The collapse of the Silicon Valley bank is not a “Lehman moment” — at least not yet

Since the implosion of the American financial system in 2008, Wall Street has been in suspense for the next “Lehman moment,” a dramatic event named after the ill-fated investment bank that triggered a wider collapse of the banking system and the economy.

The alleged last Lehman Moment occurred on Friday with the crash and burning of a Silicon Valley bank.

With assets of about $200 billion, this is the second largest banking collapse in history.

Bank stocks have been pummeled in recent days as traders and investors worry that SVB’s losses are an indication of systemic risk spreading through the broader banking system, leading to a series of bank losses, some possibly crashing, then recession.

Then the banks stop lending, the companies go under, and the economy heads into the tank.

I say “allegedly” because according to my sources, this isn’t exactly a Lehman moment — at least not yet.

That the SVB is sliding into the abyss is a warning sign, they say, that we have a problem with the plumbing of the banking system that was built through years of free spending, i.e. money printing at the Federal Reserve and financial explosions by the Biden administration.

As reported, the FDIC took control of SVB on Friday as SVB headed for bankruptcy.

Its parent company, SVB Financial, is scrambling to find a buyer.

Like Lehman, it will be difficult, so a complete collapse is very possible.

Any sale must be approved by regulators like the FDIC and Fed, which narrows the list of acquirers to major financial institutions.

The big banks will be reluctant to buy the SVB portfolio.

It is difficult to assess the experience they gained during the financial crisis, which may not have been a good start. Recall: JP and BofA bought Bear Stearns and Merrill Lynch, respectively, as they were falling apart—only to be saddled with huge responsibilities.

That leaves potential buyers with alternative asset managers like private equity, and companies like Blackstone and Apollo.

But they are both vulture investors and may want to get their hands on an SVB portfolio very cheaply.

The collapse is inevitable

In other words, bankers I interview say a Lehman-style collapse is almost inevitable for SVB.

Here’s the good news: Lehman’s holdings of underwater mortgage debt that triggered its bankruptcy are found on every major bank balance sheet, hence the need for a government bailout to prevent financial Armageddon.

Silicon Valley’s trading portfolio is very idiosyncratic. It mainly caters to venture capital firms that have begun withdrawing money from accounts as technical losses mount.

That forced the bank to unload its holdings of Treasuries, itself depressed amid the Fed’s rate hike, which led to the crash. Big banks like JPMorgan have a more diversified client base, so you don’t have to worry about emptying Treasurys to counteract the bank’s influx, at least not yet.

But that doesn’t mean SVB experience isn’t a concern.

It is quite clear that the massive amounts of fiscal spending and the printing of money that have only recently ended have marred so much of the plumbing of the banking system that the recent increases in Fed interest rates are beginning to wreak havoc.

SVB’s holdings of Treasuries exploded amidst this huge amount of fiscal surplus, but similar holdings at every major bank.

Prices remained stable and high even during the Biden administration’s spending because the Federal Reserve continued to print money, buying up the bonds the Treasury was selling.

This was all well and good until inflation kicked in and the Fed had to reverse course.

Increases in Fed rates are now driving down bonds held by not only SVB but all of the major banks.

Again the good news: unlike Silicon Valley, most of the big banks have a diversified depositor base that doesn’t trigger deposit withdrawals.

What is being held in the banking systems, however, is a core of assets with prices distorted by the era of big government money printing and which, under the right circumstances, could create the Lehman Moment that the market was worried about.