Broker Check

Is this 2008?

March 13, 2023

On Friday word spread that Silicon Valley Bank was insolvent and being taken over by the US Government.  That sent markets spiraling downward yet again to close the week.  That news was quickly followed by the news that Signature Bank was in the same position.  The fear is obvious….are we experiencing another financial collapse like we did in 2008?  I would say it is highly unlikely.  These are regional banks.  Silicon Valley was the 16th largest in the country, with a large amount of their assets coming in just the last few years which was part of the issue they experienced.  Signature Bank was a little over half the size of SVB but also had large exposure in the crypto space. 

The US Government stepped in late Sunday night and guaranteed all deposits for the banks, even above the FDIC amount of $250,000.  The Federal Reserve has also set up a new Bank Term Funding Program that will allow other banks to cover any withdrawal run they might experience.  The only caveat is that the bank must put up their assets as collateral.  The positive is that the Fed is using the face amount of their bond holdings and not the current value.  As was the case with bonds for consumers last year, banks have significant amounts of unrealized losses in their bond holdings.  So when a large amount of withdrawal requests come in at once, they are forced to liquidate those bonds at a heavy loss which ultimately can render the banks insolvent.

That all led to an intense day of volatility today with the S&P ending slightly negative and the NASDAQ slightly positive.  The VIX which tracks volatility closed at its highest levels since November.  The announcement last night did not seem to ease investors fears if this will be a systemic issue like we saw in 2008.  I truly believe this is contained to smaller regional banks.  I also jumped on a call with Dr. David Kelly of JP Morgan to get his thoughts.  Dr. Kelly is someone who I have a lot of respect for and is a thought leader in the industry.  His feelings were the same, that this issue is more of a smaller bank issue and that the government has set up the safeguards necessary to prevent any type of domino effect.

One potential win out of this?  As I have constantly written, inflation is what is driving the market, both up and down.  I’ve said multiple times that economic bad news is potentially market good news.  With the failure of these banks and the nervousness its created, does the Fed have the nerve to continue to raise rates at the pace that it has?  With the inflation report coming out the morning of the 14th, a continued sign of declining inflation may allow the Fed to cap their rate hikes where they are, hopefully buoying the markets.  That’s a big IF and one I will have my eye on.

For now, I understand your fears.  If you have any specific questions about your portfolio, please don’t hesitate to contact me.  Otherwise, as always I will be monitoring investments for opportunities and will be in touch with you for appropriate changes.