While markets ended Q1 of 2023 higher than they began, it has been a bumpy ride. At the end of January, it looked like the market might have been beginning its recovery. The Dow Jones Industrial Average (DJIA) was up 3%, the NASDAQ was up by a whopping 11% and the Standard and Poor’s 500 Index (S&P Index) was up by 6%. Wall Street believed that the worst of the Fed’s attempt to curb inflation was behind us and that interest rates would begin to fall. They were wrong.
Inflation, which is largely the result of corporations increasing the prices for their goods and services, remained stubbornly unmovable and therefore the Fed pressed up interest rates even further. Real Estate prices in many localities cooled as sellers realized that higher interest rates meant fewer buyers could afford the monthly payment. The DJIA was down by 4.2%, the NASDAQ lost a percentage point, and the S&P Index was down 2.6%. Still, those numbers meant the DJIA was back where in started in January, the NASDAQ was still almost 10% higher than where it started the year, and the S&P had a net gain of nearly 3% for the year. Not a great deal of progress, but better than nothing.
Wall Street had its own March Madness. First, Silicon Valley Bank (SVB) failed when depositors tried to withdraw $42 million on March 9th. Regulators did not allow the bank to open the following morning. The next day Signature Bank of New York failed. Both banks catered to privately owned businesses.
Silicon Valley Bank may have had a boatload of assets, over $200 billion. Its deposits grew by 86% in 2021, but these deposits came from Venture Capitalists, each of whom deposited much more than the $250,000 that was FDIC insured. In fact, 90% of their deposits were not insured. Consequently, if those depositors got even a whiff of worry about the solvency of the bank, they were likely to remove everything all at once, which is what many did. Unfortunately, SVB held its reserves in Treasuries and Mortgage Bonds, which, thanks to the Fed’s interest rate increases, had taken a beating recently. So, SVB could not raise sufficient cash to meet the run on the bank.
This is what Ben Eisen and Andrew Ackerman wrote yesterday in the Wall Street Journal on 3/11/2023:
“Silicon Valley Bank’s failure boils down to a simple misstep: It grew too fast using borrowed short-term money from depositors who could ask to be repaid at any time and invested it in long-term assets that it was unable, or unwilling, to sell.”
Now, you may ask: how that could happen? Where were the regulators? Wouldn’t the stress testing in the Dodd-Frank Act, passed after the mortgage debacle of 2008, have prevented such an occurrence? Both SVB and Signature Banks were considered less inclined to pose a systemic risk, and this type of bank asked the Trump Administration to roll back the more stringent Dodd-Frank requirements for this class of banks. The regulations were rolled back, but it didn’t take long to discover that we have regulations for a reason.
The FDIC has assured depositors that they will receive the full value of their accounts, which quelled the skittishness at least for now. Large parts of SVB were purchased by North Carolina’s own First Citizen’s Bank.
It might be helpful for us all to remember the pivotal scene in It’s a Wonderful Life when George Bailey leaps over the counter and urges his depositors to understand how banks work. “You’re thinking of this place all wrong. Your money isn’t here. It’s not in a safe. It’s in Joe’s house . . . .”
You put your money on deposit and the bank loans out the money to others for legitimate purposes. They pay it back a little at a time, and with interest. Regulators assured the depositors because they believed that the bank has a creditworthy loan portfolio.