Vladimir Tregubov Another “black swan” in biggest bank failure since 2008 03/15/2023, 11:22

Thursday, March 9, marked an important date in the lives of branches and subsidiaries of SVB – Silicon Valley Bank, the main financial institution that invests in many companies and start-ups in Silicon Valley, corporate America and many countries around the world. was run. The pages of well-known business publications and news agencies were filled with headlines about the impending collapse of at least the tech sector, if not the entire US economy.

The charts of the main financial indicators fell sharply and turned red – panic swept the main stock markets. Banking stocks fell 10-20%, the Dow Jones Banks index fell more than 6%, and the NASDAQ hi-tech index lost almost 4%. Leading the decline were SVB’s own shares, which lost almost 60%, while shares of other Silicon Valley companies fell to roughly the same levels. Chicago Board Options Exchange’s CBOE Volatility Index rose 10% to 24.80%, a level reflecting investor tension.

Against this backdrop, investors around the world have turned their attention to gold, an asset haven whose price rose more than 2% ($38 per day!) and reached $1,873 per tr. self. Also, on Friday and Monday, yellow metal prices continued to grow almost to the 1900 level.

Ten days ago, Greg Becker, CEO of SVB Financial Group solemnly said: “We are proud to be the best financial partner in the most difficult times.” This was the day before the bank was nominated for the Bank of the Year award in London. Times are indeed very difficult now – the US Federal Reserve, the European Central Bank and the Bank of England are trying to rein in 40 years of record inflation.

Within a week, everything changed dramatically. The bank is threatened with bankruptcy, and with it dozens, if not hundreds, of high-tech firms that hold deposits and receive bank financing for their operations in a dozen countries. Fears about the delay of the crisis and raids by savers have already reached Canada, India, Singapore, Denmark, Germany, Sweden, Israel and China. In the UK, the bank’s subsidiary has already been declared bankrupt. The leaders of 180 high-tech companies sent a letter to the British Chancellor asking him to intervene and help them get out of the crisis. According to Bloomberg, the letter stated that the loss of deposits of companies held in the SVB could set the industry back 20 years and many companies could be closed immediately.

Will the bankruptcy of the SVB lead to a new financial crisis? Many believe that the financial authorities of the United States and other countries will quickly stop the problem.

The Federal Reserve System, the Department of the Treasury, and the Federal Deposit Insurance Corporation (FDIC) leadership met urgently on Saturday and Sunday, March 11-12, to adopt a contingency plan to support bank depositors and further fund the industry. According to FDIC rules, deposits in banks that are part of this company are insured up to $250,000. However, most Silicon Valley companies held millions or even tens of millions of dollars there. It is clear that they will only receive the insured portion of the deposit and the remaining amounts will have to be written off as a loss. In addition, the bank took loans from other banks and the probability of their return is very uncertain. This can create a “domino effect” in the banking system, not only in the United States, but in the countries listed above where the bank has its divisions.

The 2008 crisis also started small, with nothing but subprime mortgage defaults accounting for less than 13% of the entire US mortgage market. But we are still feeling the consequences of this crisis. From where? Yes, because the US Federal Reserve cannot mitigate the consequences of crises without a sharp drop in interest rates. Credit is supposedly cheap. “helicopter money” – the economy is slowly coming out of the crisis. However, with these measures, the regulator inflates another financial bubble (as in 2001 – the “dot-com bubble”, in 2008 – mortgages, and in 2020 – “coronacrisis”). Then the Fed, ECB, Bank of England and other central banks, who have monetarist views on regulating the economy, rub their heads and say that inflation is out of control. This has never happened before and suddenly again!

Since last year, the Fed and other regulators have been raising interest rates and selling bonds to banks to curb liquidity. Credit is getting more expensive, but government bonds, and not just them, are getting cheaper. Oddly enough, Silicon Valley companies’ money was invested in SVB federal treasury bills – and that’s more than half of their assets! One feels that bank leaders have no idea about the management of assets and liabilities and also do not understand the negative consequences of the Fed’s monetary policy and its impact on the debt market.

Yes, I would like to think that by getting money into a bank with subsidiaries of the US Treasury, you could save such an important industry. After all, in 2008 they found money for Goldman Sachs, AIG, JP Morgan and other financial institutions on the “too big to fail” principle. It was about hundreds of billions of dollars. This time they will find it. A number of large banks are also ready to buy the SVB business – JP Morgan and others.

Something is worrying. Won’t the bankruptcy of the SVB act as a detonator in the US financial system, already overheated by skyrocketing interest rates? “We may have found a new Enron today,” said prominent Wall Street investor Michael Burry. Let me remind the readers that the fraud scandal in the financial statements of this company, which turned 60 billion dollars into profits for the report in the shareholders’ board and was even approved by the famous accounting firm Arthur Andersen, caused a scandal. storm of rage in corporate america. The result was the passage of the Cyburns-Oxley Act, which criminalized such games by numbers.

Burry has already warned investors of an impending financial collapse – in January his tweet had only one word: “Sell!”.

Also, the US Federal Reserve’s interest rate committee is about to meet, and Chairman Jerome Powell had previously said that “we can tighten monetary policy further if unemployment or inflation indicators don’t suit us.” So last week’s data on non-agricultural employment is unlikely to match the Fed. What awaits a new series of rate hikes? Last fall, the Bank of England tightened its screws in the fight against inflation that the entire pension fund sector nearly sank because of cheap government bonds.

But the frustrating thing is this. The whole world suffers because of the mistakes of bankers and regulators in the USA and Europe – they have learned to put the severity of the crisis on other people’s shoulders.

Note: According to the Financial Times, on March 13, the US Federal Reserve announced that it would issue emergency loans to support US banks. All SVB customers will receive full deposit funds, an extraordinary step towards stabilizing the US banking system.

This was expected, but what decisions will be made at the US Federal Reserve meeting on March 21-22? And will the “black swans” return to the US financial skyline in the face of tightening monetary conditions? And what new extraordinary measures will the US administration take?

Meanwhile, markets are not yet convinced of the Fed’s ability to stabilize the market situation. Gold is trading around $1905, breaking the 1900 level. self. But the dollar index falls to the level of 103,500.

The author expresses his personal opinion, which may not coincide with the editors’ position.