WEEK AHEAD

What was initially viewed as this week’s market overreaction to Chair Powell’s congressional testimony on monetary policy was replaced by the left-field pandemonium from the collapse and FDIC seizure of Silicon Valley Bank. Although the S&P 500 sustained a major loss of 4.53% in a short period of a week, Financial stocks were shaken and dropped 8.17% by the news of Silicon Valley Bank’s fall, dropping 63% before the stock was halted from trading. Due to contagion fears, regional banks measured by KRE (SPDR S&P Regional Bank ETF) sank 16.05% in a week. In reaction to recession fears and the Fed tightening monetary policy, the bond market had the opposite reaction as yields narrowed and gained 1.2% while long Treasuries gained 3.6% during the week. It is a modest week ahead for earnings releases. As the fallout from Silicon Valley Bank continues to unfold this week, the market will tread on understanding the widespread impact to the bank’s corporate customers and many tech start-ups. Sentiment will initially focus on the CPI and Industrial Production report being released this week, but angst will likely center around the banking sector and liquidity fears until the U.S. Treasury Department

Silicon Valley Bank’s sudden takeover by the regulators brings memories of 2008, but this collapse is more like “It’s A Wonderful Life’s” B&L potential demise. Jimmy Stewart portrays character George Bailey who thwarts the run on the bank that might have been. However, today, tragically, SIVB could not avert the “run on the bank,” and unlike in Bedford, we’re left wondering why things aren’t so Wonderful.

There are parallels, though, that we see in the fictional Bedford that seemed to have played out in the real Silicon Valley. And we’re already hearing questions about how this collapse of SIVB will affect the tech and start-up community in Silicon Valley. In Bedford, there were only two financial institutions, “the bank” and George and Harry’s Building and Loan (B&L). The key to the story and the beauty of Capra’s story is the people, and key in the story, outside of George Bailey, is the depositors and the borrowers or homeowners.

It is true for Silicon Valley, too, though talking heads on superficial cable channels will say otherwise as they make dire comparisons to 2008. 2008 was not about depositors but the investments and assets that banks and bank borrowers bought with leverage that was suddenly no more. Both cases highlight the concentration of depositors in both Bedford and now Silicon Valley. Are there only two banks in Silicon Valley? Of course not, but clearly, we need to understand why the close-knit network and Twitter-induced fear were so concentrated among depositor clients of SIVB.

Much like the homes of Bedford that B&L loaned money to purchase, there will surely be unequivocal evidence that SIVB’s investments were sound despite some short-term losses on the Treasury Bond holdings caused by the forced liquidation of the inflation-reduced bonds. In this case, we might even be able to point to inflation’s first victim. Perusing the bank’s balance sheet highlights atypical growth in deposits and investments between 2019 and 2021 that will likely be investigated further by regulators.

In “It’s a Wonderful Life,” the Uncle Billy character sets all the events in motion as he absent-mindedly loses the $8,000 deposit money. We also find out that Potter, the antagonist, doesn’t mind stealing the money or doing a number of unethical things to get ahead—very much the opposite of the kind-hearted George Bailey. We feel awful for Uncle Billy, but it’s not like we trust him to put himself on the line to rectify things. This is the same for Silicon Valley Bank, the “Uncle Billy” or Billys that crafted the last couple of days of announcements and actions by SIVB didn’t know that this would induce a run on the bank and crash the bank. Many other bank executives probably genuinely feel bad for SIVB and are trying to understand what happened. They may even be thanking their lucky stars that it wasn’t them or their banks. Be assured every bank board is scrambling now to get a full report on whatever and whenever. However, these bankers still can’t help their inner “Potter” feeling that they have an advantage to have the George Bailey of banks go under. Stay tuned. We’ll uncover some more “Potters” in this story.

This gets us to our assessment. This is a “run on the bank” that should never have happened, and there is plenty of blame to go around, mostly at Silicon Valley Bank, obviously... poor Uncle Billy. But this is the drama, induced by fiction and a little reassures the market as they determine bailout options. On Sunday, Treasury, Federal Reserve, and FDIC issued a joint statement that the U.S. Government would protect all SVB’s deposits to assure the global market’s confidence in the U.S. banking system. However, special mention was made to shareholders and debtholders they will not be protected.