The collapse of the 16th largest bank in the US, Silicon Valley Bank (SVB), in as little as just 48 hours has rattled the world, and raised the most uncomfortable question: Will the 2008 financial crisis be repeated?
Well, the answer is neither a clear yes nor no as of now, and various financial experts have a different take on it. While some are denying the chances of any massive upcoming damage despite the bank's collapse, others are indeed not ruling out comparisons with 2008's crisis.
What Experts Are Saying About SVB Collapse
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US billionaire and hedge fund manager Bill Ackman has compared the fall of SVB to "bear Stearns"--the first bank to collapse at the start of the 2007-2008 global financial crisis.
Taking to Twitter, Ackman wrote, "The risk of failure and deposit losses here (SVB) is that the next, least well-capitalised bank faces a run and fails, and the dominoes continue to fall".
However, some analysts think that the SVB collapse is more company-specific for now, as per Mint.Joe Biden administration has also argued that safeguards enacted after the 2008 financial crisis would protect the country's economy amid the shuttering of Silicon Valley Bank.
US Treasury Secretary Janet Yellen has expressed full confidence in banking regulators to take appropriate actions in response and noted that the banking system remains resilient and regulators have effective tools to address this type of event.
Indian-American Vivek Ramaswamy who is running for the 2024 US Presidential poll questioned whether SVB used ESG factors to price its loans, and compared the "key cause" of the 2008 financial crisis.
Reuters
In a video message, Ramaswamy wrote, "A key cause of the 2008 financial crisis was the use of social factors to make loans (back then, fostering home ownership). When we don’t learn lessons, history repeats itself: did Silicon Valley Bank use ESG factors to price its loans? Roll that log over & see what crawls out".
The Economist Stephanie Pomboy told Fox news that we are on the brink of a 2008-style financial crisis and I'm not trying to be hyperbolic... We've got some major consequences coming at us, and I think it's going to devolve very rapidly because of all the leverage.
Mike Mayo, Wells Fargo senior bank analyst told CNN, said the SVB crisis could be “an idiosyncratic situation."
“This is night and day versus the global financial crisis from 15 years ago," he said. Back then, he said, “banks were taking excessive risks, and people thought everything was fine. Now everyone’s concerned, but underneath the surface, the banks are more resilient than they’ve been in a generation."
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US Financial commentator Robert Armstrongin his latest opinion piece said that "SVB's collapse is not a harbinger of another 2008".
Armstrong in Financial Times wrote that “The risk of contagion within the banking system appears to be limited. But at the end of every central bank rate-increase cycle, there comes a phase where things in the financial system begin to break. These breakages, minor or major, erode the confidence of investors and consumers, increasing the odds of recessions. The failure of SVB does not herald another 2008, but it does mark the beginning of the breakage phase".
The risk of contagion within the banking system appears to be limited. But at the end of every central bank rate-increase cycle, there comes a phase where things in the financial system begin to break. These breakages, minor or major, erode the confidence of investors and consumers, increasing the odds of recessions. The failure of SVB does not herald another 2008, but it does mark the beginning of the breakage phase".
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What Happened During The 2008 Financial Crisis?
The massive financial crisis of 2008 needs no introduction. The seeds of that long pending financial crisis were planted after the dotcom bubble of 2000, with the deadly 9/11 terror attack of 2001 further adding to the fear.
The Federal Reserve lowered the federal funds rate from 6.5% in May 2000 to 1% in June 2003, with the aim of boosting the economy by making money available to businesses and consumers at such minimal rates.The result, as expected, was an upward spiral in home prices as borrowers took advantage of the low mortgage rate of 1%.
The banks then sold those loans on to Wall Street banks, which packaged them into what were billed as ‘low-risk financial instruments’ such as mortgage-backed securities and collateralized debt obligations (CDOs).
Soon, even the Securities and Exchange Commission (SEC) in October 2004 relaxed the net capital requirements for five investment banks, including Lehman Brothers, with this action freeing these five to leverage their initial investments by up to 30 times or even 40 times.
Eventually, interest rates began to rise and homeownership ultimately reached a saturation point. In June 2004, the Fed had already started raising rates from that 1% mark, and two years later, the Federal funds rate had reached 5.25%, on which it remained until August 2007. By 2004, U.S. homeownership had already reached its peak at 69.2%. And then in early 2006, home prices started to fall.
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This caused real hardship to a lot of Americans, with their homes now being worth much less than what they paid for them.And in January 2008, the Fed announced its biggest benchmark rate cut in a quarter-century, as it sought to slow the economic slide.
In March 2008, global investment bank Bear Stearns, which had been a pillar of Wall Street that dated to 1923, collapsed and was acquired by JPMorgan Chase for pennies on the dollar.
And that is not all. By the winter of 2008, the U.S. economy was in a full-blown recession, with the collapse of the venerable Wall Street bank Lehman Brothers in September 2008 marking the largest bankruptcy in U.S. history, and certainly became no less than a symbol of the devastation caused by the global financial crisis.
The financial crisis impacted India as well, with Sensex falling massively and repeatedly. From falling by over 1400 points on 21 Jan 2008, 875 points the next day, to further falling in the range of around 800-900 points on various instances during the entire year.
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