Anatomy of a Bank failure: SVB

The first real cracks caused by higher interest rates begin to appear. That, combined by egregious risk management, caused Silicon Valley Bank to go belly up in 48 hours, the fastest time in history a bank goes under. Silicon Valley Bank is in the top 20 in the US, and it's especially popular with tech companies as its name suggests.

Let's first start by highlighting the main problem: their (and pretty much all other banks in the US) deposit rates are too low. All good in a zero rates environment, however with risk-free bonds paying 5%, and CDs north of 4% money quickly flows to better returns. The solution? raise rates - oh wait, that hurts profits so let's see how long it takes for the consumer to figure this out..

Let's look at a timeline of events, and then add some commentary:

1) SVB faces a genuine bank run as its $90 billion bond portfolio faces interest rate risk (bonds purchased at rates close to zero, quickly lose value as "newer" bonds pay a much better coupon)

2) SVB is forced to sell in a hurry a $21 billion bond portfolio. Takes a staggering $1.8 billion loss, more than 2022 FY profits

3) To shore up capital, SVB announces a $2.3 billion equity sale (massive shareholder dilution)

4) Investors freak out at the thought of the equity offering and SVB fails to raise capital

5) Credit Agencies cut SVB ratings

6) SVB announces it's up for sale

7) FDIC takes control of SVB

What is happening now?

With the Feds seizing SVB, the equity, preferred and bonds will go to zero. My take is that if a sale is not brokered by the weekend, Monday will be a carnage in financial markets. If this is not resolved quickly, the risk of contagion is extremely high.

Following the GFC, large banks are in a much better position, however many smaller regional banks are at risk. The 500 basis point rise in interest rates have resulted in enormous unrealized losses on banks Balance Sheet. The losses are estimated to be $650 billions today vs just $3 billions a year ago. If they are forced to sell, and realize those losses (like it happened with SVB), they will take a big capital hit, and in some cases they will not survive.

The real problem banks have right now is liquidity. Everyone wants to withdraw their money to move to either Money Market funds, or short term government treasuries.

The FED went too far. They either pivot or they let the whole house of cards fall. The economy is too indebted, and cannot sustain high rates without things breaking.

The chart below should at the very least give you pause:

And this one, is a very self explanatory look into the future. While nothing is certain, the probability of a very hard landing here is incredibly high. A recent history of yield curve inversion, and history telling us what happens next.

Not investment advice, however sound money (Bitcoin), and precious metals, continue to be my choice for the turbulent years ahead of us. Bonds will most likely increase significantly in value as well as in my opinion we have reached max rates environment already.