ISTANBUL
Four US banks' sudden demise in past weeks brought up many questions about tech start-ups, venture capitalism, the crypto industry, risk appetite, global capitalist system in general, and the regulations in place.
Is this a fluke, or is the US financial crisis of 2008 happening again, despite all the tougher regulations that had been put in place during all past crises?
Does capitalism has an inherent weakness of a cyclical format when firms and banks go through a boom-and-bust cycle, or do larger institutions absorb smaller ones at an expense?
When billions of dollars exchange hands, and some evaporating in recent weeks, who are responsible, and what should be held accountable?
What happened?
The first US banking institution that was experiencing financial difficulties was Silvergate Bank, which was heavily focused on the cryptocurrency industry, announcing on March 8 that it would wind down operations due to heavy losses in its loan portfolio.
The implosion of the crypto exchange FTX late last year, once the world's second-largest by daily transactions, primarily led to the demise of Silvergate Bank since FTX was a major customer of the bank.
Silvergate Bank was lauded by the FTX's former head and co-founder Sam Bankman-Fried, who now faces 12 charges for the implosion, while three of his former executives have already pleaded guilty amid the crypto trade platform's sudden collapse.
Second, came Silicon Valley Bank (SVB) which publicly announced difficulties on March 8, surprising the US financial world and investors, since it was perceived as a strong-capitalized institution.
SVB was at the heart of the tech region of the US -- California, headquartered in Santa Clara. It was the largest bank in Silicon Valley based on local deposits and among the biggest banks in the nation.
It had been a major source for venture capital, which is a form of private equity financing startups -- companies at an early stage, mostly in the tech industry possessing huge upside growth potential, resembling such of Microsoft, Apple, and Google at an entry-level.
However, SVB's fallout has begun at the end of February when some of the senior officials of the bank started unloading their shares.
It was made public later that Chief Executive Officer Gregory Becker, Chief Financial Officer Daniel Beck, and Chief Marketing Officer Michelle Draper sold their shares worth $4.5 million of the bank's parent company SVB Financial Group.
When SVB sold its $21 billion bond portfolio at a $1.8 billion loss, and Becker announced on March 8 the bank has sold "substantially all" of its securities portfolio, panic took over Wall Street and the US financial industry by storm.
SVB had approximately $209 billion in total assets and around $175.4 billion in total deposits by end of 2022, and it was unusual for a well-capitalized institution to go under so suddenly.
In less than 48 hours, the stock price of the bank's parent firm SVB Financial plummeted more than 60%, while its trading was halted multiple times due to high volatility.
Silicon Valley's biggest shuts down
Amid the sudden collapse, SVB was immediately closed by US regulators, California Department of Financial Protection and Innovation appointed the Federal Deposit Insurance Corporation (FDIC) as the receiver.
FDIC created the Deposit Insurance National Bank of Santa Clara (DINB) to protect insured depositors, while it immediately at the time of closing transferred all insured deposits of SVB to the DINB.
It was the largest failure of a US-based financial institution since Washington Mutual's collapse at the height of the 2008 financial crisis, which stemmed from the US housing bubble that was first built on sub-prime mortgages and later created derivatives, such as toxic CDOs, that overvalued junk-rated assets for more profits.
While the 2008 financial crisis in the US spread worldwide and became a global catastrophe, what investors feared the most about SVB's demise was its potential snowballing effect -- whether SVB is a domino that could make other US banks fall as well?
Signature Bank, headquartered in New York with $110 billion worth of assets and $8 billion total equity, was in trouble next when customers began withdrawing their deposits in panic.
It was closed by the New York State Department of Financial Services on March 12, on a Sunday, since the bank showed that it was unable to improve its finances before Monday morning.
As the panic turned into a full-blown fire-sale, then came the fourth US bank -- First Republic Bank, a full-service bank and wealth management company, which saw its shares plummet more than 20% on March 15.
In less than 24 hours, a total of 11 major US banking giants -- such as Bank of America, Citigroup, JPMorgan Chase, Wells Fargo, Goldman Sachs, and Morgan Stanley -- poured $30 billion in deposits to save First Republic Bank.
Who are responsible?
Sudden crises require immediate scapegoats. After the quick demise of four banks in the US, all eyes turned to leadership positions in those banking institutions.
