LARRY KUDLOW: That was a classic active-passive mismatch

Right now, we can only hope that the financial system is safe and stabilized by some swift government action over the weekend. Stock markets were mostly flat today. Interest rates on government bonds fell. Gold and silver rallied – that’s not a great sign, but, right now, there is no contagion in the banking system, right now.

Look, like everyone, I hope Silicon Valley Bank The problem is contained, but as someone who reported on two daily shows during the financial meltdown of 2008-2009, I know how difficult, indeed heartbreaking, a widespread banking collapse can be, especially for typical working families.

No one wants to see another stock market crash or banking crash. Well, like you, I hope this Silicon Valley Bank crisis is contained, but I’ve never liked that word “contained” because that’s what the government authorities were saying all the way back in 2007 and 2008 and they’re saying it again now.

In the meantime, we’ll see what’s been done. The Fed, the Treasury and the FDIC have guaranteed all deposits at SVB. The Fed has launched a new liquidity facility that will make one-year loans to federally insured depositories, mostly collateralized by bonds that will be priced at par.


A sign for the headquarters of Silicon Valley Bank (SVB) is seen in Santa Clara, California, March 10, 2023. (Reuters/Nathan Frandino/Reuters Photos)

It includes some help for Fed overnight loans, and the Fed is opening the discount window wider for emergency loans. Well. Bang bang bang. They did all these actions. Will this stop the bleeding?

I honestly don’t know. This is a known unknown. Recently, a bunch of regional bank stocks fell sharply. This is not good. This whole story is kind of weird because SVB they had a liquidity problem and badly messed up the risk management of their securities portfolio.

They had a lot of money in deposits, but they continued to use it to buy medium and long-term government bonds, the value of which continued to fall as interest rates continued to rise. Meanwhile, the cost of money on the liability side, including deposit rates, has risen astronomically and rapidly over the past year – from zero to 5%.

So it was a classic asset-liability mismatch: the borrowing rate exceeded the return on assets. The yield curve was upside down and they didn’t know how to deal with it. Now, they may not be alone in managing their risks, but they sure did prevent, and I think that’s the biggest problem SVB has.

Then they start selling assets, chasing lower prices. It’s like catching a falling knife. You can’t do it. So their equity investors disappeared, management was properly thrown out and now the government owns and runs it. We’ll see how they do.

At the moment, the way these government aid programs are structured is very strange. It is both inflationary and contractionary. Economist Larry Lindsey got it right this morning: valuing the bond portfolio at par actually increases liquidity, but the collapse of the entire bank will lead to tighter lending standards, likely freezing all lending.

This is a financial contraction and, to some extent, because SVB is the financial pulse of the entire Silicon Valley private equity tech world, I hope they are still fulfilling their core banking and payroll functions, but they are not going to extend loans and the entire the tech world may suffer.

I don’t know why the bank hasn’t been sold yet. I do not understand it. There are rumors that one of Elizabeth Warren’s radical socialist protégés at the Federal Trade Commission, who now heads the CFPB and sits on the board of the FDIC, is stopping the SVB takeover.

If this is true, it’s pure bullshit. Socialism strikes again, but I also have to wonder about the quality of their loan portfolio. Let me put it on the table. Who knows? They haven’t reviewed it yet.


Joe Biden speaks at the G20 Summit

President Joe Biden on Saturday urged major G20 energy producers with excess capacity to boost production to ensure a stronger global economic recovery as part of a broad effort to pressure OPEC and its partners to increase oil supply. (AP Photo/Evan Vucci/AP Newsroom)

Perhaps the final lesson here: wouldn’t it be great if the left-wing Bidenomics tax-and-spend program was thrown into the dustbin once and for all? Because, you know what, the $5 trillion in spending that was injected in early 2021 and continued for two years created big inflationary pressures and Jay Powell’s Fed weakly helped them along and all they got was a burst of inflation and then an interest burst velocity and then inverse yield curve.

This seems very difficult for bank risk managers. This whole thing has been a sad story since the beginning, more than two years ago. Now, we have to wait on braces and hope that upside economic policies can be prevented by another upside economic crisis. It’s not good. Hopefully there is no transmission.

This article was adapted from Larry Kudlow’s opening commentary in the March 13, 2023 edition of “Kudlow”.

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