Darrell Castle talks about the collapse of the Silicon Valley Bank (SVB) and the Signature Bank that was shut down as well due to systemic risks. Is it 2008 all over again -- another systemic collapse of the banking system unless there is a federal bailout?

Transcription / Notes

IS IT 2008 ALL OVER AGAIN?

Hello, this is Darrell Castle with today’s Castle Report. This is Friday the 17th day of March in the year of our Lord 2023. I will be talking about the collapse of the Silicon Valley Bank (SVB) which was taken over by federal regulators on Friday March 10th. Signature Bank was shut down as well on Sunday, March 12th because of “similar systemic risk” to SVB. Is it 2008 all over again, and are we looking at another systemic collapse of the banking system unless there is a federal bailout?

SVB was the 16th largest bank in the country and its collapse was the 2nd largest after Washington Mutual in 2008. Does that mean that we are in 2008 all over again? The short answer is no, I don’t believe it does according to everything I have been able to learn from my research into both 2008 and now. However, Swissbanc is in trouble and would reportedly have failed without assistance from other Swiss banks, and Goldman Sachs this morning reported what the bank called “cracks in the system.”

So, what happened to SVB which was known to be the go-to bank for tech start ups especially in the green energy segment. Forbes Magazine had just praised the bank and named it a member of the top 100. SVB grew very quickly from a deposit base of $55 billion in 2020 to $220 billion at the time of its collapse. Its base of borrowers was small and didn’t need to borrow that much money, so the bank started investing the money from depositors and with rates low they had to take risks to get a return. Its investments were long term, about 10 years, its deposits were subject to instantaneous withdrawal. The value of its investments fell dramatically with the FED’s rapidly increasing interest rates until SVB could not cover its $162 billion in losses.

SVB held $27.7 billion in derivatives which is not a small sum, but JP Morgan, by comparison, holds $55.387 trillion in derivatives making it the largest derivatives bank in the entire casino. SVB’s fall is not, then, a threat to the entire banking system as happened in 2008, or at least that is what I have determined from my research. The federal government will simply rob the rest of us to make good the losses. Oh they will say the charges go to other banks, but eventually it makes its way to the bottom of the pyramid. The people on the point of the pyramid are covered for their excesses by the mass at the bottom.

How is SVB different from 2008 which was a systemic threat to the entire system. In 2008 the entire banking system had spent about 3 years investing in what came to be called mortgage-backed securities. Just mortgages bundled together and sold as security. Rates were low and credit fueled the economy, especially mortgages, but when the economy started a downturn and people lost their jobs they just walked away from all those mortgages.

 The FED  was engaged in lowering interest rates to very low numbers which caused massive inflation in the housing and derivatives bubbles. The FED then attempted to let a little air out of the bubble which caused cracks in the entire system. The entire credit system of the country, especially the one based on mortgage financing, began to collapse. Banks from the smallest to the largest had at least some part in the scheme because there was just too much money to be made for any banker to resist.

Mortgages were sold to subprime borrowers by the millions which means people borrowed the money to buy houses they had no ability to pay for. Many of those deals were on an adjustable-rate basis meaning that at some point there was a large bubble payment due or else the mortgage had to be refinanced at a much higher interest rate.