The best explanation for why SVB failed I’ve read is here.
The bottom line is that as interest rates rose after they’d been low for a long time bonds, including Treasuries, lost value putting strain on balance sheets, and if a bank didn’t handle it right by making the correct bets, they could get slaughtered. Even so SVB might well have survived in a pre-internet banking era and/or if it didn’t have so few depositors, with so many of them depositing so much.
As at the end of 2022, it had 37,466 deposit customers, each holding in excess of $250,000 per account. Great for referrals when business is booming, such concentration can magnify a feedback loop when conditions reverse.
The $250,000 threshold is in fact highly relevant. It represents the limit for deposit insurance. In aggregate those customers with balances greater than this account for $157 billion of Silicon Valley Bank’s deposit base, holding an average of $4.2 million on account each. The bank does have another 106,420 customers whose accounts are fully insured but they only control $4.8 billion of deposits. Compared with more consumer-oriented banks, Silicon Valley’s deposit base skews very heavily towards uninsured deposits. Out of its total $173 billion deposits at end 2022, $152 billion are uninsured.
The Fed appears to have effectively said that from now on all customers in bank failures will be made whole. They’re going to do it for SVB, and once they’ve done it they have to do it for everyone. I suspect a lot of this is because of who SVB’s customers are: Silicon Valley tech firms, including startups. Letting them be wiped out would be a massive blow and rich people are always made whole.
However, it’s a terrible precedent. If there is no risk, if “heads we win, tails the Fed picks up all the pieces” is the case, then why not gamble all to hell? The 2008 bailout was terrible in exactly this fashion, but this is worse. Banks will compete on terms and gamble even more on securities and since customers know they’ll be made whole no matter what, why not go to the bank which offers the most, even if that most is based on vast risk taking?
Back in 2009/10 I wrote repeatedly that the Dodd-Frank financial services bill would be inadequate. It’s ironic really: the banks and brokerages hate the bill, and Dodd, as a result, gave up a very lucrative retirement, but it’s not good enough (or bad enough, if you’re a bank.) Glass-Steagall should have been reinstated with some updates for the modern era, and banks should be have been broken up en-masse. The US now has 4 mega banks and the concentration keeps increasing.
But zero interest rates and quantitative easing were also insane. Tons of free money+shitty bonds with no returns make an odd combination, but like any drug high, coming off it was going to be horrific. As I pointed out years ago, QE did cause inflation, it’s just that it showed up at the high end, since almost all the money was going to already rich people. But the money wasn’t based on actual increases in America’s real economy and that was bound to have consequences.
Most of the money corporations got was spent on stock buy-backs, since that’s a guaranteed return. It was not spent on expanding business.
So here we are. One of the most important banks in America, because it specialized in supporting a key sector and startups has gone under. Concentration has increased. Other banks are suffering from the same basic issues: a bond collapse caused by increased interest rates, making all those Treasuries and so on they hold, supposedly the “gold standard” a bleeding hole.
If the Fed drops interests rates without significant changes to fiscal and operational policy (Congress and Presidency, respectively) then inflation will go even higher. If they don’t drop them, banks continue to bleed. If they raise them…
There’s no such thing as free money. If you increase the money supply faster than the real economy is increasing, and you do that for too long, there will always be ugly consequences. Yes, the pandemic was the trigger, but there’s always going to be another crisis: history does not stop.
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DMC
And once again we miss an opportunity to clear out some of the corporate dead wood. When will the US learn that massive corporate incompetence needs to have real consequences?
Ché Pasa
So what this is telling us is that effectively, there is no limit on deposit insurance in banks deemed worthy; depositors will be made whole — regardless of what happens to the bank.
It’s been fascinating to watch the liberalsphere perform cartwheels and jump splits to distract from what’s really going on: going forward those who put their deposits at risk will not have to worry. They will be paid. In full. Bank shareholders? Not sure, but the likelihood is that they too will receive full — or maybe more than full — compensation from reserve funds held somewhere for just such eventualities. Bank executives have already been compensated; they’ll no doubt receive more. And so it goes.
