As chancellor Jeremy Hunt prepared his budget speech this week he was absorbing the news of a massive bank collapse. It’s not the 2008 financial crisis—yet—but the second-largest bank failure in US history underlines the fragility of the world economy.
Silicon Valley Bank (SVB) was valued at more than £35 billion less than 18 months ago. Now it is worthless—indeed the state has stepped in to pay much of its debts and a portion of its account-holders’ cash.
The bank took deposits and lent money to tech start-ups and thrusting new companies. It ended up with so much money that it couldn’t find sufficiently profitable places to invest it.
So, seeking easy gains, it parked £70 billion of its deposits in securities such as mortgage bonds and US Treasuries, which were deemed safe.
But then the Federal Reserve, the US equivalent of the Bank of England, increased interest rates. It wanted to snuff out inflation, crash the economy and intimidate workers from striking for higher wages.
The result was SVB’s “safe” investments are now worth at least £10 billion less than when it bought them. This led to panic and people demanding their cash from the bank.
It couldn’t cough up the money. So the state stepped in to hold the system together—there’s always money for bank handouts.
Hunt was deciding this week whether to bail out British tech start-ups caught up in the bankruptcy. More than 210 technology companies wrote to the chancellor warning of an “existential threat to the UK tech sector.” They said businesses risked being “sent into involuntary liquidation”.
“This crisis will start on Monday and so we call on you to prevent it now,” said the letter, signed by founders and chief executives from companies including Adzuna, ClearScore and Curve.
SVB’s collapse came two days after Silvergate, a San Diego-based bank that catered to the crypto industry, said it would voluntary close down after anxious customers withdrew billions of dollars. The whole banking system is now jumpy.
A senior executive at one multibillion-dollar venture capital fund said in the Financial Times newspaper, “SVB’s 40 years of business relationships supporting Silicon Valley evaporated in 14 hours.”
The newspaper added, “The ramifications of SVB’s troubles may be widely felt. The lender is the banking partner for half of US venture-backed tech and life sciences companies.”
Financial authorities halted trading—gambling—in PacWest, Western Alliance and First Republic banks. This is after their shares fell 40 to 50 percent because they were thought to have similar problems to SVB.
Marxist economist Michael Roberts said, “SVB’s failure may be a one-off, but financial crashes always start with the weakest or the most reckless.
“This is a bank that was being squeezed by the scissors of an impending slump—falling profits in the tech sector and falling asset prices caused by rising interest rates.”
An interest in profit-making
Most bonds pay a fixed interest rate that the rich and companies that buy the bonds collect whatever happens. When interest rates are low or falling that looks a top bet and more people try to buy bonds, driving up the price.
But if interest rates rise, the lower fixed interest rate paid by a bond doesn’t look so attractive. The price of bonds fall.
That’s a problem if bondholders need cash and have to sell them off. They collect less than they had hoped.
Higher interest rates mean banks worldwide are sitting on £500 billion of potential losses on these bonds. That isn’t immediately a problem. But it is if they need cash and start to sell them.Original post