SVB collapse: David McCormick warns failure indicative of ‘broader set of problems’
Ryan King
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Former Bridgewater Associates CEO and Pennsylvania Senate candidate David McCormick raised concerns that the Silicon Valley Bank collapse is indicative of broader turbulence in the economy.
McCormick, a top official in the Treasury Department during the 2008 financial crisis, surmised that low interest rates from the Federal Reserve coupled with excessive spending has spawned a slew of asset mismatches in the financial sector. He also voiced apprehension about the implicit backstopping of uninsured SVB deposits by the government.
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“What we have now is a crisis that’s the byproduct of a decade of excess spending and excessively low interest rates. And that’s creating an asset-liability mismatch,” McCormick told CNBC. “And I think Silicon Valley Bank had lots of problems about its management, poor oversight from the San Francisco Fed, but ultimately, it’s an indicator of a much broader set of problems.”
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Alluding to the red-hot inflation gripping the country, McCormick suggested that the need for the Fed to jack up interest rates is spelling trouble for the financial system. Underlying SVB’s woes was that higher interest rates meant a trove of older bonds SVB amassed shed value because higher rates made newer ones more desirable for investors, given that they yielded higher earnings.
SVB was forced to sell $21 billion in bonds, cementing $1.8 billion in previously unrealized losses, then announced plans to seek $2.25 billion in additional equity last Wednesday. This and the deluge of deposit withdrawals sparked a frenzy and prompted mass withdrawals. On Thursday, $42 billion was withdrawn in a single day. By Friday, regulators took over the company amid its collapse.
Over the weekend, government officials announced that depositors would be able to have access to their money by Monday. This was significant because the Federal Deposit Insurance Corporation insures deposits up to $250,000, but SVB was loaded with ones above that threshold. The move was intended to stem panic from ravaging the banking sector.
“I’m worried about the fact that the uninsured depositors were protected that way,” McCormick said, noting fairness concerns. “There’s $18 trillion of bank deposits, 8 trillion or so are uninsured. So is this a precedent? Is this actually a practical way to do it? So I’ve got real concerns about it.”
“Banking is about confidence. And I understand the need to create confidence, but we’re also creating precedents that are deeply troubling,” he continued. “The second and third order consequences of policy isn’t always evident until sometime down the road.”
The FDIC projects there were roughly $620 billion in unrealized potential losses in banking assets across the system as of the end of last year.
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McCormick is promoting his new book, Superpower in Peril: A Battle Plan to Renew America, which outlines a conservative agenda for the country and has been seen by some as a prelude to another Senate campaign in 2024.
Bridgewater Associates, which he led from 2020 to 2022, is one of the largest hedge funds in the world.