There are two failed banks in the U.S.: Silvergate, drowned with crypto, and Silicon Valley Bank, heavily exposed in real estate, drowned, above all, for having an exaggerated amount of Treasuries in its belly, sold in the market for liquidity hedging purposes. Securities that if carried to maturity would have been no trouble. But as rates rose, the price of said securities fell sharply and this originated a loss of $1.8 billion.
The 16th largest bank in the United States, SVB, thus went bankrupt in a flash, leaving many traders stunned by the speed with which the bankruptcy occurred. Immediately evoking the Washington Mutual of 2008.
On the FED’s website on Friday evening, an official announcement appeared of an extraordinary meeting of the Governors “under Expedited Procedures,” that is, called urgently, which will take place next Monday at 11:30 a.m. U.S. time. For three weeks we will have American time advanced by one hour in our time zone, due to the difference in the start date of the respective legal hours: so it will be 4:30 p.m. Italian time (and not 5:30 p.m.).
This is not the first time the FED has convened an emergency meeting, the last one, was last year. Years of sprinkling liquidity and resetting rates to zero, followed by a significant increase in them, have created this situation: banks, not only in the U.S., are full of government bonds whose nominal value has fallen, to compensate for the increase in rates.
As long as there are no liquidity problems, there are no problems. When, for some reason, the panic begins to spread and depositors come to demand their money back, and the bank is exposed with mortgages, and therefore with liquidity coming back in the long run, should the need arise, there are securities in the belly to put on the market.
Securities that generate abysmal losses as their market price falls from their book value are made in times of zero rates.
For the failed bank, it is a kind of betrayal of the Fed: in years past, an invitation to buy government bonds, then rising rates cause their value to fall … and if the bank goes into a liquidity crisis, it realizes that the unaccounted-for potential losses become real when it goes to place the securities in the market.
Suddenly, there is the other side of the coin that appears behind rising interest rates. The large number of outstanding securities whose market value has dramatically dropped. If you make it to maturity, everything is fine. If you sell early you go at a loss.
The puzzle the Fed has to solve is complicated. The fight against inflation has achieved some results, and the path laid out seems the right one. Powell’s recent statements have reaffirmed the continuation of a tough policy of raising rates.
Now, the Silicon Valley Bank case would suggest going much more cautious. Because the shock could hit banks and the financial system, a phenomenon even more dangerous than inflation itself.
And if we think that the problem could have worldwide repercussions, more than a few doubts come about insisting too much on raising rates abruptly. Rumors are already running that the next FED meeting is to enshrine the beginning of a different policy.
In an age like this, where dietrology and skepticism have become a mantra (rightly or wrongly, I won’t pronounce), alarming rumors are circulating about rushing to withdraw money from banks or seeking safe-haven assets (some even impractical): rumors that, of course, only add to the already existing confusion.
The market, as we know, reacted with a scene of panic, manifested last Friday.
From what we are observing, the margins demanded by brokers on options on the S&P500 have risen conspicuously, a clear indication that risk is being priced in rather seriously. We will see today if this is confirmed.
The opinion of some investors is that on March 22, at the next regular calendar meeting of the FED, there will be no rate hike and that by the end of the year, we should expect a 0.25-point decline. Note that opinions 72 hours earlier said the exact opposite, an increase of 0.50 basis points and further subsequent increases of 0.25, with resulting heavy stress on rates at year-end.