A guest post by Chuck Moss.

DOUBLE BANK SHOT!

Talk about bank shots!

Silicon Valley Bank (SVB) collapsed and was shut down last week, in the biggest bank failure since the 2008 meltdown. New York-based Signature Bank soon followed.

What’s going on?

Bank-A-Geddon?

Margin Call 2?

So far, it seems the line is being held, and some depositors are getting their money.

But what happened?

Here’s how banks work:

Mary deposits money in Bob’s Bank. Bob pays you interest using your money. Bob lends the money you deposited to Jim at interest so that Jim can open his YoYo Store. Jim pays Bob’s Bank the principal and interest so Bob can pay Mary the interest and make a profit besides.

Bob also has other ways to make money so that he can pay the depositors. For example, he can buy a portfolio of bonds for guaranteed income. The bonds are just someone—say, the government—themselves borrowing money for a fixed term, say 4% for ten years.

Now Mary can withdraw her money from Bob’s Bank with no trouble—unless she’s the one biggest depositor-like Jed Clampett in the Beverly Hillbillies. Mary can probably get her money any time she wants, but if all the Marys decide they want all their money at once, Bob won’t have enough cash on hand. If everybody suddenly loses confidence in the bank wants their money, you’ll get a bank run.

Remember the 1929 Crash scene from “It’s A Wonderful Life?” Jimmy Stewart had just enough to pay off and keep a dollar left over. A lot of banks didn’t.

SVB didn’t.

Why?

Silicon Valley Bank’s business was lending money to tech startups in…well, Silicon Valley. This sector has been slowing. SVB had a lot of money in deposits. To hedge its bets and keep income, it did what a lot of banks do: it bought US bonds. These bonds were stable and long-term, with a lower interest rate, but tied up the investment longer as well.

Now the bonds had a decent rate of return when bought, but when interest rates go up, the bonds with lower interest rates fall. Interest rates have been going way up to try and cool inflation. So SVB found itself in a fragile position, and if it suddenly needed to play Jimmy Stewart and pay off depositors, it might not have enough cash.

Now one idea:

Peter Theil, PayPal founder whose Founders Fund recently withdrew money from SVB, may have been Jed Clampett to SVB’s Melvin Drysdale. But Thiel’s a Republican donor and would make a convenient villain for the usual suspects.

Whatever the cause, depositors rushed in, and SVB didn’t have enough cash; selling its bonds wasn’t an option because the market price had dropped due to rising interest rates. Bank closes. Feds say they’re bailing out depositors, but it’s not a bailout. OK, then.

Next, the same thing happened in New York with Signature.

So now you know how SVB failed and how banks work—or don’t work. Some other Qs:

—Who was watching the store? Didn’t SVB see higher interest rate danger? It’s not like the Inflation wasn’t obvious a year ago, and raising interest rates is a guaranteed response. Well, banks hire people to be Risk Managers to keep an eye on things like inflation and possible rising interest rates. SVB had one: Jay Ersapah, head of financial risk management at SVB Bank. She evidently had other tasks as well: chairing the LGBTQ+ group and spreading awareness of lived queer experiences.

Maybe it had nothing to do with her failure at her main job, but SVB indeed got woke and went broke.

—The big villain? BidenFlation. Inflation doesn’t just steal from folks like you and me at the gas pump and grocery store. Now it’s claimed two banks. And it’s still going on.

—The bank bailout that isn’t a bailout? Shades of Too Big To Fail?

—Interesting tie: an SVB Executive sits on the board of Governor Gavin Newsom’s significant other, Jennifer Siebel Newsom’s California Partners Project. SVB executives were big contributors to Democrat politicos and the party. Depositors, including top-tier venture capital firms like Andreessen Horowitz and Sequoia Capital—big Dem backers– were bailed out, and the equity and bondholders were completely wiped out.

Too big to fail, or too connected to fail?

—Lesson: Keep your eye on your money, and maybe trust, but always verify.

Chuck Moss is a writer and a former MI State Representative (R). This article was re-published on 100 Percent Fed Up with his permission. Go to ChuckMoss.com to read more thought-provoking pieces written by Chuck.