Thus far in this 3-year fiasco of mismanagement and corruption, weíve avoided a financial crisis. Thatís for specific reasons. We just had not traveled there in the trajectory of the inevitable. Are we there yet? Maybe. In any case, the speed of change is accelerating. All we await is to observe the extent of the contagion.
The failure of the Silicon Valley Bank (SVB), $212 billion in assets until only recently, is a huge mess and a possible foreshadowing. Its fixed-rate bond holdings declined rapidly in market valuation due to changed market conditions. Its portfolio crashed further due to a depositor run. And it all happened in less than a few days.
Itís all an extension of Fed policy to curb inflation, reversing a 13-year zero-rate policy. This of course pushed up rates in the middle and right side of the yield curve, devaluing existing bond holdings locked into older rate patterns. Investors noticed and then depositors too. The high-flying institution that specialized in providing liquidity in industries that have lost their luster suddenly found itself very vulnerable.
In addition, the bank was exposed with a portfolio of collateralized mortgage obligations and mortgage-backed securities. But with rates rising, those are coming under stress too as high leverage in housing and real estate become untenable amidst falling valuations. Borrowers are finding themselves under water and that in turn adds to stress on lenders.
And where did SVB, and the entire banking industry, get the funds to bulk up their portfolios with such debt holdings? You guessed it: stimulus payments. Billions flooded in and it had to be parked somewhere making some return. At the time it seemed like a good deal, until Fed policy changed.