After a few days marked by frenzied bank runs, plunging stocks and an extraordinary government intervention, the mood on Wall Street was, well, surprisingly chill.
Why? The government's emergency measures — backstopping deposits and setting up a lending facility for banks that need cash — seem to have worked, at least for now.
No banks failed Monday or Tuesday, despite concerns that turmoil from the collapse of Silicon Valley Bank would spread. Shares of those midsize regional banks that got pummeled yesterday were on fire today.
First Republic Bank, which many had feared could be the next domino to fall, surged nearly 60% early Tuesday after falling by the same amount the day before. It was up 26% at the close.
Of course, it's hard to say how long this zen state will last. Investors have another week to wait to hear from the Fed, and that's another week to fret about things they can't control.
"The market has deluded itself into a mix of self-calm and enthusiasm that the Fed ... will pivot far sooner," said Eric Schiffer, chairman of private equity firm Patriarch Organization. "But it's wrong ... inflation won't just die without a further rate hike walloping."
'Bonfire of fear'
Like a bad flu, the panic came on fast, briefly made some people feel like the end was near, and then abated just as quickly.
Last Thursday, as Silicon Valley Bank began to unravel, a venture capital fund founded by billionaire tech founder and investor Peter Thiel reportedly advised companies to pull money from SVB amid concerns about its financial stability.
The bank's customers — mostly tech firms and the people running them — got word of trouble through frantic texts and tweets. (Check out my colleague Jennifer Korn's latest on how this crisis became the first Twitter-fueled bank run in history.)
On Friday alone, those customers withdrew cash at a rate of $4.2 billion every hour, for 10 hours — $42 billion in a single day. That left the bank with $1 billion in negative cash balance.
At the same time, short-sellers piled on, betting SVB's stock would continue to fall.
"Once Thiel and others piped up, this became a short-seller-induced bonfire of fear," Daniel Alpert, managing partner of Westwood Capital, told me.
"Most of what has happened is profit-seeking by opportunistic shorts who are just sitting there saying, 'This is great — everyone's tanking," Alpert said. "The shorts will eventually say, 'OK I've had enough.'"
(When short-sellers "cover" their positions, the shorted stock typically rebounds, as most regional banks did on Tuesday. )
'Moral hazard'
The Federal Reserve is now in an awkward spot, cast as both hero and villain in the current banking drama.
After a yearlong campaign to tame prices, the central bank now faces a no-win situation: Annual inflation is at 6%, triple what the Fed considers to be healthy. But the Fed's rate hikes also contributed to this mess by collapsing the value of banks' government bond holdings.
"The decisive and quick actions by the Feds did help to calm not only the banking sector but also the broader markets," said Reena Aggarwal, a professor of finance at Georgetown's McDonough School of Business.
But there is a "moral hazard problem" when regulators step in, she added, referring to the notion that banks may take on greater risk if they believe they will ultimately be bailed out.
The rescue isn't without critics — this is America, after all.
Ken Griffin, the billionaire hedge fund manager, rather dramatically told the FT that American capitalism is "breaking down before our eyes." (Oh, if only, Ken...)
His argument: The US economy is so strong that government should have let SVB's customers lose their money.
"It would have been a great lesson in moral hazard," he said, practically tripping down the steps of his $450 million Palm Beach estate.
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