Easy Money Bill Coming: Silicon Valley Bank Crash Isn’t a ‘Lehman Moment’ — At Least Not Yet

Since the collapse of the US financial system in 2008, Wall Street has been on pins and needles in anticipation of the next “Lehman Moment,” a trigger event named after the ill-fated investment bank that led to a wider collapse of the banking system and economy.

Lehman’s latest alleged moment came on Friday with the collapse and burning of the Silicon Valley bank.

With about $200 billion in assets, this is the second largest bank failure in history.

Bank shares have tumbled in recent days as traders and investors fear that SVB losses are an indicator of systemic risk spilling over into the wider banking system, leading to a string of bank losses, some of which may collapse, and then a recession.

Then banks stop issuing loans, business loses ground, the economy goes to a standstill.

I say “presumably” because, according to my sources, it’s not exactly Lehman Moment – at least not yet.

SVB’s slide into the abyss, they say, is a warning sign that we have problems with the plumbing of the banking system built up by years of free spending, that is, the Federal Reserve’s money printing and the Biden administration’s budgetary shenanigans.

As reported, the FDIC seized control of SVB on Friday as SVB approaches bankruptcy.

Its parent company SVB Financial is struggling to find a buyer.

Like Lehman, it will be difficult, so a total collapse is quite possible.

Regulators such as the FDIC and the Fed must approve any sale, narrowing down the list of buyers to large financial institutions.

Large banks will be reluctant to buy the SVB portfolio.

This is difficult to assess and, given their experience during the financial crisis, probably unfortunate. To recap: JP and BofA bought Bear Stearns and Merrill Lynch respectively when they were failing — only to be saddled with huge liabilities.

This leaves alternative asset managers such as private equity firms such as Blackstone and Apollo as potential buyers.

But both are vulture investors and may only be willing to purchase the SVB portfolio at a very low price.

Collapse is inevitable

In other words, a collapse like Lehman is almost inevitable for SVB, say the bankers I spoke with.

Here’s the good news: Lehman’s stock of undersea mortgage debt that caused it to fail has been found on the balance sheets of every major bank, hence the need for government bailouts to avert financial Armageddon.

Portfolio business in Silicon Valley is quite peculiar. It caters primarily to venture capital firms that have begun withdrawing money as technology losses soar.

This forced the bank to divest its holdings in Treasury bonds, which were themselves depressed by the Fed’s rate hikes, leading to its crash. Big banks like JPMorgan have a more diverse customer base, so they don’t have to worry about unloading Treasuries to deal with the influx of banks, at least not yet.

But that doesn’t mean the SVB experience isn’t a concern.

It is clear that the massive amounts of government spending and money printing that have just ended have distorted so much of the plumbing of the banking system that the Fed’s recent rate hike is starting to wreak havoc.

SVB’s holdings in Treasury securities surged amid this abundance of fiscal revenue, but so did similar holdings at every major bank.

Prices remained stable and high even during the Biden administration’s spending because the Fed kept printing money, essentially buying bonds that the Treasury was selling.

All was well until inflation kicked in and the Fed had to change course.

The Fed’s rate hike is currently having a negative impact on bonds not only of SVB, but of all major banks.

Again, the good news is that, unlike in Silicon Valley, most of the big banks have a diversified depositor base that doesn’t break deposits.

However, what is held in the banking systems is a huge amount of assets with prices that have been distorted by the era of super-big government money printing, which, under the right circumstances, could create the Lehman Moment the market was worried about.