Many analysts blamed a lack of management, effective leadership, corrupt management practices, and the inability of top executives to predict the potential impact of the turmoil in the crypto market last year.
President Joe Biden assured Americans that the US banking system and depositors are "safe" and vowed on March 13 "No losses will be borne by the taxpayers."
He further stressed: "Investors and the banks will not be protected. They knowingly took a risk and when the risk did not pay off, investors lose their money. That's how capitalism works."
Biden, after all, was the vice president under former President Barack Obama's administration that had overtaken the wreckage in 2008 in the financial system, which adopted tougher financial regulations on Wall Street.
However, the motto embedded in capitalism says "individual ambition serves the common good," according to Adam Smith -- the 18th-century Scottish philosopher who is widely dubbed as "the founder of modern economics" or "the father of capitalism."
"Wherever there is great property there is great inequality. For one very rich man, there must be at least five hundred poor, and the affluence of the few supposes the indigence of the many," he wrote in his famous book An Inquiry into the Nature and Causes of the Wealth of Nations published in 1776.
So, behind every successful bank, there are hundreds that collapse?
Is the Fed to blame?
There have been, indeed, several banking crises in the US for more than 100 years, during each time large banks, or firms, swallow smaller and bankrupt private institutions.
When New York-based Lehman Brothers, once having over $600 billion in assets, filed for bankruptcy in September 2008, its investment banking business was acquired by British multinational bank Barclays.
Fast-rewinding to the 1929 Great Depression ...
"Between 1929 and 1933 ... some 7,000 banks failed," according to an article by David Wheelock, senior vice president and special policy advisor at the Federal Reserve Bank of St. Louis.
The US Federal Reserve, which controls the total supply of the US dollar in the world, undertook two major moves in the past three years -- injecting an unprecedented $5 trillion suddenly into the US economy during the coronavirus pandemic, causing high inflation, and now raising interesting rates too rapidly to bring down inflation that spiked to a 40-year-high.
The Fed's aggressive monetary tightening last year saw interest rate increases for a total of 425 points on seven occasions, followed by another 25 basis points rate hike on Feb. 1 that carried the target range for its federal fund's rate to 4.5% to 4.75% -- the highest since October 2007.
Money supply, liquidity, bonds
Many economists firmly believe that the Fed moved too fast and too high in rate hikes, withdrawing too much money from the global supply of the greenback, and leaving the US economy without enough liquidity for new investments, especially in the tech industry.
The safest and most typical investment action by banks under such aggressive monetary tightening is buying Treasury bonds guaranteed by the US government. Since they carry a low risk of default by the US government, they have a fixed interest rate but with a small return.
Because however, tech start-ups were in dire need of cash last year due to falling ad-based revenues, venture capital funding was drying up and caused tech-heavy-invested banks exposed, such as SVB, to see their customers withdrawing deposits more and more.
Larger withdrawals eventually cause any bank to begin selling its own assets in order to meet customers' withdrawal demands. As a result, SVB was forced to sell its so-called safe bonds at a loss; and when those added up it led to SVB becoming insolvent -- a point when a bank cannot repay its depositors because its liabilities are greater than the assets that it owns.
What awaits now?
The 1929 Great Depression, the 2008 Great Recession, the 2000 dot-com bubble burst ...
While all crises showed the need for more regulations and tougher government control; companies, banks, and private institutions vehemently demand Adam Smith's "invisible hand" -- private actors behaving for their own self-interest in a free market without any government interventions, advocating it would be better for the whole society.
Investors, meanwhile, seek huge profits on a very small amount of investment with an unquenchable thirst for risk appetite, which sometimes paves the way for sudden demises just like the latest bank collapses.
Although the current banking crisis in the US immediately requires actions to prevent a domino effect and ward off other bank failures in the nation, as well as around the world, the major question is much wider.
The answer we seek should ultimately address more fundamental causes and effects to be a lesson for capitalism and improve the dominant economic system for the 21st century.
Despite all the booms and busts during the past hundred years, we cannot dispose of the contemporary interconnected global economy and borderless financial system since it addresses our immediate needs of consumerism and our too much dependency on it.
There will always be new technology, new start-ups, new risks, and rewards. What will stay the same is the clash between the risk-loving human appetite and the regulations that are in need to provide balance.
