Pied Piper

We had a bit of selling yesterday after Janet Yellen threw cold water on the idea of insuring all deposits by executive order, but of course the dip is being bought overnight because… Actually the market is being led higher by the usual handful of “tech” stocks, in turn being led by Nvidia. This seller of video cards has had a good run from crypto, where the parallel computing power of the graphics chips can be effectively utilized. But it is winter in crypto land (yes, I know Bitcoin is running but it is lonely) so Nvidia needed a new story. Press releases followed mentioning AI (plausible) and quantum computing (not so much). Anyway the stock has taken off again, now on offer for a mere 25 times sales. Yippee.

Nailed It

“In five years a number of banks will not be around because of blockchain technology.”

— Joseph DiPaolo, CEO, Signature Bank, 2018

Silicon Valley Bank (SVB)

Last week, SVB was taken down by a classic bank run triggered, whether deliberately or not, by the VC community, with which the bank had close ties. Panic spread as portfolio companies and individuals rushed to take their money out of the bank. SVB was unable to meet the demands of depositors and was seized by the FDIC on Friday. Like many banks, SVB had significant unrealized losses on its securities portfolio, due to rising interest rates, and took a big loss as it sold securities to raise liquidity.

It seems like the FDIC attempted to sell the bank, but the effort went nowhere. Fearing a domino effect, the FDIC decided to extend its insurance to all depositors, removing the $250,000 limit. The Fed enhanced its “discount window” to allow banks to borrow against their securities portfolio at par, so they could raise liquidity without taking losses. While they were at it, the team also closed Signature Bank, a crypto-focused bank in NY state, on the same terms. All of this was entirely appropriate in my opinion. I’m bearish, but the last thing I want is a dysfunctional banking system. If that happens, even the bears don’t get paid. The Fed acted in its only proper role, as lender of last resort. The FDIC acted to spread any losses, after wiping out the share and bond holders, over the whole FDIC-insured banking system.

At the end of the weekend, the Fed is now free to continue hiking rates without crushing the banking system if it feels the need to do so. There is no need to line up outside your bank. From a macro point of view, very little has changed. The SVB head office and branches will open Monday morning under a new name (Deposit Insurance National Bank of Santa Clara).

This is not a bailout. Existing processes have been broadened in scope, but there is no repetition of the taxpayer-funded capital infusions of the past. This was the failure of a badly managed bank, arguably excessively focused on “woke” virtue signalling, combined with a tightly connected community as its customer base. The Feds acted swiftly to not only fix the immediate problem, but put in place processes to minimize repetitions.

Edit: the borrowing at par applies only to collateral acquired before Sunday 3/12. So no running out to buy underwater Treasuries. If you didn’t read the term sheet you can put them back now.

Edit: Name is now Silicon Valley Bridge Bank

Bank Runs

Silvergate Capital, a bank known for its ties to the crypto industry, said yesterday that it would voluntarily liquidate. Today Silicon Valley Bank, known as close to the venture capital industry, was closed by California regulators. Both are somewhat special cases, so aren’t necessarily a sign of general distress.

However, it is fair to say that banks are pressured on both sides of their balance sheets. On the asset side, interest rate increases have caused securities portfolios to drop in value. On the liability side, short-term Treasury securities offer a safe and highly liquid alternative to bank deposits, forcing banks to either raise the interest that they pay or accept the loss of deposits needed for liquidity. So far most banks have chosen the latter, but it is a risky choice, as evidenced by Silicon Valley Bank, which was forced to sell its entire tradable securities portfolio at a significant loss in an attempt to shore up liquidity. This situation illustrates the two ways banks can fail – on the asset side, losses on loans and securities reduce the bank’s capital so that it cannot continue or, on the liability side, withdrawals deplete the bank’s liquidity – cash if you like – so that it is unable to meet the demands of depositors.

So far the impact on the broad stock market has been negligible, probably balanced between fear of a financial meltdown and confidence that a tremor in the banking system would force Powell to pivot. GLWT.

