• One last time with SIVB via the mailbag.
• Contagion risk, operating funds, and foreign entities are looked at.
• The dollar is looking frighteningly vulnerable.

Happy Tuesday!

Yesterday’s markets were pancake-flat, so there’s not much to discuss.

So after drinking a few coffees this morning, I remembered my good friend and colleague Dustin Weisbecker sent me the name I missed last week. As a result, I omitted an important letter from the mailbag that I’d like to address today.

They say, “Shit rolls downhill.” They forget to tell you the farther down the hill you go, the faster it rolls.

So it is with the US dollar.

Boy, are some friends, enemies, and frenemies getting uppity lately. It’s as if they can feel the unipolar American moment has passed.

I will use Bruce P’s great comment below as the base for my argument that bad banking policy has led us to the brink of ruin.

First, read this:

I am not happy with the decision that all bank deposits will be covered in the recent SIVB and SBNY failures, but I strongly disagree with your characterization that “this may cause contagion (though I think, in this case, it’d be minor).”

There were payrolls and operating funds were also on deposit. Kicking the SIVB high-tech customers would have dealt a stifling blow to one of our strongest elements of economic growth.

There were also funds on deposit from foreign entities, which could have precipitated foreign depositors looking elsewhere with potential repercussions on the US Dollar.

I know that you did not want to get into the weeds on the bank failure, but there will be negative consequences from the new Fed lending facility, backstopped by the US Treasury, which will allow banks to borrow face value (purchase price) on now devalued (low interest) treasuries.

Although this facility only stands for 1 year, I suspect we will see it renewed next year and expanded to include other devalued securities. This will have a more serious result than the “bailout” of SIVB depositors. The immediate result could be an influx of cash in the banks (some of which will be required to go to “reserves”), and pump the economy with additional lending.

Bruce P.

Bruce, thank you for writing in with such a well-thought-out argument. I will present my rebuttals to each of your points in turn. Then, I’ll show some of the more immediate consequences I’ve seen lately.

Contagion Risk

Yes, Silicon Valley Bank was a big regional bank in the Bay Area.

SIVB offered services specifically designed to meet the needs of the tech industry. It soon became the largest bank by deposits in Silicon Valley and the preferred bank of almost half of all venture-backed tech startups.

The bank's customers were primarily businesses and people in the technology, life science, healthcare, private equity, venture capital, and premium wine industries.

Ok, tech, life sci, healthcare… big industries. As are PE and VC. Premium wine? Not so much.

This is why I think the “contagion” would’ve been minor. It’s just California businesses in a California bank. Were there exceptions? Sure. My friend’s London startup banked with them. But they are the exception to the rule.

Payrolls and Operating Funds

This was Bill Ackman’s and David Sacks’s big argument for saving SIVB.

But for every company’s bank accounts, they’ve got payrolls and operating funds to mind. Everyone is making out like this is the first time it has ever happened.

This stems from a fundamental misunderstanding. If you’re an uninsured depositor (anyone over $250,000), you are last in line in the case of bankruptcy.

That’s right. It’s bondholders, then equity holders, and if anything is left over (usually not), uninsured depositors get that.

They’re not first in line. It doesn’t matter if business owners think they haven’t taken on risk by putting all their eggs in one basket. They’ve taken on enormous risk. They and their defenders are just unaware of it.

I’m gobsmacked at how many CFOs and company treasurers didn’t know that. It demonstrates the embarrassing lack of professionalism in the C-suite nowadays.

(If you’ve got less than $250,000 in the bank, you don’t have to know that.)

As a personal aside, I’ve got five different bank accounts in four different countries to keep my cash balances under each deposit insurance limit. I can’t recommend that strategy enough. Even if you can’t go global, going local will be good enough.

Foreign Entities

Again, this has turned out differently than you think.

Sure, would foreign entities have deposited at SIVB? Most likely.

And would they have been angry at losing everything over $250,000? Probably.

But that’s their own fault.

Here’s what’s much worse: thanks to Janet Yellen not insuring all deposits over $250,000, now the entire world knows the USG plays favorites.

This has put a big dent in the trustworthiness of the USD.

Here’s Xi and Putin talking about changes they’re bringing about that are greater than anything that’s happened in the last 100 years.

Here’s Russia risking it all by using the Chinese yuan in international trade.

Here’s India’s significant role in de-dollarization.

Here’s Saudi Arabia and Iran getting together to take a chunk out of the USD.

Here’s Kenya’s president telling his people to dump dollars.

I know many of those plans were already in motion. But those countries have put their feet on the floor.

Here’s Fareed Zakaria talking about it.

Here’s Fox News covering it.

My goodness, it must be serious if the MSM is talking about it.

Treasury Facility

“Nothing is so permanent as a temporary government program,” said Milton Friedman.

The ability to pledge discount t-bonds for the full face value without a haircut (usually about 2-4%) is insanely inflationary.

This is while the Fed is still hiking rates. If you’ve got contradictory policies, it’s usually between the Fed (monetary) and the Treasury (fiscal).

But here, you’ve got the Fed hiking rates (contractionary) while expanding its balance sheet (expansionary).

Powell is trapped. His next moves will be interesting.

Now, ask yourself this: if they didn’t bail out SIVB and the rest, would this dopey Fed policy even happen?

I don’t think so. Again, based on the balance of probabilities, I’d prefer to have let the bank fail.

Will more people borrow? I don’t think so. And the TBTF banks don’t even want this kind of small(er) business to begin with.

And we didn’t even mention the cost of First Citizens buying SIVB.

The FDIC is on the hook for $20 billion. Small when compared to the totality of banking. But it’s significant when compared to its resources.

How will the FDIC replenish the $20 billion hole in its deposit fund?

By charging you, that’s how.

Wrap Up

Thanks again to Bruce P. for writing such a stimulating email.

But I stick to my guns and say it would’ve been better to let SIVB and the rest fail.

As a believer in free markets, there’s no place where free markets are more important than banking.

Sure, there are consequences. But regulatory medicine doesn’t cure anything. In fact, it makes the gamble riskless to the perpetrator, which we know it’s not to the broader public.

The dollar is suffering for this.

Let’s hope it’s not too late to pull back from the brink.