This past weekend I received at least two dozen law firm emails about last Friday’s failure of Silicon Valley Bank. Who knew a bank could fail? And the law firm newsletters were so helpful. Who knew that if a failed bank held your payroll account you might not be able to meet payroll, which might be a labor law violation? And who knew that might force you to have to scrounge around for cash? Thank you, Dr. Obvious!
Oh, right. The tech bros and crypto enthusiasts who are the newsletters’ targets weren’t old enough in 2008 to pay attention to what was going on then. And some of them weren’t even born the last time a tech bubble burst, in 2000. They certainly don’t know anything about the S&L crisis in the late 80s, or the Texas energy bubble bursting in the mid-80s that led to a series of regional bank failures at the time. They probably skipped class the day their high school U.S. history teacher mentioned FDR’s three-day bank “holiday” closure in 1933 right after his inauguration.
As it happened, late on Sunday as the Oscars were getting underway, the government announced that all depositors would be protected, even above the FDIC insurance limit, so the worst fears of a major bank run were averted. The regulators were impacted by the failure of Signature Bank over the weekend, another mid-tier bank as popular with crypto fans as SVB was with tech companies and investors. Clearly we don’t want a repeat of the fall of 2008. To this point only depositors are protected, so customers with non-deposit arrangements will need to look to their underlying contract terms and collateral if for example they have repos or derivatives. All non-deposit contracts will be impaired, even if the impairment only turns out to be one of timing while everyone sorts everything out. The banking regulators also announced an emergency lending facility, called the Bank Term Lending Program, which is a back-stop lending facility for banks that need liquidity. Shades of TARP and all the other lending programs created in the wake of the 2008 banking crisis. We know how to do this.
This is a simple case of asset-liability mismatch, which is as old as banking. When SVB’s soundness was called into question in the middle of last week, tech bros tried to move their money, resulting in a classic run on the bank. No bank can liquidate its assets fast enough to pay depositors the liabilities it owes them under those circumstances, at least not without central bank assistance which is why the Fed was created in the first place. The speed with which technology permits us to act contributed to the rapid downfall.
Watching the tech bros respond to the need for a federal bailout has been amusing. Crypto is neat. Tech is neat. Libertarian free markets are neat too. But when the you-know-what hits the you-know-what, we want government to step in to bail us out. Bill Ackman proposed on Twitter a Fed-led financing to keep SVB afloat. At least he acknowledged it would have to be dilutive to existing shareholders, who actually deserve to be wiped out. The normally anti-regulation Wall Street Journal asked in a headline over the weekend “Where Were the Regulators?” A tech bro complained that “the feds blew it.” A crypto bro said that the failure of SVB showed just how important crypto was and how dangerous it is to have a “centralized” finance system. Apparently “decentralized”, i.e., crypto-based, with no safety net or off-ramp, is the way to go. We tried that in the 1800s, when every farm and prairie town had a local bank, issuing their own notes. It didn’t turn out too well. It certainly didn’t meet the needs of a modern industrial economy, let alone the technology-based economy that we have now. The hypocrisy is astounding.
What is going on from a macro perspective is the Fed tightening cycle that results naturally from a long period of financial and rate repression after 2008 and continuing through Covid. We needed to do what we did during Covid to avoid a major recession, but it predictably left us with an inflationary aftermath that needs to be addressed. Increasing rates decreases bond prices, as well as the discounted present value of expected future cash flows that underlies all equity markets. Hence the bursting tech and crypto bubbles that led to the bank runs. Tech and crypto investors may think they’ve found the next big thing, but economic fundamentals impact all asset classes. No one is immune from the laws of economics and finance. The bond rally this week is telling us that Mr. Market expects these bank failures will force the Fed to raise rates more slowly.
In the meantime, cry me a river for the tech bros and crypto enthusiasts who may be stung by a bank failure of the sort they’ve never seen before in their short business lives. Since the feds are already acting to bail them out, the river needn’t be as large as the Mississippi. Cry me at least a small stream for the law firm associates who had to write the emergency newsletters late on Friday night and over the weekend.
Parenthetically, a good friend who has spent his life in finance sent me a text over the weekend, saying he had seen the asset-liability mismatch movie before. I told him that there was only one movie about that eternal banking problem…It’s a Wonderful Life. I guess The Big Short too if you were paying attention to the lecture going on during the hot tub scene.
The views expressed here are those of the author, and do not necessarily represent or reflect the views of NYCLA, its affiliates, members, officers or Board.