Little fry, like the rest of us? Tough luck, suckers. No loan forgiveness or much of anything else for you.
This state of affairs is not sustainable for more than a century or two. Then comes the Revolution. Right?
Mary Bennett
Guess it is time to choose. Are we going to support Israel, Ukraine and a bloated defense industry or will we finally invest in our own country and people?
anon y'mouse
sounds like it would have been alright, except a few richies got scared and started telling all of their friends to do a run on the bank.
right after the heads of the bank got bonuses and bailed on their own stonks.
none of this sounds accidental in any way. but there won’t be any looking through Thiel’s couch cushions, unlike a typical SOB with the IRS turning him upside down.
StewartM
I would also add that this is the problem when the “cure” for inflation is attacking workers/consumers by rate hikes (not the cause), rather than the uncompetitive markets and labor shortages as the real cause (though in some cases completely artificial labor shortages, as the same companies downsizing their workforce to bump up the stock price are the same companies crying about there being a labor shortage).
Or to sum it up, when you make the paper economy more important than the underlying real economy. “The Reagan Revolution”.
NR
I understand the moral hazard argument, but if only depositors are going to be made whole, and the bank itself (shareholders) are not, then where is the moral hazard in this case?
I also understand the argument that this could lead to increased risk-seeking in the future, and regulations certainly need to be put in place to account for that, but what about situations where the depositors are victims of adverse actions by the bank? Actions that they may not have even known about prior to making their deposits?
NR
It’s also worth noting that at least in this case, the bank didn’t fail because of risky bets. It failed because it had over-invested in the safest investment on the market: U.S. treasury bills. Silicon Valley bank wasn’t really doing anything regarded as excessively risky.
Paradoxically, what the bank should have done was make riskier bets with higher returns to stay ahead of inflation! They might not have failed if they’d done that.
Eric F
While it is stupid and dangerous to normalize moral hazard by bailing out all the gamblers (who have big friends), I think it is also important to understand why so many SVB account holders had so many accounts above the FDIC insurance limit.
I read an article linked at Naked Capitalism that said many start-up funders required that the money they provided be deposited at SVB.
It was an inside racket.
“We will fund you, but you have to keep those funds in our bank.”
More like mafia than “business”.
Are we surprised that the Fed bails out the Mafia?
GlassHammer
I think we can say that there are quite a few regional banks whose balance sheets aren’t much better than SVBs and that is probably why the bailout of SVB happened. Basically, if SVB failed it probably would have caused capital flight across other banks.
The FED and FDIC can probably handle a couple of insolvent banks in a short time period but not dozens or more in a short time period.
DMC
Possible fallout in the derivatives sector, something I’ve been worried about since 2008 showed the whole casino like nature of much of High Finance:
https://ellenbrown.com/2023/03/13/the-looming-quadrillion-dollar-derivatives-tsunami/
Ché Pasa
Much of government and business is fundamentally no different than organized crime. It exists and functions on what can be extracted — often by theft — from the Little People, and it wouldn’t function if that theft were not possible.
The trick is to make it impossible.
Feral Finster
The war must continue and cannot be questioned. Labor must be brought to heel and rich people cannot be allowed to lose money.
With that in mind, the bailout was inevitable, other than they can’t call it a “bailout”. Stock are up big today. And why shouldn’t they be? Heads the investors win, tails the feds lose.
marku52
This raises some interesting consequences. Stock speculators have opined that “The Fed will raise rates, but eventually something will break and they will be forced to back off.”
Well, several things “broke”. But if all the losses are back stopped, the Fed may feel free to continue to raise rates.
Also, what is the effect on international flows? Credit Suisse is now under questioning. Does the fact that US banks are ensured for any amount mean that money that was in EU banks start flowing back into US ones? Another front in the US war on the EU?
Also: “Billions for Ukraine, and the SillyCon Valley $sshats. Not a penny for East Palastine.” I’m sure republican presidential candidates are observing this.
