re: Silicon Valley Bank: Customers withdrew $42 billion by the end of Thursday

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"One of the problems [for SVB] was when money was so freely available to all these start-ups, they didn’t borrow a lot,” Carney told Kudlow. “So, they had a ton of deposits coming in and not a lot of opportunity to make loans out to people. I mean, yeah, you can lend money so people can buy a yacht or a fancy mortgage on some tech start-up billionaire’s fancy mansion, but they really had way too much money. So, they invested it in bonds. Bank of America I think has 25 percent of its assets in bonds, but this bank had over 50 percent of its assets in bonds.”

Kudlow noted that when the yield curve inverted, these bonds incurred a negative return.

“They’re losing money,” Carney agreed. “And at the same time, all these start-ups who are depositing so much money there are now withdrawing it because they don’t have access to free money anymore. So, they’re withdrawing it just to pay their bills. So, you’re having the deposits go down. They have to sell into a market where they are actually producing real losses, not just mark to market losses.”

“That is what sparked the panic basically,” he continued. “Earlier this week, [SVB] announced something like a $2 billion loss on their assets. And people said, ‘I better get my money out quickly.’”

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All of this has been exacerbated by the Federal Reserves’ rate-hiking fight against inflation, which has signaled the end of the cheap lending low interest rate monetary policy that fostered Silicon Valley start-ups, Carney explained.

“I think we’re going to see a lot of the California-based financial institutions get into trouble because they were so dependent on this very cheap money ecosystem that was feeding start-up culture and is no longer there,” he said.
“What happens to the start-up culture now that there’s no cheap money or there’s no cheap, cheap money?” Kudlow asked. “[Are] they’re going to have trouble getting loans?”

“Absolutely,” Carney said. “They’ll have trouble getting loans and have trouble raising money because if you can get five percent on a treasury bond, why are you trying to get 10 percent on a very risky start-up? You’re not going to do that. You might as well just double down on leverage and get a treasury. So, I think that they’re going to have a lot of trouble being able to continue to raise money. And we’re going to see a lot of the start-ups start to tilt over.”
Kudlow asked Carney about the risk that this bank failure will spread beyond SVB.

“I think there’s a high risk that it spreads,” he said. “People are right now looking at every other bank, not the big banks—the JP Morgans, Citigroups, Wells Fargos, they’ll be fine.”

“The banking system is extremely well capitalized,” he added. “And so, I don’t think we’re on the verge of a financial crisis. But I do think we’ll probably have a couple more bank failures ahead of us.”

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