Will bank faiure contagion spread in US and elsewhere in the world

Every generation needs a revolution - an entrepreneurial revolution

In March alone there at least 2 bank failures with at least $100 billion in assets:  Silicon Valley  ($300b) and Signature Bank ($100B)

What is interesting to note is that SVB failed despite being liquid.   The trouble was with investment decisions.   Since it could not lend out its huge liquidty on hand, it invested in long term bonds (govt and private)  at 1.5%  The culprit was the high interest rate imposed by Fed whose recent rate was up to 4.75%.  It is possible that the  rates can go up further

Now there is inverse relationship between bond prices and interest rates.   High interest rates depresses long term bond prices   Investopedia - inverse relationship between bond prices and interest rates

Now the prices of bonds held by SVB declined in prices and therefore the bank incurred losses, depressing its stock prices.  This worried the  depositors who went into a bank run  SVB had to sell its bonds at fire sale further worsening its PNL

"Bonds have an inverse relationship to interest rates. When the cost of borrowing money rises (when interest rates rise), bond prices usually fall, and vice-versa.

At first glance, the negative correlation between interest rates and bond prices seems somewhat illogical. However, upon closer examination, it actually begins to make good sense.

KEY TAKEAWAYS

• Most bonds pay a fixed interest rate that becomes more attractive if interest rates fall, driving up demand and the price of the bond.
• Conversely, if interest rates rise, investors will no longer prefer the lower fixed interest rate paid by a bond, resulting in a decline in its price.
• Zero-coupon bonds provide a clear example of how this mechanism works in practice

It is possible in the country financia institutions like banks insurance companies, pre need companies and other banks have this dire situation.   And may have incurred paper losses further exacerbated by low investment rates and inflation

There is no substitute for good decision and wise management 

Computing for bond prices

Bank	City	State	Year	Assets at time of failure (nominal)	Assets at time of failure (inflation-adjusted, 2021)	Ref.
Washington Mutual	Seattle	Washington	2008	$307 billion	$386 billion	[3]
Silicon Valley Bank	Santa Clara	California	2023	$209 billion	$209 billion	[4]
Signature Bank	New York	New York	2023	$118 billion	$118 billion	[5]
Continental Illinois National Bank and Trust	Chicago	Illinois	1984	$40.0 billion	$104 billion	[3][6]
First Republ

US govt intervention in financial crisis of 2008

Every generation needs a revolution - an entrepreneurial revolution

This post went through several videos on the financial crisis of 2008

Several questions were raised?

1  Should the US govt bailed out Lehman brothers.?

    The prevailing thought was no   It is a private enterprise  Corporate greed

     (the  top dog said to have earned $200 to $500 million on their record year)

    and that the govt is not empowered to assist private enterprise.   

    Well the bail out or even the guarantees could have been very small say $5 to $10B.  Thereafter the         govt poured in at least $500 B in QE funds which did not lift the economy soon enough  And the             TARP ( Troubled Assets Relief Program about $500 billion) Not to mention the recession and huge          losses for many people

      Could the FED have stopped the practice of sub prime mortgages.   Alan Greenspan said that

      it was part of the 30% where he made an ooops.  

     The US Govt was not in the mood for more bail outs of the  too big to fail.  It just rescued Bear

      Stearns, Ginna Mae and Fanna Mae (the govt secondary mortgage markets

2.   Was the private company Lehman entirely responsible for this failure

      According to a Chief Economist Brian Wesbury lecture at TED talk, the indigestion at Lehman was        the result    interest rates that led to more mortgages and subprime mortgages  It is also the fault of          the firm  management, not managing well the down side of subprime mortgages and investing                heavily on such risky product   Clearly Lehman was not in this alone