Easy money bill is due: Silicon Valley Bank’s collapse isn’t a ‘Lehman Moment’ — at least not yet

Ever since the 2008 implosion of the US financial system, Wall Street has been on tenterhooks for the next “Lehman Moment,” a triggering event named after the ill-fated investment bank that led to the broader crash of the banking system and the economy.

The latest alleged Lehman Moment occurred Friday with the crash-and-burn of Silicon Valley Bank.

With around $200 billion in assets, it’s the second-biggest bank collapse in history. 

Bank stocks have been crushed in recent days, as traders and investors fret that losses by SVB are an indication of systemic risk spreading through the broader banking system, leading to a string of bank losses, some possibly collapsing, and then a recession.

Banks then stop lending, businesses recoil, the economy goes into the tank.

I say “alleged” because according to my sources this isn’t quite a Lehman Moment — at least not yet.

SVB’s slide into the abyss is a warning sign, they say, that we have trouble in the plumbing of the banking system built up through years of free-spending, i.e., money printing at the Federal Reserve and fiscal blowouts by the Biden administration.

As reported, the FDIC seized control of SVB on Friday as SVB headed to insolvency.

Its parent company, SVB Financial, is scrambling to find a buyer.

Like Lehman, it will be difficult, so complete collapse is very possible.

Regulators like the FDIC and Fed must approve any sale, narrowing the list of acquirers to major financial institutions.

Big banks will be hesitant to buy SVB’s portfolio.

It’s difficult to value and given their experience during the financial crisis, probably a non-starter. Recall: JP and BofA bought Bear Stearns and Merrill Lynch, respectively, as they were collapsing — only to be saddled with huge liabilities.

That leaves as possible buyers alternative asset managers like private equity, firms like Blackstone and Apollo.

But both are vulture investors and might want to pick up SVB’s portfolio only on the very cheap.

Collapse inevitable

In other words, a Lehman-like collapse is almost inevitable for SVB, bankers I interview say.

Here’s the good news: Lehman’s holdings of underwater mortgage debt that caused its insolvency were found in every large bank balance sheet, hence the need for a government bailout to prevent financial Armageddon.

Silicon Valley’s portfolio business is pretty idiosyncratic. It serves mainly venture capital firms that began yanking money from accounts as tech losses mounted.

That forced the bank to unload its holdings of Treasury bonds, themselves depressed amid Fed rate increases, leading to the crash. Big banks like JPMorgan have a more diverse customer base so they don’t have to worry about unloading Treasurys to meet a bank run, at least not yet.

But that doesn’t mean the SVB experience isn’t of concern.

It’s pretty clear that the massive amounts of fiscal spending and money printing that only recently ended distorted so much of the banking system’s plumbing that recent Fed rate increases are beginning to wreak havoc.

SVB’s holdings of Treasury securities exploded amid this bonanza of fiscal excess, but so did similar holdings at every major bank.

Prices remained stable and high even during the Biden administration’s spending because the Fed kept printing money, essentially buying the bonds the Treasury was selling.

That was all well and good until inflation set in and the Fed had to reverse course.

The Fed rate increases are now depressing bonds held not just by SVB but every major bank.

Again the good news: Unlike Silicon Valley, most large banks have a diversified depositor base that isn’t yanking deposits.

Still, what’s being held in the banking systems is a mother lode of assets with prices that were distorted by the money printing era of super big government, which under the right circumstances could create that Lehman Moment the market has been worrying about.