Silicon Valley Bank Collapse "Second-Biggest" in U.S. History

Tiassa

Let us not launch the boat ...
Valued Senior Member
Silicon Valley Bank Collapses


CNBC↱ describes the "second-biggest bank collapse in U.S. history":

On Wednesday, Silicon Valley Bank was a well-capitalized institution seeking to raise some capital.

Within 48 hours, a panic induced by the very venture capital community that SVB had served and nurtured ended the bank's 40-year-run.

Regulators shuttered SVB Friday and seized its deposits in the largest U.S. banking failure since the 2008 financial crisis and the second-largest ever. The company's downward spiral began late Wednesday, when it surprised investors with news that it needed to raise $2.25 billion to shore up its balance sheet. What followed was the rapid collapse of a highly-respected bank that had grown alongside its technology clients.

Even now, as the dust begins to settle on the second bank wind-down announced this week, members of the VC community are lamenting the role that other investors played in SVB's demise.

“This was a hysteria-induced bank run caused by VCs,” Ryan Falvey, a fintech investor of Restive Ventures, told CNBC. “This is going to go down as one of the ultimate cases of an industry cutting its nose off to spite its face.”

Rising interest rates presented challenges for SVB's investment portfolio, forcing a bond sale representing a $1.8 billion loss. Depositor concerns in a sector rattled by financial uncertainty spiked withdrawals, creating potential for a proper run. CNBC explains, "a bank run at SVB could pose an existential threat to startups who couldn't tap their deposits". A conference call with CEO Greg Becker failed to assuage fears; the stock price plummeted, and "Becker couldn't assure listeners that the capital raise would be the bank's last". Prominent investors and depositors started pulling out; Ryan Falvey, a venture investor with prior experience at SVB, described the beginning of a run: "When you say, 'Hey, get your deposits out, this thing is gonna fail,' that's like yelling fire in a crowded theater. It's a self-fulfilling prophecy."

In a follow-up report, CNBC↱ considers the impacts:

The sudden collapse of Silicon Valley Bank has thousands of tech startups wondering what happens now to their millions of dollars in deposits, money market investments and outstanding loans.

Most importantly, they’re trying to figure how to pay their employees.

“The number one question is, ‘How do you make payroll in the next couple days,’” said Ryan Gilbert, founder of venture firm Launchpad Capital. “No one has the answer” ....

.... While bank failures aren’t entirely uncommon, SVB is a unique beast. It was the 16th biggest bank by assets at the end of 2022, according to the Federal Reserve, with $209 billion in assets and over $175 billion in deposits.

However, unlike a typical brick-and-mortar bank — Chase, Bank of America or Wells Fargo — SVB is designed to serve businesses, with over half its loans to venture funds and private equity firms and 9% to early and growth-stage companies. Clients that turn to SVB for loans also tend to store their deposits with the bank.

The Federal Deposit Insurance Corporation, which became the receiver of SVB, insures $250,000 of deposits per client. Because SVB serves mostly businesses, those limits don’t mean much. As of December, roughly 95% of SVB’s deposits were uninsured, according to filings with the SEC.

Right now, the FDIC is focused on quelling further risk; moreover, everything feels strange because, "according to SVB’s audited financials, the bank has the cash available," finance expert Mark Williams explained, "its assets are greater than its liabilities — so there’s no apparent reason why clients shouldn’t be able to retrieve the bulk of their funds"; moreover, "regulators understand not moving quickly to make SVB’s uninsured depositors whole would unleash significant contagion risk". For many SVB depositors, the question might well be who can weather the disruption. Additionally, SVB always had a concerning risk profile. Williams explained, "It’s a concentrated bet on an industry that it’s going to do well", and suggested, "The liquidity event would not have occurred if they weren’t so concentrated in their deposit base."

According to legend, SVB was first imagined over the course of a poker game. "And," Williams observes, "that's kind of how it ended."
____________________

Notes:

Levi, Ari. "Startups scramble to meet payroll, pay bills after SVB’s swift collapse". CNBC. 10 March 2023. CNBC.com. 10 March 2023. https://bit.ly/3J5OQVX

Son, Hugh. "Here’s how the second-biggest bank collapse in U.S. history happened in just 48 hours". CNBC. 10 March 2023. CNBC.com. 10 March 2023. https://bit.ly/3mCELbr
 
Is this thread about discussion or just reporting news?

The Fed is basically the problem here.
 
