You have an elegant solution to the Silicon Valley Bank crisis
“CNBC Special: America’s Banking Crisis” will air Sunday at 7 p.m. ET, where Jim and other experts will discuss the impact of the Silicon Valley bank’s demise on the economy and stock market. Fears of contagion from banks with profiles similar to Silicon Valley Bank have brought several government agencies together to find a buyer for the ailing institution, which on Friday became the second-largest bank failure in U.S. history. At the very least, the Federal Deposit Insurance Corporation, the Federal Reserve, the Treasury Department, and President Joe Biden are looking for some sort of safety net that extends deposit insurance to all individuals and businesses with funds at Silicon Valley Bank. This safety net is incredibly important given the bank’s $173 billion in deposits, of which only $4.8 billion is fully insured. We’ve had plenty of time to ponder why Silicon Valley Bank — parent company SVB Financial (SIVB) — became such a nightmare, but we’ll briefly explain some of it here. Crucially, however, the stock market will have a very tough time on Monday unless the government comes up with a plan. What I want to say on Sunday evening is that the risks are high, but the government understands that this crisis will be over on Monday and will present a notable buying opportunity if a full guarantee of deposits is offered through a Fed-provided note becomes. If the government can find a buyer for SVB, similar to what happened when Washington Mutual collapsed in 2008, then the crisis will be averted. That’s because the actual loan book and deposits on hand will appear to cover the losses of all depositors. In the WAMU case, the government seized the bank, placed it under receivership, and then sold the assets and liabilities to another major bank, JPMorgan (JPM). A similar auction is currently underway. We may not know the results until Sunday evening, but the government wants every auction to be resolved on Sunday so it doesn’t spill over into Monday. The government failed to understand the dire nature of the situation on Friday because things just happened too quickly. But policymakers, including California Governor Gavin Newsom and President Biden, have now been made more aware and understand the seriousness of the situation. What could go wrong? If anyone in these constituencies says we’re not going to bail out any more banks because we have to keep a hard line. That stance, if it catches on – and I can’t rule it out if an auction fails – would make Monday very hard to follow due to the contagion already emerging at several banks, notably First Republic (FRC). I hesitate to use a word like “crash” because it’s loaded and instills a level of fear that isn’t helpful. Let’s go through the who, what, where, how and why of this moment. Who is Silicon Valley Bank? It’s not like most banks. It’s a merchant bank – top 20 by size – with a storied 40-year career as a start-up and venture capital banker. It is considered iconic and powerful. It survived several struggles with problems in the US and especially in the technology sector and came out all the way. There is a possibility of deposits being withdrawn at many banks. Certainly anything over $250,000 is problematic due to concerns that anything over that amount will not be protected by the FDIC. Most of the fleeing deposits would most likely go to one of the largest banks, leading to further concentration than we already have in this country. The biggest winner would be JPMorgan, which has the best balance sheet of any major bank. Politicians are as worried about this concentration as they are afraid of looking like they are bailing out a smaller bank. The where focuses primarily on Silicon Valley because that bank was unique. It supported thousands and thousands of startups, but it seems to have required users of that support to deposit all their money in the bank. So there is a very high concentration of uninsured deposits. Keep in mind that only a fraction of the $173 billion in deposits is guaranteed, a real outlier in the system. As you can imagine, a start-up receiving SVB’s help would risk all of its assets with SVB – and those deposits would far exceed the protection of $250,000 per account. Silicon Valley Bank probably wouldn’t support your business if it didn’t receive all of your deposits. How did this happen? Quite simply, when the Fed pushed a lot of liquidity into the system in 2020 to avoid a Covid-related crash, deposits at the SVB skyrocketed. Unlike most other banks, which bought lower-yielding, short-dated government bonds, this bank chose to invest in longer-dated government bonds. The bank wanted to collect additional income. Why regulators allowed this is a mystery. It was ill-advised, and in hindsight regulators should have ensured the portfolio was more balanced. But the result was a bank that didn’t have enough short-term paper in its treasury to cash in when depositors wanted their money. It didn’t help that some venture capitalists accelerated a run on the bank because the FDIC actually had a plan to bail out the bank. However, the rush went too fast for any plan to work, leaving a solvent bank insolvent overnight. And that was because the bank was taking heavy