My Thoughts On the Failure of SVB

by Don Fredrick, The Complete Obama Timeline, ©2023 

(Mar. 14, 2023) — The failure of SVB had nothing to do with the partial rollback of some Dodd-Frank provisions. Stop believing the nonsense from media toadies who are blaming Trump for the bank’s failure. Even Barney Frank (the Frank in Dodd-Frank) said, “I don’t think that [the changes to Dodd-Frank under Trump] had any effect.” The failure of SVB was caused by short-sighted management, Federal Reserve actions, and the irresponsible spending of the federal government. Monumental deficits forced the Federal Reserve to inflate the money supply to cover those shortfalls. The Dodd-Frank legislation was a response to irresponsible investments in risky ventures. But SVB’s problem was not that it had made risky investments. In fact, it had invested in “safe” government bonds. That is, it had loaned the government money to help finance its massive deficits. But the government gave away trillions of dollars it did not have because of the China virus and the absurd, business destroying, Covid lockdowns that followed. That deficit spending resulted in even more borrowing by the government.  But the government had to pay increasingly higher rates of interest to find buyers of those bonds, securities, and bills. The necessary higher interest paid on those new bonds caused the older bonds to suddenly be worth less. SVB had a boatload of money in the older, lower-interest bonds.
 
What does that mean? Let’s say a business customer of SVB needed to withdraw $25 million from its account to meet payroll. Normally, SVB would sell some of its government securities to come up with that cash. But now those bonds were worth a lot less because of the higher rates of interest on new government bonds. Therefore, SVB lost money when it sold bonds to cover customer withdrawals. SVB executives, faced with the likelihood of the Fed increasing interest rates even more to “fight inflation” by intentionally slowing down the economy, saw the handwriting on the wall when its bond portfolio kept losing money every day. In order to sell its bonds to cover withdrawals, it had to lower their sale price. That problem kept getting worse as the Fed continued to raise rates.
 
Again, this has nothing to do with Dodd-Frank, which certainly did not consider federal bonds, bills, and securities to be “risky” investments. On the contrary, Dodd-Frank encouraged banks to put their money in those instruments.
 
If you want to blame Trump, then blame Trump, Biden, and the members of Congress in both parties who passed the ridiculous legislation that passed out “Covid relief” money like candy.
 
Note that banks bigger than SVB are still covered by Dodd-Frank, and they have the same problems SVB had. The values of their bonds have also declined dramatically, and they will decline even more as the Fed raises interest rates. Any bank that has invested in older federal securities (and that means most banks) has seen its assets decline accordingly.
 
What will the Federal Reserve now do? My guess is that it will slow down, or even stop, the interest rate increases in order to rescue the rest of the banks. That will keep their bonds from losing any more value. Of course, if the Fed stops raising interest rates, that means it has to give up its “inflation fight.” In other words, the Fed, in an effort to save more banks from going under, is going to let inflation continue. That means consumers will continue to see rising prices. Consumers will pay more for goods and services in order to rescue the banks. The Fed’s choice is: save the banks or save the consumer. It will save the banks and screw the consumer.
 
It was the Fed keeping interest rates artificially low that caused this mess in the first place. It kept rates low to “goose” the economy (and keep politicians happy and reelected). The low rates prompted speculative investments in “Silicon Valley” businesses that did not actually make anything in factories. Those companies made money hand over fist with frivolous services that most consumers can do without. Much of that money was deposited at SVB. Everything might have been fine had interest rates remained low. But the government’s continued deficit spending forced the Fed to raise interest rates. That led to the decline in bond prices. It is not just SVB that is losing, of course. Any bank or individual holding low-rate bonds is now seeing the value of those bonds plummet.
 
In order to link the SVB mess to Dodd-Frank you must label government securities a risky investment. Don’t waste your time. Instead, invest in gold and silver and stay away from bonds. And pray.