March 11, 2023 at 3:42 am #241392
Silicon Valley Bank (SVB), the nation’s 16th largest bank, failed after a run on the bank.
Depositors – mostly technology workers and venture capital-backed companies – hurried to withdraw their money this week as anxiety over the bank’s situation spread.
SVB had prompted a global sell-off in banking stocks after it launched a rescue share sale to plug a near-$2bn (£1.7bn) hole in its finances.
The bank lost the funds when it sold a portfolio of bonds in response to a decline in customer deposits. Those bonds had dropped in value as a result of rising interest rates, leaving SVB with a shortfall.
Its US-listed shares initially plunged 60% on Thursday, and were halted on Friday after tumbling 66% in pre-market trading, before regulators stepped in.
The turmoil could put customers’ deposits at risk and lead to further panic across the financial system.
“Fear is contagious,” said Angela Lee, a Columbia Business School professor of venture capitalism. “Bank runs can start on a rumor and this is much bigger than a rumor. I worry about folks overreacting to this and overcorrecting.”
Silicon Valley Bank’s failure arrived with incredible speed, with some industry analysts on Friday suggesting it was a good company and still probably a wise investment. Silicon Valley Bank executives were trying to raise capital early Friday and find additional investors. However, trading in the bank’s shares was halted before the opening bell due to extreme volatility.
Yet another confirmation of the Party’s bank theoryMarch 11, 2023 at 9:40 am #241417Lizzie45Participant
Yet another confirmation of the Party’s bank theory
And a prime example of quote mining.
“The troubles facing SVB were relatively unique – given it serves startups in the tech sector, for which funding has dried up in recent months. Silicon Valley was heavily exposed to the tech industry and there is little chance of contagion in the banking sector similar to the chaos in the months leading up to the recession more than a decade ago. The biggest banks – those most likely to cause a systemic economic issue – have healthy balance sheets and plenty of capital.”
(emphasis added)March 11, 2023 at 10:24 am #241419
According to some, credit creation can be achieved by a ‘stroke of the keyboard’, called the money creationist theory of banking.
We have said that a bank is a go-between, borrowing money from depositors at one interest rate and lending it out at a higher rate to make profit.
SVB’s problems appear that they did not have sufficient deposits to cover the bonds they lent out.
See our pamphletMarch 11, 2023 at 11:40 am #241428
Do you know what our theory of banking is? In case you don’t, it repudiates the quasi currency crank view that banks can somehow create money to lend “out of thin air”.
If this was the case, then why would a bank go bankrupt? It could simply create more money. In fact, of course, banks can only lend funds that they already have (or can quickly get) as from depositors or by themselves borrowing money.
The news report confirms this:
“SVB. . . launched a rescue share sale to plug a near-$2bn (£1.7bn) hole in its finances.
The bank lost the funds when it sold a portfolio of bonds in response to a decline in customer deposits. Those bonds had dropped in value as a result of rising interest rates, leaving SVB with a shortfall.”
The “shortfall” was between its loans and the funds it had to cover them due to a fall in deposits, and then to the sale of the bonds (loans it had made to companies or government) not raising enough to cover it.
As they couldn’t fill this “hole in their finances” (the difference between the loans they had made and the funds to cover them) they went bankrupt. This confirmed our view that banks don’t and can’t create money to lend out of thin air.
Banks are financial intermediaries borrowing money at one rate of interest and lending it a higher rate, the difference between these being their income of which a part is their profits.March 11, 2023 at 4:24 pm #241450
Eight years before the second-largest bank failure in American history occurred this week, the SVB’s president personally pressed Congress to reduce scrutiny of his financial institution, citing the “low-risk profile of our activities and business model”. Three years later – after the bank spent more than half a million dollars on federal lobbying – lawmakers obliged.
The bank reportedly did not have a chief risk officer in the months leading up to the collapse, while more than 90% of its deposits were not insured.March 12, 2023 at 5:29 pm #241484
There’s a good explanation of why the Silicon Valley Bank failed here:
“Silicon Valley Bank has been bleeding deposits as the Federal Reserve has aggressively raised borrowing costs to fight inflation. Higher interest rates bludgeoned many of the tech businesses that had deposited their money with the bank. As venture capitalists retreated from offering companies fresh infusions of capital to sustain their businesses, startups needed to burn through the cash in their accounts to stay afloat. Deposits the bank had on hand have fallen steadily over the last several months, according to S&P Global Ratings. Higher rates also meant more investments offered an attractive yield, leading some clients to pull out their deposits and put them elsewhere.”