Last edited:
#reminder | #TagToStopTex


Click for final victory: ("There is no final victory. The only thing you can do is burn and burn and burn.")

David Dayen, yesterday↱:

SVB was mostly invested in long-term government bonds, which are normally pretty safe. (They also had a large batch of those mortgage-backed securities, which you might remember from 2008.) The bank really succumbed to the wild swings in the tech industry, which soared in the immediate aftermath of the pandemic but has plummeted recently, as rising Federal Reserve interest rates put cheap money out of reach. SVB grew massively in 2020 and 2021, but with tech startups suffering, its customers pulled their money, and because of the interest rate spike, those government bonds were worth less. When SVB conducted a fire sale of some of those assets to cover the depositor losses, it came up $2 billion short.

In total, the bank was underwater by around $15 billion, according to the Financial Times. The bank run from the startup world forced the realization of some of those losses.

There are a couple of important lessons here. First and foremost, the Fed's rapid pivot on interest rates couldn't help but spill over into the broader economy. As Dennis Kelleher of Better Markets, who sees this as just the beginning, explained, banks had no time to adjust to the rate changes, which caused mismatches between the expected and real value of their assets. Indeed, stock in First Republic Bank, a regional lender in California and elsewhere, plunged 50 percent in Friday trading.

"The Fed's actions to fight increasing inflation will need to be materially adjusted, which it should be anyway because inflation is driven by many factors that are beyond the Fed's control," Kelleher said. "Causing financial instability and a recession (of any depth and length) while missing the mark on inflation should cause a fundamental rethinking of the Fed's powers, authorities, and role."

Second, because the depositors holding the bag at SVB are Very Important People, there's going to be intense pressure for a bailout. Hedge fund titan Bill Ackman is already calling for one. Larry Summers told Bloomberg that the financial system should be fine, as long as depositors get every penny of their money back, which would be a $150 billion bailout. The character of the depositors as "job creators" will be used to push this narrative, as Atrios points out.

In tweetform, Dayen noted↱, today, "I wrote something quick yesterday before I realized how integrated this was with the 2018 deregulation". Dayen covered a banking bill back in 2018, and as he explained↱, today: "The regulators were watching until 2018, when SVB and other banks lobbied to send the regulators home, and convinced Republicans (and 50 Democrats) to do it." He was responding to Mark Cuban's version of wondering where the regulators were before the SVB collapse. Dayen reminded, "Your favorite people warned that it would go badly. It did."

Or, as he reported in 2018↱:

… Citigroup executives held a conference call with reporters about the bank's fourth-quarter 2017 earnings. The discussion turned to an obscure congressional bill, S.2155, pitched by its bipartisan supporters mainly as a vehicle to deliver regulatory relief to community banks and, 10 years after the financial crisis, to make needed technical fixes to the landmark Wall Street reform law, Dodd-Frank.

But Citi's Chief Financial Officer John Gerspach told the trade reporters he thought that some bigger banks — like, say, Citigroup — should get taken care of in the bill as well. He wanted Congress to loosen rules around how the bank could go about lending and investing. The specific mechanism to do that was to fiddle with what's known as the supplementary leverage ratio, or SLR, a key capital requirement for the nation's largest banks. This simple ratio sets how much equity banks must carry compared to total assets like loans.

S.2155 did, at the time, weaken the leverage ratio, but only for so-called custodial banks, which do not primarily make loans but instead safeguard assets for rich individuals and companies like mutual funds. As written, the measure would have assisted just two U.S. banks, State Street and Bank of New York Mellon. This offended Gerspach. "We obviously don't think that is fair, so we would like to see that be altered," he told reporters.

Republicans and Democrats who pushed S.2155 through the Senate Banking Committee must have heard Citi's call. (They changed the definition of a custodial bank in a subsequent version of the bill. It used to stipulate that only a bank with a high level of custodial assets would qualify, but now it defines a custodial bank as "any depository institution or holding company predominantly engaged in custody, safekeeping, and asset servicing activities.") The change could allow virtually any big bank to take advantage of the new rule.

