Nigel's Eyes

20230313 Silicon Valley Bank and the risk of contagion goes beyond banking sector

There are news reports that some USD58,000 million was "wiped off" the share value of the USA's four biggest banks as soon as trading started today.

This matters to you.

Leaving aside the fact that nothing has been wiped off anything because shares are only notional value until they are sold or used as security, the story behind the reduction is fascinating.

Get your hankies ready, world, because this is about contagion in America and, as we all know, when America sneezes, the world catches a cold.

Silicon Valley Bank is real but until recently its main focus was on the tech industry in, you guessed it, Silicon Valley. OK, let's skip most of the story and get to what happened yesterday. It turns out that Silicon Valley Bank had a stock of US bonds. It's easy to see why: they are (in principle) stable and a good hedge against lots of things.

But they are not a good hedge against inflation. There's a complex mechanism that I probably won't explain well: the end result is that when inflation rises, bond prices fall. They are still worth, on redemption, what the US government sold them for but any "investment value" can be wiped out and, in this case wiped out is what happened, to the extent of USD1,800 million. But I'm getting ahead of myself.

When banker to crypto-stars Silvergate's problems became apparent and then apparently terminal, those with deposits in Silicon Valley Bank thought "tech. bank. F**K" and demanded their money back. Silicon Valley didn't have it so it sold bonds that it had bought before inflation took hold and which have, in the meantime, depreciated rapidly. That's where the USD1,800 million fits.

Guess why it didn't have the money? It's because it had bought a mountain of mortgage-backed securities. Remember them, from the CDOs that were the pivotal point of failure for the global financial crisis? They are highly illiquid unless very heavily discounted. No one wants them now because the US housing market is having its own mini-meltdown. sssh. Don't tell the Fed.

So now those people who hold shares in big banks are saying "bank. bonds. F**K" and they are selling shares in banks that are heavily exposed to the bond market.

As US bank shares tank, shareholders in other banks, all over the world, will look and say "bank. depreciation. F**K" and try to sell their shares before everyone else.

And as bank shares around the world fall, shareholders in all kinds of business will say "banks. blue chips. F**K" and sell shares in large international businesses with big borrowing, especially where (get this) they have hedged with US bonds.

Did you get those tissues?

First published as " Tissues required as US bank stocks suffer huge drop." at World Money Laundering Report