why the Wall Street “hole” has gone from 8 to 620 billion dollars – Corriere.it

Where were the controllers, i.e. the Fed, Federal Deposit Insurance and all those who were supposed to check the health of the failed Silicon Valley Bank, asked the Wall Street Journal. Legitimate question, since the foolishness with which the administrators of the Svb have managed the assets and liabilities of the bank borders on the improbable. But we should also ask ourselves: where were the rating agencies? In particular Moody’s which up until a few hours before the bankruptcy had maintained the A3 rating: not exactly a good grade, but nevertheless a dignified adequacy. To be clear, A3 is the rating that Moody’s attributes to a solid and prudent company such as the Italian Generali. And where were the analysts? In large part to advise the purchase of the stock, since the buys (to buy) three months ago beat the sells (to sell) 11 to one, to then reduce to 7 against one. And where were the investors? Buying the stock as the price fell from $750 18 months ago. SVB was valued at more than four times its equity and another ailing bank, First Republic (just now downgraded to junk status by S&P Global and Fitch), three and a half times: when a solid institution like Bank of America capitalizes at least two times the assets. After all, Svb was considered a blue chip, remember an American broker and a prestigious magazine, which one Forbesdefined it until a few days ago as one of the best banks in America, despite the fact that rumors of a possible insolvency had already circulated.

Shared responsibility

The administrators of 2-3 Venture capital funds understood that Svb was not in good health and, at the beginning of March, had advised some startups to withdraw the money from the bank. And the managing director, the financial and marketing director of Svb knew it well, as they had sold shares in the bank for an equivalent value of about 5 million dollars, on February 27, 10 days before the bankruptcy. And they had also collected the generous annual bonuses. Apart from this last ruse, in the management of Svb there was no malice or fraud, only a profound foolishness, endorsed by the lenient American regulation on small banks. Government bonds and long-term bonds were bought with depositors’ money, because they gave a higher yield than the deposits were remunerated. In short, long-term assets were financed with short-term money (almost on demand), in the belief, after 15 years of zero rates and quantitative easing, that the Fed rate would not rise much and indeed would be cut. The more interest rates and therefore the cost of money received from depositors rose, the more administrators bought long Treasuries, without having to adjust the bank’s capital, because the rules allowed it. But as customers began to withdraw cash, it turned out that the securities in the portfolio were worth far less than they had been paid for, for the obvious reason that rising yields had reduced their price: in the end, the bank he didn’t have enough money to pay back.

The Fed’s plan

In the same conditions as Svb, a dozen small regional banks found themselves, mostly devoted to a clientele of startups, technology companies, active in cryptocurrencies and other dedicated to real estate. Cos the Fed and the US Treasury rushed to prepare a bailout plan that on paper should not impose burdens on citizens: for one year the Fed will grant loans to banks, valuing the securities given as collateral at nominal value, rather than at market prices that have fallen well below par. In fact, it is another quantitative easing, smaller and more generous. Not only will deposits up to $250,000 be guaranteed, but all of them: for SVB and other regional institutions, the share of deposits above the insured threshold of $250,000 accounts for between 60 and 90% of the total. While these banks do not pose a systemic risk, US authorities hope to avoid contagion and bank runs. There is some doubt that they will succeed, since, in a few days, JPMorgan and BofA have seen thousands of new customers arrive with sums of money that already exceed 30 billion. If we consider that the unaccounted losses on bonds of the American banking system amount to 620 billion (they were just 8 billion in 2021), the bailout plan risks being only a temporary relief.

Wall Street trust

But there is a remedy for everything, Wall Street operators think, because the Fed will do everything possible to avoid a new financial crisis. It will no longer raise interest rates on March 22 and will indeed cut them. And if that weren’t enough, because things could get worse, the central bank will always be able to count on the tool that has guided monetary policy for 15 years: a new, real quantitative easing with the risk of aggravating an inflation that is proving to be more tenacious than expected, especially for the core component. Finally came the beating from Credit Suisse, and this is what could trigger systemic risk. Although the Swiss bank has important activities in the US, Wall Street treated the event as a European affair, minimizing the declines compared to our stock exchanges. After all, three decades of easy money have created the belief that this time everything is different and the financial risk is a thing of the past. It is no coincidence that in the latest BofA survey, a credit crisis (as in 2008) was feared by just 8% of large investors and it was still pointed out by Nouriel Roubini and Michael Hartnett of BofA. If you believe that the Fed and Treasury are ready to mend every tear in the system, it means that for the market a patched jacket is as good as new. Just have faith.