Government fears about Silicon Valley Bank – and how to make money
A week ago, traders were pricing in a 50 basis point Fed rate hike at the March 22 meeting. Now, after all the fear of bank failure, I have no idea what the Fed will do.
But whatever the Fed does, I bet it spews more chaos than calm.
Treasury Secretary Janet Yellen — the Treasury Department’s version of Anthony Fauci — loudly proclaimed on Saturday that the Fed would not bail out Silicon Valley Bank.
On Sunday, however, they announced along with the Fed and FDIC that they were bailing out SVB’s depositors — but not its shareholders or creditors — while insisting it was not a bailout at all.
Inconsistency creates fear.
The media say SVB̵[ads1]7;s failure was the second largest ever, and that New York-based Signature Banks was the third largest. Scary. But they weren’t really No. 2 and No. 3.
Yes, SVB was $200 billion plus in deposits and they are #2 by that measure. But in relevant economic impact—what really matters—the SVB, for example, was only about 4% as large relative to the size of the economy in 2023 as compared to what the Bank of the United States was when it failed in 1931.
This despite the fact that SVB was approximately 1,000 times larger in dollars than New York’s Bank of the United States.
Nominal GDP (not adjusted for inflation) growth since then accounts for the difference. Relative to today’s GDP, Signature and SVB were smaller than 1984’s Continental Illinois debacle — relative pimples, not major bleeds.
UK Chancellor of the Exchequer Jeremy Hunt, who boasts that Britain spared the roughly 3% of SVB’s assets parked there, claimed that if they had not stepped in, “strategically important (UK) companies would ‘be wiped out’.”
Such statements create fear. But name one British company that would be wiped out. You can not. He can’t either.
President Biden said failing bank executives should be fired. Again – scary. But when?
If senior management had been fired last weekend, the FDIC would have had no one to talk to at SVB to enable customers to redeem deposits. Chaos would reign.
Later, Mr. President, about the shooting blather.
SVB’s main problem? The investor base was far too concentrated in companies and employees from the venture capital area.
When VCs began urging their portfolio companies last Thursday to withdraw their SVB deposits before others could, it launched a “run” on SVB among those firms, employees, families and friends.
Almost no American bank has anywhere near as concentrated a depositor base as SVB. First Republic Bank — the same size as SVB with a large geographic overlap, but with a far more diversified depositor base by industry — fell heavily on Friday and early Monday amid all the fears.
But then it stabilized, then it skyrocketed.
Banks use deposits to fund long-term loans that fall in value when long-term interest rates rise – as they did from 2023’s rising inflation fears.
SVB’s marginal balance could not take it from last week. Ironically, 10-year yields have just now fallen by 0.5% — actually now down slightly overall in 2023. SVB was caught in between.
Most banks do not because of their diverse depositor base.
Large banks are in far better financial shape than small ones.
But overall, the banks are close to the best condition (as measured by total loans to assets) in my more than 50-year professional investment career.
Shares are up this year as I expected, but down since February.
There’s a lot I don’t know – like where the stocks will be in 45 days.
I know that when you get to bank failures, the stocks are hugely higher two years later.
The sentiment shows (as comments on my March 5 column) overwhelming negativity and fear.
As Warren Buffett said, “You should be afraid when others are greedy and greedy when others are afraid.”
Ken Fisher is founder and executive chairman of Fisher Investments, a four-time New York Times best-selling author and regular columnist in 17 countries globally.