The Economy

You will probably see someone purchase SVB by the end of the weekend. But after the way banks that did that in 2008 were treated, it's not the foregone conclusion it should be.

 

This may be the most competent thing he did as CEO, to be honest. And that's not really an indictment of him, because this isn't happening because of HIS incompetence (he was fucked no matter what), it's a consequence of Ben Bernanke and Janet Yellen and Jay Powell's actions and the iron-clad power over the price of money we inexplicably give them in this country as price-fixing czars.

This bank seems fairly unique in that given the nature of its clients, it had a boatload of deposits and a small loan portfolio compared to the typical bank.

When I post about how the Fed has had a policy of robbing savers to reward debtors, what I usually have in mind is the risky behavior outside of the banking system that it has spurred and all of the malinvestment lurking beneath our economy as a result. That would be the types of companies this bank has as clients that only exist because of the free money and lending standards degradation the Fed has given us.

In the case of this bank, they actually weren't (couldn't legally because of banking regulations) taking risks to try to make up what they were being robbed of by the Fed, which is what put them in the situation of having huge unrealized losses. ... they took all of those deposits they were sitting on (all of those startups were flush with venture capital), and to put them to work, they only yield-bearing assets they could really buy. ... were the treasuries and mortgage-backed securities that the Fed was driving the price up of (in order to suppress interest rates, which has been their policy). By artificially sending the price of bonds to the stratosphere as a matter of "policy," the Fed created the situation where SVB is now caught holding the bag.

That is because now that rates have risen so much so quickly (even if they are still relatively low, the rate of increase has been violent), the value of those bonds has dropped in value substantially (they are slowly popping the bond bubble they have blown). ... which makes all of the banks holding unrealized losses susceptible to a run on their bank. This bank was particularly susceptible.

As CEO, he knew that. So I would not be surprised if he at least saw the risk of what was happening with rates rising and said, "Hey, I should sell some of my personal stock just in case!" It doesn't mean he was expecting it, it would have meant he knew that things were getting more precarious over time as the Fed kept hiking. Outside investors saw that risk too, FWIW; the bank's financial position was deteriorating for a long time and the stock price had been dropping like a rock as rates were rising.

I actually feel bad for the guy. ... given the nature of the bank and the types of depositors and loans it specialized in, it was particularly susceptible to this happening. But there are A LOT of banks out there (just about every bank) that are sitting on huge unrealized losses right now if they were forced to mark to market. This is thanks to the Fed. The default strategy for those banks is hope and prayer, and if that fails, they know there will be the usual calls for bailouts (who could have seen this coming? We need to socialize the cost!). This guy actually saw the precarious position his bank was in and (stupidly as it paradoxically turns out) actually tried to be proactive and address the hole in his bank's balance sheet by raising capital. ... rather than sticking his head in the sand. It was the fact that people knew he went out to raise that capital that precipitated the run on his bank. There are definitely other banks out there that SHOULD be desperately trying to raise capital, but aren't, for this reason.