Chris Whalen: Collapse of Silicon Valley Bank ‘Goes to the Feet of Jerome Powell’ and Federal Reserve

Chris Whalen, chairman of Whalen Global Advisors, blamed Federal Reserve Chair Jerome Powell for the failure of Silicon Valley Bank (SVP) in a Friday interview on Forward Guidance with host Jack Farley.

The Federal Reserve’s raising of interest rates “rendered the bank insolvent,” Whalen remarked. He said:

Rising rates cause book value to go down, and when rates rise a lot — like we just saw with Silicon Valley Bank — then you have market risk, and that market risk has turned into credit risk, and the bank had to be taken over.

This all goes to the feet of Jerome Powell and the members of the Federal Open Market Committee because they did this. There is nothing wrong with that bank. There was nothing wrong with Silicon Valley Bank six months ago, three months ago, and now they’re dead.

Farley linked the Federal Reserve’s manipulation of the U.S. dollar money supply to SVP’s collapse. He remarked:

This bank failed because they didn’t fully understand the implications of the Fed’s actions, especially quantitative tightening, and now a good bank is gone. This shows you the downside of quantitative easing, the destruction that the Fed’s reckless and insensitive policies are causing.

The Fed should have known that when you concentrate all of the risk of the banking sector and the bond market into three points, in terms of coupons on securities and loans, and then you move the market 600 basis points in terms of interest rates, you’re obviously going to have a problem. A first-year banking associate can figure this out without a calculator, but the Fed governors don’t seem to understand these things. So we’re paying the price for that.

“The Fed’s actions essentially rendered the bank insolvent,” he added.

Whalen estimated, “It’s just like the 1930s, okay? There’s no difference. The only difference is the Fed has caused this problem because they are not sufficiently tuned in to the financial markets.”

Whalen said the Federal Reserve must lower interest rates to prevent a financial “contagion” from infecting other financial institutions and causing more bank runs, which would further increase the rate of inflation. He stated:

The Fed has embedded trillions of dollars worth of losses in the financial sector, and we’re supposed to just deal with this and not complain? I think that Fed really needs to be held to account by members of both parties on the Hill because quantitative easing was a mistake in many ways. We see with Silicon Valley [Bank] what’s happened.

But keep in mind, the Fed is also constrained with the fact that they can’t fight inflation anymore. They can’t raise interest rates even to current levels. I think we’re going to see rates go back down and then this whole narrative about the Fed and their irresponsibility [in] defending us from inflation, that’s all going to be finished. We’re not even going to be able to talk about that anymore.

Whalen concluded, “The only way we’re going to get ahead of this is if the Treasury secretaries stands up there with Jerome Powell and the other regulators and say, ‘We’re on it. We’re dropping rates, and by the way, if you need liquidity, if you’re a bank come and talk to us, the [discount] window is open.’ If that’s not the message on Monday, we have a problem.”

Follow Robert Kraychik on Twitter @rkraychik.