What a week for the banking industry. Earlier this week, Silvergate Capital ($SI) would be winding down operations and liquidating its underlying Silvergate Bank. That was an abrupt end for the firm which had been in business since the 1980s.
However, Silvergate ran aground after its business pivot into cryptocurrencies led it to a massive withdrawal of deposits last year. Silvergate was unable to effectively plug the hole in its balance sheet leading to the bank suspending operations and shareholders seeing a near total wipeout in value.
Silvergate was not a particularly huge firm, and as such, it didn’t send shockwaves through the market.
But closely following Silvergate’s decline, a much bigger firm ran into trouble. We see SVB Financial ($SIVB), the holding company for Silicon Valley Bank, failed in an attempt to plug a hole in its balance sheet. The bank announced its capital raise had failed on Friday morning, and that it was putting itself up for sale. That didn’t keep the problems away, however, as the FDIC intervened and made a speedy move to shut down SVB’s operations during market hours on Friday.
SVB’s collapse has led to a contagion effect across the banking industry, especially in certain niche financial companies. On Sunday, we see Signature Bank becoming the next casualty.
Fed to the Rescue
This morning, the Fed announced a rescue plan to nip the issue in the bud.
This is the biggest bail out since 2008 and one of the biggest in history.
- All depositors will have access to ALL money on Monday
- Fed announces new “emergency bank funding programme”
- Fed to make additional funding available to banks
- FDIC/Fed discussed plan with Biden
The new “emergency bank funding programme” provides cheap and under secured loans – the exact opposite of good central banking. A bank can take collateral trading at $0.90 and borrow a $1 from the facility at below market rates.
In other words, the Fed has decided to bail the banks…. again! Given that SVB’s collapse is due to the rising interest rates… does that give ample reason for Fed to pause?
Remember to Chill.. and not be so pessimistic
“Pessimism is intellectually seductive in a way optimism only wishes it could be”
Morgan Housel
Over the weekend, I received numerous forwarded messages on why the US banking system is on the verge of collapse and the stock market will drop and this is going to be worse than 2008… Chill people.
For this, let’s visit my current favourite book “The Psychology of Money” by Morgan Housel. You can refer to the link below to this to have a gist of what its about.
https://collabfund.com/blog/the-seduction-of-pessimism/
Basically I love how he wrote that it makes people seem “smart” when they are giving a pessimistic opinion. Tell someone that everything will be great and they are likely to either ignore you or have a sceptical eye. Tell someone that they are in danger and you have their undivided attention.
In today’s era, hearing that the world is going to hell is more interesting than forecasting that things will gradually get better over time. This makes people taking pessimism even more seriously than optimism. Chances of creating a viral post of forecasting a market crash is high compared to one talking about $50/barrel oil.
Underestimate our Ability to Adapt
I’m not saying that it may not happen, but we are so obsessed about it. We don’t respond faster to pessimism; rather we become so indulged towards it for a longer time than it is necessary. Have you ever asked yourself, why do you cling so much towards pessimism? There are so many times that I choked when I see the stock price on my watchlist dropping like flies. I frozed and switched off my laptop where I should be buying these stocks hands over fist.
“A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty”
Winston Churchill.
Pessimists also forgot that we have the ability to adapt and change.
Anything that currently looks bad can be always extrapolated into something disastrous. Extrapolate Covid-19 related deaths and humans will become extinct. Compound government deficit and we might go bankrupt in 25-30 years. Extrapolate a recession or inflation rate and we will go broke soon. All of these could be reasons for pessimism if we assume no future change or adaptation. Which is crazy, given our long history of changing and adapting.
So this is my reminder to everyone to chill… and look at things from a broader perspective. Also have faith that we will always strive for a solution to the problems we face. Be a little bit more optimistic.
Credits to Mr. Morgan Housel, who has written about this topic.