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Why is there a run on banks?

Why is there a run on banks?

Is there systemic risk to the global financial system from the SVB collapse?

Many across the global financial system wonder if the shocking failure of Silicon Valley Bank is a 2003 “Lehman moment”?

Yesterday, California regulators seized Silicon Valley Bank, shut it down and appointed the Federal Deposit Insurance Corp. to take over. Only 48 hours ago Silicon Valley’s CEO told investors on a conference call to relax and everything would be fine.

We spoke with a brilliant Point72 Portfolio Manager who shorted many banks into receivership!

And he told us he felt “shocked at the speed of which SVB failed. These things usually take a few weeks. Maybe because it was a tech bank the speed of the run on Silicon Valley was unprecedented?”

We asked him if he was worried about the markets and economy and if this was indeed another “Lehman moment”? He told us, “back in 2008 Lehman Brothers failed because of bad debt that all of the big banks held. Today the big banks are flush. In addition, Silicon Valley had terrible risk management. How can you not hedge your bank’s largest asset?”

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A typical bank will make more money from rising interest rates. As their mortgage loans to customers will see higher payments. However, Silicon Valley didn’t take their deposits and lend it out to local clients for houses to buy. Instead, they bought a big pool of loans at the peak of an inflated fixed-income market.

Emanuel Lehman (1828-1907) was one of three Jewish-German immigrant brothers whose cotton brokerage, founded in Montgomery, Alabama, during the mid-nineteenth century, eventually expanded to become the financial conglomerate Lehman Brothers.

The term “Lehman moment” refers to the bankruptcy of Lehman Brothers, a global financial services firm, which occurred on September 15, 2008. The bankruptcy of Lehman Brothers, now widely considered a critical event that triggered the 2008 global financial crisis.

Lehman Brothers was one of the largest investment banks in the United States, with a significant presence in the mortgage-backed securities market. The company had invested heavily in mortgage-backed securities, which turned out to be highly risky assets that suffered significant losses as the US housing market collapsed in 2007 and 2008. As a result of these losses, Lehman Brothers found itself in a severe financial crisis, with its liabilities far exceeding its assets.

Head office of Lehman Brothers in Frankfurt, Germany

In the weeks leading up to its bankruptcy, Lehman Brothers sought a bailout from the US government, but the government refused to provide one. On September 15, 2008, Lehman Brothers filed for bankruptcy. As a result, making it the largest bankruptcy in US history at the time. The bankruptcy had far-reaching effects on the global financial system, causing a credit freeze and a severe economic downturn.

The term “Lehman moment” is now used to refer to a major financial crisis or event that has the potential to trigger a wider national or global economic crisis.

Additionally, the phrase often becomes used to describe situations where a significant financial institution or market experiences a sudden and dramatic collapse. As a result, leading to a loss of confidence in the broader financial system.

Moreover, in popular culture, the term “Lehman moment” has been used in a variety of ways to describe different kinds of crises. For example, some people use the term to refer to the COVID-19 pandemic. Which has had a significant impact on global financial markets. Furthermore, others use the term to describe the collapse of individual companies, such as Enron or WorldCom, which caused significant damage to the broader economy.

In conclusion, the term “Lehman moment” has become a shorthand for a financial crisis that has the potential to cause widespread economic damage. Lastly, it is a reminder of the fragility of the global financial system and the need for vigilance and oversight to prevent future crises.

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Why is there a run on banks?