Astrid
What’s going to be more interesting is how the fallout of SVB will interact with KSA’s normalization of relationship with Iran and formally joining the BRICS. SVB’s rescue will likely involve lowering interest rates and increasing inflationary pressure (not necessarily bad economic policy), but now that inflationary pressure is going to be pushed into smaller portions of the world with the fading of the petrodollar.
I should probably just buy gold bars and hide them in my mattress.
multitude of poors
So where is the gotta be president, Creative Destructor, Silicon Valley’s Deep State California Governor on this matter?
Poor California Guv Gavin Getty Newsom just can’t catch a break from well deserved outrage and scrutiny. Last week it was that sunbathing in Mexico vacay™ during a crisis (perhaps a bit too much silver iodide cloud seeding for snowpack and rainfall ( https://www.library.noaa.gov/Collections/Digital-Collections/Weather-Modification-Project-Reports ) from those contracted, private, Utah and Nevada companies; and who knows whatever non documented Bill Gates funded experiments; or other permitless, rogue agents. E.g. Silicon Valley Speshle Boyz don’t need no stinking permits, we OWN GAVIN.
Mexico doesn’t too much care for that rogue agent, Luke Iseman, a former director at the Silicon Valley tech incubator Y-combinator: https://www.geoengineeringmonitor.org/2023/01/by-prohibiting-solar-geoengineering-experiments-mexico-sets-a-global-example-of-precaution/ ).
This week it’s Gavin’s personal and Getty Newsom PlumpJack Winery Silicon Valley Bank (SVB) accounts; his hollow, vapid, wealthy as sin inheritor wife’s Non Profit™ and SVB accounts and dealings with SVP VIP John China; and god knows whatever other utterly opaque non profits™ and start ups™ the vile prick is involved with.
I can’t stomach the intercept (e.g. vile Micro loaner™ Pierre Omidyar; and ex Interceptor™ of Citizen’s United infamy, Greenwald), which appears to be the only link showing on my browser now, though I’m sure there are others far meatier being rapidly censored, or I’d provide a link.
Guess vile Newsom pissed vile Thiel off, though at the end of the day he’ll remain frenemys with him, just like he is with vile Melon Husk—Thiel’s frenemy and PayPal Mafia Partner in Deep State Crime. Melon Husk has generously offered to take over Silicon Valley Bank for the Gavster, and perhaps make vile Jon Lonsdale (whom the PayPal Mafia mentored) CEO. Vile Joe Lonsdale has never seen a homeless person he didn’t want to die on the spot, nor likely a very attractive female he didn’t want to physically assault.
gotta run …
multitude of poors
oops, it’s Joe Lonsdale, not Jon in that last paragraph.
BC Nurse Prof
Michael Hudson:
https://michael-hudson.com/2023/03/why-the-banking-system-is-breaking-up/
“Any bank has a problem of keeping its asset valuations higher than its deposit liabilities. When the Fed raises interest rates sharply enough to crash bond prices, the banking system’s asset structure weakens. That is the corner into which the Fed has painted the economy by QE. “
multitude of poors
Re my first comment above:
1 Unfortunately, that Daily Mail link re Gavin’s vacay, does not at all cover the devastating consequences of California’s still continuing historic storms on all of those now homeless big AG workers Gavin always nefariously pretends to welcome with open arms.
E.G. Deep State, CIA Leon Panetta’s son Jimmy’s inherited Monterey County Big AG District 19, which includes Watsonville and Pajaro, loaded with Mexican Americans and Mexican Ag workers now thoroughly traumatized: hungry; drenched; chilled to the bone, ‘evacuated’; and homeless, or shackless—while the storms and bizarre and abrupt weather changes unrelentingly continue.
