Is SVB Just the Beginning?
Our guard should have gone rocketing up last month — when Mr. Jim Cramer recommended Silicon Valley Bank stock to his listeners.
That is because the fellow is a nearly perfect “contrarian indicator.” If he says x you can very reliably wager on y.
SVB stock was trading hands at $320 that day. Today it trades hands at $0. It has vanished from existence.
Silicon Valley Bank — formerly the 18th-largest bank in the United States — has fallen into receivership, defunct, destitute and dead.
It is presently in the hands of the Federal Deposit Insurance Corporation.
Its demise represents the largest bank flunking since 2008’s Great Financial Crisis.
A Classic Bank Run
What went so catastrophically wrong? Bloomberg:
That is, Silicon Valley Bank had a bank run on its hands.
Affirms Mr. John Wu, Ava Labs president:
No. You do not want to be the last guy there.
In Far Too Deep
The Bloomberg passage cited above referenced a “significant loss on [SVB’s] portfolio.”
That portfolio was packed to the gunwales with longer-dated government bonds.
Prior to its dying, these bonds occupied some 57% of the bank’s investment portfolio. In contrast, not one of the remaining 74 major United States banks held more than 42% of such securities.
And here our tale gathers pace…
You may recall that bond prices and yields are related in the way that polar ends of a seesaw are related.
If bond prices swing higher, their yields swing lower. And vice versa.
Meantime, longer-term bonds are uniquely sensitive to changes in the interest rate. They are more sensitive than shorter-term bonds.
We need not concern ourselves with the whys and wherefores at present.
It is enough to recognize that longer-term bonds are more sensitive to changes in the interest rate than shorter-term bonds. Now, to proceed…
The Fed Killed SVB
The Federal Reserve has been hard at the business of raising interest rates since last March.
This tremendous pushing has worked significant upward pressure on bond yields. But recall, bond prices and bond yields occupy opposite ends of our seesaw.
As bond yields have taken to the upswing… bond prices have taken to the downswing.
Bond prices — especially long-term bond prices and for the reasons listed — have decreased remarkably.
The value of Silicon Valley Bank’s portfolio has therefore endured a fantastic degradation.
Again, recall that it held a great preponderance of longer-term bonds. Now, as our colleague Dave Gonigam of The 5 Min. Forecast explains:
This was the hapless fate of Silicon Valley Bank.
The bank sold some $21 billion of these bonds in an attempt to reinvest them in shorter-term bonds — which again, are less sensitive to increases in the interest rate.
It attempted to raise some $2 billion to cover its flanks but the operation failed and the bank descended into the oblivion of insolvency.
It died the death.
Here you have the autopsy, to our understanding at least. It admittedly lacks anatomical detail.
Now we come to the question that is worth $64,000:
Will Silicon Valley Bank’s failing lead to a cascade of other bank failings?
After all: In the banking world the foot bone is connected to the leg bone is connected to the knee bone is connected to the thigh bone is connected to the hip bone is connected to the backbone is connected to the neck bone.
Before a fellow knows what has struck him the rumpus in his foot bone has his neck bone in siege.
On the Verge of a Banking Crisis?
It is plausible to assume that the largest banks will prove immune to contagion. They have the wherewithal to absorb a blow.
Yet it is the small to medium-size banks, the regional banks, that may get licked. They lack the wherewithal to absorb a blow.
Explains Zero Hedge’s pseudonymous Tyler Durden:
And quite a confidence game it is. It occurs on a rickety, ramshackle structure erected atop a foundation of sand.
Jerome Powell’s Trapped
But as Mr. Durden further observes, the entire SVB affair — particularly with its contagion risk — jams Jerome Powell into a very tight corner.
Inflation remains amok and he is hot to get it under his thumb. He must continue to elevate interest rates to get it there.
This he pledged to do in this week’s congressional testimony. He was very clear about it.
Yet if he elevates interest rates further, he will further depress bond prices… which could place stupendous strain upon the regional banks… and eventuate in additional Silicon Valley Banks.
Trapped… indeed. How will he wriggle out of it? What will the poor man do?
Following this week’s “hawkish” testimony, the market gave nearly 80% odds of a 50-basis point rate rise this month.
Today, with the SVB hullabaloo, those odds have plunged to 35.1%.
Mr. Powell must pick his poison, as the phrase runs. He can opt for one poison or the alternative poison.
Regardless: Poison it will be…
Send this article to a friend: