Warnings, Panic, Shock: SVB Collapse Shakes Nation

“Our sense of the range of institutions under scrutiny is that any issues are finite and idiosyncratic — in other words, they don’t threaten the whole system and should not lead to endless contagion, as long as we remain calm, acknowledge the problems are very serious and capable of spiraling out of control,” Jefferies CEO Rich Handler wrote Sunday, in what amounted to an open letter.

It was supposed to be comforting, but I’m not sure the caveat (i.e., everything that came after “as long as”) inspired much confidence. He was referring, obviously, to the closest thing the US financial system has seen to a Lehman weekend since… well, since Lehman weekend.

Of course, it’s not Lehman. And nobody serious would suggest it is. I should emphasize that. But even as it doesn’t have that kind of potential, it has that kind of vibe. Which really takes me back — to Camel Turkish Golds and gin gimlets.

When I read Handler’s letter, I couldn’t help but be reminded of what SVB CEO Greg Becker told VCs last week just 24 hours before the bank was seized by California regulators. “[We have] ample liquidity with one exception: If everyone is telling each other SVB is in trouble, that would be a challenge,” Becker said.

Becker’s “challenge” materialized, and it proved insurmountable. As Handler put it, recapping a by now familiar tale, “low-yielding long-term assets and commitments were underpinned by fairly concentrated overnight funding” at SVB, and “when confidence was shaken and depositors became a herd heading for the doors, the bank failed.” He called that “a conventional bank run that led to illiquidity because of a fundamental mismatch of duration in assets and liabilities.”

Could it become more than that? Well, yes. It absolutely could. And that’s what US regulators spent the weekend trying to avert. “The best solution would be a merger occurring [Sunday], but more is needed,” Handler said, noting that “short of an outright stabilizing rescue which would border on the miraculous, there needs to be a clear process of how people beyond the $250,000 insurance threshold will have access to their cash.”

The Washington Post said the Fed and Treasury were mulling a plan to backstop the uninsured deposits — all of them. And, yes, that is legal, as it turns out. Or, maybe I should say it isn’t illegal. You need two-thirds of the Fed and FDIC boards to declare a systemic risk, and then you need the Treasury Secretary to agree. At that point, you can tap an FDIC fund that banks pay into, and if the losses exceed a threshold, banks can pay in more, a prospect I’m sure they’d all be thrilled about.

As the Post intimated, the discussions themselves were worth reporting irrespective of the outcome. “The deliberations reflect concern over the collateral damage from SVB’s collapse and authorities’ struggle to respond amid limits on their powers implemented following the 2008 financial bailouts,” Jeff Stein, David Lynch, Tony Romm and Tyler Pager wrote, adding that “any decision to provide unusual assistance to SVB’s depositors would likely draw opposition.” Long story short, it wasn’t clear whether SVB was, in fact, a systemic risk.

Cornell professor Bob Hockett offered a colorful assessment. “If there looks like there could be a bank run on all the non-Jamie Dimon banks, they can, in a pinch, insure previously uninsured deposits for the full amounts,” he told the Post.

A bipartisan group of lawmakers on Sunday sent a letter to Janet Yellen, Jerome Powell and the FDIC. “Right now, we are concerned about the depositors at SVB, and at banks across the country suddenly unnerved by Silicon Valley Bank’s catastrophic failure that unfolded in only 48 hours,” they wrote, adding that,

If Americans can’t trust that their basic deposits are safe, we could suddenly face runs at banks of all sizes across the country. In the 2008 financial crisis, banks were “too big to fail.” We cannot encourage a system where banks are too “small to succeed.” Additional steps need to be taken to give confidence to depositors and discourage them from fleeing to only the largest banks. Unjustified runs on healthy regional banks would be highly damaging to our economy, threaten our national security and create enhanced long-term risks.

Their suggestions included bank lines of credit to SVB depositors, Fed repos and increasing the cap on FDIC deposit guarantees.

Bloomberg’s Hannah Levitt said the Fed was considering loosening discount window terms so that in the event there are runs, banks can get cash without taking large losses in a fire sale.

“I hope and trust that the authorities are on a path to doing what is necessary to restore confidence,” Larry Summers offered, noting that “acting decisively and rapidly is both the cheapest for taxpayers and the best for the economy.” He continued:

Failure to act strongly enough would be a Lehman-like error. It is a clear imperative that all SVB segregated assets and uninsured deposits be fully backed by Monday morning. Also imperative that sufficient support be provided to other banks to insure full availability of deposited funds across the banking system. This is not the time for moral hazard lectures or for lesson-administering or for alarm about the political consequences of “bailouts.” Authorities only have the luxury of ruling out classes of institutions as bidders if they are certain that confidence will be fully restored. Confidence is most important now. Afterwards there is much to review regarding risk management, regulation, accounting for capital conventions and what this all means for stress testing.

Almost everyone who cared to weigh in over the weekend seemed to agree that uninsured SVB depositors should be able to get most of their money back, it was just a matter of when and, more importantly, whether any delay would risk turning an isolated incident into a national crisis.

As Handler went on to write Sunday, “any impairment of the deposits should be fairly modest.” He emphasized that Jefferies wasn’t attempting to “downplay the injustice of even a penny of discount to one’s hard earned cash.” Rather, his point was that “assuming the wind-down is done promptly and smartly, this event in and of itself should not cause a systemic crisis.”

Again, the key was getting it done fast. Because every bit of this is about confidence. If that’s lost, it’s over. Bloomberg ran a good quote from Michael Purves, founder of Tallbacken Capital Advisors. Markets, he said, haven’t had to confront bank stability risks in quite a while. “The newness of this type of risk coupled with the muscle memory of GFC systemic collapse is perhaps driving narratives and anxiety” both from markets and policymakers, he suggested.

For his part, Jefferies’ Handler did adopt a constructive, hopeful cadence, but in my reading (and I emphasize this is just my reading, so my opinion), it was apparent that the level of angst on Sunday among people who understood what was going on was probably higher than the vast majority of Americans knew.

And therein lies the real challenge: You want to be transparent, but then again, you don’t really want them (the public) to figure things out. Because that’s when a fire becomes a conflagration.

“Unfortunately, this entire situation has heightened vulnerabilities elsewhere and we could witness another handful of these in the next hours or days,” Handler cautioned, referencing bank runs and failures. “Should that happen, the ramifications become harder to contain.” He added the following:

Given our experience dealing with fast moving liquidity challenges as they spiral out of control, the only way to solve them is to present the completed solution when providing transparency on the problem. Solving a portion of the problem or looking for the markets to be able to handle the uncertainty and price the solution will only cause everyone who can exit the scene to do so as fast as possible.

On Sunday evening, Bloomberg said Powell and Yellen were weighing emergency authority for a lending program and a backstop for bank customers. Ultimately, both were unveiled.