News-Press columnist Brent E. Zepke writes Silicon Valley Bank was a victim when excessive government spending ultimately led to a rapid succession of interest rate increases.
Brent Zepke
The author lives in Santa Barbara
The words “Silicon Valley Bank” has been thrust at the start of stories by pundits on virtually all news outlets since March 10. While that is interesting, the words that follow rang the bell at the top of a “fascination” scale. Here is how I see the events.
Based in Santa Clara, Silicon Valley Bank popped up on my radar under the symbol it trades under on the stock market, SLVB, a couple of
years ago as I searched for a great bank in which to “take-a-position” for investment purposes.
I liked that as a regional bank, it was not subject to the strict restrictions imposed by the Dodd-Frank law passed under the Obama-Biden term. I liked that it served the best growth area I had ever seen: Silicon Valley, or as my manager at Smith Barney used to say, “the peninsula.” It’s not a peninsula, but no one corrects someone from Chicago.
I invested, SLVB performed, and we both flourished.
After the 2020 election escorted in what would become the “Biden economy,” the new theme of “runaway inflation” entered my investment model, and I “bid my adieu” to SLVB. To quote Satchel Paige: “Don’t look back; someone may be gaining.”
Until March 9 when it imploded.
In summer 2021, I had watched the potential problems begin building when it became obvious that inflation was building by the Pelosi-Schumer team, sending trillions of dollars to the Biden team through legislation. That increased inflation, which is too much money chasing too few goods. The obvious remedy was for the Pelosi-Schumer team to reduce the money they were sending to the Biden team, and for the latter team to spend less. But politically this was unpopular, so it did not happen.
The venture capitalist, who tended to be very bright, saw that making money in the Biden economy would not happen, so they put all the money they made under the previous president into Silicon Valley Bank.
How much money?
Estimates are that their deposits grew from $60 billion to $200 billion almost overnight. Prudent rules provided that Silicon Valley Bank invest in U.S. treasury bonds. The bank did so at that period’s interest rate of 1.7%.
In September 2021, the Biden team had spent so much that there were indications that the head of the Federal Reserve, Jerome Powell, should raise interest rates. But President Biden threatened to not reappoint him if he did. So he did not.
The Fed took no action until after President Biden re-appointed Chairman Powell in January 2022. The Fed’s rates action have such a huge impact on financial markets that they rarely are raised more that 0.25 of one percentage point, which to avoid fractions is expressed in “basis” points, so 0.25 is 25 basis points. The Feds traditionally wait six months before another change as this is generally how long it takes for the effects of rate changes to travel throughout the financial market.
Waiting is a great idea, but as the president — living up to my nickname of the president who “walks softly and carries a big checkbook” — eliminated the benefit of waiting until the impact of a rate change works its way through the financial system. He spent money so fast that there became a serious risk of a market crash as rates were raised from the 1.4% under Trump to higher than 8%.
Chairman Powell could have afforded to wait the six months in-between, but took the unprecedented steps of raising rates eight times by 25, 50, 75, 75, 75, 75, 50, 25 basis points in 2022. Did it stop inflation?
No, raising interest rates cannot stop inflation unless the president also slows his spending. Did it slow down?
No, the rate increases had a similar effect as shooting a charging grizzly bear with a pistol. It stimulated him to increase his actions.
As 2022 closed, Pelosi-Schumer “exited left,” to use a term befitting their acts, after repeatedly gifting the president with more money.
The situation was that Chairman Powell’s goal for inflation was 2%. Inflation was 6.5%.
As 2023 began, the Biden team tried to explain away inflation still increasing in a variety of ways while spending more.
March arrived, and Biden proposed a budget to spend even more, which caused venture capitalists to withdraw their money from banks in order to invest it elsewhere for a greater return. Their money was in Silicon Valley Bank.
SLVB, to raise the cash for the withdrawals, had to sell the treasuries that were paying 1.7% into a market, where newer treasuries had incrementally increased to 4.2%.
Would you buy a note paying 1.7% when others pay 4.2%? Neither would anyone else, so they sold them at a huge loss.
March 10 brought a feeding frenzy as the media attacked everyone at Silicon Valley Bank.
The Department of Justice and the Securities Exchange Commission may find an “insider trader” to blame.
My counsel is that if they do, listen for them to avoid connecting those actions to the cause of the crash. They are not connected. Their actions were an “effect,” but what employee of the government would be foolish enough to identify the actual cause as being the actions of the president?
The cause was the Biden-Pelosi-Schumer spending that forced Mr. Powell to raise interest rates much too quickly in order to save our economy, which caught prudent banks, like those at Silicon Valley Bank, off guard.
Political interest may prevent challenging the administration on why they think Silicon Valley Bank would be the only bank caught this way, particularly after the Obama-Biden team changed the rules to force banks to syndicate their risks? Who lost the money that disappeared from the system?
When listening to the Biden administration and mainstream media, investors would be well served to remember, “Fool me once, shame on you, fool me twice, shame on me.”
Brent E. Zepke is an attorney, arbitrator and author who lives in Santa Barbara. His website is OneheartTwoLivescom.wordpress.com. Formerly, he taught law and business at six universities and numerous professional conferences. He is the author of six books: “One Heart-Two Lives,” “Legal Guide to Human Resources,” “Business Statistics,” “Labor Law,” “Products and the Consumer” and “Law for Non-Lawyers.”
