Financial experts agree that US government bonds are the safest investment in the world - but don’t try to convince officials at Silicon Valley Bank of that. They invested the majority of the bank’s deposits in US Government bonds, only to watch them crash. Now investors are asking: Are other banks also at risk? Can the carnage spill over into stocks? Will depositors lose their money?
By all logic, no one should be asking these questions. In 2008, Lehman Brothers, a Wall Street institution, folded; the next day, the worst financial crisis since the Great Depression erupted. More than 100 other banks failed, unemployment soared, and the S&P 500 plunged by 50%.
Then the government stepped in. There were numerous hearings, and new banking regulations were established to strengthen the financial system. And yet here we are. Investors large and small, in the US and around the world, are wondering how the economy will be impacted and whether ordinary people may be affected.
Then And Now
In 2008, Lehman went under in large part because it put most of its assets into risky mortgage bonds, a popular strategy at the time. Silicon Valley Bank (SVB), the largest of the banks that failed recently, is very different. Most of its portfolio was in government bonds.
So if those are so safe, why did SVB fail? The answer is that the value of bonds and interest rates move in opposite directions. In other words, when interest rates rise, bonds lose value – and interest rates have been rising very sharply for months.
SVB lost a great deal of money because they loaded up on long-term government bonds when interest rates were much lower. The average yield in their bond portfolio was just 1.78%.
The bonds that SVB bought 2-3 years ago that yielded 1.78% now yield between 3.5% and 5%. And since the value of bonds and interest rates move in opposite directions, the bank suffered very sharp losses on them.
SVB’s 2022 annual report, published on January 19, 2023, makes this very clear. It shows about $15 billion in “unrealized losses” on their government bonds.
What’s Going On?
If you find the ongoing events confusing, welcome to the club. The government is going to great lengths to reassure Americans that the financial system is sound. President Biden said in an early morning address to the nation on March 13, “Americans can have confidence that the banking system is safe.” At the same time, many people are withdrawing their money from banks, markets remain jittery, and even high-quality stocks have sold off sharply.
On March 10, SVB became the second biggest bank in US history to collapse, despite having over $175 billion in deposits. Only hours later, Signature Bank also failed.
While SVB served all kinds of investors and businesses, it focused particularly on tech start-ups, although other clients included some of the biggest players in the tech industry.
When the economy was booming, the tech start-ups kept very large balances at the bank. “But the Fed felt compelled to raise rates to control inflation and that created a problem for many companies, tech start-ups among them,” said Roman Balmakov, a reporter at The Epoch Times and host of “Facts Matter.”
“Through 2022, the cash held at SVB was withering away,” he said. Tech start-ups could no longer raise money easily and were forced to withdraw cash from their accounts to pay for their expenses.
Banks, however, don’t let their assets collect dust; they either lend them out or invest them, and SVB had purchased a great deal of US Treasury bonds. But in order to cover the amount of money being withdrawn, the bank had to begin selling them at a loss.
On March 8, SVB released a statement explaining they needed $2.25 billion quickly to strengthen their balance sheet. According to Balmakov, this shocked investors and caused a run on the bank. In the 24 hours, following the bank’s statement, customers had withdrawn a massive $42 billion of their deposits. The next day, the government shut the bank.
More Questions Than Answers
What happens to the money in customers’ accounts? All deposits up to $250,000 are insured by the FDIC, so those are safe. However, around 97% of all deposits at SVB exceeded $250,000. If the tech start-ups didn’t have access to their money, problems could have spread to many companies.
Incidentally, the situation was not very different at Signature, the New York bank that also went belly up, as about 94% of its deposits exceeded $250,000.
In situations like these, regulators sell off a bank’s assets and use proceeds to pay depositors. It’s been estimated that in this case, business clients will get back more than 80% of their deposits.
But regulators became convinced that SVB was too big to fail and needed to be bailed out as quickly as possible – if not, large depositors at banks across the country would immediately withdraw their money – and that would cause a run on the banking system.
The Ratings Game
Rating services hate to lower clients’ ratings, but this is exactly what happened on March 14, when Moody’s lowered its outlook for the entire US banking system to negative, citing the “rapidly deteriorating operating environment following deposit runs at Silicon Valley, Silvergate Bank and Signature Bank and the failures of Silicon Valley Bank and Signature,” according to a report on CNBC. And it added ominously that “other institutions” could be at risk.
Moody’s also placed under review for possible downgrades First Republic, Intrust Financial, Zions Bancorp, Western Alliance, and Comerica. Shares in other regional banks also sold off sharply.
The crisis was not confined to the US. Overseas, shares in Credit Suisse, a major bank, plunged to yet another all-time low; the stock, and maybe the bank too, were saved by an emergency $54 billion cash infusion. But rumors about the solvency of other banks in the US and abroad are swirling.
So what’s the bottom line? On the one hand, the President is trying to reassure investors, the markets showed signs of calming down, and market guru Michael Burry said he thought the crisis would soon be over.
But on the other hand, investors have suffered painful losses, and banks potentially still have to deal with major problems with real estate, credit cards, student loans, and auto loans.
Although no one knows exactly how these developments will play out, there is no reason for panic or alarm. But there is reason to consult with experts about what, if any steps, to take. Hopefully, in the following weeks, we’ll all be able to breathe a sigh of relief.
Sources: www.bloomberg.com; www.cnbc.com; www.msnbc.com; www.economiccollapseblog.com; www.wsj.com; www.zerohedge.com; www.michaelcowan; Roman Balmakov, Facts Matter: “Fed Panics As 2nd Bank Fails”
Gerald Harris is a financial and feature writer. Gerald can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it.
