Silicon Valley Bank (SVB) said on Wednesday (March 8) that it would like to raise some funds – US$2.2 billion to be precise. Investors as well as venture capitalists were surprised that the bank – 16th biggest in the United States, with US$209 billion in assets – suddenly needed so much money. Within 48 hours, the bank had collapsed, ending its 40-year banking business.
California banking regulators closed the bank and promptly appointed the Federal Deposit Insurance Corporation (FDIC) as receiver. SVB’s failure is the largest since Washington Mutual (US$300 billion in assets) went bust in 2008 during the Global Financial Crisis, which in turn was the most serious financial crisis since the Great Depression (1929-1939).
SVB CEO Greg Becker made the mistake by asking customers to “stay calm” on the same day US$42 billion was withdrawn as depositors interpreted the message as a crisis and ran for the exits. At the end of the business day, SVB had a negative cash balance of US$958 million. The share price of the bank tumbled 60% to US$106, before it was suspended. But it was just the beginning.
The crisis saw more than US$100 billion wiped out of the stock market value from U.S. banks within the 48 hours. European banks alone lost around US$50 billion in capitalization. Then came another bombshell – New York-based Signature Bank has also been forced to shut its doors. Signature Bank’s latest filings show it had US$110.4 billion in total assets and US$88.6 billion in total deposits.
While Silicon Valley Bank was established to specifically serve venture capitalists, Signature Bank was a favourite among the cryptocurrency industry. But both banks share a similar problem – more than 90% of the deposits were uninsured. Meaning 90% of US$175 billion in uninsured deposits of SVB would be up in smoke without any rescue or bailout plan.
The banking sector was not the only one panicking. The government was terrified at the prospect that the collapse of SVB could spread nationwide.
In fact, SVB provided the fuel – money – to more than 2,500 Venture Capitalist firms that burned millions of dollars every month. For example, Roblox Corp held 5% of its US$3 billion in cash at the bank, while streaming device maker Roku Inc had US$487 million in deposits at the bank. Crypto firm Circle revealed it had US$3.3 billion cash with SVB, with remainder US$40 billion held elsewhere.
Senator Bernie Sanders said – “Now is not the time for U.S. taxpayers to bail out Silicon Valley Bank. If there is a bailout of Silicon Valley Bank, it must be 100 percent financed by Wall Street and large financial institutions. We cannot continue down the road of more socialism for the rich and rugged individualism for everyone else.” That’s easier said than done.
After all, the U.S. top-5 biggest banks have almost US$13 trillion in assets. But you cannot control the emotional – fear – among customers of other banks about their money. Already, crypto bank Silvergate has just gone bust. Gone were the days you had to physically go to a bank to withdraw your money. Today, you can transfer your money online in a matter of seconds.
At least US$6 trillion was printed to boost people’s savings during the pandemic. It was this money supply that led to inflation. The Fed had only rushed to raise interest rate after three consecutive months of hitting highest inflation in 40 years last year (Jan’s 7.5%, Feb’s 7.9% and Mar’s 8.5%). Worse, the Congress had approved a whopping US$113 billion in aid to Ukraine in 2022 alone.
Those money increase deficit spending, adding more debt to America’s existing massive US$31 trillion national debt. The new bailout of Silicon Valley Bank means more money will be printed. Now, the clueless Fed is trapped by its own incompetence and the United States is trapped by its own arrogance for power.They have to choose whether to save the financial system or the dollar.
If Washington wants to save the dollar, they will have to raise interest rates. To save the financial system, they will have to stop or loosen the rate hike, which might see inflation skyrockets again. The U.S. can only save one thing at a time. And the SVB bankruptcy could be just the tip of the iceberg. Chances are they will cut rates to to save the system, meaning inflation will explode and leads to recession.
The U.S. government is still in denial, believing that money printing does not cause inflation and can continue forever. Make no mistake – a crash is coming. The chickens have come home to roost.
American Capitalism Is Breaking Down – Here’re More Signs The Economy Will Be Really Bad This Year
Ken Griffin, founder of hedge fund Citadel, said the rescue package for SVB shows American capitalism is “breaking down before our eyes”. The billionaire, who has grown Citadel to manage US$54 billion in assets, has condemned the U.S. government, saying it should not have intervened to protect all Silicon Valley Bank and Signature Bank depositors.
Regardless whether it was the correct move to bail out Silicon Valley Bank and Signature Bank or not, it’s hard to deny that the American capitalism is breaking down. It was only on February 16 when Forbes ranked SVB as America’s Best Banks for the 5th straight year. Exactly how could the best bank collapsed in a matter of 48 hours, ending its 40-year banking business.
It also raises the possibility of insider trading when SVB CEO Greg Becker sold US$3.6 million of shares in SVB’s parent company on February 27, just weeks before it goes bust – the largest failure since Washington Mutual (US$300 billion in assets) went bankrupt in 2008 during the Global Financial Crisis, which in turn was the most serious financial crisis since the Great Depression (1929-1939).
