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Backfired
“The best place to be in a bank run is first out the door,” Mr. Cho said in the Wall Street Journal piece.
This is everyone’s mentality when a bank’s confidence wains. Every person for themselves.
Because when confidence erodes… people grow anxious and skeptical. They’re on edge. Waiting for the first person to start running for the exits.
Then comes mayhem.
Usually it’s an individual person or company that starts the bank run.
During the Great Depression in the 30s, it was the stock market bubble that popped in 1929. The Dow Jones Industrial Average dropped 33% in just six days that October.
The crash in stocks rippled throughout the economy. The collateral damage forced people to cut back.
Supply was humming along from assembly lines. But demand dried up almost instantaneously. This imbalance created the avalanche.
Wealthy Americans had to sell assets and withdraw savings to cover losses. This meant banks had less deposits to loan out (they do this via fractional reserve banking). Banks also had less collateral to use as real estate prices dropped too.
The dynamism of the American economy was more fragile than President Hoover thought… as he wanted to let the economy self-correct.
By November 1930, 256 banks failed with an aggregate amount of $180 million.
The following month the bank run on the Bank of United States started. From Americana: A 400-Year History of American Capitalism by Bhu Srinivasan (emphasis added):
“There had been rumors among depositors about the strength of the Bank of United States, which, despite its official-sounding name, was an entirely private affair. It had no more affiliation with any form of U.S. government than did A.P. Gianni’s Bank of America. With 400,000 depositors, the bank had a deposit base of nearly $200 million even after a rush of earlier withdrawals, which, as the New York Times reported, was a ‘Small savings of comparatively poor people.’
With fears stemming from the hundreds of small bank failures that had occurred earlier that year, and aware that the Bank of United States was less liquid after the initial wave of withdrawals, depositors began to withdraw money before others got the same idea, with rumors making it everyone’s idea at the same time.
The bank’s assets were largely in the form of mortgage loans collateralized by New York buildings and land…
At 9:00 a.m., on December 11, 1930, [state of New York’s superintendent of banking, Joseph] Broderick announced that the operations of the Bank of United States were suspended until its assets could be liquidated.”
This was the beginning of the end for America which led into the Great Depression.
History rhymes… but this time it wasn’t the record stock and bond losses of 2022 that led to Silicon Valley Bank (SVB) to go belly up.
It was a self-inflicted wound.
As we pointed out in our January 31st piece, One Of Wall Street's Dirty Little Secrets, the market is narrative driven.
Control the narrative, and lead your shareholders to profits.
Silicon Valley Bank did the opposite.
Late Wednesday (March 8th), it announced a $2.25 billion offering to “reposition its balance sheet.”
This was after it sold $21 billion in U.S. Treasuries and mortgage-backed securities (MBS) to free up its balance sheet — which SVB lost $1.8 billion doing so.
This signal to “reposition its balance sheet” was a “Wait, what?” moment from investors and depositors.
Investors were asking “what’s wrong with the balance sheet that you need to raise money for? You just sold $21 billion worth of assets.” This signaled to depositors the same question (which many were likely also shareholders).
The stock fell 30% Thursday morning.
Chief Executive Officer Greg Becker held a 10-minute call to investors telling them to “stay calm.”
"SVB Financial CEO asks clients to stay calm in call earlier today"
There are no dead bodies about to surface in VC land. Everything is totally fine in a recession $SVIB
— Keith McCullough (@KeithMcCullough)
3:01 AM • Mar 10, 2023
Then the dominos started to fall… and the bank run started.
Silicon Valley Bank couldn’t meet the amount of withdrawals depositors were asking for. And within 48 hours SVB had to be taken over by the Federal Deposit Insurance Corp (FDIC).
SVB was down 60%+ Friday — which shares were then subsequently halted.
That’s how fast the narrative was lost. That’s how fast a bank goes from solvency to insolvency.
Less than 48 hours.
The KBW Bank Index lost $90 billion in value — the worst day since June 2020. The biggest banks in Europe lost more than $40 billion from their market capitalizations on Friday.
The iShares U.S. Regional Bank ETF (IAT) — which holds 37 other bank stocks — was down 13% over Thursday and Friday.
The U.S. Government announced they’ll make all depositors whole over the weekend. Biden had a press conference expressing confidence in our banking system on Monday.
Whether or not you agree with government intervention isn’t the point. They need to maintain a narrative too. The narrative of economic and financial banking stability.
Because with SVB — a top 20 bank — going belly up… SVB’s collapse would cascade into the rest of the economy. Banks and economies alike.
The fight for narrative is still being written. Investors are still questioning other banks with similar exposure as SVB.
U.S. Regional Bank Stocks Now:
1. Western Alliance, $WAL: -75%
2. First Republic, $FRC: -65%
3. Zions Bancorp, $ZION: -43%
4. PacWest, $PACW: -41%
5. Comerica, $CMA: -33%
6. Fifth Third, $FITB: -20%
Markets are betting that SVB's collapse broke the regional bank system.
— The Kobeissi Letter (@KobeissiLetter)
1:42 PM • Mar 13, 2023
IAT is down another 11% Monday (as I write).
We won’t be writing about the events that unfold. We’ll let the major publications do that.
Rather, we’ll be watching what these narratives project to give us insight as to how we can adjust our portfolio… and even find ways to profit.
You should too.
Good investing,
Lance