If you cheat, money will follow

Chapter 655: The aftermath

Silicon Valley Bank’s main business lines are clear and focused.

On the one hand, they attract deposits from small and medium-sized enterprises in Silicon Valley with low interest rates.

On the other hand, they invest their funds in Treasury bonds and mortgage-backed securities (MBS) to obtain high returns through bond investments, thereby earning interest differentials.

They also hold options in Silicon Valley startups, increasing the business's profit potential.

However, why would such a bank with sound operations be on the verge of collapse?

And the process is so fast?

The reason behind it is not complicated.

First of all, the Federal Reserve’s interest rate hike policy has had a huge impact on the investment side of Silicon Valley Bank.

从2022年3月到2023年3月，短短一年时间，美联储连续8次加息，利率从0.25%飙升至4.75%，上调幅度高达450个基点。

This policy has caused a profit inversion in Silicon Valley Bank's business model, that is, deposit interest continues to rise, while investment bond returns continue to decline, resulting in continued losses on the books.

Another fatal blow came from a run on depositors.

As the Federal Reserve raises interest rates to harvest global assets to cover huge debts.

Market liquidity has been severely affected, and monetary tightening has intensified.

As a result, Silicon Valley companies are encountering increasing difficulties in obtaining investment and financing, and they can only withdraw funds from banks to make up for their cash flow.

This massive run eventually led to a liquidity crisis on Silicon Valley banks.

On December 2022, 12, Silicon Valley Bank's total deposits were $31 billion.

By March 2023, 3, the night before the collapse, there was a deficit of -$9 million in total deposits.

No matter how good a bank is, facing a large-scale run, there is only one result: bankruptcy.

The collapse of Silicon Valley Bank triggered a series of chain reactions.

This bank has always been a model of financial support for the real economy. It has been named the best bank in the United States by Forbes magazine for five consecutive years.

It has strongly supported the development of early-stage technological innovation enterprises and achieved its own rapid development in this way. Such as Facebook, Twitter, etc., known as a paradise for start-ups

However, its failure may cause other banks to further strengthen their "dislike the poor and love the rich" strategy and be more cautious about maintaining cash flow to prevent the impact of a run.

In addition, Silicon Valley Bank’s customers are mainly technology enterprise users in Silicon Valley.

If this incident cannot be properly handled, these already vulnerable companies will be directly impacted.

What’s even more serious is that there are a large number of banks and institutions that are facing the same situation as Silicon Valley Bank.

They also hold large amounts of bond products and face the risk of paper losses.

Once these institutions encounter a crisis of trust and run on them, the consequences will be the same as those of Silicon Valley Bank.

That night, the lights in the White House were extremely bright.

The Sleeping King urgently convened the Ministry of Finance, the Federal Reserve, the FDIC (Federal Reserve Insurance) and other departments and institutions to study resolution plans.

After looking around for a week, Sleeping King locked his eyes on Federal Reserve Chairman Powell. He asked in a deep voice: "Mr. Powell, what do you think caused the collapse of Silicon Valley Bank?"

Regarding the collapse of Silicon Valley Bank, the outside world seems to have reached a consensus.

Powell met the Sleeping King's gaze and answered without hesitation:

"Mr. President, we don't think the failure of Silicon Valley Bank has more to do with raising interest rates."

"The main reason for the collapse was that the management did not manage risks well and did not deal with the identified problems seriously and timely, leading to the accumulation and escalation of problems."

At this point, Powell paused and continued: "In addition, the regulatory agencies are also responsible. They did not upgrade their supervision in a timely manner based on the actual situation of Silicon Valley Bank."

Who is the regulatory authority?

After hearing this, the Sleeping King frowned slightly. He turned his gaze to Treasury Secretary Yellen and asked her opinion: "Ms. Yellen, what do you think?"

"Mr. President, I do not agree with Mr. Powell's point of view." Yellen shook her head slightly:

“Silicon Valley Bank’s problems arise from a hostile interest rate environment.”

“It was the Federal Reserve’s continued hikes in interest rates that caused bond prices to continue to fall, triggering panic in the bond market and causing the run.”

"This is caused by environmental issues, not technical regulatory issues."

Well, both sides matched up.

"Ms. Yellen, the collapse of Silicon Valley Bank was a textbook case of mismanagement, and it's obvious." Powell argued:

"We can all see that the Silicon Valley Bank board and management did not effectively oversee the risks in the business model and balance sheet."

"It also failed to establish a risk management framework in a timely and adequate manner that matches its growth rate and business model risks."

"This is a management issue, not a rate issue."

"No, I don't think so." Yellen refused to give in.

“It is the Federal Reserve’s tireless efforts to raise interest rates that have kept the entire financial market in a higher interest rate environment.”

“This in turn leads to increasing financing costs, rapid loss of deposits, and a run.”

"Mr. Powell, if you want to recreate a Lehman moment, you can keep raising rates."

Powell wanted to continue the argument, but was stopped by the Sleeping King.

While the two were arguing, the Sleeping King waved his hand and interrupted their argument:

"Okay, now is not the time for arguments. What we need are solutions."

Then, Sleeping King turned to FDIC Chairman Martin: "Mr. Martin, what do you think?"

The Sleeping King looked at FDIC Chairman Martin.

"Mr. Martin, what's your opinion?"

As soon as the Sleeping King finished speaking, Powell and Yellen turned their attention to Martin almost at the same time, and both pairs of eyes burst out with hope.

Under the gaze of everyone, Martin cleared his throat slightly embarrassed:

"Mr. President, I don't quite understand what happened at Silicon Valley Bank..."

Powell: "..."

Yellen: "..."

Sleeping King: "..."

"But, I know what happened at Signature Bank." Martin continued:

"Their boards and management pursued rapid, unrestrained growth without developing and maintaining appropriate risk management measures and controls appropriate to the size, complexity and risk profile of the institution."

At this point, Martin seemed to realize something and immediately changed the subject:

"Of course, a run is a very fatal factor. If there had not been a crisis of confidence and a run, such a problem might not have happened."

When the Sleeping King heard this, he didn't say anything.

He asked with concern: "Mr. Martin, I think your condition doesn't seem to be very good."

"Huh? Yes, Mr. President, I had a cold yesterday." Martin immediately replied weakly.

"Oh." Sleeping King retracted his gaze, glanced at the three of them, and continued:

"Then the cause of the problem is obvious. On the one hand, it stems from interest rate hikes..."

Powell: "..."

"On the other hand, it stems from the lack of internal management and supervision..."

Yellen: "..."

"So how do we solve these problems?" Sleeping King emphasized:

“First, the Lehman moment must not be repeated;”

“Second, taxpayer funds must not be used to bail out the market.”

"Mr. Powell, what is your plan?"

"Mr. President, we can stabilize the banking system and inject continued credit and liquidity into the economy by establishing a new bank term funding program," Powell said:

"We should pay full deposits to depositors of bankrupt banks including Silicon Valley Bank and Signature Bank to maintain market confidence and avoid a crisis of trust."

“However, financing programs should be collateralized by Treasury securities, agency debt and mortgage-backed securities, and other marketable qualifying assets, with the collateral valued at par value.”

Sleep King nodded, Powell's point of view fit his thoughts perfectly.

The Sleeping King looked at Yellen again: "Madam, what is your opinion?"

"Mr. President, no matter what method is adopted, the legitimate rights and interests of consumers should be protected and the use of taxpayer funds to bail out the market should be prohibited. At the same time, financial institutions should be allowed to be broken up..."