March 10 was bonus day for the 8,000 employees of Silicon Valley Bank.
They got their bonus that Friday.
Hours later, the bank failed.
On Monday, customers could be seen lining up to try to retrieve their funds.
Silicon Valley Bank was the bank of choice for thousands of companies in the tech sector
- many of them startups fueled by angel investors.
Almost half of all venture capital funding in the United States flowed through the bank
at one time or another.
And then, suddenly, it all came to an end.
The speed at which things unraveled caught many by surprise – even the bank’s CEO.
A few weeks before the collapse, CEO Greg Becker told CNBC that the future looked good.
“What we are expecting to see in 2023, first half, actually in venture capital, actually
a little bit more of a decline even than what we saw in the fourrth quarter.
But the second half was going to kind of create that modest improvement and really set the
stage for a better 2024.
So, we’re optimistic because our crystal ball is a little clearer than it was in the
third quarter last year.”
Perhaps his crystal ball wasn’t shiny enough to predict the future.
Startups struggled to raise additional venture capital due to the current economic environment.
So, they began withdrawing more and more of their cash from their SVB accounts.
The bank had the money – in theory – but it wasn’t sitting in a vault waiting to
be handed back to its customers.
You’re thinking of this all wrong as if I had the money back in the safe.
The money’s not here.
The bank had invested the money in Treasury bonds, a type of government debt, in which
the government borrows money and pays it back with interest.
When customers started pulling their money out of the bank, SVB had no choice but to
start selling the bonds at a discount so they could get enough cash to satisfy customer
demand.
Becker decided to publicly announce that the bank had sold off $2 1 billion in bonds.
But those bonds weren't worth as much as they used to be because the Fed kept raising interest
rates.
When interest rates go up, bond prices usually go down.
This is because new bonds have higher interest rates, so people prefer them over older bonds.
Think of it like this: Imagine you have a candy store and sell a candy for $1.
This candy gives the buyer a little 10-cent surprise each year.
If another store sells a similar candy for the same price but offers a 15-cent surprise
each year, people would choose to buy candy from the other store instead.
So the bank had to sell its older bonds at lower prices, which ultimately led to a loss
of $1.8 billion.
While Becker hoped to raise more than that in new capital, he said he still had not found
anyone willing to help the bank ride out the storm.
Perhaps he was looking to be transparent, but it backfired.
Big time.
CNN quotes an anonymous bank employee as saying: “That was absolutely idiotic…their transparency
and forthrightness did them in.”
The extent of the bank’s financial troubles panicked customers, leading to a phenomenon
called a bank run, where everyone starts taking their money out of the bank all at once.
The next day, customers withdrew $42 billion from their accounts, leaving SVB with a negative
cash balance of $958 million.
And, public filings show Becker himself cashed out personal shares and options worth $2 million
dollars just before the collapse!
The day the bank failed, Becker told employees, “I’m not making the decisions anymore.”
This is the second largest bank failure in US history, behind only the collapse of Washington
Mutual at the height of the subprime mortgage crisis in 2008.
And then, the third largest bank failure in U.S. history happened on SVB’s heels.
Two days later, on March 12, regulators shut down Signature Bank in New York to prevent
the crisis from spreading through the entire financial system.
A quarter of Signature Bank’s deposits came from the cryptocurrency sector.
But, regulators denied it closed the bank because of its large hand in crypto and, rather,
cited what it called “a significant crisis of confidence in the bank’s leadership”.
The question now is: are there more bank failures to come?
They are more common than people think.
Few people are old enough to remember the 2,293 banks that collapsed in 1931, a development
that led to the Great Depression.
But there have been more than 500 since the collapse of Washington Mutual in 2008, although
most pale in comparison to the size of SVBs.
Mark Williams, a former bank examiner for the Federal Reserve, told Boston University’s
daily news website BU Today, “If not quelled, bank runs can spread like wildfire, crippling
even the soundest of banks.”
To quell further panic, President Biden quickly assured Americans.
“Americans can have confidence that the banking system is safe.
Your deposits will be there when you need them.”
In the U.S., deposits in a bank are insured by the Federal Deposit Insurance Corporation
or FDIC up to $250,000.
However, over 90% of deposits at SVB exceeded that amount.
The federal government then jumped in to guarantee deposits greater than $250,000.
And, the Federal Reserve also said it would make additional emergency funds available
to eligible financial institutions to prevent similar problems in the future.
Billionaire hedge fund investor, Bill Ackman, made a point of saying:
“Had [U.S. regulators] not intervened today, we would have had a 1930s bank run continuing
first thing Monday causing enormous economic damage and hardship to millions.”
However, Ackman also warned: “More banks will likely fail despite the intervention”.
There’s little doubt that the Fed is partly to blame for SVB’s stunning collapse.
Over the past year, the Federal Reserve has been aggressively hiking interest rates to
tame inflation by making borrowing more expensive, which slows down spending and keeps prices
from rising too quickly.
And in the process, SVB got caught in the undertow.
Former U.S. Treasury Secretary Larry Summers criticized regulators and also the bank’s
management.
“And I have to say that it doesn’t appear on current facts that a very good job was
done about regulating and supervising Silicon Valley Bank.
It had committed kind of the most elementary errors, in borrowing money in a very short
term way and then investing it in a long-term way, and then when interest rates went up,
those assets lost their value.”
Some are blaming wokeness for the bank’s demise, implying that the collapse was related
to the company’s focus on diversity and inclusion.
A Wall Street Journal opinion columnist wrote: "I'm not saying 12 white men would have avoided
this mess, but the company may have been distracted by diversity demands"
The best outcome for the failed bank is for U.S. officials to find a buyer.
There will be no bailout…which typically uses taxpayer dollars to keep the bank afloat.
Biden does not want to reignite the anger from the 2008 Wall Street bailouts that were
funded by taxpayers, especially with a presidential election approaching.
The collapse of Silicon Valley Bank brings up memories of another President who took
office in 1933 when banks were going under almost daily.
During his inaugural address, President Franklin D. Roosevelt famously urged people not to
panic.
“Let me assert my firm belief that the only thing we have to fear is fear itself—nameless,
unreasoning, unjustified terror which paralyzes needed efforts to convert retreat into advance.”
It appears that 90 years later, Roosevelt's wise counsel has been largely ignored.
Financial stocks have now lost a combined $465 billion in just one weekend.
But will it be the last disaster?
This crash was caused in part by the Fed raising rates - which they may still be committed
to.
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