Svb, HSBC save the English branch, the “total” guarantee on deposits is triggered: what’s going on – Corriere.it

A second bank, Signature Bank, was closed by the American authorities. This was stated by sources from the US Treasury Ministry, the FDIC and the Fed in a joint note in which they illustrate their plans for Silicon Valley Bank. Signature Bank is headquartered in New York State.
Meanwhile, in Great Britainat Bank of England race for cover to nip the possibility of contagion in the bud: the British branch of Silicon Valley Bank (SVB) has in fact already been taken over by HSBC, a global credit giant headquartered in London. The news was released in the early hours of the morning by the British Minister of Finance, Jeremy Hunt, who spoke of a private deal favored by the Bank of England. In this way, the Chancellor of the Exchequer wanted to underline the joint intervention of private capital, politics and the British central bank to put a dam and avoid the insolvency of the Svb branch on the British Isles.

Stock market futures rebound

The entry into the field of the American government, which has promised that all Silicon Valley Bank deposits will be repaid, and the immediate intervention of the government and central bank across the Channel seems to halt the collapse of confidence on Wall Street where futures take off, with those on Nasdaq which rise by 2%, pulling the sprint to the S&P 500 (+1.8%) and the Dow Jones (+1.2%). The expectation of a less aggressive Fed is also driving US bonds, with yields on two-year Treasuries dropping almost 20 basis points.

Here the text of the newsletter Whatever it takes by Federico Fubini which explains what happened so far:

Blanket guarantees granted overnight by the US Treasury on all deposits and the closure of another institution, this time the Signature Bank of New York. As the impact of Silicon Valley Bank’s fall unfolds, I can’t help but have a thought for Mitt Romney and especially Larry Summers. You know them both. The first, Republican candidate for the White House defeated by Barack Obama in 2012 and now a senator. The second, Bill Clinton’s former Treasury secretary and Obama’s former economic adviser. Two distant men, but today united in demanding that the US government absolutely guarantee all the blocked deposits of the failed Californian bank. Even, say, those of a cryptocurrency company called Circle that had a $3.3 billion cash account (how did they come up with that?). Or that of another company called Roku that makes media players for streaming and had a cash deposit of $487 million in cash.

End of model-California business with zero rates
True, Silicon Valley Bank was considered a star among banks (cheers for foresight, see above). But the argument of Larry Summers and Mitt Romney – if I can sum it up like this – that to save Main Street you have to save Wall Street. Basically, it is necessary to put public money without limits to guarantee the errors of private managers of this and other. Or it will be even worse: Silicon Valley companies that have their cash trapped in the bank failure will no longer be able to pay wages and suppliers, therefore they will lay off en masse and unload the crisis on still other companies. For this, according to Larry Summers and Mitt Romney, the government must guarantee all deposits (for 342 billion dollars, in the case of Silicon Valley Bank). No longer just up to the $250,000 limit, but unlimited.

Just before midnight yesterday Italian time, Summers and Romney won: iThe US Treasury has issued a statement, short and blunt, in which he announces that shareholders and “certain unsecured bondholders” in Silicon Valley Bank will not be protected and will lose their money. But all depositors will be fully protected. Even the billionaires who had recklessly put all their liquidity into one account. Other than a $250,000 cap on the deposit guarantee. This is exactly what the 5 Star Movement loudly demanded in Italy during the banking crisis: let’s put everything at the expense of the taxpayer and never talk about it again. The drastic nature of the measure gives an idea of ​​fear in the American government that, starting this morning, other banks suffer a dramatic run on the branches. The fact that yesterday around midnight Italian time the American authorities also had to announce the closure of Signature Banka New York institute used by law firms, gives an idea of ​​the panic risks they had to manage.

We will see in the next few hours if this will be enough to calm the waters. No one today can rule out that things would turn out as Summers and Romney said they feared. For the immediate, however, I also find interesting what the two have not said. Romney does not say that his career is deeply linked to the world of private equity: the funds that buy debt-ridden companies, put the debt on the companies themselves, restructure them by cutting hard costs, resell them and so try to obtain double-digit returns. Larry Summers also doesn’t say that he has been working for over a decade (also) for Andreessen Horowitz: one of the largest venture capital funds in Silicon Valley, exactly the type of operator that risks losing a lot if the government does not save the bank deposits of the start-ups in which the fund itself had invested.

