The reason for its failure was due to having a high percentage of its investments in uninsured deposits and risky fixed rate "hold to maturity" bonds or "HTM" bonds (meaning they aren't readily tradable for other higher yield securities).
Silicon Valley Bank (SVB), based in Santa Clara California, represented 50% of the money available to venture capital firms, particularly those with interest in new and emerging technology as well as biogenetics. While it was one of the primary banks to venture capital firms, its total assets were relatively small compared to the major banks like JP Morgan Chase, Citibank, or Bank of America.
According to investigators, 93% of SVB's deposits were uninsured. This means that many of its customers had deposits in excess of $250,000, which exceeds the amount covered by the FDIC. This percentage second highest in the banking industry behind Mellon Bank of New York with 96% of its deposits uninsured. 94.4% of its investments were in long term HTM securities and loans, compared to Mellon's 31.2%, meaning Mellon had more available liquid assets on hand.
Back when technology industry was booming and stock prices were rising, SVB saw its deposits grow from $65 billion in 2019 to $189 billion three years later. ignoring all the warning signs, the inevitable bust came in November of 2021, resulting in many of its corporate investors (especially tech companies) to begin a drawdown of their money, especially in light of rising interest rates and a downturn in the stock market.
The second bank failure of 2023 was the better known Signature Bank. It's failure was primarily the result of a run on the bank by spooked depositors after learning of SVB's collapse (such is the power of mob mentality). However, the underlining reason for its failure was its highly speculative investment in cryptocurrency, resulting in the fourth largest bank failure in the industry's history.
Like SVB, Signature Bank had a similar percentage uninsured deposits at 89% along with 93% of its investments tied up in loans and HTM bonds. While SVB and Signature were the only two banks with investment ratios this high, their implosion sent shock waves through the financial industry. Banks and other financial institutions, both domestic and global, saw their stock prices take a hit amid fears of possible bank runs by depositors and the stability of the financial market in general.
While it's unlikely their will make any more bank runs, the collapse of SVB and Signature Bank nevertheless reveals an underlining concern by the public and corporate investors alike about rising inflation rates along with rising interests rates amid a shaky U.S. economy and deep concerns about the prospects of a new world war which could quickly go nuclear.
The U.S. economy had been doing rather well, with inflation running from around 1.5% in 2015 to a low of .07% in 2017 under President Obama (the "ideal" rate of inflation is about 2%). When Donald Trump took office in 2017, inflation was still a respectable 2.1% before dropping to 1.4% in 2020. Under President Biden, inflation jumped to 7% in 2021 before dropping slightly to 6.5% in 2022. It's now hovering at about 6%.Median household incomes grew an average of 5.8% over his two terms (by comparison, median household incomes rose an average of 13.9% under President Clinton but dropped to 4.2% under George W Bush). Home prices rose by 20%. The number of uninsured Americans dropped by 15.2 million individuals.
It's worth noting that under Clinton, corporate profits rose 55.2% while under George W. Bush they skyrocketed 118.9% before falling back to 54.9% under Obama (during the Nixon-Ford years, corporate profits rose by a astonishing 125.4%).
During Trump's tenure as President, unemployment rose to 6.3% while 2,876,000 jobs were lost. Nevertheless, the number of job opening rose 25.7%. Poverty continued to decline by 1.3%. The median household income rate grew by 6%. and median home prices rose by 27.5%.
Although food stamp recipients dropped by 1.7%, the consumer price index (the change in consumer prices) rose 7.6%. The number of people without insurance increased to over 3 million individuals, affecting single parent households the most. Wages for private sector workers, however, rose by 8.7% under President Trump.
Under President Biden, the numbers aren't so rosy. Speaking at the Conference of Mayors, Biden said that thus far under his administration, unemployment had dropped by 16 million. Impressive, but not true. Analysis shows that while unemployment has dropped, the numbers were a much less impressive 5 million.40% remaining unfilled or permanently lost. And, as an aside, President Jimmy Carter grew the largest number of new jobs at 8.4%, not Biden.
President Biden claimed in a Tweet on March 16th that food related prices have dropped. Again, not true. Data from the Bureau of Labor Statistics shows that over the last year, food prices rose 11.8%. For cereals and bakery goods, overall prices rose 16.1% last year. Dairy and related products (like ice cream, cheese, cottage cheese, etc), prices went up 15.3%.
