Lessons From The Collapse Of SVB
By Paul Homewood
The collapse of SVB, the second biggest bank bankruptcy ever, seems to have gone under the radar until Fox News shone the light on it last week.
Here, one of President Trump’s senior advisors lifts the lid on it:
https://www.foxnews.com/media/svb-collapse-tip-iceberg-biden-spending-policies-economist-warns
While woke ESG policies obviously did not help, the real reason for SVB’s collapse was the rapid rise in increase rates, which in turn devalued their assets held in government bonds.
And the main factor behind the rise in interest rates was the explosion in federal spending and deficits, which were the direct result of Biden’s policies.
Let this be a reminder that there is no such thing as a magic money tree, which all UK parties still seem to believe in, not least to finance Net Zero.
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NOT A LOT OF PEOPLE KNOW THAT 
Fiat currency for global trade = Money tree.
Until you do it to excess, you have to pay higher and higher interest to attract foreign investors and as they begin to doubt that you can repay, the value of the currency starts to fall away.
Go back to Clinton and Brown changing rules for Banks, it would seem the whole Banking system is full of gambler’s and speculators. Roosevelt set rules in place so the great depression wasn’t repeated, but guess who repealed them? Now we’ve got people saying this is why we need ‘Crypto’, in my view a ponzi scheme even less attractive than a battery car.
It might seem it’s the whole banking system, but it’s the people at the top that set policy, negotiating with the politicians, while the rest work at their own, more focused, objectives.
National politicians make the Law, not the people that work in banking and, in the UK, national politicians have become lazy, losing focus, rubber stamping Brussels directives and losing the concept of responsibility, though still wanting to interfere.
And as for Roosevelt’s economic skills:
FDR’s Folly: How Roosevelt and His New Deal Prolonged the Great Depression
“The Great Depression of the 1930s was by far the greatest economic calamity in U.S. history. In 1931, the year before Franklin Roosevelt was elected president, unemployment in the United States had soared to an unprecedented 16.3 percent. In human terms that meant that over eight million Americans who wanted jobs could not find them. In 1939, after almost two full terms of Roosevelt and his New Deal, unemployment had not dropped, but had risen to 17.2 percent. Almost nine and one-half million Americans were unemployed.”
https://fee.org/articles/fdrs-folly-how-roosevelt-and-his-new-deal-prolonged-the-great-depression
Thanks, but I was referring to Roosevelts rules introduced to govern the banks and their liquidity, not his economic skills. Needless to say when let off the leash, by Clinton, the banks lost the plot lending to all and sundry regardless of whether they could afford it.
This is simply false. It was Clinton’s threats to banks that caused the problems, aided by his direction to federal agencies that they had to buy mortgages from banks that caused the problem, not the lack of separation between retail and investment banks. And there’s no evidence Roosevelt’s injunction was right. Subprime was only possible because lenders could sell their loans.
You got that right, kill net zero and esg and dei!!
Not sure that Treasuries were their safe haven.
They appear to have put $80bn in mortgage backed securities. Very 2008.
From what I have read, there were no MBS involved. They got caught in the switches of BidenFlation causing rising rates. When you buy ten year Ts at 0.86 stated rate, and the market rate goes to 4.5% you just lost about 40% of the value of the bonds. And according to Lower of Cost or Market accounting rules, you must report the 40% loss on your statements. An inverted yield curve will get you every time you go long on bonds.
Joe’s gonna make it all okay. He doesn’t want the family’s money to disappear.
It has taken a career of many years to accumulate a fortune. 😂
Paul, there’s a typo in your first para – “the rapid rise in increase rates”. “Increase” should be “interest”.
I’m not sure rising interest rates can be attributed to Biden’s policies. They are rising all over the world, having been absurdly low for far too long. They are still, even now, at historically relatively low levels. It doesn’t say much for the bank’s risk management, nor for the rules put in place by central banks after the last banking fiasco. As we have just seen at the Bank of England, perhaps there is the beginning of a recognition that central banks have had their eye on the wrong ball, in their case climate change.
I agree MH a good point. There IS unfortunately ‘ a magic money tree’, it’s been used to finance the lockdown. But it’s fruits, though they are delicious to the pickers, are poisonous to future generations and bring misery and impoverishment in their wake.
Paul,
in the firts sentence after the video link, it says “increase rates”, interest rates I think you meant?
Alex’s 4-part cartoons in the Telegraph always have brilliant punch line. This one’s no different:
https://www.telegraph.co.uk/business/2023/03/01/alex-cartoons-march-2023/
Don’t worry folks cos, “ you will own nothing and be happy”
Here’s the test question…where does this phrase come from ?
So much for bank rankings…
Silicon Valley Bank Was Named One Of America’s Best, 5 Days Before Fall
https://www.ndtv.com/world-news/silicon-valley-banks-downfall-boasting-forbes-best-banks-list-while-falling-apart-3854402
Jo Nova on form here:
Silicon Valley Bank was a Big Green Government Ponzi Scheme
During the pandemic, fluffy money, made from nothing by Big Government to “save the economy” was put into stupid businesses to “save the planet”. The businesses put their cash into Silicon Valley Bank, which got so much cash, it couldn’t do anything with half of it — except give it back to Big-Government in the form of a loan called a Treasury Bond — thus completing one full Cycle of Stupid. Money printed from nothing, achieved nothing, and went back home. On the way a whole lot of people got paid to pretend to change the weather.
https://joannenova.com.au/2023/03/silicon-valley-bank-was-a-big-green-government-ponzi-scheme/
She’s a very strong commentator, is Jo. Well worth following.