Edit: From an anonymous VC to a portfolio company CEO: “Our view is that this is a sector-wide issue. We’re advising founders not to use a bank right now. We’re pooling together our portcos’ capital and executing a large batch transaction for Starbucks gift cards. Starbucks is likely more stable than banks (they’re on every corner and everyone drinks coffee).

To cash out, we’ll just buy a bunch of those dipped madeleines they have near the checkout. Best case we make back 98 cents on the dollar. Worst case, we have a few million cookies that have a long shelf life.”

Of course the portfolio companies will never see that cash – the cookies won’t make it past the break room at the VC outfit.

Crypto Crackdown

The SEC is making headlines as it has fined cryptocurrency exchange Kraken $30 million and forced it to shut down its crypto “staking” operation.  According to the SEC, Kraken had $2.7 billion worth of crypto in the program, earning Kraken $147 million. Coinbase CEO Brian Armstrong has commented that the SEC was looking to “get rid of crypto staking in the U.S. for retail investors”. Coinbase has a similar operation called “Earn”, so I looked to see what Coinbase has to say about “staking.” 

As far as I can tell you turn over your crypto to Coinbase, which then either turns it over to a third party to use as “proof of stake” or uses it on its own crypto servers for the same purpose. Coinbase does not assume any of the risks involved. Proof of stake is essentially a security deposit required of anyone who wishes to participate in the validation of new blocks on certain blockchains – which earns a share of the transaction fees or “gas” paid by users. Faults such as validating a fraudulent block or going offline may cause the stake to be “slashed.” And that means your crypto goes bye-bye.

This is unlike, for example, a bank deposit where your account is an obligation of the bank, not related to any lending activity of the bank. Losses from defaulting borrowers are charged against the bank’s capital account, not depositors’ accounts. The bank’s capital is backed up by the FDIC or FSLIC. I presume this is the basis for the SEC’s position. Seems to me a very modest return for an unknown risk, especially when compared to short-term Treasury securities.

Whitewashing

The Democrat machine swings into action to preserve Sam Bankman-Fried from any consequences from the collapse of FTX. I can scarcely believe the nerve of these people, but after all this is the Hillary Clinton tradition. Add this to the list of howls of outrage. The New York Times Confirms SBF To Speak Alongside Zelenskyy, Yellen,

Lehman II?

The second-largest crypto exchange, FTX, has halted withdrawals and appears to be bust. Formerly valued at $32 billion, one must assume that it is now worth a lot less than that. The largest exchange, Binance, negotiated a non-binding bailout agreement and then withdrew it after a look at the books. I wonder if this is crypto’s Lehman moment? The time when the fantasy meets hard, cold reality?

Edit: FTX has/had more than five million customers worldwide. The Miami Heat’s home stadium, named FTX Arena, will be getting a new name. Porn movie producers Bang Bros. tweeted that their 2019 $10 million bid for the naming rights was still good, and they added that they promised that a lot fewer people would be f***ed.

Fun With Crypto

It seems obvious that cryptocurrency bears a strong resemblance to a Ponzi scheme. The defining characteristic of a Ponzi scheme is the requirement for new money to fund withdrawals, and of course all crypto that is not backed by cash – some of the “stablecoins” are – meets this criterion. The big difference is that this is no secret, unlike a true Ponzi scheme there is no fraud, no Bernie, at least in the underlying concept, which is fully disclosed.

There is, however, massive fraud by people taking advantage of the largely unregulated nature of crypto.

Bitcoin Energy

I saw this piece about a planned Bitcoin “factory” in Texas.

Still, 800 locals have signed a petition against plans to built America’s largest bitcoin-mining facility — a facility which will consume 1.4 million gallons of water a day and 1 gigawatt of electricity (enough to power 200,000 homes).

This is just pure waste to support a giant Ponzi scheme. Isn’t it time to call a halt to all these frauds?

The Wild West Of Crypto

The world of crypto is fraught with scams. Here is a website, “Web3 is going just great,” which is keeping a journal of reported scams and frauds since the beginning of 2021. It includes a running total of the losses involved, $9.875 billion as of this writing.