031223 By Susanne Rust Before disastrous flood, officials knew Pajaro River levee could fail but took no action https://www.latimes.com/california/story/2023-03-12/authorities-knew-the-levee-could-fail
2 I neglected to thank anon y’mouse for that Melon Husk tag for Elon Musk, which I stole.
gotta run …
anon y'mouse
no, mulititude of poors.
i stole that, from somewhere in my internet travels.
but it fits sooo well.
your news of CA sounds typical of the place. rack & ruin always coming to the poor areas, although usually by calling it “renewal” and allowing crimcapitalists to profit.
their shantytowns won’t be ad hoc affairs. they make them via the real estate developers out of sawdust and stucco and sell them for hundreds of thousands so that some slumlord can put `12 people in it for overpriced rents, while the gov. looks away at the distortions this causes to rental markets.
seriously, a place across from a friend’s house i was staying in was, on paper, 4 bedrooms. they had actually taken the garage and divided it into another 2 bedrooms, with what appeared to be two beds each. that became visible to us one day when the “property manager” was doing their annual inspection and they would clean the place out and vacate all of the extra cars taking up all of the parking in the lot.
i am sure the property manager knew what was really going on there. as endless neighbor complaints would show plainly a place being used way beyond its capacity.
another friend lived in a complex where, underneath her and all around her, one bedroom units had 5-8 adults plus kids living there while they ranted to her about her friend sleeping on the couch about “occupancy limits”.
as for “fascism”, that word needs to be defined much like liberalism.
what most people are talking about when they discuss “fascism” is totalitarian governments, which can be of any ideology they like. the fact that this fascism concept has no true meaning among most people is why you get those idiots that think that Hitler & pals were trying to install “socialism”, hence socialism is everywhere and always fascist, when USSR simply became totalitarian for a time.
if fascism is the merger of the corporation with the state, then we already have it. of course, it has to take on that laissez faire appearance and be “soft” so that the people can keep ranting about “fascists” on all sides without knowing they are in it.
different clue
I’ve thought of another name for Elon Musk.
Elon Stench, in case anyone wants it.
multitude of poors
anon y’mouse,
Been working on a response but fallen down a
rabbitrattler hole. Hopefully I might post it here by the end of this day (03/15/23) Midnight PDT, depends on how much worse this rotten day goes, as I’m now faced with a possible buttiegegg related nightmare that could double the time I need to spend daily to move backward a little slower.The short response (If I’m unable to respond further), is yep, I agree. California is a far more brutal and venal experience for ‘nobodies’ than so many seem to realize, admit, or are threatened/or paid to ignore. It’s most particularly venal because its vile, grifter politicos are always proclaiming the highly: meritocratic™, humane™, and sustainability™ ground.
gotta run …
multitude of poors
Sigh. Was working on the longish response with the funky keyboard set up, in dimmed light so as not to wake someone, ready to copy and paste it, stupidly hadn’t saved it, not sure exactly how the hell it happened, it was actually sort of spooky, but poof it was gone, with only some fragments remaining on the clipboard.
If I can, I’ll piece it back together today, while my memory’s fresh.
gotta run
Astrid
Nothing more totalitarian than the Western “end of history” total spectrum domination. Whereas the material realities of Chinese and Russians have changed significantly in the last 40 years to meet their needs and aspirations, Biden promised that “nothing will fundamentally change” for us, and so it has been since Nixon was removed by the Rockerfeller/Bush tied Deep State.
multitude of poors
anon y’mouse re:
Truly, so I’m providing these horrid recent examples for those —unaware—which I used to track in some detail when my life wasn’t quite so over flowing with continuous, ever accelerating blows to the ones I love, and myself, as now.
11/08/18 The Paradise [Camp} Fire Incineration. Was a high poverty community overall. At least 85—mostly poor: over 60 and disabled on fixed™ incomes—suffered a terrifying death.
07/01/19 PG&E donated millions to California politicians after it was convicted of 6 federal felonies connected to the 2010 San Bruno pipeline explosion that killed 8 people. https://www.abc10.com/article/news/investigations/governor-newsom-most-state-lawmakers-took-money-from-convicted-felon-pge/103-2414790f-3a19-4411-92c2-fe23b519d646
06/16/20 Pacific Gas and Electric (PG&E) utility pleaded guilty to 84 counts of Felony Manslaughter regarding that Paradise™ incineration.
