SVB – Flash Back to 2008

Hmmm, I don’t deny that reading about the failure of Silicon Valley Bank hasn’t got me concerned. Reading that this is the second largest bank failure in US history is not a joy to read, with 2008 Lehman Brothers failure still rattling around my brain. The memory isn’t fresh, but it is exactly dim either.

Is this a Lehman Brothers type failure? My reading of the news indicates no, not at this time. All experts say that this failure does not appear to be the same type of failure. This is a bank that services technology startups, so it is at the center of innovation and venture capital. Current reading indicates there are none of that fishy business of derivatives or aggressive lending that brought about the 2008 Great Recession.

Last night I watched a news show about this event, and I could see that the host and guest were being very careful in their choice of words, presumably not to spread panic…because we certainly don’t need panic.

Background for my note-keeping: From my readings, this bank didn’t do anything nefarious. It just got caught between a rock and a hard place. In this environment of supposedly weakening economic results for the tech sector, thus inducing layoffs (or maybe it is just the investors forcing senior executives to “right” size the company), its clients – the startups – were having problems getting funding so they are dipping into their deposits to make payroll and other payments. Overall, SVB started to see much lower deposit holdings which forced them to sell off some of their assets to meet deposit withdrawals. I think the assets being sold were bonds and in this environment of higher interest rates, the value of their bonds was not as high as previously.

Whatever the case may be, their asset sales may have precipitated a further run on the deposits to the point that on Friday, the bank was close to being out of money. The federal government stepped in on Friday and took over the bank.

This background doesn’t sound like anything like the housing environment of 2005 to 2007 which precipitated Lehman’s collapse in 2008. At that time, when the housing market softened due to the borrowers’ inability to pay their debts, experts said something to the effect that the market was just softening. I don’t recall any real concerns. The experts misjudged the impact of the softening housing market.

It was when Lehman collapsed that everything went to hell.

This SVB incident may not be a Lehman event but it might be a Bear Sterns event that occurred probably one year before Lehman. If I remember correctly, Bear Sterns was kind of the canary in the coal mine – in hindsight.

That’s my fear: SVB being a canary.

I think everybody is on a contagion watch. The saving grace is that the large banks such as JP Morgan, Citicorp, Bank of America have been under federal regulations since the creation of the Consumer Financial Protection Bureau under the Dodd-Frank Act of 2010. I know that the prior president weakened the bureau and the Republicans want to abolish it. I hope that won’t happen.

Banks need to be regulated.

Here’s a site that provides background materials to the Dodd-Frank Act and the Consumer Financial Protection Bureau.

So now, we have to watch and hope nothing further happens.