In the fall of 2008, an earthquake along the opacity fault line in the global financial system triggered the acute phase of the Great Financial Crisis. Prior to the earthquake, investors Trusted Wall Street’s valuation stories without Verifying if they were true or not. The earthquake hit when investors came to doubt these stories and went to look for the data to verify them. Of course, where there was opacity, there was no data available. So naturally, investors “ran” from these securities (this included both structured finance deals and banks).
Fast forward to March 10, 2023 and we discovered nothing has been done to reduce, let alone eliminate, the opacity in the global financial system.
What happened?
The 16th largest bank in the US, Silicon Valley Bank, had to be taken over by regulators as a result of a bank run. Depositors ran to the bank attempted to withdraw over $40 billion of deposits from a slightly over $200 billion in asset bank.
Why did depositors do this?
If you look at the bank’s publicly disclosed information, nothing looks particularly suspicious. Then you will notice it owned a lot of US Treasury Bonds and mortgage-backed securities issued by Fannie Mae and Freddie Mac. While these securities are not subject to credit losses, they are subject to losses from an increase in interest rates.
Hmmmm ….
Were the mark to market losses on these securities from the Fed’s raising rates so large as to wipe out the bank’s capital?
We don’t have the necessary information to know. This is the unsolved opacity problem.
Facing opacity which prevents verifying the story the bank can continue operating, the prudent step for depositors with deposits in excess of the Federally guaranteed $250,000 was to run to the bank and try to get their money out.
In case you are wondering, this could have happened to any of the large banks. The lack of disclosure of their current exposure details means there is no way of knowing if any of the Too Big to Fail banks is solvent (market value of its assets exceeds the book value of its liabilities).
A highly respected bank analyst suggested due to the Fed’s interest rate increases, the banking system needs another $1 trillion in capital. This strongly suggests so long as banks operate behind a veil of opacity the run on Silicon Valley Bank is not going to be a one-time event.
I agree with you, but then I thought it irresponsible of the Fed to say it was going to hike interest rates until something broke. Why? There is zero guarantee what breaks will be fixable by Fed policy.
It seems that the many prognostications that the Fed will hike rates until they break something are beginning to reach the point where they are breaking things. the UK pension system (tangentially), FTX, SVB. what's next? my take is momentum is gathering and perhaps by June we see the next domino fall. be careful all