The Unexpected Downfall of Silicon Valley Bank
On March 10, Silicon Valley Bank (SVB) made headlines not for its innovation but for its spectacular collapse. Federal Reserve Chairman Jerome Powell, who must have felt like he was on a roller coaster with no safety belt, admitted in a press conference right after the FOMC meeting that the Fed was ‘blindsided’ by this financial fiasco.
The Search for Answers
Powell, while trying to maintain his poker face, realized that an internal investigation was essential after hearing about SVB’s sudden shutdown. He said, “I realized right away that there was going to be a need for a review.” It seems the question of the weekend was not just, “How did this happen?” but also “How do we look like we knew this would happen?”
Investigating the Investigation
The Fed quickly launched an internal investigation, led by Vice Chairman Michael Barr, to dissect the situation and inspect how it supervised and regulated the bank. Because, let’s be honest, nobody wants to be the person who forgot to lock the bank vault before leaving for the weekend.
Interest Rate Hikes: The Silent Killer?
It’s widely accepted that the serpent of rising interest rates, aimed at controlling inflation, might have danced its way to SVB’s demise. Long-term bonds bought while interest rates were near zero suddenly turned into pumpkins as the rates increased. When SVB revealed it was suffering a whopping $1.8 billion after-tax loss and needed to raise $2.25 billion, the market didn’t just panic – it panicked like it just saw a spider.
The Wipeout
In just 24 hours, SVB saw a jaw-dropping $160 billion evaporate from its market cap. While the CEO urged everyone to “stay calm,” depositors responded by rushing for the exits, leading to a bank run that would put a marathon to shame.
Government’s Plan of Action
The United States Federal Deposit Insurance Commission stepped in, taking control to protect depositors from the chaos. Shortly after, the government took emergency measures to guarantee all deposits at SVB, ensuring nobody would have to sleep on a park bench next to their savings account.
Criticism from All Corners
Just when you think it can’t get messier, enter Senator Elizabeth Warren. Following the incident and the Fed’s decision to increase interest rates by 25 basis points, she expressed her frustrations, labeling Powell as a “dangerous man” to have in charge. She believes his regulatory approach over the years paved the way for this crisis, despite him raising interest rates consecutively to reach a staggering 5%.
Poking the Bear: Economic Risks
Warren ominously warned about the risk of recession due to the rapid rate hikes, stating, “We’ve never seen hikes at this rate in the modern economy.” Seems more like a game of economic Jenga, and we all know how that ends.