‡​

Aside from the gifts to Citigroup and other big banks, the bill undermines fair lending rules that work to counter racial discrimination and rolls back regulation and oversight on large regional banks that aren't big enough to be global names, but have enough cash to get a stadium named after themselves. In the name of mild relief for community banks, these institutions — which have been christened "stadium banks" by congressional staff opposing the legislation — are punching a gaping hole through Wall Street reform. Twenty-five of the 38 biggest domestic banks in the country, and globally significant foreign banks that have engaged in rampant misconduct, would get freed from enhanced supervision. There are even goodies for dominant financial services firms, such as Promontory and a division of Warren Buffett's conglomerate Berkshire Hathaway. The bill goes so far as to punish buyers of mobile homes, among the most vulnerable people in the country, whose oft-stated economic anxiety drives so much of the discourse in American politics (just not when there might be something to do about it).

"Community banks are the human shields for the giant banks to get the deregulation they want," said Sen. Elizabeth Warren, D-Mass., who is waging a last-minute, uphill fight to stop the bill. "The Citigroup carve-out is one more example of how in Washington, money talks and Congress listens."

As one Senate aide told Dayen, the point was "to be able to say ‘bipartisan' to constituents", and "the 'what' doesn't matter". And, sure, it sounds as stupid as it is, but it is also a viable marketplace consideration; Democrats, in recent decades, are especially vulnerable. Inasmuch as Democrats might compromise with failure↗, it seems nearly reflexive, at best.

Dayen, for his part, suggests↱, "there's almost never been such a perfect example of a deregulatory policy coming back to bite".
____________________

Notes:

@ddayen. "Funny story about #2, Mark. The regulators were watching until 2018, when SVB and other banks lobbied to send the regulators home, and convinced Republicans (and 50 Democrats) to do it. Your favorite people warned that it would go badly. It did." Twitter. 11 March 2023. Twitter.com. 11 March 2023. https://bit.ly/3Lc9Jl7

—————. "I wrote something quick yesterday before I realized how integrated this was with the 2018 deregulation." Twitter. 11 March 2023. Twitter.com. 11 March 2023. https://bit.ly/3mJzU8u

—————. "Yes it is. I spent weeks of my life covering that legislation, and there's almost never been such a perfect example of a deregulatory policy coming back to bite." Twitter. 11 March 2023. Twitter.com. 11 March 2023. https://bit.ly/3ZHnwof

Dayen, David. "Revenge Of The Stadium Banks". The Intercept. 2 March 2018. TheIntercept.com. 11 March 2023. https://bit.ly/3LfWj7u
 
interesting that this is not making front page news globally

share holders have lost 50% of their money(or more)

then the banking industry looses 50 billion over night as a repercussion on share losses.

i suspect the run on the bank was caused by people spreading paranoia on their business networks trying to be the 1st to get out to make the most out of the loss.

will the shareholder have any power to enact changes ?
probably not.

what happened to liquidity regulations ?

i hope all the banks multi millionaire salaried executives are not going to get paid out by tax payer money.
 
Last edited:
It's an interesting case of where a bank really didn't do anything wrong and yet is now out of business. Technically they did something wrong or this wouldn't have happened but what the Fed is doing is pretty extreme and is most of the cause for this situation.

It will be interesting to see if the Fed starts to slow down with the rate hikes as a result of this (and due to other banks that could be in similar situations).
 
It's an interesting case of where a bank really didn't do anything wrong and yet is now out of business. Technically they did something wrong or this wouldn't have happened but what the Fed is doing is pretty extreme and is most of the cause for this situation.

It will be interesting to see if the Fed starts to slow down with the rate hikes as a result of this (and due to other banks that could be in similar situations).
Sure, it's unfortunate, but the fact that this is the only bank that seems to have suffered this issue suggests that it is something within the bank, either the structure of its customer portfolio, or in the management. If their customer base is mostly to tech companies, should they not have foreseen the rising rates as putting pressure on the ability of those companies to raise their own capital (their usual source of cash flow in a sector that grows so fast), and thus might seek to withdraw their funds from the bank to satisfy cash flow? It's not as though the Fed has suddenly ramped up rates without warning. They have made noises about the need for rises pretty much since the start of 2022, and to the levels they might need to go.
But maybe the bank did all that assessment, but were already at that time unable to satisfy their predicted withdrawals. But I doubt it. In fact their woes are all due to being wholly reactive rather than proactive. I.e. they only recently sold a bond portfolio to create the cash for the withdrawals, and it was that sale - at a USD1.8 bn loss - that has ultimatley caused their downfall, spooking their customers to withdraw more of their cash, and spooking possible investors as well such that efforts to plug the loss through raising capital subsequently collapsed.
One could say that investors were spooked too easily, and had the bank managed to raise the capital then all would be well - no shortfall, cash to pay out the withdrawals etc. But ultimately I think the only people to blame are those at the top of the bank, for poor management. But then hindsight is a wonderful perspective! ;)
 
There is a particular strain of conspiracism shooting through the SVB chatter, having to do with what role a particular person might have played, so the heads and tails of that comes down to threadbare circumstantial speculation versus the idea that one person could be so influential.

