Silicon Valley Bank’s collapse invokes the ghost of Lehman Brothers
The collapse of Silicon Valley Bank has inevitably led us to the metaphor of the dominoes. This is the concern of what we call markets, central banks and finance ministers around the world: how to avoid the contagion effect.
“The risk of failure and deposit losses here is that the next less well capitalized bank will run and fail and the dominoes continue to fall“, hedge fund manager Bill Ackman commented last Friday. That’s the fear. And hand in hand with that giddiness we return to Lehman Brothers.
Although before the Lehman brothers’ bank there was another. In the global financial crisis of 2007-2008, the first bank to collapse was Bear Stearns.. This global investment bank and broker was the first domino in the dominoes; the first to fall. The question is not trivial because it is a question of knowing (intuiting) whether in the present crisis Silicon Valley Bank is the Bear Stearns or the Lehman Brothers of 2008.. In the first case there is more time to stop the dominoes.
Bear Stearns fell first
Bear Stearns engaged in securitization and issued a significant amount of asset-backed securities, often mortgages (and cheap ones at that). As investor losses began to mount in these types of markets in 2006 and 2007, the firm continued to increase its exposure to them, particularly in mortgage-backed assets, which were key in the development of the mortgage crisis subprime.
In March 2008 it secured an emergency loan from the Federal Reserve Bank of New York to. try to prevent its collapse. But it was too late. JP Morgan Chase bought Bear Stearns at a price of only $2 per share. The failure of this bank was the prelude to the collapse of the financial sector. investment banking sector in September 2008 and the subsequent global financial crisis.
How Lehmann Brothers went bankrupt
The flagship of the general collapse was Lehman Brothers. Founded in 1850, it declared bankruptcy on September 15, 2008. Before that, it was the fourth-largest investment bank in the United States. (behind Goldman Sachs, Morgan Stanley and Merrill Lynch) and had US$680 billion in assets.
Lehman Brothers became heavily involved in the market for the mortgages subprime and in doing so took enormous risks. When the U.S. housing bubble burst, the bank had plenty of tickets to collapse. And that is what happened. It collapsed after the departure of most of its customers, drastic losses in the stock market and the devaluation of its assets by the major rating agencies.
‘Too big to fail’
It was the largest bankruptcy in U.S. history. On September 16, Barclays announced an agreement to acquire the investment banking and trading divisions of Lehman Brothers, as well as its New York headquarters. Nomura Holdings then announced its intention to acquire Lehman Brothers’ franchises in the Asia-Pacific region, including divisions in Japan, Hong Kong and Australia, and investment banking and wealth business divisions in Europe and the Middle East. This agreement became effective on October 13, 2008.
The collapse of Lehman Brothers prompted the ‘too big to fail’ doctrine… what later became bank bailouts.
The collapse of Lehman Brothers gave impetus to the doctrine of ‘too big to fail’… what later became the bank bailouts. too big to fail (too big to fail). In economics, the expression refers to the situation of a bank or any other financial institution whose failure would have disastrous systemic consequences. on the economy. That is why it is considered better to be rescued by the public authorities, as we saw in Spain with the bank bailout that was never intended to be called a bank bailout, when in fact it was.
What measures did the U.S. take
In response to the crisis and to prevent contagion, in October 2008, the U.S. government passed the Emergency Economic Stabilization Act. It included $700 billion for the Troubled Asset Relief Program. 205 billion was used in the Capital Purchase Program for the Troubled Asset Relief Program. lend funds to banks In exchange for dividend-paying preferred stock.
The Federal Reserve lowered interest rates and significantly expanded the money supply to help address the crisis. In February 2009, Barack Obama signed the Recovery and Reinvestment Act, a $787 billion stimulus package. More than $75 billion of this was earmarked for homeowner assistance programs. in difficulty.
What differentiates the SVB from the Lehman
They are very different cases. Actually, the SVB only bears one similarity to what happened in 2008. with Lehman Brothers. In both cases, the lack of supervision by the competent bodies allowed too much slack in their operations. The rest is malpractice in the pursuit of the highest profit.
The differences begin with context. The Lehman bankruptcy was born out of a structural situation and a mortgage bubble.which has nothing to do with Silicon Valley Bank.
In addition, the SVB clientele was largely made up of emerging technology companies that took advantage of low interest rates to finance themselves. As rates rose (inflation had to be combated), they were unable to meet their repayments. But the profile of these customers was specific to the SVB, not to most banks.
“This is not 2008.”
The big question at the moment is whether the failure of Silicon Valley Bank, and the subsequent failure of Signature Bank, is the beginning of something much biggermore destructive. That said, the metaphor of the dominoes.
The White House assures us that no, “this is not 2008”. This has been repeated several times by White House spokeswoman Karine Jean-Pierre, speaking to reporters aboard the presidential plane Air Force One.
What steps Biden has taken
On Sunday night, the Treasury Department, the Federal Reserve (Fed) and the Federal Deposit Insurance Corporation (FDIC) – like our Deposit Insurance Fund – announced. a plan to protect deposits of Silicon Valley Bank of California and Signature Bank of New York.
The FDIC will guarantee all deposits of the bank’s customers and. beyond even the $250,000 legal limit.. The money to be used to guarantee the deposits of these institutions will come from a guarantee fund to which U.S. banks contribute. The White House spokeswoman has emphasized that the money will come from a guarantee fund to which U.S. banks contribute. money will not come out of taxpayers’ pockets.
90% of Signature Bank’s deposits are uninsured and 20% of its capital is in cryptocurrencies
This decision seeks to avoid the contagion effect. And it is especially important for the second domino in the domino: Signature Bank. The 90% of its deposits are not FDIC insured.. It is a bank similar to SVB, i.e. it has invested heavily in startups technology and cryptocurrencies. In fact, 20% of its capital is in cryptocurrencies.
“Deposits are safe.”
In his Monday appearance, President Joe Biden, assured that “Americans have to. have confidence in the banking and financial system. They can breathe easy because companies are going to be able to pay the bills and their employees.”
Americans can rest easy, the U.S. financial system is safe.”
Biden said that “Americans can rest easy, America’s financial system is safe“He said that “deposits are safe” and that “they will guarantee” that “they will do what is necessary so that this does not affect other countries”. He recalled that when he was vice-president of the Obama Administration, mechanisms were created to “reduce the risk” of another economic crisis happening again.
