Let’s start with Silicon Valley Bank
Silicon Valley Bank depositors will have their deposits backed by the F.D.I.C (Federal Deposit Insurance Corporation), but not the shareholders (not sure how this is going to work but it’s somehow tied to Goldman Sachs buying the debts – mortgage backed securities again! Not a bailout!!) at bargain basement prices. And while US Treasury Secretary Janet Yellen says the US banking system is “sound,” many wonder what might happen next.
“I can reassure the members of the committee that our banking system remains sound and that Americans can feel confident that their deposits will be there when they need them. This week’s actions demonstrate our resolute commitment to ensure that depositors’ savings remain safe. Importantly, no taxpayer money is being used or put at risk with this action.” —US treasury secretary Janet Yellen’s prepared remarks ahead of a Senate Finance Committee hearing on March 16, 2023.
Not all are so optimistic, senior multi-asset strategist Arun Sai, “You could have a period where you see a precipitous drop in the (availability of) credit in the U.S. This takes us closer to a hard landing, to a U.S. recession.”
The SVB Bank Collapse in a Nutshell
- SVB’s customer deposits fell 8.5% from 2021 to 2022 with 8% losses on Held To Maturity (HTM) Bonds, unrealized gain or losses on HTM debt are not counted as income.
- March 10, Silicon Valley Bank, a regional bank with $150-200b in assets, collapsed as the value of their long term assets fell (75% invested in mortgage backed securities with returns after 10 years or more) and they became insolvent, this meant that they didn’t have enough cash on hand to cover withdrawals.
- Depositors (many tech startups) then couldn’t withdraw the funds they needed to service their own debt and for things like payroll and operating funds.
- Goldman Sachs worked with the US Treasury and Federal Reserve to buy 20b of SVB debt at a 1.2b loss, a fraction of what it was previously valued at, and will make a substantial (around 100m) fee, in addition to what it makes from selling the debt to other buyers.
- SVBs bankruptcy started to impact its parent company, as well as other banks.
- The F.D.I.C is parting out the bank’s assets, but there aren’t many buyers.
- Now the fear and panic have caused many other depositors to withdraw from banks in fear of a repeat.
- The FED stepped in and is lending significant amounts to banks. The assets they’re lending on have lost value but they’re loaning as if they haven’t, allowing banks to keep their assets rather than sell them at a loss. Typically banks borrow less than 10b annually in this way, “Two key programs together lent $163.9 billion this week.” –Ruh Roh.
What does all of this mean for you?
With interest rates rising, in theory, to fight inflation, credit card interest rates are higher than pre-pandemic levels as are balances, topping almost 1T. The result? People are missing their car payments in record numbers.
“In January, severely delinquent auto loans hit their highest rate since 2006.”
But don’t try to save money with a used car, the industry has grown wise. Increased profits, decreased output, and increased demand? Yes please!
“You know what might help? A kick in the nuts!” ← the idea is that to help the working class is to increase unemployment. Because the problem is that we’re all buying too much stuff.
Check out this cool animated timeline of the world economies ranked over the years to make yourself feel better: