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Op-Ed: Karmic ripples from Silicon Valley Bank spread as the finance sector tries to adapt

The situation now is that the canary has died.

The California-based Silicon Valley bank was closed by US authorities on Friday
The California-based Silicon Valley bank was closed by US authorities on Friday - Copyright AFP NOEL CELIS
The California-based Silicon Valley bank was closed by US authorities on Friday - Copyright AFP NOEL CELIS

It’s starting to look very like karma. A crypto entity called Circle, a major player in the crypto market has admitted to a $3.3 billion exposure to SVB. Circle has called for a rescue for SVB, but it’s not looking good. There’s no indication of a bailout for Silicon Valley Bank, the second-largest bank failure in US history.

The reluctance of regulators to bail out is understandable. The finance sector caused a gigantic hit to the US middle class in 2008. The damage is still visible. The sector had to be bailed out then, with the clear risk of a serious collateral meltdown to the entire US economy.

The US financial sector has been an ongoing series of train wrecks. The arrogant demand for deregulation and its disastrous effects are a case in point. Out-of-control prices, inaccessible health, and similar disasters are part of the mix. The insufferable decades-long “masters of the universe” financial culture doesn’t help.

The gods of deregulation now want help from regulators. Karma, indeed. That’s not going to happen.

The situation now is that the canary has died. If any other major debt is linked to stocks or similar types of equity, SVB won’t be the only problem. A lot of debt is based on pretty iffy securities if any. The look is not good.

There’s a less obvious problem, and it’s systemic. It’s an actual pattern. Much of the grief has come from sheer irresponsibility in the credit market with no oversight at all. The market is now and in the future likely to be “regulating itself” with expensive failures. …At the expense of the entire economy. Losses and ridiculous levels of debt are almost normal.

The price of those low-interest rates is now payable. Many investors and corporations are now saddled with debt and no clear way forward. Prudent lending went out the window with regulation. Now, unmanageable debts are the baseline call for insolvency.

The other problem is too obvious. The Fed simply can’t bail out everyone. There are far too many likely candidates. The low rates caused people to stockpile debts, and those debts are now much more expensive.

The karmic element has a very clear lineage. In practice, the low rates were historically so atypical and so unrealistic they couldn’t last. Many people made money borrowing at 1% and lending at much higher rates. A chicken could make money like that; no intellect is required.

Add to this idyllic idiocy the sudden spike in the cost of living and demand for money, which simply make cash tighter and repayments harder. The increased demand for money means higher rates by definition. This is a basic principle of credit. None of the current generation of the Masters of the Clueless-verse have ever been exposed to higher rates.

Therefore, the fan is getting hit, hard. Any number of different types of debts can hit it. There’ll be plenty of short selling of debts, with good reason and big margins, from the look of it.

There’ll also be some reluctance to get involved, with good reason. The global credit market is extremely tangled. A owes B owes C, etc. The risks are high, and the market’s credulity tends to reduce with every headline. Actual liabilities will need to be clearly visible and credible before the hardheads with big money get involved.

An irony of ironies – In a market with tight credit, asset prices have to be tailored to that market. Nobody’s going to be paying top dollar for assets in this environment. Doing nothing right now makes sense when you can get good deals later.

To the sound of breaking crockery and egos, someone will definitely make money. It won’t be the guys carrying the cans.

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Written By

Editor-at-Large based in Sydney, Australia.

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