Silicon Valley Bank collapsed because of bad decisions by senior management, but the historic failure was helped along by the Biden administration’s disastrous handling of the economy, Ben Shapiro said on his podcast Monday.
Deficit spending that drove inflation and prompted interest rate hikes by the Federal Reserve, combined with poor investment strategy by the bank caused the collapse, according to Shapiro, the best-selling author and Daily Wire editor emeritus. SVB had $200 billion in deposits at the end of the first quarter of 2022, a jump from $60 billion in 2020, which Shapiro attributed to more money being injected into the U.S. economy than at any time in history.
“A lot of that money went to firms that didn’t know where to put the money and so they started shoveling it into tech,” Shapiro said, adding that the tech “boom” looked a lot like the tech bubble of 1999, when ridiculously high valuations were placed on unproven companies.
SVB's meltdown is indicative of the larger problem of central bank policy now acting as the prime mover for markets.
— Ben Shapiro (@benshapiro) March 13, 2023
Banks like SVB wound up holding huge amounts of the flowing cash, swelling their balance sheets. But instead of keeping liquid cash on hand, SVB and others lent to other ventures and bought stocks and bonds. As always, banks make their profit by investing deposits, Shapiro said. To succeed, they need a better return on the money they invest than the yield they’ve promised depositors.
“So what exactly did SVB Financial do with this massive influx of cash?” Shapiro asked. “Well, they started buying tens of billions of dollars of seemingly safe assets, primarily long-term U.S. Treasuries and government-backed mortgage securities, which means that SVB’s securities portfolio rose to about $27 billion in the first quarter of 2020 to $128 billion by the end of 2021.”
These investments soured when inflation and subsequent interest rate hikes by the Federal Reserve caused the value of those bonds values to drop. The government will then issue bonds at higher rates, wiping out the market for the lower-rate bonds. And since the long-term notes don’t mature for several years, SVB is stuck with them even as inflation eats away at their underlying value.
Once word of the bank’s position got out and depositors wanted their money back, all the bank could do was sell their long-term treasury notes and government-backed securities at a discount that amounted to huge losses that caused SVB’s collapse.
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“And so suddenly, if everybody goes to the bank at the same time you have the Mary Poppins scenario, right?” Shapiro said. “Everybody goes to the bank at the same time. It’s a run on the bank and everybody freaks out because they have to shut the windows. There actually is no money at the bank.”
The failure of SVB, the nation’s 16th-largest lender, was the nation’s biggest bank failure since Washington Mutual in 2008.