Yesterday's Silicon Valley Bank one of the 20 biggest banks in the United States lost 60 percent of its Share value. as the bank faces the prospect of an imminent collapse in pre-market trading this morning, the banker lost another 40 and it brought down the entire banking sector with it. The four biggest U.S banks lost 52 billion dollars in market value and this collapse came after the Federal Deposit Insurance Corporation said that the U.S lenders across the board had about 620 billion dollars of unrealized losses sitting on their books. The stock market is panicking because suddenly everyone remembered Lehman Brothers and bear Stearns And naturally, everyone immediately concluded that this is an exact repeat of the 2008 financial crisis, because well, the situation involves Banks So are we at the precipice staring down into the abyss of a huge stock market crash or is there a bit more Nuance to it? Well, first, let's look at what caused the Silicon Valley Bank to nosedive yesterday because it's important to understand all of the moving Parts silicon value Bankers unlike most big banks in the United States and that almost all of its business is dealing with startups and venture capital.

And in the last three years, business was booming as we saw record numbers of IPOs and spag deals and all of that jazz interest rates were at zero percent. Happy Days startups got funding from major Capital like money grew on trees and you can see in the latest 10K submission with the SEC that the Silicon Valley Bank saw 40 billion dollars of deposits arrive in 2020 and 78 billion arrive in 2021. But then the party began waning, interest rates started going up in 2022, starter valuation suddenly collapsed. A random College Dropout with an idea scribbled on the back of an envelope was suddenly not immediately worth two billion dollars and a lot of the startups in Silicon Valley were busy playing with pretend money which is cute because my four-year-old son also loves Monopoly.

But last year they found out that magic money that creates infinite riches out of thin air collapses just like every other type of Ponzi scheme and many of these data Subs lost a lot of money. So before 2022, Silicon Valley Bank was collecting all of these deposits and had to decide what to do with all the cash. which was a giant pile of cash was the majority of the cash that the bank had. Rules brought in after the financial crash in 2008 dictate that banks have to be responsible and instead of you know, gambling away over their customers money, they had to keep a big chunk of it in safe and secure assets things like government bonds.

So the guys over at Silicon Valley bank took the cash and went shopping for government bonds specifically. at the end of last year, they carried 26 billion dollars worth in available for sale. Securities As the name implies, these are the sorts of Securities that you can sell if you need to. We'll come to that in a second.

You can see the 16 billion dollars out of that are U.S treasuries and 6.6 billion is in mortgage-backed Securities. And in this other table, from the SEC findings, you can see that the weighted average yield of the US treasuries was at 1.49 So when the cash arrived during in the covert gambling period, they parked a giant chunk of it in long-term government bonds paying very low yields. Very smart, obviously. They also had 91 billion dollars parked in Halt and maturity Securities which is even more fun because as the name implies, you can't go and sell it in the same way if you have a bank run, which is a bit of a problem now.

since they went and bought a boatload of treasuries at record low yields, the rates have gone up I Know nobody could possibly have predicted that when the rates were at zero percent. There may be possibly could increase in the next 10 years. But there we are. and there is a problem when interest rates go up because when interest rates go up, the yields on newly issued bonds also go up.

The two-year treasury yield at the moment is at 4.8 percent and the 10-year as at 3.9 And this means that the old bonds that have the low yield are not exactly attractive. If you're out there trying to buy a bond, you can buy these new ones that pay a lot more in return. So why would you go and buy the old one? And when this happens, the value of the low yielding bonds drops. because if you buy the low yield bonds at a cheaper price, then you can make up the difference in the yield between the new ones and the old ones by getting a bit of a discount on the face value of the bond.

And while this was happening, the clients of the bank were looking to make a return on their money Because remember, Silicon Valley Bank is not a bank where they have regular retail clients that hold their money there that have checking accounts and savings accounts. You see retail clients are not as price sensitive. Those people who have maybe a few thousand dollars in their bank account are not going around chasing the best possible return on their money. You can see the Bank of America for example, right now offers savings accounts to pay 0.01 annual return.

But Silicon Valley Bank deals with active investors and startups with piles of that investor cash guys who do want a return on their money. They have actual teams of people employed whose job it is to make sure that their cash is getting an appropriate rate of return when it's parked in the bank. And because the bank Parks all of its money in these low yield bonds, it means that in order to retain those balances, they would have to borrow money in order to pay that interest. and they would have to pay a higher interest on the money that they borrowed to fund those then the amount that they are earning on the bonds where their money is packed.

And so two days ago, Silicon Valley Bank published an update on their investor site and in the presentation, they said that they sold 21 billion dollars of their available for sale security. So they sold pretty much all of it. Because remember, they only had 26 billion a few weeks ago. As of the end of Q4, you can see in the table that the average security sold had a 3.6 year duration at just 1.79 yield.

and through this sale they lost 1.8 billion dollars, which is about 8.6 percent of that 21 billion. And the problem with losing 1.8 billion is that it isn't the bank's money. this is the customer's money. Remember this money was parked on behalf of their customers to help manage the risk of keeping cash.

