SVB's collapse: what happened?
Hello Financial Healers,
Last week Silicon Valley Bank (SVB), the 16th largest bank in the U.S. went the way of the dinosaur.
It caused a major, albeit brief panic that made many wonder, “Is the next crash here?”
President Biden assured the U.S. public that the banking system was “safe and secure.”
Secretary of the Treasury, Janet Yellen, put banking regulators in charge of SVB, assuring depositors that they’d gain access to their funds, albeit not from tax payers.
The message was clear, “this is not 2008.”
But looking into our banking system, I wonder, how safe are we?
The U.S. is in trouble
The best explanation I’ve found about what happened is from Simon Black, writer and Founder at Sovereign Research. You can find his full article here.
Or you can keep reading for the short version... 👇
How a low risk investment became a death spiral
Remember Lehman Brothers? They were the institution that filed for bankruptcy in 2008. Many claim this filing triggered the subsequent crash, the “worst economic and financial devastation since the Great Depression.”
But why did Lehman Brothers fail?
They invested heavily into high-risk mortgage bonds that didn’t pay off.
SVB, in contrast, “parked the majority of their depositors’ money ($119.9 billion) in US GOVERNMENT BONDS.” When the value of those bonds fell, the bank collapsed.
Simon Black writes, “US government bonds are supposed to be the safest, most ‘risk free’ asset in the world. But that’s totally untrue, because even government bonds can lose value. And that’s exactly what happened.”
SVB took a risk. They invested billions in U.S. Treasury notes when the price was low. But when interest rates rose, the notes lost value.
Black continues, “The same bonds that SVB bought 2-3 years ago at 1.78% now yield[ed] between 3.5% and 5%… meaning that SVB was sitting on steep losses. Their 2022 annual report… showed about $15 billion in ‘unrealized losses’ on their government bonds. By comparison, SVB only had about $16 billion in total capital… so $15 billion in unrealized losses was enough to essentially wipe them out.”
Because banks loan out most of their money (SVB is no exception), there wasn’t enough cash to cover the losses.
Black concludes, “SVB failed because they lost billions from US government bonds… which are the new toxic securities.”
Thus, insolvency.
So, SVB made a huge investment that didn’t pay off.
What does this mean for us?
I don’t mean to be all doom and gloom, but it’s important to know what goes on in the U.S. economy.
An educated population is a healthy population.
SVB’s failure shows just how vulnerable our banking system is (and our country, in general).
I think Westerners tend to think we’re immune to difficulty.
We’re spoiled, so when tragedy arises, we get surprised.
But if history shows us anything, upsets happen, so it’s smart to prepare. Now.
I’m not an investment guru, so I won’t give any recommendations on that. But here’s what I can suggest (easy and simple steps):
Get out of debt.
Build your savings.
Control spending.
Inflation isn’t going away any time soon. Some economists say this economic climate could last for 10 years.
So, make a plan to control your finances. Stick to it.
Get disciplined with money.
If you need to make hard choices, go for it it. You’ll be ahead of the curve when the economy settles back down, and it will.
Also, remember, God is still in control.
He’s immune to poor economic decisions.
The U.S. economy feels rough right now, but it will improve.
P.S: if you need some tips on how to tackle debt, build savings, and control spending, check out my Prosperous Home Ecourse.)
God bless your Prosperous Soul,
Stephen K. De Silva