Ever because the 2008 implosion of the US economic system, Wall Street has been on tenterhooks for the following “Lehman Moment,” a triggering event named after the ill-fated investment bank that led to the broader crash of the banking system and the economy.
The newest alleged Lehman Moment occurred Friday with the crash-and-burn of Silicon Valley Bank.
With around $200 billion in assets, it’s the second-biggest bank collapse in history.
Bank stocks have been crushed in recent days, as traders and investors fret that losses by SVB are a sign of systemic risk spreading through the broader banking system, resulting in a string of bank losses, some possibly collapsing, after which a recession.
Banks then stop lending, businesses recoil, the economy goes into the tank.
I say “alleged” because in accordance with my sources this isn’t quite a Lehman Moment — no less than not yet.
SVB’s slide into the abyss is a warning sign, they are saying, that we’ve trouble within the plumbing of the banking system built up through years of free-spending, i.e., money printing on the Federal Reserve and financial blowouts by the Biden administration.
Silicon Valley Bank Financial is now searching for a buyer. AFP via Getty Images
As reported, the FDIC seized control of SVB on Friday as SVB headed to insolvency.
Its parent company, SVB Financial, is scrambling to seek out a buyer.
Like Lehman, it’ll be difficult, so complete collapse could be very possible.
Regulators just like the FDIC and Fed must approve any sale, narrowing the list of acquirers to major financial institutions.
Big banks shall be hesitant to purchase SVB’s portfolio.
It’s difficult to value and given their experience through the financial crisis, probably a non-starter. Recall: JP and BofA bought Bear Stearns and Merrill Lynch, respectively, as they were collapsing — only to be saddled with huge liabilities.
That leaves as possible buyers alternative asset managers like private equity, firms like Blackstone and Apollo.
But each are vulture investors and might want to select up SVB’s portfolio only on the very low cost.
The FDIC took control of Silicon Valley Bank Friday. AP
Collapse inevitable
In other words, a Lehman-like collapse is sort of inevitable for SVB, bankers I interview say.
Here’s the excellent news: Lehman’s holdings of underwater mortgage debt that caused its insolvency were present in every large bank balance sheet, hence the necessity for a government bailout to forestall financial Armageddon.
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Silicon Valley’s portfolio business is pretty idiosyncratic. It serves mainly enterprise capital firms that began yanking money from accounts as tech losses mounted.
That forced the bank to unload its holdings of Treasury bonds, themselves depressed amid Fed rate increases, resulting in the crash. Big banks like JPMorgan have a more diverse customer base in order that they don’t should worry about unloading Treasurys to fulfill a bank run, no less than not yet.
But that doesn’t mean the SVB experience isn’t of concern.
It’s pretty clear that the large amounts of fiscal spending and money printing that only recently ended distorted a lot of the banking system’s plumbing that recent Fed rate increases are starting to wreak havoc.
SVB’s holdings of Treasury securities exploded amid this bonanza of fiscal excess, but so did similar holdings at every major bank.
Prices remained stable and high even through the Biden administration’s spending since the Fed kept printing money, essentially buying the bonds the Treasury was selling.
That was all well and good until inflation set in and the Fed needed to reverse course.
Mo Grimeh, a managing director who worked at Lehman Brothers for 10 years, reacts as he leaves the corporate’s headquarters on seventh Ave. in Latest York City on Sunday, Sept. 14, 2008.AP
The Fed rate increases at the moment are depressing bonds held not only by SVB but every major bank.
Again the excellent news: Unlike Silicon Valley, most large banks have a diversified depositor base that isn’t yanking deposits.
Still, what’s being held within the banking systems is a mother lode of assets with prices that were distorted by the cash printing era of super big government, which under the best circumstances could create that Lehman Moment the market has been worrying about.
