*-The failure of the Silicon Valley Bank last week represents the first bank run of the 21st Century with deposits cascading out with a few clicks on a smart phone being egged on by social media. The Fed and the FDIC came to the rescue by insuring deposits over the $250k limit. This granting of super-deposit insurance was by my reckoning, a mistake. Instead, the FDIC should enforced small haircuts on deposits in excess of $250k. My take would be to offer 95% to those depositors who wanted their money immediately and issue for those who could wait, a one year zero coupon note priced at 95. This would still be a far better deal than one that would have been typical in a bank failure.
*- This episode represents a complete failure of the bank regulatory apparatus in that Silicon Valley's 86% deposit growth in a year represented an unmistakable yellow flag. Further, the bank invested those deposits in long duration assets which should have been viewed as a per se violation of safe and sound banking practice. That would have triggered either the closing of the bank or the firing of its officers. I can't wait to hear the testimony of the regulators from the FDIC, the San Francisco Fed and the State of California testifying before Congress.
* - Despite what Senator Elizabeth Warren said, the Silicon Valley Bank would have passed the stress test that it was exempted from. Why? As usual the Fed was fighting the last war by gearing their stress test to asset quality. Silicon's assets, by and large, were not subject to credit risk; instead they were subject to gigantic interest rate risk that the Fed to ignored. Chalk that up the Fed's zero interest rate policy that finally ended in early 2022.
*- As fears of a generalized run on the banking system catalyzed borrowings at the Fed's discount window surged to record $153 billion, up from $5 billion the prior week. An additional $143 billion was to guarantee the deposits of the three banks that recently failed and $12 billion was allocated to the Fed's new, and dubious, term lending facility.
* - The Fed's Open Market Committee meets this week and only 10 days ago market participants were anticipating a 50bp increase in the Fed Funds rate. Now the debate is whether the Fed will do 25 bps or nothing. There are good arguments on both sides, but my guess is that the Fed will copy the ECB and do a 25 bps increase and signal at least a temporary pause.
* - Unfortunately there will be another shoe to drop. The value of office real estate has plummeted and those losses have yet to be recognized on the balance sheets of banks, CMBS', private equity, and pension funds. Along with bank stocks cratering last week, the shares of the office REIT's collapsed. See below for the price declines of a sample of office REIT's over the past year which are down 55%-71%.
REIT 52- Week High Current Price % change
BXP (Boston Properties) 133 51 -62%
Cousins Properties 42 19 -55%
Douglas Emmett 35 11 -69%
Kilroy Realty 79 29 -63%
SL Green 84 24 -71%
Vornado Realty 47 14 -70%
* - As a result my guess is that the path of least resistance for stocks is lower with a retest of the October lows likely.
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