Writers: Parth Kochhar, Theodore Bernstein, Natalie Viderman, Alexei Varah
Publication #1
Editors: Maxwell Chosed, Anirban Mazumder, Andrew Chen, Parth Kochhar
Silicon Valley Bank ($SVB) shook investors this week as the bank declared that it was shuttering, blaming rising interest rates and insufficient capital. SVB was known for providing capital and investment accounts to small-cap companies and startup companies in Silicon Valley. SVB’s clients initiated a bank run due to low income from inflationary pressures, and SVB could not meet the cash demand that depositors requested. Using consumer deposits, Silicon Valley Bank bought billions of dollars worth of government bonds over the past couple of years, as government bonds are considered a safe investment with low risk. These bonds were at lower interest rates than we see today, as interest rates have skyrocketed due to the Federal Reserve’s precautionary inflation measures. The consistently rising interest rates/yields caused the values of SVB’s government bonds to fall significantly, and SVB was losing money on investments they could not control.
When price yields rise, the prices of current bonds fall.
SVB was running low on reserves as their investments were decreasing in value rapidly. Since SVB’s lenders were mainly startup companies experiencing significant losses due to the high-interest rates and increasing production/labor costs, they needed to take money out of their investment and capital accounts to fund their costs at a loss.
On Monday, SVB experienced something called a “Bank Run.” A Bank Run is when tons of depositors, or consumers who bank with SVB, withdraw savings and investments simultaneously when there is a fear of a bank not meeting its solvency requirements. SVB’s lenders, mainly startup companies, had capital accounts worth much over $250,000, which the FDIC covers through insurance. These lenders were all asking for money out of their capital accounts to supply their cost measures and out of a precaution to ensure their money was safe, and SVB did not have the funds to match the demand. SVB ended up selling their government bonds with low-interest rates for much less than purchased as interest rates have risen significantly, and SVB was now insolvent.
To determine solvency, one can follow the basic formula: Liabilities - Assets. If this is positive, a company is solvent. If this is negative, a company is insolvent.
Since the FDIC took control of SVB’s assets and deposits, multiple companies have released statements claiming their capital is inside their frozen deposit accounts in SVB. Roku, known for its streaming services, reported having $487 Million, or 26% of its assets, in SVB. Roblox, known for their video game production services, reported having $150 Million, or 5% of their assets, in SVB. Investors have been worrying about possible corruption inside the company and why SVB executives did not report their bank statements correctly. “The Big Short” Investor Michael; Burry, known for predicting the failure of CDOs (Collateral Debt Obligations) and the 2008 crash, claimed that there was “Hubris and Greed” in SVB’s collapse, reminding him of Enron, an energy company in Texas that ceased operations for using fraudulent financial practices.
Now investors are panicking, removing investments and deposits in smaller regional banks and moving to larger cap banks with more reserves, such as JP Morgan Chase (JPM) and Goldman Sachs (GS). First Republic Bank, another regional bank based out of California, slid more than 70% during trading on 3/14 on fears that it may need assistance from the FDIC. Signature Bank, a regional bank based out of New York, slid more than 30 and ceased operations as the FDIC took over general operations.
Large Cap stocks are at the top of my buy list.
*Disclaimer: Parth owns stock in Goldman Sachs ($GS).
2008 in 2023- The Regional Bank Disaster
By Parth Kochhar
Sam Bankman-Fried (SBF) is one of the most famous names in the crypto world. Educated at MIT, he founded the trading company Alameda Research in 2017. Two years later, he launched FTX, which soon became the world’s third-largest centralized cryptocurrency exchange. As of November 2022, FTX went bankrupt and has shaken the entire crypto universe — how did a company valued at $32 billion become worthless overnight? Why is SBF now under arrest, facing criminal and civil charges?
Simple — SBF invested the funds of millions of customers into personal real estate, political donations, and his own company. All he has said to date about this is that he “f—— up.”
How did FTX Implode?
FTX was one of the largest cryptocurrency exchange platforms in the world; interestingly, however, the currencies purchased on the FTX platform were legally and technically owned by the buyer, but FTX held the actual crypto keys and, in turn, their value. Based in the Bahamas, the company built its business on risky trading options that are not legal in the United States.
