WATCH LIVE: Will the SVB crash spark the biggest economic disaster of this decade?

The whole world is watching the current events surrounding Silicon Valley Bank with bated breath. It is no exaggeration to say that we are at the end of a similar gigantic global crisis that was triggered by the collapse of Lehman Brothers in 2008.

SVB may well cause the biggest economic event in recent years

Financial group SVB $SIVB has bought some of the safest assets in the world of finance. So how is it possible that it crumbled to dust in two days?

Mar 13, 2023 8:11 AM - Michael Burry has again leaned hard on a current cause. "2000, 2008, 2023, it's still the same," laments the hedge fund manager famous for his successful bet against subprime mortgages that led to the 2008 financial crisis. "People ruled by greed take stupid risks and fail. Then they print money. Because it works so well."

Mar 13, 2023 7:33 AM - The Federal Reserve moved quickly late Sunday night to prevent the collapse of SVB Financial from causing further damage to the U.S. banking system, offering billions of dollars in Treasury-backed secured loans to lenders .

The Fed said it would set up a "Bank Term Funding Program" (BTFP) that will allow U.S. banks to borrow billions on favorable market terms, as long as the loans are backed by Treasury bonds, high-quality agency debt securities or mortgage-backed securities. These securities will not be subject to the usual discount, or haircut, if used as collateral for a loan, the Fed said, allowing U.S. banks to get quick cash based on their full face value. As a result of the sharp rise in market interest rates that has flooded fixed-income portfolios around the world, banks have unrealized losses on an estimated $620 billion of Treasuries, agency bonds and MBS.

"BTFP will be an additional source of liquidity against high-quality securities, eliminating the need for institutions to sell these securities quickly in times of stress," the Fed said. "The Board is closely monitoring developments in financial markets. The U.S. banking system's capital and liquidity position is strong and the U.S. financial system is resilient."

Mar 12, 2023 9:22 PM - Gentile, a former Silicon Valley Bank (SVB) executive, was a member of the bank's board before the 2008 collapse of Lehman Brothers. Prior to joining SVB as Chief Administrative Officer, Gentile served as Chief Financial Officer (CFO) at Lehman Brothers' Global Investment Bank. Gentile left Lehman in 2007, just a year before its 2008 bankruptcy

Before the Federal Deposit Insurance Corporation (FDIC) took control of SVB, the bank posted mounting losses and its stock plunged more than 60% before the shutdown. The bank found itself in the midst of a liquidity crisis after announcing plans to sell $1.25 billion worth of stock for which there was little interest. According to the FDIC, SVB was among the 20 largest U.S. commercial banks with total assets of $209 billion at the end of 2022. It is the second-largest bank to close in the U.S. since 2008.

Hitting the wall. The bank's stock lost more than 60% before the trading halt

What happened?

SVB Financial is the parent company of Silicon Valley Bank, which counts many startups and small venture firms among its clients. During the pandemic, these clients generated a lot of money, which led to a surge in deposits. SVB ended the first quarter of 2020 with total deposits of slightly more than $60 billion. By the end of the first quarter of 2022, that amount had climbed to just under $200 billion.

SVB's quarterly deposit levels. Source

SVB Financial has purchased tens of billions of dollars of seemingly safe assets, primarily long-term U.S. Treasury bonds and government-backed mortgage securities. SVB's portfolio of securities has grown from about $27 billion in the first quarter of 2020 to about $128 billion by the end of 2021. There is virtually no default risk on these securities (as if I've heard that somewhere before). However, they pay fixed interest rates for many years. This is not necessarily a problem if the bank suddenly needs to sell these securities. But because interest rates have moved so much higher, these securities are suddenly worth less on the open market than they were originally worth to the bank. As a result, they could only be sold at a loss. SVB's unrealized losses on its portfolio of securities at the end of 2022 had ballooned to more than $17 billion.

The next big blow

That still wouldn't be so bad. But the bank still had the wind taken out of its sails by its own clients - i.e. startups and smaller companies. Indeed, the inflow of deposits into SVB turned into an outflow as its clients burned through cash and stopped raising new funds from public offerings or fundraising. Attracting new deposits also became much more expensive as the rates demanded by savers rose along with the Fed's interest rate hikes. Deposits have fallen from nearly $200 billion at the end of March 2022 to $173 billion at the end of 2022.

On Wednesday, SVB said it sold a large portion of its $21 billion worth of securities, at a loss of about $1.8 billion after taxes. The bank's goal was to help it reset its interest income at today's higher yields and give it balance sheet flexibility to face potential outflows and still fund new loans. The bank also set a capital raising target of approximately USD 2.25 billion.

The nail in the coffin

Following the announcement on Wednesday evening, the situation for the bank seemed to have worsened. The announcement of the share sale led to a drop in the share price, which made it more difficult to raise capital and led the bank to cancel its plans to sell shares. Clients began to withdraw their deposits in large numbers.

On Thursday, customers tried to withdraw $42 billion worth of deposits - about a quarter of the bank's total deposits - according to a filing with California regulators. It ran out of cash. Many of the bank's deposits are large enough not to be covered by Federal Deposit Insurance Corp. protection. SVB said it estimates that the amount of deposits at its U.S. branches that exceed the insurance limit will be $151.5 billion at the end of 2022.

Chain reaction

Right. You say to yourself that one bank is going to fail, which is a sad event, but that's the end of it. Wrong! And that is why everyone fears the worst.

Investors are selling bank stocks across the board. Trading in shares of other mid-sized lenders like First Republic Bank and Signature Bank were halted Friday morning.

One of the big questions to come out of this will be which banks misjudged the correlation between the price and life of their deposits and the yield and duration of their assets.

Everyone involved - including the Fed - had the entire weekend, when markets are not trading, to sort out the situation. But tomorrow is expected to be another big chaos and sequence of events that quite possibly will define the next few months or years.

For example, Bill Ackman commented on the situation: Bill Ackman: You have 48 hours to fix an irreversible mistake with SVB Financial

Big names

No one knows how the situation will play out. But speculation has already begun about a possible solution. One way to avoid a catastrophic scenario and a taxpayer-funded bailout would be for a third party to step in and buy the bank. Elon Musk says he is interested in playing the role of white knight. He said this on Twitter when one user floated the idea that Twitter, which he owns, should acquire what's left of Silicon Valley Bank.

This scenario would allow the billionaire to realise his ambition to turn the platform into a mega-application called X, which would offer financial and other services.

"I think Twitter should buy SVB and become a digital bank," said a Twitter user.

"I'm open to that idea," Musk replied, without giving further details. Is he dealing with the FDIC, for example?

We're following the whole thing closely and will continue to keep you updated on the latest developments, because this is extremely important to the entire world - and not just the investment world.

We will keep updating this article and bringing you the latest information regarding the whole case to keep you in the loop! You can also follow everything about the case on our Twitter and all other networks. Soon you can also look forward to a video where I will explain everything in detail.

Are you interested in something specific? Do you have an opinion on the whole situation? Share it in the comments!

Disclaimer: This is in no way an investment recommendation. It is purely my summary and analysis based on data from the internet and other sources. Investing in the financial markets is risky and everyone should invest based on their own decisions. I am just an amateur sharing my opinions.

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