Happy St Patrick’s Day!
There. That’s out of the way.
Oh, yes. For those few of us who don’t keep more than $250,000 in our bank account and therefore had avoided visions of “The Grapes of Wrath,” loading up the Joad family truck and heading west, there were the first rounds of the men’s NCAA basketball tournament: March Madness.
What follows is generally correct. I am not a banker, nor an economist, so don’t bother sending corrections over the functional equivalent of a misplaced semicolon.
At the teller window, a bank I’d never heard of, the Silicon Valley Bank, realized it had been hoist on its own petard by holding billions of treasury bonds (or whatever they’re officially called) which they bought when the Federal Reserve was charging banks zero or near-zero interest.
U.S. Government paper is backed by the full faith and credit of people like that Master of Monetary Manipulation, Donald Trump,when he was President, so what could go wrong?
What went wrong was that the bonds still offered the interest rate that is printed on them, but as the Fed has raised rates from effectively zero to the current prime rate of 7.75%, that extremely low-interest paper is worth less. Not worthless, but far less than the value being carried on the bank’s books.
Came a moment – a little over a week ago – when the Silicon Valley Bank (or SVB as those of us who discuss such things our local Starbucks like to refer to it) noticed rather larger than usual outflows of deposits.
For commercial banks, as opposed to retail banks, customers are not “sticky.” That is to say they will chase an interest rate increase on its deposits. Millions or billions in money sitting in the bank at 2.05% will leave to go to the bank across the street (or across the country) paying 2.10%.
Saddled with its billions in low-interest bonds, SVB needed to come up with the cash that the Galen Portfolio of Entrepreneurial Endeavors wanted to withdraw and move to higher paying institution.
SVB didn’t have it.
They tried to sell their overvalued government bonds, but no one wanted them. Moreover, the very act of trying to unload that paper signaled to sharp-eyed Silicon Valley-ites that something was amiss at SVB.
As I read over the week, one investor said, “The safest place to be in a run on a bank is the first one out the door.”
Like the run on the Bailey Building & Loan in “It’s a Wonderful Life,” depositors metaphorically lined up to get their money out before some other guy called from his yacht to get HIS money out.
Unable to hide its problems, managers at SVB (some of whom had unloaded considerable amounts of stock in the past few months) openly went looking for injections of capital from people and firms who had lots of it.
Much of this was done in the dead of night further adding to the reality that SVB was going belly up. That led to the near-unanimous response: “Um, yeah. No.”
The Feds stepped in an took over the bank, shut it down, and locked the vault, at least over last weekend.
Making up the rules to achieve a greater good, the Fed, the FDIC, and the Treasury Department announced that all deposits – no matter how large – would be made whole, that paychecks would clear, and payments to vendors would be honored.
Going back to the top, I house my business account in our local bank here in Alexandria, Virginia. There is a comma involved, but not much to the left of it. It’s just there to pay my business taxes and expenses.
I also have money in one of the Big Three – one of the “too big to fail” banks.
I am exactly the right size to fail and I don’t expect to see Janet Yellen at my door anytime soon with a bag of money, so …
Ok. This WAS going to be a column about the first full day of the Men’s NCAA basketball tournament. The two teams I was most interested in, split. Maryland won over West Virginia by two. Virginia lost to Furman by one.
Furman, by the way, has the best nickname in the nation: The Purple Paladins.
Both basketball and banking fit into the same cubbyhole this week.
See you next week.