How Biden’s $4 trillion COVID stimulus package helped create a tech investment bubble
The collapse of Silicon Valley Bank came quickly. In just a few days, the country’s 16th largest bank suffered the second largest bank failure in US history.
But the seeds of the bank’s demise were sown in its pandemic boom as Joe Biden’s $4 trillion COVID stimulus package flooded Silicon Valley with easy money.
As of January 2020, SVB had $55 billion in customer deposits on its books, which had more than tripled to $186 billion by the end of 2022.
SVB was heavily invested in long-dated government bonds and 10-year mortgage-backed securities, which were lured by higher yields of 1.5 per cent versus short-dated Treasuries at 0.25 per cent.
But like Lehman Brothers before it, that greed would come back to bite them as the Fed hiked interest rates to curb rampant inflation. When interest rates rise, bond prices fall.
A fund owned by SVB CEO Gregory Becker (pictured at a conference in Beverly Hills last week) sold $3.6 million worth of SVB stock on February 27, days before SVB posted a $1.8 billion loss US dollar announced, which triggered the fatal run on the bank. The trades were scheduled on Jan. 26 by an SEC rule that allows company bosses to schedule automated sell-offs to allay suspicions of insider trading
Speaking before markets opened this morning, Joe Biden declared: “Our actions should give Americans confidence that the US banking system is secure.” It comes after the White House yesterday guaranteed it would give SVB customers “whole.” ‘ and that ‘no losses will be borne by the taxpayer’.
The bank failed to diversify its portfolio to hedge against the interest rate and threw good money after bad, though Jerome Powell made no secret that the Fed would continue its efforts to dominate the overheated economy in 2022.
The effect was that SVB was sitting on $16 billion in unrealized losses at the end of the year, meaning its assets barely covered its liabilities.
The SVB was not a normal bank. At its peak, it held more than $200 billion in assets with fewer than 38,000 corporate accounts and a small number of retail clients. Many of them were technology companies backed by venture capital funds.
Bosses remained optimistic, believing they had enough cash to weather the storm. Last week they announced plans to raise capital by selling bonds and stocks.
His customers, however, were terrified. This spelled disaster for SVB, whose tech-savvy clientele were quick to take to social media to report impending doom.
In addition, many of the start-ups that have had at SVB Bank have been backed by venture capital funds that can have a major impact on their companies.
News fired between venture capitalists and start-ups on Wednesday, after the bank’s efforts to raise $2.25 billion in a stock sale fell through.
The run on SVB was accelerated as customers withdrew money with a swipe of their finger.
Peter Thiel’s Gründerfonds on Thursday urged the companies in its portfolio to withdraw money from the bank, and a number of other venture funds soon made the same recommendation.
By the end of the day, customers had triggered withdrawals in excess of $40 billion.
SVB boss Gregory Becker warned customers not to panic. A group of venture capitalists say: “I ask everyone to support us as we have supported you.”
Yet even while doing so, he appeared to be executing his own exit strategy.
A trust owned by Becker sold $3.6 million worth of SVB stock on Feb. 27, days before SVB announced the $1.8 billion loss that sparked the fatal run on the bank.
The trades were scheduled on Jan. 26 by an SEC rule that allows company bosses to schedule automated sell-offs to allay suspicions of insider trading.
Customers queue outside a Silicon Valley Bank branch on Monday as they rushed to withdraw their money after the government promised their funds would be safe
Accounting firm KPMG is also under scrutiny after giving the SVB a clean bill of health just 11 days before the sinking.
KPMG undertook the audit of banking books for 2022 on February 24 before regulators seized the bank on March 10.
Although the speed of withdrawals has increased significantly in recent weeks, the bank’s deposits fell by $25 billion over the last nine months of 2022.
Accountants like KPMG are supposed to warn investors when companies get into trouble. For the year after publication of the annual financial statements, they must analyze “whether there are significant doubts about the company’s ability to continue as a going concern”.
While the bank has not had any problems over the past year, auditors still need to consider developments that have occurred after the balance sheet date in order to provide investors with an accurate picture.
“Common sense tells you that a chartered accountant who gives a clean report, a clean bill of health for the 16 chief accountants of the Securities and Exchange Commission to the Wall Street Journal.
SVB could potentially have saved itself from failing to hedge interest rates and prepared for customer withdrawals if it had sold equity to cover its losses.
They appeared to be hammering out a deal with JP Morgan before the Federal Deposit Insurance Corporation lashed out on Friday, having already seen enough damage.
The Biden administration confirmed Friday that all customers’ cash will be guaranteed with funds from the deposit insurance fund, which banks have been required to deposit since the 2008 financial crash.
Joe Biden on Monday blamed the irresponsibility of SVB leadership and the relaxation of regulations under Donald Trump.
But analysts say the brutal rate hikes the Fed has carried out to cool the overheated economy were the result of Biden’s $4 trillion Covid stimulus package.
Steve Moore, former Trump White House adviser, warned that SVB “might just be the tip of the iceberg,” revealing broader weakness amid rising inflation.
Moore told Fox News: “I think it’s important for people to understand how this potential banking crisis happened. It’s not because there aren’t enough banking regulators, as Biden is trying to say.
“Because of massive inflation and the trillions and trillions of dollars that the federal government has borrowed, our financial system is in grave jeopardy and jeopardy.”
Source: | This article originally belongs to Dailymail.co.uk
https://www.soundhealthandlastingwealth.com/celebrity/how-bidens-4trillion-covid-stimulus-package-helped-create-a-tech-investment-bubble/ How Biden’s $4 trillion COVID stimulus package helped create a tech investment bubble