To try to compensate for this, the Bank sold off its holding of government and other bonds. Unfortunately for them, rising interest rates meant that the price of bonds went down and they couldn’t raise enough. And they went bust.
“When banks run into trouble, they can be forced to sell off investment assets, typically U.S. government debt and mortgage-backed securities, that they purchased to earn a return on their customers’ deposits. As interest rates climb, the price of those older securities fall — which means the banks sell those investments at a loss.”
If banks could, as some claim, simply create money to lend “out of thin air” and get interest on it, why would losing deposits make any difference? If a bank was short of money, all it would have to do would be create some more to lend and get the money as interest on them.
That this didn’t happen shows that banks cannot create money out of nothing but are only financial intermediaries borrowing money at one rate of interest to cover loans at a higher rate.
Our theory of the nature of banking stands confirmed. New wealth can only be created by humans applying their mental and physical energies to change the form of materials that originally came from nature, not by banks practising magic or financial alchemy.March 14, 2023 at 8:55 am #241508
More on why SVB failed, showing that people in the City, as opposed to academia, know that banks can’t create money out of thin air and that they are financial intermediaries borrowing money at one rate of interest and lending it at a higher one.
From today’s Times:
“Banks are fundamentally precarious things, borrowing short and lending long”
“The bank [SVB] pumped money into long-dated bonds, whose value has collapsed in the past year, while having to pay out higher interest rates on skittish deposits.”March 14, 2023 at 1:51 pm #241514AnonymousInactive
The FDIC ( Federal Deposit Insurance Corporation ) only covers up to $250,000 per depositors, and per banks, but they are willing to provide protection over that amount of money, and they are acting quickly to defend and protect the interests of the rich class, and acting slowly for the real needs of the working peoples which is something typical of the capitalist society.
Comrade Buick has raised a good question which is a blow on the face of the money crankers: If banks are able to produce money from thin air, why are they going in bankruptcy ? Why do they need a bailout from the capitalist state ? Why banks borrow money from others banks in order to finance large projects and infrastructures ? It has been proven that all their conspiracist theories are completely wrongs, even more, finance schools and the AIB ( American Institute of Banking ) courses prove that they are wrong too, they do not have a clue about Finance and banking
The new bailout approved by George Biden and members of the Congress including Republicans ( as it was done by Obama and Bush ) is a clear indication that the state is saving the rich instead of the fallacy that workers are paying for the bailout, and that the workers are the major taxpayers. This situation has proven the long standing issues of the Socialist Party. This is the analysis made by a leftist organization:March 15, 2023 at 11:46 am #241529Young Master SmeetModerator
Seems Credit Suisse have just had to hike their interest offer to depositors to dig themselves out of trouble…March 15, 2023 at 12:47 pm #241530
That’s a clincher. If the Gnomes of Zurich can’t conjour up money from thin air then nobody can.
I notice that the chairman of Credit Suisse is called Lehmann. I am imagine he hopes he can avoid the fate of his brothers.March 15, 2023 at 5:52 pm #241534AnonymousInactive
It is going to be like during the 2008 financial crisis. JP Morgan ( Chase ) is going to take over all of those defaulted banks. In 2008 they acquired all the deposits and asset from Washington Mutual and they became a bigger and stronger bank. Bank of America acquired Lehman brothers and Mrerryl Lynch and it became the largest financial institution in the whole world. Citibank ( First National City Bank ) and Wells Fargo Bank became smaller financial institution compared to Chase and Bank of America, and they do not have a strong Metropolitan Banking services like in prior years. Manufacturers Hanover Bank ( run out of depositors ) was taken over by Chemical Bank. First Interstate Bank and others became smaller banksMarch 15, 2023 at 6:39 pm #241539robbo203Participant
An article by Michael Hudson I came across. He reckons “The crashes of Silvergate, Silicon Valley Bank, Signature Bank and the related bank insolvencies are much more serious than the 2008-09 crash”. We shall see how things turn out…March 15, 2023 at 10:47 pm #241543AnonymousInactive
The financial crisis of 2008-2009 affected the whole real estate banking system, the whole banking investment system, and the savings banks, this crisis is only affecting one sector of the banking system, and the state invested a larger amount of money in the bailout of 2008, There was also an over production of houses, apartments and condominiumMarch 16, 2023 at 6:11 am #241547james19Participant
Credit Suisse borrows £44.5bn from central bank to stem crisisMarch 16, 2023 at 10:13 am #241552
I haven’t seen a headline yet saying:
“Credit Suisse creates £44.5bn from thin air to stem crisis.”
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