From Sam Bankman Fried to the Great Silicon Valley Bank Collapse of 2023, the U.S. economy seems to be on a wild ride.

Photo by Heather McKean on Unsplash.

BuzzFeed says most of cash and cash equivalents held at SVB,” reported Reuters on Monday, March 13. It was the last thing a beleaguered outlet like BuzzFeed needed on top of approaching penny stock territory.

“Startup-focused lender SVB Financial Group last week became the largest bank to fail since the 2008 financial crisis, sending shockwaves through the global financial system and prompting regulators to step in to contain the fallout,” continued Reuters.

BuzzFeed isn’t the only company hurt by the sudden and unexpected failure of Silicon Valley Bank. And the crisis may be far from over.

Moody’s has since cut the outlook for the U.S. banking system to negative, sending shockwaves throughout the global marketplace.

“We have changed to negative from stable our outlook on the US banking system to reflect the rapid deterioration in the operating environment following deposit runs Silicon Valley Bank (SVB), Silvergate Bank, and Signature Bank (SNY) and the failures of SVB and SNY,” Moody’s said in a report issued Monday.

“Banks with substantial unrealized securities losses and with non-retail and uninsured US depositors may still be more sensitive to depositor competition or ultimate flight, with adverse effects on funding, liquidity, earnings and capital,” advised Moody’s.

“We expect pressures to persist and be exacerbated by ongoing monetary policy tightening, with interest rates likely to remain higher for longer until inflation returns to the Fed’s target range,” Moody’s added. “US banks also now are facing sharply rising deposit costs after years of low funding costs, which will reduce earnings at banks, particularly those with a greater proportion of fixed-rate assets.”

First Republic Bank, Zions, Western Alliance, Comerica, UMB Financial, and Intrust Financial are also being reviewed by Moody’s. Over the weekend, Signature Bank was seized by bank regulators.

The U.S. crisis also has every indication of spreading into a global phenomenon.

Credit Suisse shares fall to all-time low as bank announces it has found ‘material weakness’- just hours after Wall Street expert predicted that it would be the next to fall after SVB,” reported the UK’s Daily Mail, adding that, “today, Credit Suisse reported an $8 billion loss in 2022 and ‘material weakness.’”

“The U.S. is supposed to be a capitalist economy, and that’s breaking down before our eyes,” Citadel CEO Ken Griffith told news outlets. “There’s been a loss of financial discipline with the government bailing out depositors in full.”

“Our system is breaking down,” agreed financier Carl Icahn, though he stopped well short of advising against bailouts. “We absolutely have a major problem in our economy today.”

“And one of the major reasons — not the only reason, obviously, but one of the major reasons — is that you don’t have good corporate leadership,” said Icahn. “If you don’t have good corporate leadership — companies, you know — when the tide is high and things are great, it doesn’t matter, and all these guys that are running these companies are partying and having a good time and giving themselves bonuses.”

Or as famous investor Warren Buffet once put it: “A rising tide floats all boats, but when the tide goes out, you see who’s been swimming naked.”

Falling confidence in the banking system could create even more headaches for the financial sector.

“A common failure mode for banks is a bank run: a bank does not have sufficient assets to pay back all of its depositors at once, because those assets have been distributed elsewhere as loans,” warned Stratechery. “Unfortunately a bank run can become a self-fulfilling prophecy: if depositors hear about a bank run at another bank, they may start to question the safety of their deposits in their own bank, starting another run.”

What is also unclear is what role social media will play in future financial crises. What bank runs will mean in a culture connected 24/7 on Twitter is anyone’s guess.

SVB collapse was driven by ‘the first Twitter-fueled bank run,’” observed Jennifer Korn for CNN on March 14, 2023. SVB may have been the first bank undermined by rumors of insolvency on Twitter, but it probably will not be the last.

“The massive amount of customer withdrawals that led to the collapse of Silicon Valley Bank had all the hallmarks of an old-fashioned bank run, but with a new twist befitting the primary industry the bank served: much of it unfolded online,” wrote Korn.

All this is causing investors, stock brokers, bankers, and depositors to hearken back to the bad old days of the 2008 Lehman Brothers collapse and the savings & loan crisis before it.

The savings and loan (S&L) crisis in the 1980s and 1990s was a financial crisis that involved the failure of hundreds of savings and loan associations (S&Ls) in the United States. S&Ls were financial institutions that traditionally took deposits from savers and lent those funds out to borrowers to finance mortgages and other loans.

During the 1970s and 1980s, many S&Ls began to invest heavily in risky ventures, including commercial real estate and speculative land development projects. These investments often resulted in substantial losses, and many S&Ls found themselves insolvent as a result. Additionally, the federal government’s decision to deregulate the S&L industry in the 1980s allowed S&Ls to engage in riskier activities, which further contributed to the crisis.

The S&L crisis reached its peak in the late 1980s and early 1990s, and by 1995, over 1,000 S&Ls had failed. The total cost of the crisis to taxpayers was estimated to be over $150 billion, making it one of the largest financial crises in U.S. history.

The collapse of Lehman Brothers in 2008 was another dark and pivotal moment for the U.S. economy and the financial sector.

Lehman Brothers was one of the largest investment banks in the world, with a significant presence in the mortgage market. In the years leading up to its collapse, Lehman Brothers had invested heavily in mortgage-backed securities, including subprime mortgages, which were loans made to borrowers with poor credit histories.

As the subprime mortgage market began to collapse in 2007, Lehman Brothers suffered significant losses on its mortgage-backed securities investments. Despite efforts to raise capital and shore its finances, the bank was unable to survive the resulting liquidity crisis. On September 15, 2008, Lehman Brothers filed for bankruptcy, making it the largest bankruptcy filing in U.S. history at the time.

As in the S&L crisis, the Lehman Brothers collapse led to a reevaluation of financial regulation and a push for greater transparency and accountability in the banking sector.

Why are these measures for greater transparency and accountability suddenly failing?

With the recent implosion of the cryptocurrency market, and the spectacular fall of Silicon Valley charlatans like Elizabeth Holmes and Sam Bankman Fried, it might be worth considering how much the market and technology have changed since 1990 and indeed 2008.

Regulations in the financial sector exist for the same reason we have child labor laws: Because we need them.

(contributing writer, Brooke Bell)