On Friday, billionaire entrepreneur Elon Musk indicated he was open to purchasing the failed Silicon Valley Bank. Musk made this statement in an exchange via Twitter, where he is known to make many of his bold claims.
It all started when Razer CEO Min-Liang Tan tweeted, “I think Twitter should buy SVB and become a digital bank.” Elon succinctly responded, “I’m open to the idea.” This interaction led many users on Twitter to comment on the possibility of Twitter becoming a financial institution instead of solely being a social media platform. Conservative commentator, Ian Miles Cheong, replied to Musk saying, “It would certainly kickstart Twitter as a financial institution.”
I’m open to the idea
— Elon Musk (@elonmusk) March 11, 2023
It would certainly kickstart Twitter as a financial institution. Perhaps?
— Ian Miles Cheong (@stillgray) March 11, 2023
Silicon Valley Bank has been slammed by financial commentators for their lack of risk management which led to the crisis. “What SVB did with their portfolio is either a signal of enormous incompetence or of outright moral hazard at play – gamble away billions as policymakers will rescue you,” said founder and CEO of The Macro Compass Alfonso Peccatiello. “I can’t believe incompetence reaches these levels, & there are some clear hints moral hazard was at play. As a result of regulation, banks have flushed their balance sheets with trillions of bonds,” he continued. “Such a large amount of bonds on the balance sheet also comes with risks though, right? Interest rate risk comes to mind: if you purchase Treasuries and yields rise, you lose money.”
“Now, what were the problems with SVB? SVB had a gigantic investment portfolio as a % of total assets at 57% (average US bank: 24%) and 78% was in Mortgage-Backed Securities (Citi or JPM: around 30%). But most importantly they DID NOT hedge interest rate risk at all! The duration of their huge portfolio before and after interest rate hedges was…the same?! Effectively, there were NO hedges. This means SVB was not applying basic risk management practices, and exposing its investors and depositors to a gigantic amount of risk. A $120 bn bond portfolio with a 5.6y duration means that every 10 bps move higher in 5-year rate lost the bank almost $700 million,” the CEO explained. “200 bps? $14 billion economic loss. Basically, the entire bank’s capital was wiped out.”
“I feel bad for all of these people that lost all their money in this woke bank. You know, it was more distressing to hear that the bank officials sold off their stock before this happened. It’s depressing to me. Who knows whether the Justice Department would go after them? They’re a woke company, so I guess not. And they’ll probably get away with it,” Bernie Marcus, co-founder of Home Depot, said.
The collapse of SVB has sent shockwaves through the financial system, with many raising the question if this is a risk other financial institutions could suffer. The regulatory decisions regarding supporting struggling banks going forward could have massive macroeconomic effects. For example, if the Federal Reserve were to bail out failing banks, it could essentially have the same effect as injecting stimulus into the economy. Some think this could have a similar effect as Quantitative Easing and make fighting inflation even harder.
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