“CNBC Special: America’s Banking Crisis” airs Sunday at 7 p.m. ET, where Jim and other experts will discuss the ramifications of Silicon Valley Bank’s demise on the economy and the stock market. Fears of contagion to banks with similar profiles to Silicon Valley Bank has brought together several government agencies to find a buyer for the troubled institution, which on Friday became the second-biggest bank collapse in U.S. history. At the very least, the Federal Deposit Insurance Corporation, the Federal Reserve, the Treasury and President Joe Biden are seeking some sort of safety net that will extend deposit insurance to all the individuals and companies with funds at Silicon Valley Bank. This safety net is incredibly important because of the $173 billion of deposits at the bank, only $4.8 billion of which are fully insured. We have plenty of time to go over why Silicon Valley Bank — parent company SVB Financial (SIVB) —became such a nightmare, but will briefly explain some of that here. What matters, however, is that if the government doesn’t come out with a plan, the stock market will have a very rough time Monday. What I intend to say Sunday evening is that the risks are high but the government understands that if a full guarantee of deposits is offered, through a note provided by the Fed, this crisis is over Monday and it will be a remarkable opportunity to buy. Similarly, if the government can find a buyer for the SVB, similar to the Washington Mutual collapse in 2008, then the crisis will also be averted. That’s because the actual loan book and deposits on hand will apparently cover any depositors’ losses. In the WAMU case, the government seized the bank, put it in receivership and then sold the assets and liabilities to another large bank, JPMorgan (JPM). A similar auction is going on right now. We might not know the results until Sunday evening, but the government wants any auction solved Sunday so it doesn’t spill over into Monday. The government did not understand the dire nature of the situation Friday because things just happened too darned fast. But the policymakers, as well as California Governor Gavin Newsom and President Biden, have since been made aware and understand the gravity of the situation. What could go awry? If someone from these constituencies says we’re not going to bail out any more banks because we need to maintain a hard line. That stance, if it prevails — and I can’t rule it out if an auction fails — would make Monday very difficult to fathom because of the contagion already occurring at several banks. I hesitate to use a word like “crash” because it is loaded and inspires a level of fear that is not helpful. Earlier, I mentioned First Republic Bank (FRC). But since we first published this story, sources tell me that First Republic will be pledging shortly 100% deposit insurance 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 have worked all weekend to liquify their balance sheet and say they have done so. There will be big signs on branch windows Monday morning saying they are open for business (much better than the lines around the block), and they will be offering small payroll loans for anyone from Silicon Valley Bank. Let’s go over the who, what, where, how, and why of this moment. The who is Silicon Valley Bank. It is not like most banks. It is a merchant bank — top 20 in size — with a storied 40-year career as the banker to start-ups and venture capital. It is considered to be iconic and powerful. It has weathered multiple bouts with trouble in the U.S., and tech in particular, and come out whole. The what is the possibility that deposits will be pulled out at many banks. Certainly anything above $250,000 is problematic because of the fear that anything north of that amount will not be protected by the FDIC. Most of the deposits fleeing would most likely go to one of the biggest banks, causing further 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 worried about that concentration as much as they fear looking like they are bailing out a smaller bank. The where is mostly concentrated in Silicon Valley because this bank was unique. It supported thousands upon thousands of start-ups, but it seems to have demanded that the users of this support have all of their money deposited at the bank. So there is a very high concentration of uninsured deposits. Remember only a fraction of the $173 billion in deposits is guaranteed, a real outlier in the system. As you can imagine, a start-up that gets SVB’s help would put all of its assets with SVB at risk — and those deposits would far exceed the $250,000 protection per account. Silicon Valley Bank was not likely to support your company if it did not receive all of your deposits. How did this happen? Simple: When the Fed pushed a great deal of liquidity into the system in 2020 to avoid a Covid-related crash, deposits soared at SVB. Unlike most other banks, which bought short-term, lower-yielding government bonds, this bank chose to invest in government bonds that had a longer maturity. The bank wanted to pick up extra yield. Why the regulators allowed that is a mystery. It was ill-advised and, in hindsight, the regulators should have made it so its portfolio was more balanced. But the result was a bank that didn’t have enough short-term paper in its coffers to redeem when depositors wanted their money. It didn’t help that some venture capitalists hastened a run on the bank because the FDIC actually had a plan in place to save the bank. However, the run happened too quickly for any plan to work, leaving a solvent bank to become insolvent overnight. And, the why is it left the bank having to take severe losses on a portfolio of bonds that were actually of good quality but were way underwater because every time the Fed raised rates it got clobbered. The irony is that the Fed creates great liquidity, SVB’s deposits grow by about 250%, it invests in longer-dated assets — but then the Fed crushes the yield of those longer-dated assets and SVB is a casualty simply because of how far out it bought government bonds, not because it had a credit problem. The rest of the bank’s bonds went unsold before it was seized. How do we get out of this morass? There’s a simple way: The U.S. government creates a note that backstops the entire deposit base. There would then be no run and the crisis would be averted. That would be incredibly clean and very bullish. Will they do it? It’s against current doctrine, which says banks should not be bailed out. But it also makes the most sense as all common and preferred shareholders would not be bailed out. If the Fed does this plan, taxpayers would not (theoretically) be at risk and the doctrine isn’t disobeyed. We move on quickly and the Fed most likely stops hiking. A less simple way is to find a buyer who agrees to take the assets and liabilities of the bankrupt entity and any depositor withdrawals in excess of what the newco (new bank) can handle are backed by the Fed or the Federal Home Loan Bank Board. The issue here is that any buyer would not pay full price so there would be a real moral hazard. The assets and the loan book most likely exceed the deposits, so the winning entity would make a killing and that’s just unseemly. A punitive option is to simply let things play out, which in that case will be very difficult to avoid a severe decline in the stock market because of other runs beyond SVB. Perhaps more important, it could cause the failure of numerous entities to make payroll and the collapse of a substantial number of start-ups and even venture capital firms. It would amount to a severe hit to the U.S. economy. What do I think will happen? We will know soon enough, but given what we have learned from 2008 it would be nuts to let the so-called free market handle this. An elegant solution is available, the note from the Fed. In order to make it so 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 journal your deposits to JPMorgan. I now understand that the discount window will be wide open to any bank under pressure. But at the same time, there will be a pullout at all banks that are not large unless there are 100% guarantees for SVB depositors. Again, there is some very good news here: If you add up the bonds that the bank holds and the loans that it has made, often to very qualified institutions, they more than cover all deposits so it is not technically a bailout. I cannot see why the government doesn’t do that and I will push for that Sunday evening. If they don’t do it, it will look like it wants to punish the rich venture capitalists. But it will end up punishing everyone. Remember, the bad news is that there is always someone in the room who says, “Nope, it is time for some punishment.” In that case, we will all be punished. I will do my best Sunday evening to say that’s a suboptimal solution. But I am just one voice among many. Stay tuned for more. If I have more before the special, I will communicate it directly to you. 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A Brinks armored truck sits parked in front of the shuttered Silicon Valley Bank (SVB) headquarters 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 experts will discuss the ramifications of Silicon Valley Bank’s demise on the economy and the stock market.
Fears of contagion to banks with similar profiles to Silicon Valley Bank has brought together several government agencies to find a buyer for the troubled institution, which on Friday became the second-biggest bank collapse in U.S. history. At the very least, the Federal Deposit Insurance Corporation, the Federal Reserve, the Treasury and President Joe Biden are seeking some sort of safety net that will extend deposit insurance to all the individuals and companies with funds at Silicon Valley Bank.
