The “easy money ecosystem” that nurtured the tech start-up culture has ended as the Federal Reserve hiked interest rates to curb inflation, and the failure of the Silicon Valley Bank could be the first domino which falls among California-based financial institutions, Breitbart business editor John Carney said in an interview with Fox Business host Larry Kudlow on Friday.
“The sudden implosion of Silicon Valley Bank (SVB) is sending shockwaves through the financial system and tech sector,” Carney wrote in Friday’s Breitbart Business Digest. “SVB plays a central role in San Francisco’s start-up economy. According to Bloomberg, it does business with about half of the venture-backed start-ups in the US.”
“One of the problems [for SVB] was when all these startups had money so freely available that they didn’t borrow much,” Carney told Kudlow. “So they had a lot of deposits and not a lot of ways to lend to people. I mean, yes, you can borrow money so people can buy a yacht or a fancy mortgage on a tech start-up billionaire’s fancy mansion, but they really had way too much money. So they invested it in bonds. Bank of America had, I think, 25 percent of its assets in bonds, but this bank had over 50 percent of its assets in bonds.”
Kudlow found that when the yield curve inverted, these bonds produced a negative return.
“You’re losing money,” Carney agreed. “And at the same time, all these startups that are putting so much money in there are pulling it out now because they no longer have access to free money. So they withdraw it just to pay their bills. So you let the deposits go down. They need to sell in a market where they are actually making real losses, not just mark-to-market losses.”
“That basically started the panic,” he continued. “Earlier this week, [SVB] announced a loss of approximately $2 billion on their assets. And people were like, ‘I better get my money out quick.’”
“Now the FDIC stepped in to avoid an old-fashioned bank run,” Kudlow said.
The bank went bankrupt on Friday when the California Department of Financial Protection and Innovation shut it down and the Federal Deposit Insurance Corporation (FDIC) issued a statement guaranteeing the accounts of all insured depositors. However, as Carney told Kudlow, that won’t reassure depositors, according to the reported 93 percent of SVB deposits that are uninsured.
“There are people who are at risk of losing their deposits, at least on paper,” Carney said.
All of this was exacerbated by the Federal Reserve’s rate-hike battle against inflation, which signaled the end of the low-interest-rate, cheap-credit monetary policy that favored Silicon Valley startups, Carney said.
“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 fed the startup culture and it’s not there anymore,” he said.
“What’s happening to the start-up culture now that there’s no cheap money or cheap, cheap money?” asked Kudlow. “[Are] will they have trouble getting credit?”
“Absolutely,” Carney said. “You’re going to have trouble getting credit and raising money because if you can get 5 percent on a government bond, why are you trying to get 10 percent on a very risky start-up? You won’t do that. You might as well just double the leverage and get a treasury. So I think they’re going to have a lot of trouble continuing to raise money. And we’ll see how many startups start tipping over.”
Kudlow asked Carney about the risk of this bank failure spreading beyond SVB.
“I think there’s a high risk of it spreading,” he said. “People are looking at any other bank right now, not the big banks — the JP Morgans, Citigroups, Wells Fargos, they’re not going to be hurt.”
“The banking system is extremely well capitalized,” he added. “So I don’t think we’re on the brink of a financial crisis. But I think we’re probably going to have a few more bank failures ahead of us.”
However, Carney said it was worrying that a well-respected financial institution such as SVB could fail so quickly.
“You see, this bank, Silicon Valley Bank, was very well respected,” he said. “So if you can flip them that quickly in a matter of days, I think people are going to start looking and going, ‘Oh, oh, maybe I shouldn’t have my money’ — I don’t want to name the other banks because I don’t want to panic – but ‘maybe I should stick it in Wells Fargo instead.’ And any bank in a fractional reserve system can collapse if depositors panic.”
Kudlow asked if this error could spread beyond West Coast financial institutions and the technology sector. Could it have an impact on real estate investments, for example?
“Commercial real estate is in big trouble,” Carney noted. “I mean, you think about all these loans to office buildings that aren’t paying their rent now because they’re half full. So I think there will be casualties.”