Seems a bit like the chaotic part of creative destruction at work, causing mayhem in the tech startup community of Silicon Valley. Some of the bank run may have been triggered by Peter Theil, and a few may have profited despite the kinds of funds held resembling the fall of FTX.
Silicon Valley Bank’s downward spiral accelerated with incredible speed this week, but its troubles have been brewing for more than a year. Founded in 1983, the bank had long been a go-to lender for start-ups and their executives.
Though the bank advertised itself as a “partner for the innovation economy,” some decidedly old-fashioned decisions led to this moment.
Flush with cash from high-flying start-ups that had raised a lot of money from venture capitalists, Silicon Valley Bank did what all banks do: It kept a fraction of the deposits on hand and invested the rest with the hope of earning a return. In particular, the bank put a large share of customer deposits into long-dated Treasury bonds and mortgage bonds which promised modest, steady returns when interest rates were low.
[...]
While the woes facing Silicon Valley Bank are unique to it, a financial contagion appeared to spread through parts of the banking sector, prompting Treasury Secretary Janet Yellen to publicly reassure investors that the banking system was resilient.
Investors dumped stocks of peers of Silicon Valley Bank, including First Republic, Signature Bank and Western Alliance, many of which cater to start-up clients and have similar investment portfolios.
Trading in shares of at least five banks was halted repeatedly throughout the day as their steep declines triggered stock exchange volatility limits.
By comparison, some of the nation’s largest banks appeared more insulated from the fallout. After a slump on Thursday, shares of JPMorgan, Wells Fargo and Citigroup all were generally flat on Friday.
— Kay🇺🇦 (make critical thinking a thing again) (@ExpelTheCrazies) March 11, 2023
Yesterday, there were whispers of a bank run at SVB triggering a massive bond sale. That bond sale of $21 billion in assets represented a realized $1.8 billion paper loss--an effort to reposition the bank's assets to better meet the duration of their liabilities. Now SVB is in receivership with the FDIC, who is custodying all assets.
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The 20th largest bank in the US was just closed by California state regulators.
Silicon Valley Bank was rumored to be in a sale process to protect its depositors.
Now, it's the second biggest banking failure in US history.
All because of a secular bet against rising rates:
Insured depositors can withdraw in an orderly manner.
Uninsured depositors--anyone with more than $250,000 at the bank--will receive a "receivership certificate."
Unfortunately, more than 93% of SVB's $161 billion in deposits are uninsured.
Meaning a huge swath of America's startup ecosystem has their money locked in a giant paper IOU with the Federal government.
Startups.
Businesses that don't make money for a long time, whose primary source of cash is raising equity from venture capital. SVB goes to founders right after they raise a very, very expensive venture round from top venture firms offering:-
10-30% of the round in debt-
12-24 month term- interest only with a balloon payment-
at a rate just above prime
No coverage or collateral requirements, since, well, startups typically don't have earnings or assets other than the cash on their balance sheet.
SVB was incredible at business development. Not only did they have a stellar reputation for service, it's a well-known fact that they gave sweetheart mortgage deals to venture capitalists and founders, backed by company and fund equity
Say you're a founder (or VC) with a bunch of illiquid but sure-to-be-worth-something-someday startup equity or fund carry, and you need a house.Typical mortgage lenders won't help you.But SVB will, at the same insanely good terms they're known for in the venture debt world.
That's why everyone in tech loved SVB:- they're nice people who take you to nice dinners- they'll help you buy a house- they provide structurally underpriced capital at comically friendly terms ("just bank with us")
It's that last part--"just bank with us"--that the entire startup ecosystem fled from in the last 48 hours.
Well with all those deposit covenants, SVB accrued $190B (with a B) in deposits in 2021.
The business model is therefore:
1) make cheap loans to elite startups and convince yourself they're definitely going to raise money again to pay you back
2) grow the capital base massively via deposit requirements connected to those loans
3) get some yield on those deposits.
What was done with those deposits is the source of SVB's troubles. In an effort to chase yield and provide a decent return on equity, SVB bought billions of dollars of long-dated mortgage-backed securities paying ~1.6%.
- collect lots of deposits
- lock them away for a long time to get some yield
“The ninth-best performer to date has been SVB Financial (the bank’s parent company). Don’t yawn,” Cramer told viewers during a Feb. 8 episode of “Mad Money.”
Cramerlisted SVB Financial among his“biggest winners of 2023 … so far” alongside blue-chip stocks such as Meta, Tesla, Warner Bros. Discovery, and Norwegian Cruise Line.
“This company is a merchant bank with a deposit base that Wall Street has mistakenly been concerned by,” Cramer said in the clip.
Cramer touted the fact that the bank was “less dependent upon private equity and venture capital offerings.”
He said the stock was the “fourth-worst performer of 2022” though it was worth buying because “being a banker to these immense pools of capital has always been a very good business.”