Sam Bankman-Fried, through FTX and Alameda, was able to amass a personal net worth of $15 billion. However, on November 11, 2022, FTX filed for bankruptcy. FTT, FTX’s original cryptocurrency, has fallen over 80%, and SBF’s fortune evaporated into thin air. The dealings between his two companies — FTX and Alameda — are at the center of the fraud charges SBF is currently facing. In addition, the lack of regulation of digital currencies has created many victims out of FTX customers who “owned” $8 billion worth of crypto.
Before FTX launched, Alameda made money by buying Bitcoin and other cryptocurrencies in one part of the world and selling them in another, pocketing the difference. However, as the New York Times reported, “finding a ready supply of dependable lenders was time-consuming for Alameda, especially since banks and traditional Wall Street firms largely shunned crypto because of the lack of regulation and oversight.” So, in 2019, SBF built FTX to bring in revenue and help fund Alameda.
To maintain the value of FTT, Alameda served as the token’s primary market maker. This meant it bought and sold most of FTT and could set its prices. FTX and Alameda benefited from the token’s rising value, eventually using FTT to invest billions of dollars in other crypto companies.
The New York Times reported that problems began to emerge this past Spring when the crypto market began declining. Falling prices led to lenders wanting their money back and a decrease in FTT’s value, which Alameda had used as collateral for some loans. As the firm struggled to pay lenders back, FTX began using funds that customers had deposited to repay Alameda’s lenders. New FTX CEO John Ray states in the FTX bankruptcy filing that “never in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here.”
Sam Bankman-Fried now has to suffer the consequences. The Justice Department brought eight charges against SBF, including conspiracy to commit wire fraud on customers and lenders, defrauding the U.S., fraud against customers, and five others. SBF and this case will likely be front-page news for months to come, but his story highlights a deeper issue: how easy it is to dupe everyone. Many of FTX’s investors were among the most sophisticated on the planet and have since said they were blindsided by FTX’s implosion, partly because they failed to recognize the symbiotic relationship between FTX and Alameda or the potential conflicts of interest that it could pose.
What’s Next for the Cryptocurrency Industry?
After the FTX scandal and the rapid decline of FTT, other cryptocurrencies are also crashing. On December 13, 2022, Bitcoin hit a two-year low. The entire cryptocurrency market has lost over $1.4 trillion in value this year — the industry is struggling to recover consumers’ trust.
Even as cryptocurrency seems to be on its last legs, there are some promises for reform. Changpeng Zhao, the founder of FTX’s competitor, Binance, is actively petitioning trading companies to provide proof of reserve, ensuring that companies always maintain enough cash to fulfill any redemption requests. No trading firm could ever move around tokens or money without a reliable net to fall back on. Proof of reserve requirements was instituted for regulated banks by the U.S. Government after the Great Depression. As the crypto industry faces its crisis of confidence, many argue that proof of reserves and regulatory oversight should be required for trading firms.
Cryptocurrency may be appealing with its promises of decentralization and financial independence, but those traits also equate to a need for more security and longevity. Though they may seem old-fashioned, bank statements are reliable, and the money in those accounts is liquid — the same is not valid for cryptocurrencies.
The FTX Crash- A Nail in Crypto’s Coffin
By Alexei Varah
After the coronavirus pandemic struck in the early spring of 2020, white-collar professionals’ new stay-at-home policies allowed them to work virtually from anywhere. The value of second homes skyrocketed due to the sudden robust demand for a pool and lawn. Exurbs, well-to-do areas beyond a city’s suburbs, suddenly attracted cooped-up urban residents. The pandemic reversed NYC’s incredible real estate incline of the past decade. With a decline in rental pricing, neighborhoods that would have previously been far too expensive attracted tenants. In the eight months since the beginning of the pandemic, the median rent in Manhattan fell by 12%, and the median rent in Brooklyn, Queens, the Bronx, and Staten Island fell by 6%.
It has been three years since the Covid pandemic, but experts estimate it will still take years for rental pricing to return to pre-pandemic levels. This pause in the real estate market is mainly due to high unemployment combined with a shortage of middle and low-income housing. The percentage of Manhattan condos opened out of the expected amount fell from 45 in 2019 to 24 in 2020. Brooklyn fell from 43 percent to 20, while Queens fell from 41 to a meager six.
