Banksters, bonds, and failure; the next pandemic dead ahead

I’m going to leave “economic reports” for later – why bury the lead (lede)?

Silicon Valley Bank (SIVB) collapsed on Friday. Excuse me, what I meant to say was: US regulators have shut down Silicon Valley Bank (SVB) and taken control of its customer deposits in the largest failure of a US bank since 2008 (Source – BBC). “The Federal Deposit Insurance Corporation (FDIC), which typically protects deposits up to $250,000, said it had taken charge of the roughly $175bn (£145bn) in deposits held at the bank, the 16th largest in the US.”

Lots of Valley startups stored their funding cash in this bank. FDIC only insures up to $250k. My guess: lots and lots of payrolls won’t be met in the next month or so, from this one event. If you could pick a target to blow up a bunch of startups in the Valley, knocking off SIVB would be a pretty good candidate. Did I mention FDIC only insures up to $250k per account?

How did it happen? Short answer: a bunch of long-bond holdings, a sharp rise in long bond rates, followed by a bank run by customers, which forced SIVB to sell their long bonds to raise cash, resulting in losses => the bank blows up. Here’s the trade in a nutshell:

How does this work? Let’s assume you run SIVB, and you bought a bunch of US 10-year treasury bonds (or some higher-yielding long-dated mortgage-backed securities) in 2020, at or near the interest rate lows. Then, you suddenly had to sell them this week to raise money to pay off your depositors who were transferring money – say – to Treasury Direct (treasurydirect.gov). Let’s assume the buy was back when the 10-year yielded 0.75%, and the forced sale was this week, at 4%, 2 years later. How does that pencil out?

We use a “bond calculator” to answer. We assume: a $1m 10-year bond purchase, coupon 0.75%, wait 2 years, there are now 8 years remaining on the bond, and the market rate on the 10-year is now 4%. Then – SELL!

https://www.omnicalculator.com/finance/bond-price

Congratulations Bankster! You just turned $1,000,000 into $779,362, in just two years!

Banksters, bonds, and failure; the next pandemic dead ahead

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