“Greed and greed” in Silicon Valley are to blame, says Trader
Andrei Rudakov | Bloomberg | Getty Images
The fallout from the Silicon Valley bank shutdown — the second-biggest banking meltdown in U.S. history — continued Monday, dragging international bank stocks lower.
European bank stocks fell 5.5% as of 10am London time on Monday after closing 4% lower on Friday as US financial regulators shut down the SVB and took control of its deposits. All major U.S. indexes closed at least 1% lower on Friday amid the SVB panic, while regulators shut down Signature Bank — one of the cryptocurrency industry’s top lenders — on Sunday citing systemic risk.
US regulators said all deposits will be made in full to relieve many depositors. But the SVB crisis is not an isolated incident, many investors and analysts say its roots lie in a larger systemic problem.
“In terms of who’s to blame here, I think the greed and avarice that have long been present in Silicon Valley have gone to sleep,” said Keith Fitz-Gerald, a trader and director of the Fitz-Gerald Group, to CNBC’s Capital Connection on Monday.
“We had the Federal Board of Reserves switch from fractional reserves to no reserves, and that caused banks like SVB to buy assets instead of just lending money,” he said. “My belief is that banking should be boring, like watching paint dry – and any time it’s not, you’re in trouble. Which unfortunately happened.”
SVB — the 16th largest bank in the US earlier this week — had been in business for 40 years and was considered reliable Funding source for technology startups and venture capital firms. The California-based commercial lender was a subsidiary of SVB Financial Group and was the largest bank in Silicon Valley by deposits.
SVB Financial Group’s holdings – assets such as US Treasuries and government-backed mortgage securities considered safe – were hit by the Fed’s aggressive rate hikes and their value fell dramatically.
The company’s turning point came on Wednesday, when SVB announced it had sold its $21 billion worth of securities at a loss of around $1.8 billion and said it had to sell $2.25 billion. Raise dollars to meet customers’ withdrawal needs and fund new loans. The news sent the share price plummeting, triggering a panic-driven wave of withdrawals from VCs and other depositors. Within a day, SVB shares had plummeted 60%, resulting in a loss of more than $80 billion in bank stocks global.
Regulators sleeping at the wheel?
Many market analysts say regulators have been sleeping at the wheel. SVB’s strategy – to rely heavily on corporate deposits, as opposed to retail customers, and to hold a large part of its wealth in loans and securities – actually made it significantly riskier than many other banks.
Some argue that the bank’s demise was due to its executives’ greed for profit: its holdings have been disproportionately exposed to long-term interest rates, which are at 15-year highs, in a bid to stem inflation. The increased interest rates impacted the value of SVB securities, which subsequently hurt depositor confidence.
I think it’s frankly an embarrassment for banking regulators.
Keith Fitz Gerald
Director of the Fitz Gerald Group
“SVB was in a league of its own: a high proportion of loans plus securities as a percentage of deposits and a very low reliance on more solid private deposits as a proportion of total deposits,” said Michael Cembalest, JP Morgan’s chairman of market and investment strategy. wrote in a weekend note to customers.
The lender, he said, “has carved out a distinct and riskier niche for itself than other banks, bracing itself for large potential capital shortfalls in the event of rising interest rates, deposit outflows and forced asset sales.”
This is more the product of a flawed system than the bank itself, Fitz-Gerald argued. Referring to regulators at the federal and state levels, he said: “I would argue that not only are they complicit, but they had a hand in creating this mess. So for me it’s the system that’s broken or at least needs serious review here.”
Legendary investor Michael Burry similarly called what he called greed and “stupid risks” in the industry.
“2000, 2008, 2023, it’s always the same,” Burry, who founded hedge fund Scion Asset Management and rose to fame in 2008 with successful bets against the subprime mortgage market, was quoted as saying on Sunday.
“People full of hubris and greed take stupid risks and fail. Money is then printed. Because it works so well.”
Fitz-Gerald does not see the collapse of the SVB and the crisis in the technology and crypto markets as a reflection of 2008. In addition, he sees a reduced risk of contagion due to the federal agencies’ contingency plan announced by the Treasury Department, the Federal Reserve and the Federal Reserve on Sunday became the Federal Deposit Insurance Corporation to guarantee depositors’ funds.
The risk of contagion “has been significantly reduced as the FDIC, the Fed and the US Treasury have joined the fray. So you know again that collective sigh of relief, I think global contagion is off the table,” he said.
“But,” he added, “we just don’t know where the counterparty risk is right now. So, unlike 2008, the parallel is really 1929. They have to stop it, and they have to stop it now. We won’t know until the US session opens.”
“I’m personally amazed that the system is the way it is today and that these things were allowed to happen,” he said. “Where were the regulators? Where were the auditors? I think there are very serious questions being asked about how the rating systems work. Why were these banks allowed to take over assets when they should have protected their deposits?” Fitz-Gerald asked.
“This is a fundamental issue that needs to come to the fore now. We can’t ignore it and kick the can out into the street. I think it’s an embarrassment for the Federal Reserve. I think it’s an embarrassment for banking regulators, straight out.”
https://www.cnbc.com/2023/03/13/svb-collapse-silicon-valleys-greed-and-avarice-to-blame-trader-says.html “Greed and greed” in Silicon Valley are to blame, says Trader