Other grocery items such as eggs, fish, chicken and beef saw an increase in prices by 7.7%. Fruits and veggies had a 8.4% jump in price. Thus far this year, prices are still rising but at a generally slower rate of roughly .03%. Another issue for customers has been the price of gas.
When Biden first took office, the average price of regular gas was $2.39 a gallon. Within a year of taking office, the national average was $5.00 per gallon for regular. Today the average price nationally is about $3.39. Biden falsely claimed in October 2022 that when he took office, the average price of gas was $5.00 and added that his policies were responsible for the decrease. Nevertheless, it our era of under regulated corporate industries, there's not much a president can do on his own about gas prices.
Another factor affecting the mood of the public and depositors alike is the war in Ukraine and rising tensions with Russia and China. The United States spends more on its military---$801 billion---than the next nine nations combined. Russia spends just $300 million on its military, which is less than the UK ($400 million) or India ($500 million), and yet we've allocated over $400 million to Ukraine (the same amount as the entire military budget for the UK!). NATO has contributed roughly $80 billion in military aid with much of that comes indirectly from the U.S..
As a result of continued Western aid, Putin has deployed nuclear ICBM missiles along with threats of using them while various NATO nations (notably Poland) have indicated they might be "forced" to get more directly involved. If Poland does, it could enact Article 5 of the NATO agreement which calls for NATO to come to the aid of another NATO member if attacked. It was this kind of distorted mentality which lead to World War I and we all know how that worked out for Europe.
Beijing has at least put forward a peace proposal as it has strengthened its relationship with Russia, including the shipment of military aid. At the same time it has been aggressively beefing up its military. Having the world's second largest budget, China has already deployed two aircraft carriers and is beginning sea trials on a third. It has enlarged its fleet in everything from amphibious landing crafts and coastal ships to cruisers and destroyers. It has also added shipbuilding yards, bringing the total to six.
Beijing has upgraded its army in terms of training and armament as well as adding troop carriers, tanks, mobile missile launchers, and aircraft. Most notably, it has also enlarged its cyber-military capabilities which not only covers surveillance and communications eavesdropping, but cyber-hacking and electronic jamming capabilities.
To makes matters more intense, China has become much more aggressive in asserting its claim over Taiwan, its border with India, and has challenged the territorial water rights of Japan, South Korea, Philippines, India, Indonesia, and Australia while asserting its own rights over the South and East China Seas.
China is also a essential trading partner of the U.S.. It makes up 17.48% of our imports. Meanwhile, the United States accounts for just 6.59% of China's imports. Their top import partners are Japan and South Korea who making up 8.44% and 8.36% respectively of its total percentage of imports.
In the era of COVID, China is an essential importer of pharmaceuticals to the U.S. which covers the gambit from medical equipment, vaccines and commonly use drugs. For example, they account for 95% of our ibuprofen, 91% of our hydrocortisone, 70% of our acetaminophen, 45% of our penicillin, and 80% of the active pharmaceutical ingredients used in other drug manufacturing (they even provide the majority of those medical masks we wore during the outbreak of COVID!).
Technology, as stated earlier, is also a major Chinese import, especially in terms of cell phones, electronic chips used in computers, vehicles, televisions, microwaves, military equipment, as well as telecommunication equipment, computers, semiconductors, and various automotive parts.
Lastly, the Chinese have been doing a lot of shopping globally, buying up mineral and water rights, oil and natural gas rights, mines, agricultural (seeds, fertilizer, etc) manufactures, food processing firms, pipelines, concrete manufacturing plants, farmland, forests, and securing exclusive agreements as they go. If they can't conquer the world outright, then they'll buy it bit by bit. So long Pax Americana!However, that's no excuse. Other banks, financial institutions, and businesses face these same issues and remain solvent.
Management will likely claim they were trying to maximize gains for their shareholders, which may be true, but it will be the taxpayers who'll end up paying for their mistakes. Ultimately, it comes down to bad judgment and a failure to maintain a proper fiduciary responsibility in an industry which is in need of tighter regulation.
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