Wall St Titans Warn: SVB ‘Canary in a Coal Mine’

Wall Street luminaries are warning that Silicon Valley Bank’s implosion could be the “canary in the coal mine” pointing to further trouble for U.S. financial markets, the New York Post reports.

Bridgewater founder and co-CIO Ray Dalio called SVB’s failure and serious trouble at Credit Suisse a potential “canary in a coal mine” that will dampen investments by the venture capital world and “well beyond it.”

Larry Fink, BlackRock CEO, said SVB’s ruination could be the start of a “slow-rolling crisis,” much like the beginnings of the savings and loans catastrophe of the 1986-1995, when 32% of all savings and loans failed.

‘CONSEQUENCES OF EASY MONEY’

“We don’t know yet whether the consequences of early money and regulatory changes will cascade throughout the U.S. regional banking sector (akin to the S&L Crisis) with more seizures and shutdowns coming,” Fink wrote in his annual shareholder letter Wednesday.

The markets are currently paying for “years of easy money” reversed by the Federal Reserve’s series of rate hikes in the past two years, Fink said.

The “second domino to fall” could be “asset-liability mismatches” like what happened to SVB’s fixed income exposure, the billionaire said, referring to the $1.8 billion loss SVB reported just before it held a fire sale of its $21 billion in bond holdings.

The “inevitable third domino to fall” will be when banks with “illiquid investments pull back on lending to shore up their balance sheets,” Fink said.

MORE BACKSTOPS, REGULATION

Dalio said U.S. and other federal regulators may have to step in with further backstops beyond SVB, Signature and Credit Suisse—plus more regulations.

“Looking ahead, it’s likely that it won’t be long before the problems pick up, which will eventually lead the Fed and bank regulators to act in a prohibitive way,” Dalio wrote in a Tuesday blog post.

“I think we are approaching the turning point from the strong tightening phase into the contraction phase of the short-term credit/debt cycle,” Dalio added.

Critics of the Federal Deposit Insurance Corp.’s guarantee of all SVB deposits, including those that were not FDIC insured, argue that it is effectively a bailout that will eventually land on the shoulders of the American taxpayer.

Ken Griffin, CEO of hedge fund Citadel, told The Financial Times earlier this week, “The U.S. is supposed to be a capitalist economy, and that’s breaking down before our eyes. “There’s been a loss of financial discipline with the government bailing out depositors in full.”

‘ECONOMY BREAKING DOWN’

Financier Carl Icahn said the disintegration of SVB points to the bigger issue of a lack of corporate leadership and accountability in the U.S. economy.

Asked by CNBC’s Scott Wapner whether he viewed the bailout of uninsured depositors as a loss of financial discipline, Icahn said, “Our system is breaking down. We absolutely have a major problem in our economy today.”

Restoring faith in the banking system through the bailout of SVB sends citizens a message that there is no accountability for their actions, that the government will step in and save the day, Icahn said.

“You can’t have the country feeling that it doesn’t matter if they save,” said the head of holding company Icahn Enterprises. “That they could spend all the money they want, they could do whatever they want, because the government will bail you out.”