I’m not sure how many of you have been following the banking committees investigation into SVB with Michael Barr but until this, I was chalking this loss up to poor management. Several VERY interesting points have been made during this meeting that start to make this look more like intent rather than mismanagement.
To briefly summarize SVB’s situation (for those that don’t know):
- SVB, like many other banks, used the funds from depositors to invest in US Treasury Bonds. The idea was to generate a return for the bank through liquid “safe” securities through which the bank could always liquidate if withdraws came up. These bonds were purchased years ago when rates (yields on the bonds) on the bonds were much lower. However, COVID happened, then inflation forcing the fed to increase interest rates to combat inflation. When this happens, new US Treasury bonds released onto the market now provide a higher yield than previous Treasury bonds. This in-turn makes these older bonds less attractive to purchase since the bonds yield less than what is currently offered on the market. In order to sell the older bonds, you’d have to sell them at discount from it’s face-value which means selling at a loss.
- Because of this, the bank now doesn’t have the liquidity it needs in order to provide everyone with their money back. For example, if I had $1000 dollars in my bank from depositors and years ago bought US treasury bonds yielding a 1% return with that $1000, the value on that bond–in order to sell it–would need to be sold for less in order to attract a buyer. Thus, if my depositors came to withdraw $1000, I wouldn’t be able to provide everyone with their money since the bond is being sold at a loss. As rates climb, these bonds lose more and more of it’s value which now threatens more depositors and their ability to withdraw their funds. Because of this, they were forced to raise capital to off set this loss (provide liquidity). When they did this, it signaled to the bank’s depositors that the bank is overleveraged and running out of liquidity. Since there accounts were uninsured, a race to withdraw their money without losing it happened. Even if it was insured, this wouldn’t change much because FDIC only provides up to $250,000 and the wealth stored (and subsequently withdrawn) was well above that limit.
Theory:
Banks are monitored by the fed.
For SVB, the fed warned them about their US treasury bonds holdings and fed rates climbing waaay in advance before they collapsed. This warning was ignored. SVB did nothing to hedge against rate hikes–literally NOTHING. SVB like many of the other banks all have the latest and greatest tools to off-set this risk through derivatives. They didn’t use any of this. So, what did the fed do? Nothing, they never even followed up and now, here we are with Contagion.
Now, why would a bank at their scale do something like this?
One potential reason is to put pressure on the fed to pause rate hikes. Not for SVB, but much LARGER banks who may have similar holdings to SVB. However, to do this, you’d need a large enough bank to get the fed’s attention without causing irreversible damage and SVB is right in that sweet spot to do so. So, by getting SVB to fail, you’d essentially put pressure on the fed to pause rate hikes regardless of what inflation is at. That either buys bigger banks time or saves them completely, we won’t know for sure because a lag tends to happen with this stuff.
If inflation is as sticky as they say it is and these bigger banks are projecting inflation to get worse, they’ll be forced into a similar situation SVB fell into if the fed continues to raise rates. They’ll be forced to buy shitty insurance on already diminished positions which will cost money they don’t want to spend. Money they may not even have. If these banks are seeing similar losses because of rate hikes, they’ll desperately need the fed to pause to avoid further loss without having to sell either. This ultimately boils down to the fed putting these bank’s and their shitty investments over the American tax payer and their purchasing power should the fed pause specifically for them. Why? Because they are greedy and they refuse to take a loss. However, they also need liquidity and raising rates diminishes that.
But what about the fed monitoring the banks?
Right, the CEO of SVB sat on the board of directors for the fed (total conflict of interest). So right there, you have a major red flag. The fed’s inaction in this situation is entirely worse than SVB’s “mismanagement” and right now, the banking committee is hammering this very point.
One of those “bigger” banks could be Charles Schwab. They have Seven trillion AUM and their credit default swaps on their bonds not only went up before SVB’s collapse, but have now SKYROCKETED out of control compared to other banks. Check out the article titled “Schwab’s $7 Trillion Empire Built on Low Rates Is Showing Cracks” put out weeks after the CEO’s iconic Big Short speech about buying more shares.
I don’t know about you guys, but shit like this doesn’t just happen. One point the banking committee made is how most other banks are all hedging against rates and SVB didn’t–at ALL. This is banking 101 folks. This is like a MLB going up to the plate and blatantly missing the ball and striking out. The CEO/chairman of the board didn’t think to implement a hedge for his position? Not even a risk management officer?!?
Nah bro, I’m sorry. I don’t care what you say about mismanagement, this smells rotten and any tax payer with a brain in finance and economics should be able to smell it too. You don’t just “forget” these things. Not in this position. Especially, when we consider the fed’s role in all of this and doing absolutely NOTHING to prevent this despite “warning” them. The fed has more than enough control to prevent this and they DIDN’T! When you look at the smaller banks and their accountability, most are fine and hedging against rates and to back the banking committee’s point, why should smaller banks have to pay for their fuck up? If smaller banks can and ARE doing this, why exactly couldn’t SVB? You mean to tell me the chair of the fed didn’t even hedge AT ALL?
Is this man stupid?…
Nah, he’s greedy.
TLDR:
Bigger banks than SVB may* be holding similar investments which may have been impacted by rate hikes. Even though they may have the liquidity now, if rates continue to raise, this may change. This means they need the fed to pause rates because they are unwilling to sell at a loss to prevent further loss and also unwilling to accept further loss on the bonds with rates going up.
To get the fed to pause, they would need a bank (SVB) big enough to experience a bank run due to fed rates and subsequently fail. Fail so that it’s big enough to grab the fed’s attention but not big enough to break the system. With the CEO of SVB being the chairman of the board, it wouldn’t surprise me if this situation was manufactured to put pressure on the fed to pause rates so that bigger banks can survive without having to sell for a loss.
For those that don’t know, if the fed is put into this situation and pauses rate despite inflation getting worse, the fed would essentially be choosing the banks with their shitty investments over the purchasing power of the tax payer.
TLDR 4 TLDR:
Bigger banks need a pause on rate hikes because of potential similar holdings to SVB. Thus, because of inflation, these bigger banks may have orchestrated SVB’s collapse to get the fed to pause rates regardless of how inflation moves in coming months.