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I'm
confident I’ve got the best
bank CEO job in the world and
maybe one of the best CEO jobs. That's
Greg Becker, the
now former CEOof Silicon Valley Bank in 2021.
Two years later, federal regulators
seized control of the lender
as it stood on the brink of collapse.
This is a classic bank run.
And when the bank runs starts,you don't want
to be the last guy and
wondering what happened. So
how did we get from this to this? Silicon
Valley Bank was
the US's 16th largest bank. With
about $212 billion in assets, it
was a fraction the sizeof JPMorgan Chase,
the biggest lender. But
it had an outsizedinfluence in tech, which
is 10% of the US economy. Let's
go back to how it all started. SVB
was founded backin 1983 by three businessmen. The
founding myth isthat the idea came up during
a poker game, but
that's only half of the story. Bob
Medearis,one of the co-founders, was
teaching a class at Stanford and
one question kept coming up. A
lot of them came and wonderedhow they could get financing from banks
because if you had an idea
venture capitalists weren't around yet,
and I got the ideathat maybe, just maybe
after Reagan came in andeased up the regulatory
structure that
there could bea financial institution. So
from the very outset, Silicon
Valley Bank intendedto work with companies who
might otherwise struggle
with established lenders like
Wells Fargo or Bank of America. The
other thing thatmost bankers don't understand,
that I think peoplehere in the Valley understand,
is somebody’s got a product,
then the product's outdated,
the company goes out of business.
They don't realize the R&Dthat goes into
the next product and
and the intellectual properties. That
was huge for the tech industry. Back
then, Silicon Valleywas mostly about hardware.
Think makers of silicon chips
and early PCs likeIntel and Hewlett-Packard.
But SVB was part ofa new wave of investing.
Rather than focusingon how profitable a firm
is tech
investors instead oftenprioritize how fast it's growing.
They assume, sometimes naively,
that at a certain point
the company willstop reinvesting its earnings
in things like acquiring new customers
and instead become profitable.
Flash forward a few decades
and SVB is riding the coattails
of a booming venturecapital industry
that it helped to facilitate.
Venture investmentsapproached $330 billion in
2021. Nearly
doublingfrom a year earlier. At
this point, SVB likes to saythat it was doing business
with about half of allventure backed tech
and health carestartups in the US.
I don't think there could be anyone
who's touched the venture capital industry
in the last 40 years,
who doesn't have some exposure to junior
type banks like SVB and Signatureand a whole
host of others. It's
become part of the fabric of theof the venture community.
The bank went from $17 billion in deposits
in 2011 to 89 billion a decade later.
It grew faster than any bank
in the S&P 500,and it wasn't even a
member of the index. Now
banks make money by taking in depositsand lending them out at higher rates
as well as investing them.
And typically,
government bonds, like Treasuries, rankamong the
safest investments out there. So
the bank plowedtens of billions of dollars into them.
Long term government debt didn'tgenerate much
interest or yield. And
as long as interest rates stayed low,pretty key detail here,
they wouldn't lose their value.
The company was aware of the risk.
In late 2020, the bank's asset liabilitycommittee
received an
internal recommendationthat it should invest new deposits
in lower yielding short term bondsjust in
case interest rates increased. But
that would have cost millions,and executives frowned on the idea.
Instead, they continued to investin the higher
yield bonds. During
the Obama-Biden administration,we put in place tough
requirements on banks like SiliconValley Bank and
Signature Bank, including
the Dodd-Frank law,to make sure that the crisis we saw
in 2008 would not happen again.
Unfortunately, the last administrationrolled back some
of these requirements. As
the VC industry grew more influential, Becker
and a slew of leaders at otherregional banks pushed for deregulation.
They got what they wanted.
The strict capital rules introducedafter
the great financial crisis would
only be reserved for the megabanks. This
teed up Silicon Valley bankto invest in securities
without a lot of government oversight,which was
okay until inflation started picking
up. We
finally got the first Fed ratehike of this cycle.
Seven hikes for this year.
You really think that a tightening cycle
is not going to have any effecton the real
economy? The
Fed embarked upon its most aggressiveinterest rate hike
campaign ever, raising its benchmark rateseven
times last year. That
changed everything,and it created two big problems for SVB.
First, it became a lotharder for startups to
raise new money. So
those that weren't already profitable, the
same companiesfor which the bank had been founded
became more likely to draw downtheir existing
funds, prompting SVB's
depositsto drop by 6 billion in 2022. That
was the most on record. Second,
the value of SVB's bondinvestments declined also by 6 billion.
Because investors can now buy bondswith higher
yields, those
with a low yield were less valuable. That
doesn't matter much if clientskeep their money in the bank.
But a lot of them were pulling it out.
These two problems combined meant lossesthat
were purely theoretical, were
becoming all too real.
In a worst casescenario, SVB
wouldn't have enough moneyto cover everyone's deposits.
On March 8th, it made an announcementthat
shocked the market. It
sold $21 billion of its assets,including a lot of that government
debt, essentially to make sureit could fund
all those withdrawals. And
it did so at a loss of .8billion.
To plug the gap, it
was looking to raise more capitalby selling billions of dollars of shares.
That sparked a panic.
No stock has been hurt more than SVBFinancial
Group today. Shares
plunged the mostin more than two decades after
the parent of Silicon Valley Bankannouncing the stock offering and well,
getting rid of some thingsthat are on its balance
sheets. A
lot of concern out there right now. It
was an old fashioned bank runwith a digital twist.
Lines were forming around the block.
Founders' iPhones lit up with textsurging them
to run for the exits, pouring
fuel on the fire. On
March 9th, depositorstried to pull $42 billion from Silicon
Valley Bank, equivalent to $29 milliona minute.
By the end of the day, the
bank had a negative cashbalance of $958 million.
The stock tumbled 61%.
That wiped out $9.6billion of market capitalization.
Big thing to remember here,
the US banking system relieson the confidence
of its depositors. If
that disappears and everyone runsto withdraw their money at the same time,
it all falls apart.
So ensuring that depositors can accesstheir
money is in the best interest of, well,
really, everyone. Government,
VCs, employees on payroll. The
list goes on. So
on Friday, March 10th, regulators at
the FDIC seizedthe business, making it the biggest US
lender to fail since 2008.
Americans can have confidencethat the banking system
is safe. Your
deposits will be therewhen you need them. By
the following Monday,a fix kind of had been cobbled together
apart from a deal with HSBCto buy the bank's
UK arm
for a nominal £1, about a dollar 20 cents, no
buyer had yet been found,but the government pledged
that depositors would be made whole.
Even those who had more than the $250,000limit
at the bank. Startups
around the worldbreathed a sigh of relief. Yes,
there were concernsthat the ultimate owner of SVB wouldn't be
quite as willing to work with riskiertech startups
as its predecessor. But
at least the startups had their money,and that was something to
be grateful for.