Who?

A strange coincidence and a special bank crash addendum

Listed Reserve
March 17, 2023

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The safest asset in the world

Let’s be honest. You had never heard of Silicon Valley Bank and neither had I. This week, and for a few more no doubt, they will be one of the best-known banks in the world. The subject of opprobrium because not only did they go bust but their CEO sold a load of shares in the final week of the bank's existence, as did the other execs a few weeks ago.

Technically, they did nothing wrong. Selling shares is fine, particularly as they recently released results to the market. The window for trading was open. Incidentally, in those results they reported a $1.5 billion profit, up 15% on the prior year. These guys were airborne, appearing on the Forbes list of America’s ‘Best Banks’ only days before.

You can’t really make this stuff up and I’m very glad we don’t have to because the fiat banking system is a gift that simply keeps on giving. The reality of fiat banking is as follows:

Money in the bank is not yours; it is a liability of the bank and they will only pay you if they can.
If everybody withdraws at once, the bank collapses. End of story.
You are insured by the government for $250,000 in Australia, a handy privilege for the banking cartel.
Over that, you lose (or you should, but rarely is that allowed to happen and in this case of course it didn’t - once again).

It’s just a confidence game. I’m not for a moment arguing that banks aren’t systemically important. SVB did pretty much everything right other than go too long with the maturity profile of their investments (again, entirely legally and cheered on by the Fed who wanted to offload their bond holdings).

They bought US government bonds, whose value has been absolutely clattered by interest rate rises. When they liquidated them early to pay out depositors, they made giant losses and goodnight Vienna. The Federal Reserve then did what it is paid to do which is provide liquidity in a time of crisis. They had no choice either.

Very obviously, the American banking system cannot survive long with rates this high. They are sitting on massive losses in their bond portfolios. On Monday the list of banking stocks that got suspended from trade was enormous.

They all bounced back but they are on the edge.

The fact that the President took to the stage to reassure Americans that the banking system is strong says it all. Reminds me of the adage that when your banker calls to tell you everything is fine, you draw the opposite conclusion.

It’s a house of cards, built on a house of cards.

Now, who's that guy again I was writing about last week that said hold cash and bonds?

Unrealised loss

The extent of the unrealised losses on bank balance sheets is really something.

For example, Bank of America sits on $116 billion of unrealised losses; 42% of their shareholder equity. Which is just about manageable, but ugly.

Of course, banks have organised for these sorts of losses to be held in reserves, so they do not show up in the P&L account when they report their results. That might be sensible because, held to maturity, they will probably get most of the value back, but right now they’re wobbling.

All of this is interesting but I think it has some profound implications going forward. Banks will be much less likely to hold US Treasuries anything more than two years from maturity, already by far the most liquid part of the market. The US government will have to pay through the nose for anything longer and will likely just cycle around in shorter term debt. There is one very obvious problem with that though. If their borrowing becomes concentrated at the same levels of maturity they are going to be rolling over trillions of dollars in bonds every year.

One other thing about this particular bank run. Most of the customers of SVB use Twitter. Tech heads, bitcoin boffins (like me) and Silicon Valley type persons. On Thursday last week everyone was talking about a run on the bank and that it would collapse; social media spread that message very quickly indeed. There were no queues outside the bank like in 2008; everyone just logged on; withdrew; bank doors closed before the end of the day. Technology has brought punishment at maximum speed to these situations. We might even see regulators do something laughably stupid about that, like try and close down social media during a bank run. Nothing would surprise me now.

What now?

So, three banks have gone. Silicon Valley Bank (killed by bonds), Silvergate Bank (killed by regulator) and on Sunday evening Signature Bank which was closed by regulators citing ‘systemic risk’.

No other banks were closed.

Those three banks were the only three in the US that banked the digital asset industry in any significant way. It is a coincidence, of course.

The closure of Signature is particularly telling. It did not have an insolvency issue; under the cover of crisis, the USG closed it down because it banked crypto-currency providers.

That is a fairly radical version of capitalism where a private institution is arbitrarily closed because the government doesn’t like it.

On the other side of the ledger, the US Treasury has released its Bank Term Funding Program (BTFP) which will provide loans for up to one year to banks that pledge US treasuries. This will shore up the Treasury market for a while.

In summary then, despite the carnage bonds caused, we end the week with bonds winning this round and bitcoin losing. One of those two assets is a ponzi scheme and you have to decide which. Is it the open source software that will behave in an entirely predictable way into infinity? Or is it the opaque system that ignores its own rules; makes new ones on the hoof, directly attacks its competitors and sucks the taxpayer dry? The overwhelming majority of people think it's the former, which in itself tells you something about how you might reasonably profit.

It’s a long term game though, and the Fed has blinked. They went straight back to bailouts, back to producing money out of thin air and no amount of euphemistic press releases can get them away from it.

Euro-Trash

Happily, the ECB executive team is on hand to provide us with some light relief. They held an internal gathering in a ‘remote arctic village’ last week. Turns out the remote arctic village was Inari, Finland’s most northerly holiday resort. It’s inside the arctic circle, so in March there is pretty much nothing you can do except talk to your colleagues about inflation.

Frankfurt to Inari is quite a long way, a 3.5 hour flight. I’m relieved that this sort of nonsense still goes on. How does this trip align with telling all your stakeholders that they need to buy green bonds, while you pollute the arctic circle with aviation fuel? Well, there is almost certainly an internal paper justifying the whole junket, which is even more brilliant than just saying, “we’re important, you're not. See you when we get back, loser.”

When they finally did return, they didn’t disappoint me and pumped out this on their social media channels: admonishing plebs like us to have not very good light bulbs, drive around in cars full of toxic acid and most importantly of all, stop having children (I read between the lines).

Still, I’d be a tiny bit nervous if I was them because if Silicon Valley Bank was a European bank it would have been in the top 10 and one of the best capitalised and most profitable.

Can’t hide in Inari forever.

Special bank crash addendum

We traditionally finish with Euro-Trash, but this week we’ve added a cheese and port course for you. A sell side analyst report on Signature Bank, released hours before it closed. “Overweight”, obviously. Target price $116, four hours later it was worth zero. You can find more on the Pied Piper website right here.

Further information

Dan's article Bear markets are for building highlights what’s being built in bitcoin while the mainstream isn’t paying attention.

Our February 2022 report to investors can be found here.

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