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SVB: Idiosyncratic or Idiot Synchronization

SVB: Idiosyncratic or Idiot Synchronization

| March 28, 2023

I realize most of the financial world has moved on from Silicon Valley Bank (SVB). And why not. The zeitgeist is that these evil venture capitalists started a whisper campaign and cashed out of their wild west bank in a few days. Besides, SVB was loaning to the tech sector. These pie in the sky startups are prone to failure and really shouldn’t have been given so many low interest loans. Shame on SVB.

Financial pundits, intrepid commentators and our government leaders were quick to put us at ease and said that SVB was idiosyncratic. I’m not smart like you so I had to look up the word. It means having to do with having idiosyncrasies. Like me. I have idiosyncrasies. For instance, I tend to not trust financial pundits, intrepid commentators or our government leaders when it comes to things like wet markets and regional bank resilience.

So, what are SVB’s idiosyncrasies exactly?

Well for one, they are a regional bank. Meaning they lend to a smaller, niche community. This community was tech startups, a highly risky endeavor. So when their loans are marked to market they need more capital, right? Wrong. Loans are not marked to market. This idiosyncrasy is NOT the problem.

Then surely, it must be that SVB made the mistake of purchasing long duration Treasuries and mortgage-backed securities (MBS). They would make money with their clients money and loan against these treasuries. Why would they do that and take on so much interest rate risk? You see if rates go up nobody wants your 30 year treasury anymore and will only give you 70 cents on the dollar. If rates go up, nobody wants to refinance their mortgage, which extends the maturity of your stinky old mortgage back maturity and drops its market value. So that must be the idiosyncrasy! Wrong. Frank Dodd legislation severely limits what any bank can buy. Furthermore, SVB didn’t have an interest rate crystal ball (which would have been truly idiosyncratic).

So, what are SVB’s idiosyncrasies exactly?

What they did wrong is they didn’t predict the fastest, steepest interest rate hike in the history of the Federal Reserve. I know what you’re going to say. “But Rey, you idiosyncratic idiot (fun fact: same root word), going from 1% to 5% isn’t the fastest and steepest. Volker raised them from 8% to 15% over a similar time frame. Blah Blah blah mer mer mer (I’m no longer listening to you at this point).”
That may be true but going from 8 to 15 is a 100% rate hike. Going from 1% to 5% is a 500% rate hike and has a parabolic not cumulative effect. Either way, all other banks went through the same rate hike and they still are around giving out free toasters.

You’re probably wondering if the type of loans and niche clientele may have been their idiosyncratic undoing. Yes and no. As I mentioned, loans aren’t marked to market so that’s not an issue. However, their clientele were EXTREMELY intelligent. Like Alex Trebek  level smart. Perhaps, in the back-slapping cycle-riding CEO groups of Silicon Valley he mentioned his banks credit spread woes. That’s just pure speculation. But the Mensa-led whisper campaign that was either caused or led to the liquidity crisis worked and with the quickness.

The good news is that the government bailed them out. And now the FDIC is splitting any future loan losses with their new owner, First Citizens. Rest easy, the officers get to keep their huge bonuses in case you were worried they wouldn’t get to go to St. Barth this spring.             

I think I’ve made my case clear that there’s nothing idiosyncratic about Silicon Valley Bank.

  • All banks are mandated to purchase a certain type of asset by Frank Dodd legislation.
  • All banks make loans that are not marked to market. Most regional banks make commercial loans with a 1% loss provision and commercial real estate is down nationally way more than 1%.
  • All banks were purchasing long duration bonds and mortgage-backed securities during this recent parabolic rate hike.
  • All banks are in great shape and there is nothing to see here.

It’s not idiosyncratic it’s idiots synchronized. If you think I’m wrong and want to fight me, I’m a pacifist. If you’d like to compliment me and boost my ego, click here.