The default of the Silicon Valley Bank (SVB) has caused shock waves in markets, governments and other capitalist institutions. Analysts are trying to figure out the similarities and differences from the ’08-‘09 financial crisis, to measure the dangers of contagion and to figure out a way forward for governments and Central Banks in dealing with similar crises.
Let’s see what exactly happened and how it can affect the world economy.
The facts
What better place to conceive the idea to create a bank than a poker game? SVB in its official website shares this information to the public, with some pride! They probably imagine themselves gambling on a poker game in which the bank always wins…
SVB was one of the top 20 banks in the US (the 16th biggest) with over $200bn assets. Its collapse was the largest bank failure since the 2008-09 crisis and the second biggest in US history.
There were two factors that led to this default.
The first is that SVB was heavily involved in the tech industry. The tech sector experienced a huge rise during the last decades; especially during the pandemic it saw its revenues sky-rocket, taking advantage of the new situation with the lockdowns, ect where online trade was booming. When economies re-opened and things gradually returned to more or less normal, tech firms found themselves more economically stranded and needed cash. That led to a shrinking of SVB’s cash reserves and raised demands for liquidity.
The second, combined of course with the first, was FED’s interest rates hikes. Banks do not want to keep money in their coffers. The money they get from the deposits of their customers are invested in bonds and stocks, so they can produce profits for the bankers. A lot of banks, and SVB among them, have heavily invested in government bonds, which until recently were considered a safe investment. When interest rates were more or less stable and close to zero, government bonds could be traded (bought and sold) even before they matured at more or less their face value. So, banks that had bonds in their portfolios could liquidate them without significant losses when they needed cash. Investments in government bonds acted as a way to stack money, and at the same time having the opportunity to turn them back into cash whenever it was needed. This changed with FED’s aggressive interest rates hikes. When new bonds are issued with yields close to the FED’s interest rate (say around 3%-4% depending on their maturity date), no one in the market is willing to buy bonds with yields less than 1%. That meant that SVB, in need of liquidity, was forced to take losses (sell bonds below their face value) in order to get rid of the bonds it had in its hands.
Information about the liquidity problems of SVB spread like fire on Twitter and messaging apps, and this led to a classical bank run, only this time an online one. Companies and individuals asked, en masse, to transfer their money to bigger banks. That led to the collapse of SVB as all banks keep only a small fraction of their customers’ money in cash, and invest all the rest in order to make profit.
Markets and corporations at this point panicked, as there were fears that they would lose their cash reserves, which would then have repercussions on the whole tech industry with defaults and closures. Nearly half of US venture-backed technology and life science companies had SVB as their bank.
The US government then stepped in and actually took over SVB, putting it under the Federal Deposit Insurance Corporation’s (FDIC) receivership. FDIC is a government corporation that supplies deposit insurance to banks. It guaranteed to make whole all SVB’s customers, even if their deposits were beyond the $250,000 limit, which is guaranteed for all individuals. Actually, more than 90% of SVB’s customers were not individuals but corporations, having significantly bigger deposits than the $250,000 threshold.
A non-bailout bailout
Time and again, we see that banks and big capitalists are resorting to the state to save them from the market forces they so passionately praise. When profits are rising, they don’t want to even hear about state intervention in their businesses. But when loses ensue, they cry out “please save our souls”!
On Sunday, March 12, five thousand (5,000) CEOs signed a call to the US government to step in and save SVB. In fact, most capitalist analysts, Keynesian or neoliberal, were frantically calling for state intervention as soon as possible.
And that’s actually what happened, as both insured and uninsured deposits will be refunded. The consensus inside capitalist strategists is that they need to step in and do whatever it takes to avoid big defaults in order not to repeat the mistake they did in the 1929 crash and the initial phase of the 2008-9 crisis.
What is striking to ordinary people is that banks get a bailout when they fail, but when working class households face economic collapse, nobody is losing any sleep over it. When public utilities and infrastructure are destroyed, when production units are being out-shored, when the cost of living crisis and inflation destroy the lives of millions of people, when whole regions of the world face starvation, then the capitalists say “there are no magic money trees”. Well, it seems that for the banks there are some.
The US government and mainstream media are also very careful not to use “the b-word”, as “bail out” is described. Biden, Yellen and Powell insist that this is not a bailout, even though it very much looks like one. The reason for this stance is that bank bailouts during the Great Recession of 2008-9 were very unpopular, and were rightly considered by the people as a reward to those that were responsible for the crisis.
But, as Amiyatosh Purnanandam, a corporate economist at the University of Michigan who studies bank bailouts, put it,
“If it looks like a duck, then probably it is a duck. This is absolutely a bailout, plain and simple.”