losses on a portfolio of bonds that were supposedly of good quality but were badly under water from being crushed every time the Fed hiked rates. The irony is that the Fed creates a lot of liquidity, SVB deposits grow by about 250%, it invests in longer-term assets – but then the Fed depresses the yield on those longer-term assets, and SVB is a victim simply for being so distant it bought government bonds, not because it had a credit problem. The bank’s remaining bonds remained unsold before being confiscated. How do we get out of this morass? There’s a simple way: The US government creates a promissory note that secures the entire deposit base. Then there would be no run and the crisis would be averted. That would be incredibly clean and very bullish. will they do it It goes against the established doctrine that banks should not be bailed out. But it also makes the most sense since not all common and preferred shareholders would be saved. If the Fed goes through with this plan, taxpayers would (in theory) not be at risk and the doctrine will not be flouted. We’re moving fast and the Fed will most likely stop hiking. A less easy way is to find a buyer who will agree to take over the assets and liabilities of the bankrupt company and any depositor withdrawals in excess of what the Newco (new bank) can handle will be handled by supported by the Fed or the Federal Home Loan Bank Board. The problem here is that any buyer wouldn’t pay full price, so there would be real moral hazard. The assets and the loan book most likely exceed the deposits, so the winning company would make a bunch of money, and that’s just unseemly. One penalty option is to just let things run, which in this case will be very difficult to avoid a sharp drop in the stock market due to other runs past the SVB. Perhaps more importantly, this could result in numerous companies failing their payroll and a significant number of start-ups and even venture capital firms collapsing. It would be a heavy blow to the US economy. What do I think will happen? We’ll know soon enough, but given what we’ve learned from 2008, it would be crazy to want to leave this to the so-called free market. According to the Fed’s note, an elegant solution is available. In order for there to be no run, the note must guarantee 100% of the deposits. Anything else would lead to runs on other banks. Why not? You simply record your deposits with JPMorgan. I now understand that the discount window will be wide open for any bank under pressure. But at the same time, unless there are 100% guarantees for SVB depositors, all non-big banks will pull back. Again, there’s some very good news: If you add up the bonds held by the bank and the loans it’s made, often to very qualified institutions, they more than cover all deposits, so it’s not technically a bailout acts. I don’t understand why the government isn’t doing this and I will be pushing for this Sunday night. If they don’t, it will look like it’s trying to punish rich venture capitalists. But it will end up punishing everyone. Remember, the bad news is there’s always someone in the room saying, “No, it’s time for punishment.” In this case we will all be punished. I’ll do my best Sunday night to say that this is a suboptimal solution. But I’m just one voice among many. stay tuned for more If I have more before the special I will let you know directly. Back to work. “CNBC Special: America’s Banking Crisis” will air Sunday at 7 p.m. ET, where Jim and other experts will discuss the impact of the Silicon Valley bank’s demise on the economy and stock market. (Here’s a full list of shares in Jim Cramer’s Charitable Trust is long.) As a subscriber to CNBC Investing Club with Jim Cramer, you’ll receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling any stock in his charitable foundation’s portfolio. When Jim spoke about a stock on CNBC television, he waits 72 hours after the trade alert is issued before executing the trade. THE ABOVE INVESTMENT CLUB INFORMATION IS GOVERNED BY OUR TERMS AND CONDITIONS AND PRIVACY POLICY ALONG WITH OUR DISCLAIMER. NO OBLIGATION OR OBLIGATION SHALL BE OR CREATED BY YOUR RECEIVING OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC RESULT OR PROFIT IS GUARANTEED.
A Brinks armored car stands in front of the closed Silicon Valley Bank (SVB) headquarters March 10, 2023 in Santa Clara, California.
Justin Sullivan | Getty Images
“CNBC Special: America’s Banking Crisis” will air Sunday at 7 p.m. ET, where Jim and other experts will discuss the impact of the Silicon Valley bank’s demise on the economy and stock market.
Fears of contagion from banks with profiles similar to Silicon Valley Bank have brought several government agencies together to find a buyer for the ailing institution, which on Friday became the second-largest bank failure in U.S. history. At the very least, the Federal Deposit Insurance Corporation, the Federal Reserve, the Treasury Department, and President Joe Biden are looking for some sort of safety net that extends deposit insurance to all individuals and businesses with funds at Silicon Valley Bank.
https://www.cnbc.com/2023/03/12/cramer-to-fed-you-have-an-elegant-fix-for-the-silicon-valley-bank-crisis.html You have an elegant solution to the Silicon Valley Bank crisis