Almost three years after the tragedy: 05/28/21 ‘Unacceptable, Egregious:’ Lawmakers Seek Probe of PG&E Fire Victim Trust https://www.kqed.org/news/11875846/unacceptable-egregious-lawmakers-seek-probe-of-pge-fire-victim-trust
Almost four years after the tragedy (I have no time to research how many survivors have since died, many likely dying shortly after the incineration): 06/19/22How the survivors of the wildfires PG&E started are being victimized all over again https://www.sacbee.com/opinion/article261979050.html
02/13/17 Poverty ridden Oroville, and the Oroville Dam Disaster. (it’s noted to be the tallest dam in the US)
02/13/17 Villages of the Dam: Homes and businesses beneath California’s Oroville Dam lie abandoned underwater – as it’s revealed officials were warned about the crumbling structure TWELVE YEARS ago https://www.dailymail.co.uk/news/article-4221808/Officials-warned-Oroville-Dam-12-years-ago.html
02/21/17 San Jose Low Income Neighborhoods along Coyote Creek, and the Anderson Dam Disaster. Due to a criminally negligent warning “system” there were no before the fact warnings and many lost everything they owned.
02/21/17 ‘Very Serious Flooding’: High Water Overwhelms San Jose Homes, Streets Along Coyote Creek —”This is the worst flooding and water rescue situation that I have personally participated in,” San Jose Fire Department Capt. Mitch Matlow, who has been working in Santa Clara County for 35 years, said https://www.nbcbayarea.com/news/local/flooding-san-jose-streets-coyote-creek/43011/
See also, especially for the photos: 02/21/22 San Jose declares local state of emergency as hundreds of residents are evacuated after dramatic rescues from ‘once-in-a-lifetime’ chest-deep flood waters https://www.dailymail.co.uk/news/article-4247770/San-Jose-declares-local-state-emergency-floods.html
Published on the five year anniversary: 02/21/22 Coyote Creek Flood Victims Still Without Reparations 5 Years Later https://www.cbsnews.com/sanfrancisco/news/coyote-creek-flood-victims-still-without-reparations-5-years-later/
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Re (anon y’mouse):
Yep, along with the MIC/Tech Oligarchs, PG&E, etcetera, The Real Estate Industry owns the Governor and the California Legislature (much like they own DC). The kicker in Silicon Valley/Santa Clara County (where 1 bedroom rents can go for over $3k, and small homes can sell for an obscene $3m) is the still active, averaging 50 years old, Federally declared Superfund Sites™ (not a good thing at all, despite that oblique moniker). Silicon Valley/Santa Clara County has more of them than any other US County. There’s a minimum of 23 of them, depending on who’s noting it (and who knows whether some recent ones haven’t been disclosed, or are being created as we ‘speak’).
Historically poorer communities are generally the closest neighboring: apartment buildings; mobile home parks; and modest homes to those invisibly highly toxic dumps—but in the last decade, High Rise Apartment Homes™, and Condos —which cash laundering owners don’t generally live in—have sprouted like fungus; along with a sprinkling of usually ugly, subsidized™ housing—with mean spirited, or corrupt, Property Managers™—that’s not even affordable to the poors. Lastly, landlords aren’t even required to inform renters of that Toxic Dump down the block ‘juicy tidbit,’ much like they’re not required to note flood zones, and asbestos issues (as in those lurvely Silicon Valley “Popcorn Ceilings,” at least some, or most of them) on a lease. The apartment I live in has all 3 of those issues, none of which I was ever informed of.
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Re (anon y’mouse): if fascism is the merger of the corporation with the state, then we already have it.
Yep, ever since I can remember.
(Finally finished this, at 3:19 PM PDT, when Astrid’s comment was the last showing)
gotta really run …