For the reason that implosion of the US economic system in 2008, Wall Street has been on pins and needles ahead of one other “Lehman moment,” an event named after the sick-fated investment bank that led to a broader meltdown of the banking system and economy.
The last alleged Lehman moment got here on Friday with the collapse and burning of the Silicon Valley Bank.
With assets of around $200 billion, it is the second largest bank failure in history.
Bank stocks have been crushed in recent days as traders and investors fear that SVB’s losses indicate a spread of systemic risk in the broader banking system, resulting in a string of bank losses, some of which could fail, after which a recession.
Banks then stop lending, businesses back down, the economy goes into the reservoir.
I say “alleged” because in accordance with my sources, this is not a Lehman moment – at least not yet.
They are saying the SVB’s descent into the abyss is a warning sign that we now have trouble sewering a banking system built up by years of free spending, i.e., Federal Reserve money printing and the Biden administration’s fiscal outbursts.
As reported, the FDIC took control of SVB on Friday as SVB headed for insolvency.
Its parent company, SVB Financial, is struggling to seek out a buyer.
Like Lehman, it would be difficult, so a total collapse is very possible.
Regulators similar to the FDIC and the Fed must approve each sale, narrowing down the list of buyers to major financial institutions.
Large banks will likely be hesitant to purchase an SVB portfolio.
It’s hard to place a price on it and given their experience in the course of the financial crisis, probably non-starter. Recall: JP and BofA bought Bear Stearns and Merrill Lynch, respectively, after they were failing – only to burden them with huge liabilities.
This leaves alternative asset managers similar to private equity firms similar to Blackstone and Apollo as potential buyers.
But each are vulture investors and should only wish to buy an SVB portfolio very cheaply.
The fall is inevitable
In other words, a Lehman-like collapse is almost inevitable for SVB, say bankers I spoke to.
Here’s the excellent news: Lehman’s stake within the underwater mortgage debt that caused his insolvency was on every major bank’s balance sheet, hence the necessity for presidency assistance to forestall financial Armageddon.
Silicon Valley’s portfolio business is quite specific. It mainly serves enterprise capital firms, which have began ripping money out of accounts as tech losses mount.
This forced the bank to release its holdings of Treasury bonds, which themselves fell as a result of the Fed’s rate hikes, resulting in the crash. Big banks like JPMorgan have a more diverse customer base, in order that they do not have to fret about unloading the Treasury to address the panic, at least for now.
But that doesn’t suggest the SVB experience is not of interest.
It is quite clear that the large amounts of fiscal spending and money printing which have only recently ended have distorted so many of the hydraulics of the banking system that the recent Fed rate hikes are beginning to wreak havoc.
SVB’s holdings of Treasury Securities exploded amid this bonanza of fiscal surplus, but so did similar holdings at every major bank.
Prices remained stable and high even in the course of the Biden administration’s spending because the Fed continued to print money, essentially buying bonds that the Treasury sold.
Every part was fantastic until inflation kicked in and the Fed had to vary course.
Fed rate hikes at the moment are weakening the bonds held not only by the SVB, but by every major bank.
Excellent news again: unlike Silicon Valley, most big banks have a diversified depositor base that does not rip out deposits.
Nonetheless, what is stored within the banking systems is a native pool of assets whose prices have been distorted by the era of super-big government money printing, which under the proper circumstances could create the Lehman moment that the market is fearful about.