Silicon Valley Bank is no more.
And in the last 24 hours, many founders, investors that I've talked to have been
desperately trying to get their money out.
Our banking system is in is in a fundamentally different place than it
was, you know, a decade ago.
Many economists are now asking if the Fed will hit pause on further rate
increases.
The question now, though, is whether the collapse of this tech friendly regional
bank is the start of something more serious, or just what happens when
higher interest rates give companies less room for error?
Silicon Valley Bank wasn't like other banks.
It dealt primarily with startups, tech companies and venture capital investors
who funded those kinds of businesses.
Not only does Silicon Valley Bank or Silicon Valley Bank provide services to
tech startups, they provided financial services to big tech, to venture capital
firms and even the individual GP's and high net worth individuals that often
made their money from tech would use Silicon Valley Bank in multiple ways.
Startups are a risky bet in the best of times, but when interest rates start
creeping up, they get even riskier.
Interest rates represent the cost of borrowing money, and fast growing tech
companies need to borrow a lot of money to keep growing and in some cases to
stay alive before their business models can start turning a profit.
And with the Fed hiking interest rates in order to fight inflation, that means
riskier areas of the financial system like crypto and tech, are prone to
getting hit the hardest.
This is really a story of an entire regional banking system that was in
peril. And the canary in the coal mine may have been Silicon Valley Bank.
And we're going to we're going to investigate.
There's going to be plenty of things that all of these banks did wrong.
But this parabolic move in rates.
Right. Really dismantled the hold to maturity portfolios of these banks.
Its startup clients needed cash to shore up their books because of high interest
rates. So they started withdrawing money at Silicon Valley Bank.
At the same time, Silicon Valley banks reserves were also vulnerable to
interest rates. The bank's reserves were mostly backed by US government
bonds that SVB bought when interest rates were much lower around one and one
half percent when.
Money came gushing in during the COVID crisis.
With all of the stimulus money, Silicon Valley Bank put a lot of that to work
and in what were at the time high yielding assets that averaged only 1.6
or 1.7% when the.
Fed began hiking interest rates to four and one half percent to fight rising
inflation, the value of those bonds took a big hit, and since SVB owned so
many of them, so did its balance sheet.
Things came to a head after the collapse of crypto focused Silvergate
Bank on Wednesday, March 8th.
High profile venture capitalists like Peter Thiel began telling people on
social media to take their money out of Silicon Valley Bank.
That kicked off a Twitter fueled bank run, forcing SVB's CEO to tell customers
to, quote, stay calm during an emergency call Thursday afternoon, the
same day SVB was forced to sell all the bonds it could at a $1.8 billion loss to
help cover the run on deposits.
Customers had withdrawn $42 billion from Silicon Valley Bank by Thursday
evening. The bank's balance sheet was deep in the red, a negative cash balance
of $958 Million.
The bank's stock nosedived until Friday morning.
Silicon Valley Bank was done for if a buyer didn't materialize.
And it didn't. Contagion was spreading.
Signature Bank was the next firm to go under.
Federal regulators quickly stepped in to make sure depositors could access
their money. Depositors at Silicon Valley Bank have up to $250,000 in
protection per account ownership category from coverage through the
Federal Deposit Insurance Corporation or FDIC.
But because the clientele at Silicon Valley Bank weren't like regular bank
customers, they were venture capitalists or tech startups.
Many depositors had more than a quarter million dollars in deposits.
Many of these depositors, as with one of your earlier guests, are basically
running small and medium sized businesses.
They're they're startups with with a few dozen, maybe people on the payroll.
So we shouldn't think of these as all large and sophisticated.
Over the weekend, the US Treasury Department designated both Silicon
Valley Bank and Signature as systemic risks, allowing the government to come
up with a plan that fully protects all depositors.
Now, almost immediately, some criticized this move as another bailout
of the banks, just like in the financial crisis of 2008.
But unlike 2008, when taxpayers covered the bill to bail out bank giants like
Wells Fargo, JPMorgan and Citigroup by the billions, SVB is still closing and
taxpayers aren't on the hook for the cost to protect deposits.
No losses.
And this is an important point No losses will be borne by the taxpayers.
Wall Street will pay the bill instead.
The deposit insurance fund, which is funded through quarterly fees imposed on
FDIC backed banks, is covering SVB deposits.
At the same time, the Fed is offering new short term loans to banks to help
them fight off any contagion.
The large banks do not have a problem.
I mean, with all of the capital standards that they have been subjected
to since 08-09, they actually been too flush with deposits.
They don't want to make that many loans.
You're not going to see a smooth transition.
This will be very bumpy.
But within the year, to your point, I think these banks will obviously
maintain profitability and build up confidence in the system.
Now that contagion is what everyone is watching for now.
That's why other regional banks like First Republic Pac-west and UMB saw huge
losses on Wall Street as investors feared more bank runs alongside the new
lending program from the Fed and the deposit protection from the FDIC.
These banks are shoring up their reserves.
First Republic, for example, told CNBC it wasn't seeing that many deposits
leave, but it still received new liquidity from the Fed and Jp morgan.
Just to be safe.
Americans can have confidence that the banking system is safe.
Longer term regulators and the Biden administration are already talking about
stronger regulations to prevent another SVB.
Now, at the same time, The Wall Street Journal reports that SVB faces
preliminary investigations from the SEC and the Justice Department to find out
what went wrong at Tech's favorite bank.
And the one.
Thing you can count on, Andrew, we're going to see a lot of criminal
allegations with regard to the management of both banks.