What a week of events - no one would have predicted that the 16th largest bank in USA (Silicon Valley Bank) would be no more in less than 48 hours....almost exactly 15 years after the events of Bear Sterns collapse...While one more (again California) bank failed (Silvergate) no one shed any tears due to its high-risk ties to Crypto world...But SVB was no small bank...in fact it was the "go to" bank for last 40 years for startups, VC and many Silicon Valley companies... but what started as typical course of action - upcoming rating downgrade due to loss on treasury holdings, attempt to raise funds to cover capital requirements turn into classic bank run as depicted in all time classic 1946 movie "It's wonderful life"...Only this time it was not a small town bank..it was one of the premier bank in most innovative place on the Earth...maybe that's what caused its downfall...it was bank for VCs and startups and they exited in droves with slightest doubt and moved their money at internet speed....nothing wrong in protecting their interests..but what could have been a normal capital raise to cover losses became a bank run triggered by tweets and many startups and tech companies found themselves in situation were billions of $$ are stuck and some of them will not be able to pay their employees on payroll day. They could access $250K per account on Monday morning..that's all. After that it all depends on how quickly FDIC and regulators move and unwind the mess...bank management made some wrong choices and caught off guard due to fast rising rates...regulators did not catch the red flags...and analysts (including Jim Cramer) were pumping the stock like its best bank stock to own just few weeks back. What a mess right in our own backyard...and SVB is not alone in this situation...every bank of similar size with similar exposure to bonds/treasuries could find themselves in similar situation since no one can trust any regional bank to keep amount over the FDIC_insured limit of $250K...unless of course regulators move fast and provide assurances that depositors would be made whole. The crypto mess continues with supposedly stablecoin USDC lost parity with $ and touched low of 90 cents (due to money tied in SVB)....This is the second "stable coin" which lost value and became "unstable"
This all happened in same week when Mr Powell told congress and markets to expect higher rate hikes to bring down inflation...Now Federal Reserve may have to watch out for systematic risk in financial system and un-intended consequences due to aggressive rate hikes. I expect rate hikes to be at pace of 25 basis points for next 3-4 meetings with terminal rate around 5.5 to 5.75. Based on stronger employment report, US economy seems to be doing just fine..but markets do not like good news due to fears of aggressive rate hikes...but Fed will not be able to get to goldilocks economy (not too cold, not too hot). So expect lot more volatility in markets for next few weeks/months.
It's Oscar weekend so time for predictions:
- Best Picture: Everything Everywhere all at Once
- Best Director: Martin Mcdonagh (The Banshees of Inisherin)
- Best Actress: Cate Blanchett (Tar)
- Best Actor: Austin Butler (Elvis)
- Best Editing: Paul Rogers (Everything Everywhere all at Once)
- Best Documentary (short): The Elephant Whisperers
- Best original song: Natu Natu (RRR)
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