So at the same time, Silicon Valley Bank has decided to raise 2.25 billion dollars from diluting their shareholders and issuing stock. An extremely desperate move to basically recoup the 1.8 billion dollars they already lost. and I'm presuming the 450 million extra is probably there in case they decide to sell the rest of their AFS Securities and lose money on that too. So naturally, the next trading day after all this comes out, the customers of the bank realize the bank is completely and so have the investors because they now have no liquid assets on the book.

They sold everything they had to fund the bank run and the real problem here is that the process of selling only made the bank run worse because it's showing that they are desperate. Yesterday the CEO of the bank was apparently calling customers to tell them that the bank is perfectly liquid. Everything is okay. do not panic, which is the worst possible thing you can ever hear from the CEO of a bank where you keep your money.

The bank held a conference call in the afternoon for investors and customers who were being assured that everything is absolutely fine and you know that when your bank has a conference call to tell you that everything is fine, then it may just possibly maybe not be fine at all. But here's the thing. Everyone has suddenly turned this into talking about contagion, because here we have a degenerate Cloud bank that deals with high risk corporate customers and has a unique portfolio where the majority of their balance sheet arrived during the last three years of the covet startup and stimulus boom, so their balance sheet is massively skewed as a result of all of that, they also have a uniquely level of exposure to price sensitive customers who are themselves in deep doo-doo and are burning through their cash while their funding has dried up. You can see on slide 16 of this presentation from the bank that their clients are burning a lot more cash, the purple bars than they are bringing in, and then a bid to try to calm everyone.

The bank kept saying I throughout the presentation. they have ample liquidity and they have strong capital and you can see here that they're claiming that everything is great because they have access to about 180 billion dollars in available liquidity. so it's all good. No worries at all.

The slight problem with this is that 65 billion dollars of the supposed liquidity comes from increasing their borrowing capacity and 73 billion dollars comes from off balance sheet sweep and wrappers. It's a bit like you having no money in your bank account and the credit card minimum repayment is due tomorrow, but it's okay because you can take the credit card to the cash machine, withdraw some more money, put it into your bank account, and hey, Presto you have liquidity that can pay your credit card bill so everything is perfectly okay. Now, after the collapse of Silicon Valley Bank started yesterday, the contagion has been spreading U.S Banks lost an average of almost five percent in Share value yesterday and this morning the biggest European Banks like Barclays Lloyds and others are all down about four percent again and everyone is running around, pants on fire, waving their hands in the air because it's 2 000 days all over again. And hey, there is an issue for all banks with interest rates because interest rates have been at near zero pretty much since 2008 and many of the other big banks have the same issue to a degree of carrying treasuries that have low yields in the high yield environment on their balance sheets.

But it's important to understand some key differences. The biggest banks out there do not have a business model that is based and predicated on dealing with risky startups and degenerate crypto low lives. Carrying those low yield bonds is only really a massive fundamental issue for your business if you're a small bank that can get a run on it from a small number of large clients at the same time, because in that case, you may have to go and sell those bonds at the loss. And remember the Silicon Valley Bank sold 21 billion dollars worth of bonds pocketing at 1.8 billion loss.

And these numbers sound big. They have all these big numbers in there, but they are chump change compared to the balance sheet of the biggest banks out there. Here is the equivalent data for Bank of America For example, you can see that they had 225 billion dollars of available for sale Securities as of the end of Q4. Over 160 billion of that sits in treasuries, and 1.8 billion of that is sitting in unrealized losses just over one percent of the total.

The mortgage-backed Securities here look a lot worse, and the health and maturity Securities are even worse than that. But that's a topic for another day. In an environment where rates are increasing, it is impossible to not have a degree of a carrying loss on your old low yield bonds. But the reasons for the demise of Silicon Valley Bank are somewhat unique to their very specific situation and very exact circumstances.

And yes, there is a high chance that they will Now fail because while they are shouting from the rooftops about their liquidity, the technical term for the current state of their balance sheet is dog. And if that happens, if they go down, we'll probably see some other clown Banks impacted. Maybe because some of them have direct exposure, some others because they were playing the same stupid games to win stupid prizes and there's going to be a general state of Market Panic Maybe, but we are not seeing the same kind of systemic issue like what we saw in 2008. There's not a systemic problem where a mass-market product or mass attribution across all the different banks is seeing something like mortgages blowing into on the sustainable bubble where everyone is in the same way.

What we're seeing is the culmination of three years of crypto Bros and Silicon Valley startups collecting dumb investor money with no accountability. We're seeing the gradual death of all the hot air and from this period where company evaluations exploded for no reason whatsoever, everyone was jumping on one hype train after the previous one. we were doing Nfts, we were doing cryptos, we were doing all kinds of and a whole generation of young people were sold as a dream of making free money by investing in jpegs of monkeys wearing funny hats and there was no way to know exactly how much Panic this sort of thing can yield and how deep that Panic can spread. So I guess we'll see over the next few days how crazy this all blows up.

If you found this video useful, please don't forget to smash the like button for the YouTube algorithm. Thank you so much for watching I Really appreciate it and as always I'll see you guys later Foreign.