The trouble has just begun. Credit Suisse saw its shares hitting a new all-time low after its largest investor, Saudi National Bank, said it could not provide the Swiss bank with any further financial assistance. Apparently, investors were spooked after the bank announced that it had found “material weaknesses” in its financial reporting processes for 2022 and 2021.
The Swiss bank, which showed a full-year net loss of 7.3 billion Swiss francs (US$8 billion) in 2022, has serious liquidity problems. The bank admitted that it was seeing “significantly higher withdrawals of cash deposits, non-renewal of maturing time deposits and net asset outflows at levels that substantially exceeded the rates incurred in the third quarter of 2022.”
Credit Suisse saw customer withdrawals of more than 110 billion Swiss francs (US$119.26 billion) in the 4th quarter of 2022, thanks to a string of scandals, legacy risk and compliance failures. The only reason this bank hadn’t collapsed like SVB is because it is much bigger and has 1.6 trillion worth of assets under its management. Still, it is expected to register “substantial” financial loss in 2023.
If the financial trouble plaguing Credit Suisse wasn’t enough to drag down U.S. banking stocks, the news that S&P Global Ratings just downgraded First Republic Bank to “junk” has accelerated the global de-risking. Prior to this downgrade, First Republic Bank and five other U.S. lenders were placed on review for downgrade by Moody’s Investors Service after the demise of SVB.
In fact, Moody’s Investors Service has downgraded the “entire banking system” to “negative” from stable. Despite the U.S. government’s bailout of SVB and Signature Bank, Moody’s was concerned about the risks of unrealized losses or uninsured depositors in other banks. Not only it expects the U.S. economy to fall into recession later this year, but also bets the Fed will continue hiking the interest rates.
Just when “Sleepy” Joe trumpeted that America was experiencing strongest job growth in history under his leadership, Facebook-parent Meta Platforms announced on Tuesday (Mar 14) it would cut 10,000 jobs – just four months after it retrenched 11,000 employees. The tech industry has laid off more than 280,000 workers since the start of 2022, with about 40% of them coming this year.
But the biggest surprise came from Apple, the world’s most valuable company with market capitalization of US$2.4 trillion. In the past, the tech giant typically doled out bonuses and promotions once or twice per year, usually in April and October. Under a new plan, however, employees won’t see bonuses or promotions next month. Instead, it will only happen in October.
The American multinational technology company is also limiting hiring for more jobs and leaving additional positions open when employees leave. Since July 2022, the iPhone maker began its belt-tightening effort due to fear of inflation and recession. And it has managed to avoid the kind of retrenchment like its tech peers, including Facebook and Google.
Now, in anticipation of tougher time ahead, Apple is delaying bonuses and expanding a cost-cutting effort – joining Silicon Valley peers in trying to streamline operations. It is under pressure after revenue declined 5% during the holiday quarter. It becomes so bad that the human-resource department has done something unthinkable – scrutinizing how often employees come to the office.
Global sell-off resumes after Credit Suisse renews worries
Renewed unease gripped world markets on Wednesday as news that Credit Suisse’s largest investor said it could not provide the Swiss bank with more financial assistance sent its shares and broader global equities sliding.
U.S. inflation data showed signs of economic weakness and cooling inflation.
Yields on U.S. Treasuries and euro zone bonds tumbled on renewed turmoil in banking stocks and shifting interest rate expectations. Gold prices renewed their recent rally as investors sought safe havens.
Shares of Swiss bank lose more than a quarter of their value in one day, dragging down European and US markets.
Shares in Credit Suisse have plunged and dragged down other major European lenders as fears about deeper problems in the world banking system have spread in the wake of bank failures in the United States.
Credit Suisse shares lost more than a quarter of their value on Wednesday, hitting a record low after the Swiss bank’s biggest shareholder, the Saudi National Bank, told news outlets that it would not inject more money into the bank, which was beset by problems long before the US banks collapsed.
The turmoil caused an automatic suspension in trading of Credit Suisse shares on the Swiss market and sent stock in other European banks tumbling, some by double digits.
That fanned new fears about the health of financial institutions following the recent collapse of Silicon Valley Bank and Signature Bank in the US.
Credit Suisse stock lost about 30 percent of its value, dropping to about 1.60 Swiss francs ($1.73) per share, before clawing back to a 24 percent loss at 1.70 francs ($1.83) in late afternoon trading on the SIX stock exchange. At its lowest, the price was down more than 85 percent from February 2021.
“The question that is in everyone’s mind is: are we headed for another financial crisis?” said Brad McMillan, chief investment officer for Commonwealth Financial Network in Waltham, Massachusetts. “That’s what’s driving the bus at the moment.”
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