“CNBC Special: America’s Banking Crisis” airs Sunday at 7 p.m. ET, where Jim and other pundits will discuss the impact of Silicon Valley Bank’s demise on the economy and stock market. Contagion fears for banks with similar profiles to Silicon Valley Bank have led several government agencies to find a buyer for the troubled institution, which on Friday became the second largest bank collapse in US history. At the very least, the Federal Deposit Insurance Corporation, the Federal Reserve, the Treasury and President Joe Biden are seeking some kind of safety net that will extend deposit insurance to all individuals and companies with money in Silicon Valley Bank. This safety net is incredibly important because of the $173 billion in deposits with the bank, of which only $4.8 billion is fully insured. We’ll have plenty of time to discuss why Silicon Valley Bank — parent company SVB Financial (SIVB) — became such a nightmare, but we’ll explain a little bit about it here. The bottom line, however, is that if the government doesn’t come up with a plan, the stock market will have a very rough time on Monday. What I want to say on Sunday night is that the risks are great, but the government understands that if a full guarantee for deposits is offered, through a note from the Fed, this crisis will be over by Monday and this will be a remarkable opportunity to to buy. Similarly, if the government can find a buyer for the SVB, similar to the collapse of the Washington Mutual in 2008, the crisis will also be averted. That is because the actual loan portfolio and deposits on hand will apparently cover the depositors’ losses. In the WAMU case, the government seized the bank, placed it in receivership, and then sold its assets and liabilities to another major bank, JPMorgan (JPM). A similar auction is currently underway. We may not know the results until Sunday night, but the government wants every auction resolved on Sunday so it doesn’t spill over to Monday. The government failed to understand the dire nature of the situation on Friday, as things were simply moving too fast. But policymakers, as well as California Governor Gavin Newsom and President Biden, have since been briefed and understand the seriousness of the situation. What could go wrong? If someone from these constituencies says that we are not going to bail out any more banks because we have to maintain a hard line. That stance, if it prevails – and I wouldn’t rule it out if an auction fails – would make Monday very difficult to fathom because of the contagion already taking place at several banks. I’m hesitant to use a word like “crash” because it’s loaded and generates a level of anxiety that isn’t helpful. Earlier I mentioned First Republic Bank (FRC). But since we first published this story, sources tell me that First Republic will soon be committing a 100% deposit guarantee through the Home Loan Bank Board/FDIC, which will help contain the contagion. Bank officials claim to have about $60 billion for the effort. They worked all weekend to liquidate their balance sheet and say they have. Monday morning there will be big signs on branch counters saying they’re open for business (much better than the lines around the corner), and they’ll be offering small pay credits to anyone from Silicon Valley Bank. Let’s take a look at the who, what, where, how and why of this moment. The who is Silicon Valley Bank. It’s not like most banks. It is a merchant bank – top 20 by size – with a storied 40-year career as a banker for start-ups and venture capital. It is considered iconic and powerful. It’s been through multiple bouts of trouble in the US, and technology in particular, and has come out whole. What is the possibility of deposits being withdrawn from many banks. Anything above $250,000 is certainly problematic due to fears that anything above that amount will not be protected by the FDIC. Most of the deposits fleeing would most likely go to one of the largest banks, creating even more concentration than we already have in this country. JPMorgan, which has the best balance sheet of the big banks, would be the biggest winner. Politicians are just as concerned about that concentration as they are afraid of looking like they’re bailing out a smaller bank. The commodity is largely concentrated in Silicon Valley because this bank was unique. It supported thousands and thousands of startups, but it seems to have required the users of this support to deposit all their funds in the bank. So there is a very high concentration of uninsured deposits. Remember, only a fraction of the $173 billion in deposits are guaranteed, a real outlier in the system. As you can imagine, a start-up getting SVB’s help would put all of its assets at SVB at risk – and those deposits would far exceed the $250,000 per account protection. Silicon Valley Bank probably wouldn’t support your company if it didn’t receive all of your deposits. How did this happen? Simple: When the Fed pushed a lot of liquidity into the system in 2020 to avoid a Covid-related crash, deposits at SVB soared. Unlike most other banks, which bought short-dated, lower-yielding government bonds, this bank chose