If not today, you may soon. The sudden shakeup toppling several banks was long foreshadowed. Classic run ruined Silicon Valley Bank less than two weeks ago. Dominos fell. First Republic required $30 billion bailout to avoid similar fate. Regulators took over Signature Bank, which was besieged by cryptocurrency losses. Over the weekend, 166-year-old Credit Suisse agreed to be acquired by UBS, in a $3.2 stock swap that is a mere pittance.
Long before the SARS-CoV-2 (severe acute respiratory syndrome Coronavirus 2)/COVID-19 pandemic, I told my wife that too many companies, banks among them, had assumed too much debt during the long period of low interest rates. Wall Street Journal story “First Republic, SVB, Credit Suisse Show How Higher Interest Rates Caught Up With Banks“, dateline today, affirms my hypothesis and gives analysis you want to give some attention.
For years after the 2008 financial crisis, interest rates were at rock bottom. That helped fuel a historic rally in risky assets. When rates rise, though, borrowing costs do too. That can put pressure on markets and cause disruptions in lending—especially when rates go up significantly in a relatively short time frame, as they did last year.
But the rot is much larger and spread farther. I encourage any one with common sense to take a close look at the massive layoffs across the high tech sector—long regarded as the stalwarts of the new economy. Pick any one: Amazon, Facebook, Google, or another. Many of these corporations—and others across a stack of industries—took on unnecessary debt when credit was cheap. Some—and too many, honestly—borrowed to buy back shares, rather than use capital from earnings. Rising interest rates pinch the bottom line. Current cost-cutting is more about debt-risk than the broader economy.
Mortgage-backed securities may not be the tinderbox, like they were in 2008. But the root cause is nevertheless the same: Interest rates held too low for too long and greedy capitalists taking on too much risk because they could with cheap credit. We stand on the precipice of another 2008. Whether or not we fall in depends much on how deep is the rot and how much of the soil upon which these institutions stand has softened from piss-poor financial irrigation, so to speak.