EJ Antoni, research fellow in regional economics with The Heritage Foundation’s Center for Data Analysis, told FOX Business on Saturday that the collapse had “nothing to do with Trump or Dodd-Frank” and more to do with an “unusual confluence of events.”
Antoni explained that the bank “dealt almost exclusively with tech firms which usually rely on continuously rolling over large debts” which means that the firms are “not paying off their debt but simply taking out new debt to pay off the old.”
“Second, SVB put a disproportionate amount of its cash into long-term bonds. Ordinarily, that’s not a bad strategy, but it’s unwise when interest rates are zero because those rates must rise eventually,” Antoni said. “When rates rise, bond prices fall. This is because an investor with the choice to buy an existing bond at a low rate or a new bond at a high rate will choose the new bond since it’s a better return on investment. If you want to sell the old bond with its lower interest rate, you must be willing to sell it at a discount; otherwise, no one will buy it.”
Antoni explained that SVB’s undiversified clientele meant “too many depositors needed cash all at once” forcing the liquidation of bonds that had lost value and a “death spiral” quickly ensued.
“SVB had to sell its bonds at a loss to raise cash,” Antoni said. “Limited transactions like this would not have been catastrophic, and in fact happen regularly in the financial sector on a small scale.”
“SVB was a case of mismanagement that was made possible by the unrealistically low rates from the Federal Reserve,” Antoni told FOX Business.