to invest in government bonds with longer maturities. The bank wanted to generate extra returns. Why the regulators allowed that is a mystery. It was unwise and in hindsight the regulators should have ensured that the portfolio was more balanced. But the result was a bank that didn’t have enough short-term paper in its treasury to pay off when depositors wanted their money. It didn’t help that some venture capitalists precipitated a run on the bank because the FDIC actually had a plan to bail out the bank. However, the run happened too fast for any plan to work, leaving a solvent bank insolvent overnight. And why did the bank have to suffer serious losses on a portfolio of bonds that were actually good quality, but were way under water, because every time the Fed raised rates, it was beaten up. The irony is that the Fed creates great liquidity, SVB’s deposits grow about 250%, it invests in longer-maturity assets – but then the Fed crushes the returns on those longer-maturity assets and SVB is a victim, simply because of how far away it bought government bonds, not because it had a credit problem. The rest of the bank’s bonds remained unsold before being seized. How do we get out of this swamp? There is a simple way: the US government creates a banknote that covers the entire deposit base. There would then be no run and the crisis would have been averted. That would be incredibly clean and very bullish. Will they do it? It goes against current doctrine, which says that banks should not be bailed out. But it also makes the most sense since not all common and preferred stockholders would be bailed out. If the Fed implements this plan, taxpayers are (theoretically) not at risk and doctrine is not disobeyed. We move on quickly and the Fed will most likely stop walking. A less straightforward way is to find a buyer who agrees to take over the assets and liabilities of the bankrupt entity and any depositor withdrawals above what the newco (new bank) can handle are backed by the Fed or the Federal Home Loan Bank Board. The problem here is that any buyer would not pay full price, so there would be real moral hazard. The assets and loan portfolio most likely outnumber the deposits, so the winning entity would make a killing and that’s just inappropriate. A punitive option is to just let things take their course, which in that case will be very difficult to avoid a sharp fall in the stock market due to other runs outside the SVB. Perhaps more importantly, it could lead to the failure of numerous entities to make payroll and the collapse of a significant number of start-ups and even venture capital firms. It would be a serious blow to the US economy. What do I think will happen? We’ll know soon enough, but given what we learned from 2008, it would be crazy to let the so-called free market handle this. An elegant solution is available, the note from the Fed. To ensure that there is no run, the note must guarantee 100% of the deposits. Anything less than that would mean there would be runs at other banks. Why not? You simply register your deposits with JPMorgan. I now understand that the rebate window will be wide open for any bank that is under pressure. But at the same time there will be a withdrawal from all banks that are not large, unless there are 100% guarantees for SVB depositors. Again, there’s some very good news: when you add up the bonds the bank holds and the loans it has made, often to highly qualified institutions, they cover more than all deposits, so technically it’s not a bailout. I don’t see why the government isn’t doing that and I’ll push for that Sunday night. If they don’t, it will look like it wants to punish the wealthy venture capitalists. But it will eventually punish everyone. Remember, the bad news is there’s always someone in the room saying, “No, it’s time for some punishment.” In that case we will all be punished. I’ll do my best on Sunday night to say that’s a sub-optimal solution. But I am just one of many voices. Stay tuned for more. If I have more for the special, I’ll let you know directly. Back to work. “CNBC Special: America’s Banking Crisis” airs Sunday at 7 p.m. ET, where Jim and other experts will discuss the implications of Silicon Valley Bank’s demise for the economy and stock market. 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A Brinks armored truck is parked in front of the closed headquarters of Silicon Valley Bank (SVB) on March 10, 2023 in Santa Clara, California.
Justin Sullivan | Getty Images
“CNBC Special: America’s Banking Crisis” airs Sunday at 7 p.m. ET, where Jim and other pundits will discuss the impact of Silicon Valley Bank’s demise on the economy and stock market.
Contagion fears for banks with similar profiles to Silicon Valley Bank have led several government agencies to find a buyer for the troubled institution, which on Friday became the second largest bank collapse in US history. At the very least, the Federal Deposit Insurance Corporation, the Federal Reserve, the Treasury and President Joe Biden are seeking some kind of safety net that will extend deposit insurance to all individuals and companies with money in Silicon Valley Bank.
