Cathie Wood: Fed Policy Was the Primary Culprit of SVB and Signature Bankruptcy

3 min read
Cointime Staff· 3 min read

Cathie Wood, the founder and CEO of ARK Invest, has responded to a letter sent by Congressman Tom Emmer to FDIC Chairman Gruenberg.

In his letter, Emmer expressed concerns about reports that the FDIC is using recent banking instability as a pretext to restrict legal crypto activity in the US.

Wood, who is known for her bullish stance on crypto, tweeted that if these reports are true, it could prevent the US from participating in the most important phase of the internet revolution.

She also shared Emmer's view that regulators may be using crypto as a scapegoat for their own lack of oversight of traditional banking.

Full thread:

Despite a yield curve that inverted last July - and credit default swaps that started flashing red - the Fed continued to vote UNANIMOUSLY to jack rates up in 75 basis point increments. They paid no heed to commodity prices and other inflation indicators that were unwinding.

Many banks made two assumptions that are haunting them now. The first was that interest rates would remain low for an extended period of time, and the second, that deposits would continue to increase. After all, they had not declined on a year-over-year basis since the 1930s.

Flush with cash from stimulus payments during the coronavirus crisis and concerned about a lack of lending opportunities in a serious recession, many banks like SVB plowed those funds into “safe” long term bonds yielding 1-2%, intending to hold them to maturity.

Crypto had nothing to do with the banks’ investment decisions, nor the Fed’s decision to jack up interest rates 19-fold in less than a year. Incorrectly assuming that it was fighting a seventies-style inflation, the Fed caught many regional banks off sides with unrealized losses.

Because they intended to hold the long term securities to maturity (HTM), banks did not have to mark them to market unless sold: they would get their principal back upon maturity, despite subpar returns in the interim.

Unfortunately, the second assumption - stable to increasing deposits - also was incorrect. Venture funding dried up so startups started draining their deposit accounts and, elsewhere, uninsured money market funds started bidding for accounts with 4-5% interest rates.

The asset/liability duration mismatch - securities earning only 1-2% vs. deposits paying 3-5% - became untenable as deposits started leaving the system. Like SVB, some banks were forced to sell HTM securities, recognizing losses that depleted their equity accounts.

Crypto did not force SVB and Signature into bankruptcy. In my view, Fed policy was the primary culprit. Because of a VC funding drought and higher yields on money market funds, deposits left the US banking system.

I am baffled that banks and regulators could not convince the Fed that disaster loomed. Did they not understand that the asset/liability mismatch - normal in most circumstances for banks - was untenable as deposits left the banking system for the first time since the 1930s?

This debacle would not have been possible in the decentralized, transparent, auditable, and over-collateralized crypto asset ecosystem. Indeed, during the last week, crypt assets behaved like safe havens: along with gold, their prices appreciated.

In our view crypto is a solution to the central points of failure, the opacity, and the regulatory mistakes in the traditional financial system. Made the scapegoat for policy mistakes, crypto will move offshore, depriving the US of one of the most important innovations in history

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