Treasury Steps in to Prevent Further Bank Runs
After Silicon Valley Bank collapsed and was seized by regulators on Friday, the government has taken steps to prevent further runs on the bank. First, on Sunday the FDIC announced that it would make all depositors whole. It extended its typical insurance limit of $250,000 per account to cover the full amount on deposit. This is not a "bank bailout"; the bank is still failed. Investors lose all their money, and executives will have to find jobs at others banks to ruin. The protection for is the people who had accounts there- which actually is a lot of companies that have their accounts there for things like payroll. I know, because I've worked at multiple companies with checking accounts there- including my present employer. 😱
The second major step the government took was this morning. To prevent runs on the bank at other banks as investors and depositors react in fear, the US Treasury has promised to redeem their underwater Treasury Bills at face value. This is arguably also not a "bank bailout" as the payments are actually loans, not full redemptions. I'm still trying to find details on it- which is hard even in financial media at the moment because of the amount of misinformation and outright disinformation (purposeful lies) that pollute the channels.
The bond loans are critical because it's US Treasury bonds that sunk Silicon Valley Bank. That's right, it wasn't something crazy and risky like cryptocurrency or "liar loans" that wrecked them, it was good old, safe, sensible Treasuries. What happened was all the bonds they bought a few years ago, when rates were really low, are now worth much less than their face value since rates are really high. For buy-and-hold investors that's not a problem; if you hold bonds to maturity, you're paid the full face price. But banks and other investors who need to sell bonds early to pay for something else- like larger-than-expected withdrawals from bank accounts- have to take the current market price. SVB got burned on that, tried to raise capital with a new stock offering, and triggered a vicious downward cycle, a run on the bank.
The second major step the government took was this morning. To prevent runs on the bank at other banks as investors and depositors react in fear, the US Treasury has promised to redeem their underwater Treasury Bills at face value. This is arguably also not a "bank bailout" as the payments are actually loans, not full redemptions. I'm still trying to find details on it- which is hard even in financial media at the moment because of the amount of misinformation and outright disinformation (purposeful lies) that pollute the channels.
The bond loans are critical because it's US Treasury bonds that sunk Silicon Valley Bank. That's right, it wasn't something crazy and risky like cryptocurrency or "liar loans" that wrecked them, it was good old, safe, sensible Treasuries. What happened was all the bonds they bought a few years ago, when rates were really low, are now worth much less than their face value since rates are really high. For buy-and-hold investors that's not a problem; if you hold bonds to maturity, you're paid the full face price. But banks and other investors who need to sell bonds early to pay for something else- like larger-than-expected withdrawals from bank accounts- have to take the current market price. SVB got burned on that, tried to raise capital with a new stock offering, and triggered a vicious downward cycle, a run on the bank.