Silicon Valley Bank, now what?

Silicon Valley Bank collapsed in 48 hours. We'll see here how it happened. We'll compare it with the downfall of Lehman Brothers, and talk about where it can lead us all.

The fall of SVG

Quick and simple. Wednesday 8th of March 2023, SVB said that it needed $2b. Markets were not happy and slapped SVB in the stock market, but this wasn't the worst. What was unexpected, was the reaction of SVB's clients: they ran. A lot of clients simply lost confidence in the bank, and left with their money.

What is unprecedented is, thanks to our electronic era, the speed at which they could do so. By end of Thursday 9th, more than 40 billion dollars had been withdrawn. [1]

If you remember, the last day FTX was able to give its clients the money they had put in this exchange, "only" $ 6 billion had been withdrawn.

By Friday the 10th of March, SVB was insolvent. 48 hours. Just as fast as the Luna crash. Just as fast as FTX crash. 48 hours, that's now the time it takes from a trusted protocol, exchange, or big bank, to go to dust.

Sunday news

Basically, the US Treasury is saying that it won't bail out SVB. I just have the feeling they are doing the same mistake as with Lehman Brothers.

Comparison with Lehman Brothers

The end result was the same: a big bank collapsed. But the way it happened differ quite a lot. Lehman had some due payments to make and asked for liquidity on the inter bank lending market. It fell short of other banks to lend it money, because the collateral Lehman was proposing in exchange of the money was rotten subprime Mortgage Based Securities.

Lehman fell, because suddenly, because of the subprime crisis, nobody would trust its collateral any more.

What has just happened with Silicon Valley Bank is completely different: it was a blitz bank run, where $ 40 billion were withdrawn in less than 48 hours because clients panicked.

SVB bank run shows how thin the trust in banks has shrunk.

So, should the US bail SVB out?

Let SVB die

Some say no, in the name of Darwinian economism: let the losers die. This will purify the ecosystem. They have little concern for the clients:

https://twitter.com/FedGuy12/status/1634949182791487489

I completely disagree with this. SVB was a top 20 US bank. As such, it is heavily regulated and audited. Who has enough competence to personally audit such an enormous institution? It's just like saying to someone who just got food poisoning at a restaurant: "Any competent restaurant client understands that he should check the kitchens before eating anything in it". No. There are auditing companies, there are regulators, who are supposed to do this.

And it's very easy to now say that SVB was badly managed. But the truth is that no bank can withstand a $ 40 billion bank run that happen in less than two days. That's what killed SVB.

Bail SVB out

Some other people think bailing out SVB is the best option:

https://twitter.com/sama/status/1634958179657449475

Just in case you don't know him, Sam Altman happens to be the CEO of OpenAI. Yes, he's chatGPT's dady. Probably not a complete idiot.

Topic pollution

This save / let die Silicon Valley Bank gets polluted by US politics. Republican, red states and all the MAGA mob is just too happy to see a Californian Wokeflix bank go under. They cheer about all the tech and crypto companies that will get ruined by SVB's fall.

Especially on Twitter, this does not help constructive thinking.

Contagion? The case of USDC

Circle (who emits the USDC stablecoin) publicly stated that it has $ 3 billion stuck in SVB. That's almost a tenth of USDC's backing, and USDC, which is supposed to be pegged to 1 dollar, has depeged down to $0.90.

This sounds normal: if $ 40 billion USDC is now only backed by a bit more than $ 36 billion accessible dollars, you could expect it to loose 10% of its price on the market.

But this is kind of silly: Circle still allows you to redeem 1 USDC for 1 dollar. No problem on that side. The only problem is that Circle will be able to pay the people who come to redeem their USDC ... up to $ 36 billion. For the last 3 and something billion USDC, if they were to be redeemed, well, Circle would have problem giving the USD back to these last USDC holders, because the money is stuck in SVB.

But I repeat: Circle still gives you back 1 dollar when you give them 1 USDC. So you see the fantastic arbitrage you have here: buy 1 USDC at $0.90 on the crypto market, redeem it for 1 dollar. Then with that dollar, go back on the crypto market to buy another USDC for 0.90, etc, etc ...

You have probably realised that this arbitrage puts a big buy pressure on USDC, which is probably why it has got back up almost to its peg by now, but hasn't recovered as much in term of market cap. Some USDC really vanished:

https://coin360.com/coin/usd-coin-usdc

Contagion?

The thing is, Circle is probably not the only institution of have $ 3 billion stuck in SVB. But who are the others and how much do they have locked in there? We'll probably find out tomorrow as the markets open and many suspected companies will have to make press releases as their shares tank.

It's going to be Celsius, 3 Arrow Capital, Luna, all over again, ... but in traditional finance this time.

The huge advantage that TradFi has over DeFi, is that the Fed can save the day.

We'll soon find out.

Worst case scenario

Ok, let's try to figure out what could happen, but most probably won't, because I don't think Yellen and Powell are that stupid.

Let's say they ditch SVB just like Lehman Bro in 2008. Then in the following days, another bank gets in trouble because they it was exposed to SVB. Then that bank gets all its clients panicking, and we have another mad bank run.

I don't think the system can afford another of its top 20 bank to go to dust within less than a week. People, institutions, everybody would start panicking and we would see, not a run on a bank, but a run on all the banks.

All Americans running to their banks to withdraw as much cash as they can. The problem gets practical here: where do you put your cash if you don't trust any bank any more? This is a scenario for a movie called bank apocalypse.

USA following El Salvador

Well, the end game of this purely fictional scenario has a practical solution. From a practical standpoint, you simply cannot hoard 2 million dollars under your bed. But holding 100 BTC on your crypto wallet is very easy.

And you can transfer the amount you need to pay your rent or your employees very easily.

You can also prove you have that cash by signing any message with your private key (which proves that you can spend these BTC).

The US would make BTC "legal" tender ... well, not the government, but the citizens, out of their distrust in their collapsing banking system.

Obviously, this won't happen as it's very easy for the US Treasury and the Fed to step in and bail everybody out.

The one last thing that has to be kept in mind is that now, thanks to our digital world, people can act together very quickly. Will the Fed be able to react as fast?

So, what do you think? Maybe by the end of the week, the whole banking system will be rumbles and BTC beyond 100k ...

🤣🤣🤣