Lloyds was rated 6th safest in World in the 2008 Global Finance ‘Safest Bank Award’, (top in UK, Wells Fargo top in USA was 9th) and them came Gordon Brown …
Yes, Lloyds was a good bank until Brown forced them to take on ruined banks, criminal really. Along with his Gold sale, dividend tax move on pensions he certainly caused some serious financial chaos.
The award was to be presented in Washington DC on 13th October 2008 at a ceremony coinciding with the World Bank/IMF annual meeting. Lehman Brothers collapsed on 15th September 2008.
Schwab, WEF.
SVB is not the only one, Signature Bank also went under at the weekend.
Paul, there’s a job to apply for in the summer:
I don’t understand. The Democrats are spending trillions to fight inflation.
History repeating itself – a financial institution – “FI” – ( or product ..) borrows ( leverages ) to increase the potential ( repeat potential ) return on a particular asset – and these FI/products get sucked in especially if interest rates fall to levels where real return vs inflation is impossible. Investment follows into the particular “asset”; interest is paid on the borrowed capital which requires collateral security against other assets. The borrower cannot control the rate of interest other than to lock in a fixed rate ( if available, as well as desirable); similarly they are also at the mercy of the “market” to which the “asset” is exposed. This type of transaction may also be complicated with SWAPS/CDOs or other derivatives.
Trouble starts if there is a run on the “market” – ?negative sentiment/inflation more of a risk/external events ( war eg) or investor “herd panic”? ; borrowers’ collateral assets fall in value which is very very problematical if the lender has the right to call in their loan in the event of total value of the FI or product falls to the level triggering the “call”. FI/product then has to sell to create cash to pay the lender – avoidable if they have the cash already but difficult if like SVB they invested in supposedly safe assets (bonds) which fall in value at the same time. Fire selling of assets in a falling market is not sensible unless forced upon the FI/product – herd instinct again takes over and panic reigns.
This is a similar ( if not entirely debt loaded) panic induced spiral or doom loop if you like that was evident in the Lloyds Syndicate panic ( 5% of a risk held with 95% “reassured” amongst other syndicates who might be taking on part the same risk they attempted to offload in the Lloyds Syndicate merry go round), Split Capital Investment Trust panic ( leveraged trusts required to repay loans once the total value of the assets against which the loan is secured falls below a certain %) and in full view when Lehmann Bros triggered the banking crisis but the reality was that banks the world over did exactly the same – lend to other banks to provide funds for “red neck ” mortgages that were parcelled up and sold on as “secure” fixed interest instruments by 100% unscrupulous “financial institutions”; leveraged asset purchases are also a massive potential risk to funded ( as opposed to unfunded mainly public sector ) pension funds engaging in LDI – something that could only happen during the period of extended Fiat money QE, artificially depressed interest rates and the refusal of central banks to tackle inflation as per the Carney inspired disaster of the BoE’s failure to raise interest rates early on – and we are all paying for that disaster now whilst Carney continues his delusional career elsewhere.
The world is drowning in fiat money driven debt both “above” and “below” the line; if the decision makers who “manage” the money, FI/products etc have the collective balls to bluff their corporate way to avoid the next panic, it might work. Once the panic button is pressed hard enough you do not have to be Warren Buffett to see how damaging events may become. “A Great Reset” will be needed if only to cancel all the debt and “start again” – uncharted territory beckons – is Gold undervalued? “This is my opinion of course, you are free to disagree” ( ackngts to NO)
The implications are wrong
Many banks invest in Treasury bonds and bortgage-backed bonds.
They are safer investments than loaning money to risky Silicon Valley startup cpmpanies.
But bonds do have interest rate risks.
And with the huge government budget deficits in 2020 and 2021 fiscal years, accompanied by unprecedented Federal Reserve Bank credit creation, higher M2 money supply growth and consumer price inflation was coming in 2021 and 2022.
Higher price inflation can by lowered with higher interest rates that discourage borrowing. This was all in the cards in 2020 and 2021. Not a mystery..
It was the duty of bank employees to hedge their bond investments with futures or derivatives. Thats what smart bankers do.
It does not appear that SVB did that.
No matter wat SVB did, no bank can survive a run by depositors demanding to withdraw their money.
Banks have short term deposits and long term investments.
They count on their customers not demanding to withdraw a lot of their money at one time. That is true for all banks.
Hence the term: Fractional-reserve banking…
Because the nature of fractional-reserve banking involves the possibility of bank runs, central banks have been created throughout the world to address these problems.
https://en.wikipedia.org/wiki/Fractional-reserve_banking
Didn’t work in the SVB case.
Did work for SVB depositors far beyond what was promised (up to $250,000 insured). The Fed bailed out SVB depositors through the FDIC with a huge amount of credit creation. They did not bail out the owners of SVB and they should not have done that
There was nothing wrong with fractional reserve banking until Barrator Biden Nationalized the Banking system to bail out the BIG democrat depositors, AND the CCP owned companies that would have been creamed had they stuck by the $250K FDIC rules. Xi Jinping phoned Brandon, told him what to do, and Brandon obeyed his psychopathic overlords of the CCP. By the way, the FDIC is broke as well, because they are holding many upside-down U.S. treasuries that are worth about 30% of par. It is over. The bottom will slowly but steadily slip away over the coming weeks. Take your money out, buy gold, and bury it in your back yard.
“And the main factor behind the rise in interest rates was the explosion in federal spending and deficits”. Really? More like Peter Thiel essentially yelling “Fire” last week. Why did he do that? Nobody really knows. The bank was not actually in that much trouble and then Thiel shrieks ‘Panic!’. There is more to this story than meets the eye.