How the Fed Broke Silicon Valley Bank

The Federal Reserve is in the unenviable position of achieving its mandate by crashing the economy. It’s not something it wants to do, as Fed Chair Jerome Powell meekly admitted in his exchange with Sen. Elizabeth Warren (D–Mass.) last week. But it’s something that happens as an unavoidable outcome of slowing down an economy littered with excess money and inflation. Broad money growth has been negative since late November, and interest rate expenses on everything from corporate borrowing to credit cards to the government’s own debt have been rising fast.

This hiking cycle, the fastest that the Fed has embarked upon in a generation, was always likely to break something. And break something they did over the weekend, from the regulated stablecoins USDC and Gemini Dollar, which lost their dollar pegs, to Silicon Valley Bank (SVB), which faced the second-largest bank run in U.S. history. If one weren’t so hung up on labor markets, inflation figures, and congressional soundbites, presumably these are the sort of things that a monetary authority like the Fed is tasked to manage. Oops.

In Powell’s back-and-forth with Warren, the senator pointed to “things you can’t fix with high interest rates—things like price gouging, supply chain kinks and the war in Ukraine.” Regardless of how little sense those arguments make, our favorite senator is accidentally correct: monetary policy is about money and assets and banks, with only limited (residual) influence over things in real markets.

Barking up the wrong trees—unemployment, market power—Warren missed an opportunity to examine the things that really are breaking. Around the same time she spoke those words and Powell defended the Fed’s action, SVB was desperately trying to raise new money. The effort failed, and plenty of tech investors, including Peter Thiel’s Founders Fund, pulled their mostly uninsured deposits at the bank as quickly as they could.

According to Bloomberg, bank CEO Greg Becker asked creditors on a call Thursday to “support the bank the way it has supported its customers over the past 40 years”—as if any bank run had ever been stopped by asking nicely.

The losses in SVB’s Treasury portfolio—courtesy of the Fed’s quick rate hikes, which crashed the bond market last year—amount to billions of dollars in unrealized losses. The accounting rules of “held to maturity” allows banks to ignore mark-to-market losses if the securities are intended to be held until they come due. Of course, holding to maturity requires you to finance the securities in the meantime, something that’s pretty much impossible when your customers don’t think you’ll make it and instead are demanding their deposits back en masse.

If we ignore this accounting trick, Silicon Valley Bank was already “insolvent” by September of last year, when the unrealized bond losses exceeded its equity.

Towards the end of last year, some $25 billion of de