With the upheaval going on in the banking sector it is becoming harder and harder not to see some political connection in all of this.
The question I am asking myself is this: If this banking failure happened to a bank that had some political connection to the GOP would the Fed and the Biden Administration been so quick to rush their aid? I am going to vote a strong maybe.
I know, fence sitting again but the reality is this, SVB may not have been in the same league as JPMorgan or Wells Fargo, it still was a significantly large bank. With over 175 billion dollars in assets it ranked 17th in the US and was one of the main bankers in Silicon Valley. I, naively, believe that the Fed would have stepped in and protected the assets of pretty much any bank, no matter where it was located and who it financed. Systemic risk or not. It is not the saving I fret about, it is the residual effects. The investigations, who was responsible and why wasn’t there more controls over the processes at the bank.?
Politically connected? I am not so sure about that but anytime you see any news out of the Bay Area there is a good chance there is some political connection. Democratic connections run deep in California and none are deeper than in the Tech sector.
It will never be proven but just like Sam Bankman-Fried getting soft treatment, I think Silicon Valley Banks missteps will also be given a lot of leeway. The Federal government is investigating? The Justice Department? The Securities and Exchange Commission? All run by Democratic appointees. How deep do you think they will go?
Deep enough to blame Donald Trump I am sure.
Hey, he hasn’t been blamed for anything in the last 48 hours, lets go!!
Seriously. There were missteps and miscalculations involved. There were obviously some banking regulators who missed some very big warning signs. The conspiracy people are running amuck with this one but I think there actually might be some fraud involved as well. Normally, I would say time will tell and let the investigations run their course but this doesn’t feel like it will uncover anything and I think that is the problem.
We have been so bombarded with political messaging from both sides that we are becoming immune to the damage the actual politicization of our economy has caused. Big donors to big candidates should yield big results. That is silently destroying the Democracy we enjoy. This is not new however and this country has survived with each party trying to destroy the other party and at the end of the day it ends up a stalemate.
I digress.
Where we are now is much more important than a few PE or VC guys having to put off the purchase of their next Bugatti for a few months. It is about confidence.
That is what makes banking such a unique industry. You trust your bank. You trust your banker. You give them money. Yes, you have a record of that deposit, but that is basically as far as it goes for you. You expect that when you need to, you can draw on the money you deposited and that is an implicit contract between you and your bank. The FDIC insures your deposit up to $250,000 but after that it is about trust.
When the trust in an banking institution cracks, very bad things can happen and that is what happened with Silicon Valley Bank and to a lesser extent Signature Bank in NY. Trust was broken. Or the implied trust that was broken. The mere thought that that trust can be broken and the bank will not make good on demands can ruin an institution because by and large banks do not keep your cash in some safe money market account or in cash or gold in some vault. They loan it out. They buy various US backed securities to maintain a certain level of assets versus deposits. I am not a banker but I am pretty sure those ratios are not 1 for 1. Loan portfolios are huge income generators for banks and their are rules that allow banks to use a certain amount of their deposits for loans. The expectation is that the deposits used for those loans will not be needed in total. Banks keep securities on hand to satisfy institutions on a normal daily basis but when some whispers turn into screams, all hell breaks lose and that is where the problem with standard banking business practices comes in. I don’t believe any bank in this country has ready access to all the money that is deposited so it could potentially happen to any bank in the United States. That is why there is such concern in the equity markets. In New York. In Washington D.C.
Will there be another run on a bank? Will there be a tightening up of the credit markets? Will there be a tightening up of banking relationships for small to midsize businesses? How will this affect the economy and what will the Fed do come next week?
I think the possibility of another sort of run like the one at SVB is highly possible. However, I do think the Fed’s intervention will help mitigate that lose of trust long term. The market’s reaction to any possible interaction will be overblown and opportunities will be there if you have the will to risk capital in a frenzy.
With banks returning to a possibly over-supervised environment (Which is sure to come next) I think you will see a tightening of the credit markets. This will not bode well for the economy but we have seen this picture before and we will get past it it for sure.
An issue that hasn’t been mentioned is the possible change of present day banking relationships that might permanently change. Business owners losing trust in their bankers is heightened now. Why does my 50 million dollar a year company want to do business with my local bank, one they have worked with for years, when the possibility of that banks future is in doubt? I’ll go to Wells Fargo. Thats not a good scenario. The other side of that coin is that banks may not want to do business with a company that has a lot of capital running through it on a weekly basis. Banks will want to try to limit the risk of a potentially large practices when there cash reserves are not adequate to support the withdrawal. This will force that business to go look for a larger bank. As I have said, this possible turnover of business could have major impacts on the small regional banks in the longer term.
What does all this mean for the economy? Hard to say but I will venture a guess. Business expansion will slow down and credit markets will tighten for sure and if you want to slow inflation without raising rates, those two factors will do it every time. With that in mind, I do not think the Fed will do anything as far as rates are concerned next week. As I said in Monday’s column, throwing a rise of any kind into this unsettled period would have an adverse affect on markets and signal worse times ahead. I see nothin wrong with holding off and waiting for the financial sector to settle down.
An industry in turmoil that is highly sensitive to interest rates should not have to deal with an additional hike. I do know that banks do well in a rising rate environment but this is not about the sector it is about the signal the whole economy will be getting.
Excellent. Just a travesty in Cal and I'm not sure how many others are........which will cost us all......