Déjà Vu? 2023 is Not 2008
Depositors heaved a sigh of relief when news broke Sunday that the Federal Deposit Insurance Corporation was going to make whole all of the accounts held at Silicon Valley Bank. Having full access to bank accounts meant those tech start-ups that make up much of SVB’s depositors would be able to make their weekly payrolls. They were the lucky ones: SVB’s equity investors were wiped out and senior bank management was fired.
This is how capitalism is supposed to work.
Those of you who sweated through the great financial crisis – even if you were short Lehman Brothers and AIG – experienced some déjà vu this past weekend. How many of you thought, “Here we go again.”? While I can’t guarantee you nothing untoward will occur, I can tell you this is not the subprime/securitized mortgage debacle that metastasized into the 2007-09’s Great Financial Crisis.
There are surely parallels between then and now (as there always are). But from what we have learned so far, the differences seem far more significant than the similarities. As the guy who (literally) wrote the book on bank bailouts, what say we do a compare and contrast?
What don’t we know? I have been surfing major crises on Wall Street for nearly three decades. Consider all of these market roiling events: The 1987 crash, Long Term Capital Management, Enron, dotcom implosions, 9/11, GFC, Madoff, Flash Crash, Covid, January 6th, and FTX. If there is a unifying theme that connects all of them, it is just how little we know as these events unfold in real-time.
UCLA Bruin coach John Wooden used to exhort players to “Never mistake activity for achievement.” Similarly, we should not confuse the sheer volume of punditry surrounding SVB with actual knowledge of what really happened.
The first draft of history is emotional, shallow, and very often incorrect. It can take years before we learn the actual details of what occurred, and understand the causation. The truth requires a concerted effort to get at all of the buried private files and conversations among the key players. There is so much we don’t yet know, and we won’t find out until a Bethany McLean, Roger Lowenstein, or Michael Lewis writes the book telling us what really happened.
Blame Game? All financial crises immediately lead to finger-pointing: How did this happen, who was at fault, and what should we have done to prevent it? There is always that other guy that is to blame. Of course, the legislation I sponsored, my recommended regulatory regime, and the FOMC rate policy I support would have prevented this.
Don’t get angry; opportunism just comes with the territory. My concern is how these preliminary half-truths and misinformation can tempt clients into making bad decisions with their capital. Hence, a series of posts (see this, this, this, and this) which puts all of this into a proper, level-headed perspective. Hopefully, this makes it easier to avoid emotional decisions and/or panic.
At least some of the angst was amusing. Gotta love the free-market Libertarians, all panic-begging for a bailout this weekend. (Slate’s Edward Ongweso Jr. has the receipts). In Bailout Nation, I quoted Jeffrey Frankel’s observation, “They say there are no atheists in foxholes. Perhaps, then, there are also no libertarians in financial crises.” Its as true today as it was then.
Systemic Contagion: The big one, where all the concern is: Does the SVB/Signature bank collapse represent a system-wide threat? Can this bank panic go viral? Did all of the banks buy the same risky paper that will lead to a credit freeze and a banking collapse?
So far, it looks like this was a one-off — or maybe a three-off — but not a systemic contagion.
It appears that a rather unique combination of factors was the driver here: Start with a huge venture capital boom-bust cycle (2020-21) that followed a decade of outsized gains. For some context, deposits at SVB jumped from almost $62 billion in January 2020 to over $189 billion by the end of 2021.
All that money needed to find a home, and SVB decided to purchase long-dated treasuries and mortgage-backed securities. These are “money-good” bonds, meaning, if held to maturity, you get 100 cents on the dollar. But long-duration bonds are the most sensitive of fixed-income paper to rising interest rates. That investment decision ran head-on into the buzzsaw of unprecedented rate increases by the Federal Reserve.
The good news is that these circumstances seem to be pretty specific to SVB and the start-up boom that was funded during and after the pandemic lockdowns. Most other regional banks did not have that enormous windfall (as far as we know) but some may have made the same mistake of buying long-duration treasuries.
But that is incomparable to the 2008-09 era, where every financial institution had consumed CDOs, where toxic sub-prime loans were securitized into ticking time bombs. In the run-up to the GFC, the Fed’s rate-hiking cycle caused the 2/28 variable rate NINJA loans to default en masse. While there might be some losses on long-term treasuries if they are marked-to-market, they are all “money good” if held to maturity.
Therein lay a massive difference between 2008 and 2023.
Market turmoil to is often chalked up to fear and emotion, and with good reason. However, truly novel situations can present a unique set of circumstances, often with few historical parallels. When this happens, as it appears here, investors have a hard time pricing in risk. I suspect this week’s emotional spasm is more than simple fear, it is the market struggling to reach some consensus on a probable outcome. Big swings in volatility are simply Mr. Market shrugging his shoulder as of to say “Damned if I know how this plays out.”
There are some smart observers of market history, like Ray Dalio, who fear SVB can be the canary in the coal mine. He may well be right, and this could be the start of a cyclical downturn. Or not. Maybe the FOMC figures out that they were late to get off of emergency footing or start raising rates to fight inflation. Instead, they increased in a panicky way and broke things. No change in rates next week would be an admission of guilt; 25 bps looks like splitting the baby.
In the meantime, 2023 is not the GFC – it is its own thing entirely.
All the Things We Do Not Know About SVB (March 13, 2023)
The Fed is Breaking Things (and it could get worse) March 10, 2023
A Dozen Questions for Jerome Powell, Fed Chair (March 6, 2023)
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