The non-bailout bailout advocates say that the FDIC, although being a government institution, does not use public money but member banks’ insurance dues. As some analysts have pointed out however, the banks will pass on the cost to their customers. Again, workers and poor will pay the price for bailing out the rich.
Oversight?
Bank runs and defaults are not new to capitalism, especially in the US. Every time their system fails, the discussion on “how to avoid this happening again” is opened up. Biden, in his speech about the SVB collapse said:
“I am firmly committed to holding those responsible for this mess fully accountable and to continuing our efforts to strengthen oversight and regulation of larger banks so that we are not in this position again.”
The total chaos that the financial and banking system in the US found itself in during the crash of 1929, eventually led to some regulation in the jungle-like, until then, banking sector.
The Glass-Steagall Act, signed by Franklin Roosevelt as part of his New Deal policies, separated investment banking from retail banks, in order to keep a check on the wild profiteering activities of the “banksters”. This of course didn’t mean that the banks stopped “gambling”. But they were forced to tolerate certain limitations.
The bankers managed to finally repeal this law in 1999, under Clinton’s administration.
Clinton signed the new law that replaced the Glass-Steagall act and stated:
“Removal of barriers to competition will enhance the stability of our financial services system”.
From the time of that statement, it took less than a decade, in the course of which gambling in the stock markets became even more intense, to lead the world economy in the crisis of ’08-‘09.
Then Obama enforced the Dodd–Frank Wall Street Reform and Consumer Protection Act in 2010, as a way to limit some of the “excesses” of the banking vultures. But then again, after a few years, Trump rolled back some of the measures administered under this law. One notable example is that in the initial Dodd–Frank law, banks with over $50bn assets were forced to have regular stress tests and other safety measures. Trump raised this threshold to $250bn. SVB CEO Greg Becker, together with other CEOs, lobbied the government to relax these restrictions, and as a consequence SVB (with assets just above $200bn) and other banks were exempted from these tests…
So, the question is not if there can be regulative measures. The issue is that bankers always find ways to overcome them, until they actually succeed to repeal them. It’s the logic of capitalism, the urgent and continuous push towards more and more profits, that wrecks every attempt to put a break at “reckless profiteering”.
“That’s how capitalism works”
Along with the SVB collapse, we had the default of two other US banks, Signature and Silvergate. More importantly, there is an ongoing tremour regarding Credit Suisse, one of the biggest banks in Switzerland and the world. While this article,is being drafted, the Swiss National Bank announced that it will provide $50bn to Credit Suisse in order to stop the impending default. Credit Suisse is mired in various scandals and that, coupled with the extreme “nervousness” of the markets has put it in the eye of the storm. It remains to be seen if the Swiss National Bank intervention will be enough to put a break in this free fall. In any case, the banking crisis is posed to evolve one way or another in the coming weeks and months.
These failures or troubles of different banks are not directly linked to each other, as was happening in the ’08-‘09 crisis. But they have a common denominator. It’s the changed landscape of high interest rates which squeezes profits and pressurizes indebted banks, corporations and sovereign nations. The wider picture is that the era of cheap money is over for the time being. The epoch in which banks could repeatedly and easily get new loans to finance the old ones is over. Entities who have high debt and falling incomes will face the prospect of default. Governments and central banks, in their bid to fight inflation, inflict pain in the economy, in the form of lay-offs and closures on the one hand and debt defaults on the other.
On the basis of the way capitalism works, inflation will only be brought down by creating a recession i.e., pushing companies to collapse and either shut down or go ahead with layoffs, increase unemployment and drop real wages.
The only answer to this is to take the banking and financial sectors into public ownership, i.e., nationalise them, without compensation to their rich shareholders, under the democratic control and management by society; i.e., by the bank workers themselves together with representatives of other sections of the working class and the social movements. Banks have so much power over the economy, that this should not rest with a handful of individuals who are only interested in their profits and wealth.
The huge wealth of banks and financial institutions should be put in the service of society, i.e., the working class, the poor and the oppressed.
Ray Dalio, founder of Bridgewater Associates said
“Based on my understanding of this dynamic and what is now happening, this bank failure is a ‘canary in the coal mine’ early-sign dynamic that will have knock-on effects in the venture world and well beyond it.”
SVB may not be a “systemic bank” to drag all the banking sector down with it. But it surely put bank failures back on the agenda. Workers and ordinary people will once again be the ones to pay for the failures of the system, sooner or later. “That’s how capitalism works” in Biden’s words. Indeed, and just because of that, we need to put all our efforts in overthrowing it.
PS: Talking about the how the private sector and the forces of the market are mutually beneficial for everybody, just to note that SVB’s CEO sold $3,6 million in stocks of his company, days before the bank’s failure…
