Silicon Valley Meltdown

The Credit Strategist Blog

There is a lot going on in financial markets, none of it particularly good. The January rally based on premature hopes that the inflation fight was done has collapsed. Cracks are appearing in the financial system - some in unexpected places - as higher rates start to set in. As I wrote the other day, rates have not been elevated for very long so it took time for them to have an impact, but as time moves forward they are starting to adversely affect asset prices, corporate profitability and leveraged financial structures of all types.

The collapse of SVB Financial Group (SIVB), the parent company of Silicon Valley Bank, happened very quickly. It started seeing deposits exit in size this week, forcing the bank to sell investments. Those investments included long duration Treasuries with very low coupons sold at big losses (~$2 billion). The bank then tried to raise $2 billion with the help of Goldman Sachs yesterday but failed, leading the stock to drop from $260/share on Wednesday to $38/share in today’s premarket trading before the stock was halted after the company announced it was putting itself up for sale. The problem is that nobody is going to pay much if anything for a bank whose deposits are fleeing, leaving a mess for regulators to clean up. Spreads on SIVB’s 2033 bonds are trading at over 1000 basis points this morning, a level that renders the bank effectively unfinanceable and distressed. That spelled the end and government regulators shut down a once-respected institution that stood at the center of the venture capital world.

If there is any good news here, this sharply reduces the odds of the Fed raising rates by 50 basis points this month (it will stick with 25).