Basically, both Romney and especially Summers they are public moralizers with private (and undeclared) interests. But is it enough to say that they are wrong?

To better understand, let’s summarize what went wrong at Silicon Valley Bank. In the last few years it had, in fact, increased by several times the liquid deposits accepted by start-ups up to 342 billion dollars: many innovative companies kept their cash there to meet expenses, waiting to start earning some money. And even venture capital or private equity funds were holding their money, waiting to find start-ups worth investing in. In short, they all behaved as if the cost of money over time was always and only zero. As if we were still living in the pre-inflation world, where central banks kept rates at zero.

The bank did it too, to behave like this. He didn’t make many loans with those deposits (just $74 billion). Instead, some time ago he had made a massive bet (100 billion) in US government bonds over three or four years when they yielded 1.79% a year. So, like its clients, Silicon Valley Bank acted as if the zero-interest world was forever: he thought he could remunerate deposits at zero and that he would earn a net margin by investing at a yield of 1.79%.

On the other hand, the world of non-existent rates was not forever. In less than a year, the Federal Reserve brought rates from just over zero to 4.75%, because inflation was galloping. And until last week he was preparing to raise them again, decisively. At that point, Silicon Valley Bank realized that the cost of returns it had to pay on deposits had grown above the rate of returns it could receive on its investments. He was essentially losing money. And selling US government bonds to free up liquidity – as it was forced to do – generated a loss: in fact, when rates rise, the prices of pre-existing bonds on the market usually fall.

Hence the fulminant crisis of confidence in recent days. worry, the funds of venture capital of Silicon Valley withdrew their funds, triggering the crisis that trapped the funds of the start-ups in which they themselves had invested. Thus an entire California business ecosystem collapsed in on itself, because it was founded on the idea that money would cost nothing forever: rates would remain at zero.

What is the lesson about what lies ahead? In the immediate future, unfortunately, there was the risk in the States (and above all in California) of a physical or digital race for deposits from smaller banks or those deemed fragile. Perhaps last night’s drastic intervention by the Treasury, guaranteeing all deposits, contained it. Maybe not entirely. However, many savers may want to move their accounts to the big four American banks considered to be sounder: JPMorgan Chase, Bank of America, Citigroup and Wells Fargo, which have assets between three and six times as large as the fifth largest bank in the country (US Bancorp). The lobby of blanket and immediate public guarantees on the 19 trillion dollars of deposits in the banking system – led by Summers and Romney – is still making itself heard. already very noisy and last night it achieved its first success. But it would not be a free lunch: if by (absurd) hypothesis they were all enforced, those public guarantees on deposits would almost double the American public debt to 200% of gross product. Therefore blanket guarantees could bring down the prices of US government bonds and the dollar: a scenario not to be taken lightly. Today I already expect that after tonight’s moves both the dollar and Treasuries will depreciate.

There is another aspect, less immediate, that worries me. In recent years, the private equity industry has grown to be worth $6.3 trillion under management and, because it manages companies not listed on the stock exchange, has not made full transparency on the losses it has suffered in the last year with the rate hike. The venture capital industry is worth two trillion dollars and the same could be said for it. Since for them (especially for private equity) debt is very important, the increase in interest rates will force them to achieve very high returns so that the businesses remain sustainable. With Fed rates at 6%, given all costs, a fund would need to return 25% a year to stand. Credible? Yet if it doesn’t stand it could generate a lot of unemployment in the many companies it controls. The recent crisis in the $69 billion real estate fund of the maxi private equity fund Blackstone could be a harbinger.

In essence, the Silicon Valley Bank crisis is the tip of an iceberg that was known, but now seen: inflation and the Fed’s rate hike are blowing up a number of zero-rate business models. These include cryptocurrencies, part of real estate, part of venture capital and start-ups (which thought they could keep the money down for years) and above all private equity. One could say that the “California-model” is over, that of a world where the warmth of cheap money reigns. The lobbying of the Fed and the White House to bail out Wall Street “to bail out Main Street” has only begun. Let’s fasten our seat belts.

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