panic and restore order. The FDIC’s role is to protect deposits. That all seems to be happening, which is good. We’re not out of the woods, by any means, but based on what I’m hearing, this shouldn’t end in an all-out economic rout like 2008 did.
It probably does shake people’s faith in smaller or regional banks, though, and is evidently leading many people to take their money to some of those “too big to fail” institutions. I don’t think that’s great.
But I’m not worried that my preferred financial institution is going under. For the record, I bank at a regional credit union, but also have accounts with bigger banks. Again, though, I don’t think my relatively small amounts of money are going to disappear overnight. I don’t think you should worry, either.
Maybe the best thing we can all do is realize that nobody knows anything until it’s too late — and that goes doubly true for investing gurus, who have a “reverse Midas Touch.”
Numbers and links
36,000: The number of kettlebells the Army ordered in 2019 as a part of the largest fitness equipment order ever placed. (Men’s Health)
$2.6 billion: The potential lost tax revenue the state of New York could miss out on by refusing to properly regulate its marijuana market. (Forbes)
“They were really doing nothing working from home”: A quote from a billionaire tech CEO, who must not have any idea that people working onsite often don’t do anything, either. (Business Insider)
Trucks and SUVs: Bigger vehicles are killing a lot of people — I don’t usually like videos but this one is pretty interesting. (Not Just Bikes)
Why would anyone put more than $250,000 in any one single bank knowing that is the insurance limit? Sounds like mis-management on the part of many of the depositors at SVB.