New York City’s housing market has become even more of a disaster in the past year. Mortgage rates (which broke 7% in 2022 for the first time in 20 years), prices, and a lack of inventory have changed the game for buyers, as they are now paying 77% more on their monthly loans than at this time last year. Despite all this, there is still hope for the Big Apple. Statistics from previous years prove that New York tends to be less susceptible to recessions than the rest of the country. Thanks to a constant flow of demand, New York usually rebounds from economic decline faster than the rest of the country. Rents have plateaued, and experts think they will decline in the coming year after closing out the past one at record highs. This year, bidding wars are stopping, and rents are stabilizing after last summer. Caps on broker fees and rent increases are at the top of the list of professional predictions. Although the rental market’s historically slowest months have passed, landlords continue to decrease their rent due to a shortage of demand for NYC apartments. November saw 20% of rental listings cut their asking price, 9% more than in 2021.
Searches for listings on StreetEasy’s market of properties in the central and eastern parts of Brooklyn and Queens, like Bushwick and Elmhurst, rose 30 to 40 percent in 2022, showing renters’ flight to more affordable and further flung NYC neighborhoods and pressure for landlords to lower their asking prices. However, prices might not drop too drastically because of the great demand for one-bedroom apartments and studios, causing the cheapest rental option for New Yorkers to increase. This winter saw the return of concessions, free perks that landlords give out to entice renters into signing a lease (the contractual terms of a property rental agreement). Manhattan’s concessions were up 16 percent in November 2022, up five from the earliest days of the fall. However, in 2020’s fall season, concessions were six times more common to come with a lease. The 2022-23 winter has been slower than the previous two, leading to management companies of buildings offering two months of concession to a 14-month lease.
These concessions are back in such force because of the sudden rapid decline in leases seen in the rental market. People are now more conservative about spending rent due to fear of a looming recession. As usual, experts are leaning on the spring to catapult the rental market forwards again, signaling the end of concessions for now. Even though detrimental factors like rising crime and unemployment exist, NYC’s real estate market is expected to return to a realistic yet robust place as it rebounds.
NYC’s Pandemic Real Estate Crash
By Theodore Bernstein
Economic recessions, which occur when there is a general decline in economic activity, have been a persistent issue for centuries. From the Great Depression in 1929 to the COVID pandemic that began in 2020, the world has experienced numerous economic downturns. Although economic recessions are often associated with the cause of external events, such as diseases, others can escalate over time, as seen in the 2008 recession. It began with a decline in house prices and quickly led to a total loss of $1.488 billion, earning it the nickname “The Great Recession.” But how could such a seemingly elementary event lead to catastrophe?
The Great Moderation, which lasted from the mid-1980s to 2007, was a relatively undisturbed period due to its occurrence post-World War II. However, as the period came to an end, the decade-long expansion of the housing market activity peaked in 2006 and began to decline in 2007. Average home prices nearly doubled between 1998 and 2006, representing the sharpest increase ever recorded in US history. This was due to US households’ expansion in home mortgage borrowing, where low-interest rates and high-risk mortgages were awarded to borrowers. As a result, the increase in available housing credit fueled the demand for housing, and stodgy pension funds bought risky mortgages.
However, as the demand for housing activity decreased, there were significant losses in mortgage-related financial assets, leading to a strain on global financial markets. In December 2007, the American economy officially entered a recession, causing the banks to panic and halt the provision of mortgages. The Federal Reserve attempted to address this situation by providing liquidity and support to improve the functioning of US markets, but the economy continued to decline.
The impacts of the 2008 recession were catastrophic, and it was one of the hardest recessions to recover from. By closely studying the origins and factors that led to the 2008 recession, finance professionals can understand how to better prevent small recessions and declines from exacerbating into an unstoppable force. Although recessions happen nearly every few years, economic stability has significantly improved from the level of the Great Depression, and with every recession comes solutions to restructure and strengthen economic systems.
The 2008 Recession and its Development
By Natalie Viderman