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The mood on Wall Street was notably cheerier Tuesday, a few days after marked by frenzied bank runs, plunging stocks, and an extraordinary government intervention.
The government's emergency measures have worked, at least for now. Backstopping deposits and setting up a lending facility for banks that need cash have prevented an all-out collapse of the financial system.
Despite concerns that the collapse of Silicon Valley Bank would cause a run on similarly positioned regional banks, no banks failed Monday. Shares of those banks, including First Republic, have bounced back sharply Tuesday after a brutal selloff Friday and Monday.
Many had feared that the First Republic Bank could be the next domino to fall, but it surged nearly 60% early Tuesday after falling by the same amount the day before. It was up some 40% in the afternoon.
Western Alliance Bancorp's stock rose by 20%, while PacWest Bancorp's stock increased by more than 40% after previously dropping by 20% on Monday.
The enthusiasm will not last long because the Federal Reserve will not back off on its interest-rate hikes.
"The market is deluding itself into thinking that the Fed will pivot sooner than it actually will," said Eric Schiffer, chairman of private equity firm Patriarch Organization. "But inflation won't just die without a further rate hike."
A bonfire of fear is a large fire that is lit in order to ward off evil spirits. It is a common practice in many cultures, and is often used to celebrate special occasions.A bonfire of fear is a large fire that is lit in order to ward off evil spirits. It is a common practice in many cultures, and is often used to celebrate special occasions. The bonfire of fear is a powerful symbol of protection, and can be used to keep away harmful energies and entities.
The panic came on fast, like a bad flu, and abated just as quickly.
On Thursday last week, as Silicon Valley Bank (SVB) started to come apart, a venture capital fund founded by billionaire tech founder and investor Peter Thiel is said to have advised companies to take their money out of SVB because of worries about its financial stability.
Customers of the bank, mostly tech firms and the people running them, got word of trouble through frantic texts and tweets.
On Friday, customers withdrew cash at a rate of $4.2 billion per hour for 10 hours, resulting in a negative cash balance of $1 billion for the bank.
Short sellers bet that SVB's stock would continue to fall while others were buying it.
"This became a short-seller-induced bonfire of fear," said Daniel Alpert, managing partner of Westwood Capital, "once Thiel and others piped up."
"Most of what has happened is profit-seeking by opportunistic shorts who are just sitting there saying, 'This is great everyone's tanking,' Alpert said. 'The shorts will eventually say, 'OK I've had enough.'"
The shorted stock typically rebounds when short-sellers 'cover' their positions, as most regional banks did on Tuesday.
is the name given to the risk that a person may take more care if they are insured against something than if they were not
The name given to the risk that a person may take more care if they are insured against something than if they were not is 'moral hazard.'
The Federal Reserve is in an awkward spot, being both the hero and the villain in the current banking drama.
The central bank now faces a no-win situation after a yearlong campaign to tame prices. Annual inflation is at 6%, triple what the Fed considers to be healthy. The Fed's rate hikes also contributed to this mess by collapsing the value of banks' government bond holdings.
"The decisive and quick actions by the Feds did help to calm not only the banking sector but also the broader markets," said Reena Aggarwal, a professor of finance at Georgetown's McDonough School of Business.
However, she added, referring to the notion that banks may take on greater risk if they believe they will ultimately be bailed out, there is a 'moral hazard problem when regulators step in.'
There are critics of the rescue, as this is America.
"American capitalism is breaking down before our eyes," Ken Griffin, the hedge fund manager, told the FT rather dramatically. (Oh, if only, Ken)
He argues that the US economy is so strong that the government should have let SVB's customers lose their money.
"It would have been a great lesson in moral hazard," he said, practically tripping over his Harvard degree and $33 billion in personal fortune.