03/18/2023
Why did Silicon Valley Bank fail, what is happening to the people who had deposits in the bank, and what does this mean for the economy?
I'll explain.
For those who don't know, SVB was a premiere bank for startup businesses, especially tech startups.
It had over $200 billion in assets, and was the 14th largest lender in the US, before it failed.
Forbes listed SVB as one of America's Best Banks for 2023, and Jim Cramer had advised people to buy stock in SVB a matter of days ago.
If you started up a new tech company, SVB was probably where you'd bank.
And there was a boom in startups from 2020 to 2022, thanks to low Federal Reserve interest rates and lots of free "stimulus" money being thrown around by the government.
SVB's deposits went from $60 billion in 2019 to nearly $200 billion in 2022.
SVB wanted a "safe" place to invest all of this money that was coming in, so they bought $80 billion worth of Mortgage Backed Securities, which had a yield of 1.5%.
With startups booming and Fed rates at or near 0%, a 1.5% return was a pretty good deal.
This is called malinvestment. It's what happens when the Fed is handing out money like candy.
And here's what happens to malinvestment:
As inflation went through the roof, the Fed started raising their rate to cool off all the lending.
Suddenly, 1.5% wasn't a good return. With each increase of the Fed rate, SVB lost billions.
And as inflation and Fed rate increases caused the economy to cool down, startups were making, and depositing, less and less money.
To try to free up some sorely-needed assets, SVB announced that they were selling some of their stocks, at a loss.
Investors panicked at the news, and SVB's shares fell by nearly 70%.
With the sale of shares failing miserably, SVB announced that it was now going to sell the entire bank.
At this point, major venture capitalists and financial pundits were publicly advising everyone to get their money out of SVB.
This sparked a run on the bank, which led to it being shut down.
That's what happens to malinvestment.
That was on Friday, and everyone was hoping over the weekend that this problem was contained and specific to just this one bank.
Then on Sunday, Signature Bank shut down too.
Signature Bank is not known as a tech startup bank. It catered primarily to large businesses in big cities.
And since FDIC only insures the first $250,000 in an account, many of those big businesses started pulling their money out, causing Signature to implode.
So in order to try to stop more banks from following, the government announced earlier today that it was backing the full deposits of all anyone with money deposited in SVB or Signature, and that executives and investors would get nothing.
So, a bailout for people who used the bank, but not the people who owned them.
There's only one problem:
That doesn't stop what caused these banks to fail.
The economy is steadily heading into a recession, and inflation is still through the roof.
If the Fed lowers rates to try to save the banks, inflation will go even higher, so doing that would make things even worse.
So no matter what, banks are losing money, by the billions.
The 2nd and 3rd largest bank failures in US history aren't an isolated incident, so I don't be surprised to see more failures in the coming days and weeks.
These endless boom/bust cycles will continue as long as government controls money, and hands it out to its buddies at our expense.
End the Fed.
End corporate welfare.
Get the government out of banking.
