Do We Face a Lehman Moment?
As if investors don’t already have enough to worry about, Wall Street is starting to wonder whether the recent woes of two high-profile banks signal an imminent financial contagion. Are we about to experience a Lehman moment?
As you probably remember, Lehman Brothers was a powerful global financial services firm and venerable brand name on Wall Street. Lehman’s implosion in 2008 triggered a domino effect culminating in the global financial crash and Great Recession.
I now bring your attention to SVB Financial Group (NSDQ: SIVB), based in Santa Clara, California, and Silvergate Capital (NYSE: SI), based in San Diego.
In addition to Silicon Valley Bank, SVB Financial Group includes three other segments: SVB Private, SVB Capital, and SVB Securities. Silicon Valley Bank had surprised the market late Wednesday by announcing it was desperately short of cash. To shore up liquidity, the bank sold off a $21 billion bond portfolio for a huge loss. Shares of SVB Financial Group plunged Thursday. Attempts of parent SVB Financial this week to raise additional capital failed.
On Friday, trading in SIVB was halted and the Federal Deposit Insurance Corporation (FDIC) seized the assets of Silicon Valley Bank, marking the largest bank failure since Washington Mutual during the nadir of the 2008 financial crisis.
Until this week’s events, Silicon Valley Bank was the biggest bank serving Silicon Valley based on local deposits. California regulators shuttered the bank Friday.
Silvergate Capital has undergone similarly grim travails. Silvergate, one of the biggest banks dealing in cryptocurrency, voluntarily began liquidation Wednesday.
Rising rates and deposit withdrawals squeezed Silicon Valley Bank and Silvergate. Are other banks about to suffer the same fate?
An outflow of deposits compelled Silicon Valley Bank and Silvergate Capital to sell assets at a loss; those assets were bonds. Banks heavily invest in assets such as Treasury bills because they need safe havens to park their cash. As the Federal Reserve boosts interest rates at an aggressive rate, those higher rates reduce the value of their existing bonds.
It’s not just the financial sector right now that’s showing stress. Many of the withdrawals at Silicon Valley Bank have come from technology firms, especially startups, that are encountering cash flow problems as the Fed hikes rates.
Wall Street is on edge, with U.S.-based financial services stocks getting hit. But the anxiety has spread across the pond, with European bank stocks sinking as well. Does a “black swan” loom ahead?
Fact is, nobody can really prepare for a black swan. Unforeseen by probability models, a black swan is a complete surprise with severe consequences. There’s no telling how the Silicon Valley Bank and Silvergate crises will affect the wider financial system. Stay vigilant.
Mixed news for inflation fighters…
We got mixed news Friday on the inflation front. The U.S. Bureau of Labor Statistics reported that nonfarm payrolls rose by 311,000 in February. This reading came in much higher than the consensus expectation of 205,000 and followed January’s print of 504,000 (revised from 517,000). See the following chart:
The labor force participation rate improved modestly to 62.5% from 62.4% in January. The unemployment rate rose to 3.6% (versus 3.4% expected) and annual wage inflation, as measured by average hourly earnings, increased to 4.6% from 4.4%. Wages were expected to jump 4.7%.
Some analysts interpreted the report as positive, because it showed resilient economic strength combined with disinflationary trends. Others were disappointed that Fed tightening hasn’t done more to dampen the labor market.
I prefer to see the silver lining. Nonfarm payrolls expanded more than the estimate, but the unemployment rate ticked higher and average hourly earnings rose less than expected. The labor market is resilient, but cooling.
That said, the main U.S. stock market indices closed sharply lower Friday, as follows:
- DJIA: -1.07%
- S&P 500: -1.45%
- NASDAQ: -1.76%
- Russell 2000: -2.95%
Investors were spooked by SVB’s collapse. Bearish technical omens emerged Friday, as the NYSE Advance/Decline Line, S&P 500, and NASDAQ 100 all broke below their 200-day moving averages.
All four major indices finished the week in the red. Regional bank stocks hit their lowest level since November 2020. The Dow Jones Industrial Average is now down 4% year to date.
If a Lehman-like catastrophe does occur, will you be ready? Financial contagion could easily spread at any time, sparked by a host of factors ranging from hotter-than-expected inflation to overseas war to poor economic data.
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John Persinos is the editorial director of Investing Daily.