Tesla’s billionaire CEO accuses banks of being incompetent at managing their own investments that often run into the hundreds of billions.
Banks have been experiencing a crisis of confidence since March 10, the biggest since the 2008 financial crisis that slowed the world economy and threatened the collapse of the global financial system.
This new crisis was triggered by the sudden collapse of Silicon Valley Bank (BLIMS) – Get a free reportwho provided specialized financial services, industry expertise, a valuable network, and a strong reputation for startups, biotechs, and venture capital firms as well.
The bank’s failure, the second largest bank failure in US history, was caused by bad interest rate bets.
Created in 1983, Silicon Valley Bank, which billed itself as a “partner in the innovation economy,” offered higher interest rates on deposits than its biggest rivals to attract customers. The company then invested the customers’ money in long-term Treasury bonds. and strong-yielding mortgage bonds.
bets gone wrong
This strategy had worked well in recent years. The bank’s deposits doubled to $102 billion at the end of 2020 from $49 billion in 2018. In 2022, deposits increased to $189.2 billion.
But everything turned upside down when the Federal Reserve began raising interest rates to combat inflation. Since bond prices fall as interest rates rise, older bonds with low coupon rates can only be sold at a discount.
Furthermore, mortgages, like those SVB invested in, are even more sensitive because when interest rates rise, people tend not to pay off their mortgages early by refinancing.
The other issue that SVB hadn’t thought about was that the vast majority of their clients (tech companies) would see their cash flows affected at some point.
During the pandemic, tech startups were doing well, but coming out of the pandemic, the economy slowed. Startups found themselves struggling to find funds to finance their projects. To cover their expenses and stay afloat, they began to dip into their deposits at SVB.
As a result, SVB had to sell discount bonds to cover withdrawals from its clients. By selling these bond positions, SVB had to take a significant loss of $1.8 billion.
Due to this loss, the bank suddenly announced that it needed to raise additional capital of $2.25 billion by issuing new common and convertible preferred shares. This decision caused panic and a bank run.
The situation also revealed that SVB had not hedged against the risk of rising interest rates. The bank even went several months without a Risk Director. He announced the appointment of a CRO last January.
a meme
For investors, SVB practices are widespread within banks and more particularly among US regional banks, because they paid nothing for their clients’ deposits during the pandemic, as interest rates were close to zero until the second half of 2021.
It’s simple: If you can borrow at essentially 0% and earn, say, 3% or more at the Federal Reserve, why wouldn’t you? This logic is at the heart of the banks’ stock market rout despite the intervention of regulators who guaranteed all SVB customer deposits and created a backstop to urgently lend money to banks in need.
Elon Musk is one of the critics of banks and, in this case, of their practices. The billionaire just accused them of applying double standards in how they treat consumers compared to how they act when it comes to themselves.
For the billionaire, banks apply strict due diligence when receiving a credit application, but are more lax when evaluating their own investment portfolios. To back up his point, the king of techno turns to a meme.
This meme is made up of two images, each accompanied by text. Pictured above is Patrick from “SpongeBob SquarePants” as a suit-and-tie lab technician looking at a sample through a microscope. Text reads: “You are assessed by banks for a $2K credit limit.”
Basically, when a client requests a loan from the bank, the latter applies strict due diligence to determine if there is a risk that the client defaults.
The next picture shows Patrick from “SpongeBob SquarePants” in a bathing suit at the beach, messing up something he’s supposed to be building. His tools are scattered and he seems lost. The accompanying text reads: “Banks Assess Their Own $100 Billion Bond Portfolio.”
Basically, banks are incompetent when it comes to assessing the risk of their own large investments.
What’s also interesting to note is the difference in energy and expertise deployed in assessing the risk of a $2,000 loan, compared to a $100 billion bond portfolio.
The billionaire didn’t say anything else, letting the meme speak for itself.
