American Economics Thread
- Thread starter Bernard
- Start date
I'm in favor of that outcome and am hoping the hedge funds get their pay day.
Any bank in the world will run out of cash if everyone goes and withdraws their money in the same day. From what I'm seeing. SVB wasn't in that bad a position, as far as the average American bank goes. It's just that the atmosphere surrounding the tech sector is really bad right now, with all the layoffs, the interest rate hikes, the fear of another recession and the 2008 collapse and 2020 covid hell still fresh in people's memories, so some bad news quickly turned into a bank run.
If this turns out to be a big deal that badly fucks with the entire banking system, it's all going to be due to fear and panic. We'll see tomorrow.
15 billions of unrealized losses from treasures isn't a token or chump change. SVB might not be in a bad shape when you first look at it. However, if you dig deeper, then you can see the problem is much bigger. There is a 9 trillions cash injection from the Fed balance sheet that is sitting on American banks accounts. And the Fed is desperately trying to bring down the amount without causing major upheaval and at the same time tame inflation.
SVB is the first domino to fall. The Fed is now in a damned if you and damned if you don't dilemma. By simply raising interest rate, banks especially those small and medium with risky practices can't seem to cope but not raising rate means the inflation would rebound. In addition, those 9 trillions are still sitting on the Fed balance and would take decade to unwind if ever.
SVB is unique in that most of its deposits were from tech companies, particularly startups.
Most startups are not profitable and need to drawdown their cash balance to pay for operations. When the economy is good, the successful startups get new cash injections from new rounds of funding and failed startups are replaced by freshly funded new startups, so the overall deposit base for SVB is stable.
In the last year, however, startup funding has completely dried up. For SVB, this means that all of its clients are drawing down their cash balance, without any new sources of deposits coming in. Even worse for SVB, recently many tech companies are having layoffs and so have been making even larger than usual cash withdrawals to pay for severances.
Ironically, there are rumors that many tech startups were planning layoffs last week and were forced to postpone the layoffs due to their inability to withdraw cash from SVB to pay severance.
Most startups are not profitable and need to drawdown their cash balance to pay for operations. When the economy is good, the successful startups get new cash injections from new rounds of funding and failed startups are replaced by freshly funded new startups, so the overall deposit base for SVB is stable.
In the last year, however, startup funding has completely dried up. For SVB, this means that all of its clients are drawing down their cash balance, without any new sources of deposits coming in. Even worse for SVB, recently many tech companies are having layoffs and so have been making even larger than usual cash withdrawals to pay for severances.
Ironically, there are rumors that many tech startups were planning layoffs last week and were forced to postpone the layoffs due to their inability to withdraw cash from SVB to pay severance.
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The dilution of the purchasing power of rest of the world being held hostage to the US dollar hegemony, which btw is itself moribund and not long for this world.
The main source of risk is that theoretically US banks are sitting on billions in unrealized losses. This is what brought down SVB. Right now the coupon on a 6 month treasury is 5% compared to 0.5% for most savings accounts. You would have to be stupid not to go into treasuries right now. This can, believe it or not, put a lot of small banks under pressure especially considering most do not have interest rate hedges in place. The more people withdraw to put into short term, the more banks would have to sell their longer term assets at big losses. Although the recent fed announcement a few hours ago significantly reduces this risk as the Fed is now just going to eat any losses caused by the rising interest rate