In other words, it should stay in the tinfoil realm, because if such a thing could turn out to be true the implications would be profoundly dangerous.
 
Perry Metzger↱ suggested, Friday:

For those who are unaware: the FDIC is brutally efficient, vastly more than almost any other government agency I can name. On Monday morning, the former Silicon Valley Bank branches will re-open under the name of another bank.

Almost certainly all of the accounts will be exactly where they were at the moment the bank closed. It is extremely rare in the United States that a single depositor loses money, even if they are over the $250,000 limit.

The FDIC always closes a bank on a Friday, and always transitions it to the new ownership over a weekend, and it always reopens Monday. Payroll systems, electronic transfers, or anything else in-flight will simply function as before.

They do this all the time. They have a lot of practice at it. And, whether one likes the government deposit insurance system or not, they are very efficient at avoiding disruption to customers.

And he seems to be standing by that prediction. And there are reasons for that confidence; his assessment isn't wrong, but, rather, wagered against the mystery of what might still go wrong. We will know, soon enough.
____________________

Notes:

@perrymetzger. "For those who are unaware: the FDIC is brutally efficient, vastly more than almost any other government agency I can name. On Monday morning, the former Silicon Valley Bank branches will re-open under the name of another bank." Twitter. 10 March 2023. Twitter.com. 12 March 2023. https://bit.ly/3YGacPp
 
Sure, it's unfortunate, but the fact that this is the only bank that seems to have suffered this issue suggests that it is something within the bank, either the structure of its customer portfolio, or in the management. If their customer base is mostly to tech companies, should they not have foreseen the rising rates as putting pressure on the ability of those companies to raise their own capital (their usual source of cash flow in a sector that grows so fast), and thus might seek to withdraw their funds from the bank to satisfy cash flow? It's not as though the Fed has suddenly ramped up rates without warning. They have made noises about the need for rises pretty much since the start of 2022, and to the levels they might need to go.
But maybe the bank did all that assessment, but were already at that time unable to satisfy their predicted withdrawals. But I doubt it. In fact their woes are all due to being wholly reactive rather than proactive. I.e. they only recently sold a bond portfolio to create the cash for the withdrawals, and it was that sale - at a USD1.8 bn loss - that has ultimatley caused their downfall, spooking their customers to withdraw more of their cash, and spooking possible investors as well such that efforts to plug the loss through raising capital subsequently collapsed.
One could say that investors were spooked too easily, and had the bank managed to raise the capital then all would be well - no shortfall, cash to pay out the withdrawals etc. But ultimately I think the only people to blame are those at the top of the bank, for poor management. But then hindsight is a wonderful perspective! ;)

The bank, in hindsight, should have anticipated more than they did but rates were near 0% when they put those funds into longer-term treasuries at 1.5% or whatever they were. It this case, as I recall, they were locked in for 4 years.

Since that time the Fed raised rates 450% in a year. In the 80's Volcker only raised them 200% (although from much higher starting positions).

They tried to meet demand by selling some of those Treasuries at a 30% loss (I think) but that wasn't enough. Had they been able to wait out the 4 years there would have been no loss. They also tried to raise funds via equity offerings but there were no takers and that's when the run began.

Usually there are no runs in a more generalized bank (less specialized) because most of the deposits are within the $250k FDIC insurance limit. As it stands (I think) no bank with FDIC insurance has ever not paid all depositors simply because it's a bad look for FDIC.

Well see how this one plays out because most of the (startup) deposits were much more than that and the majority of the customers were start-ups.

I'm guessing that since this was an important and generally well run bank that all will turn out OK for everyone (who knows about the shareholders but everyone else).

I just heard that the Fed will hold an emergency meeting on Monday. I don't know the details. I'm just curious as to the longer term effect on the Fed and whether they slow down the rate increases. These things have a long lag and the Fed usually over does it in both directions. I think the best outcome could be to leave rates as they are currently and then just wait.

The inflation was due to doubling the money supply during Covid and not due (primarily) to too much demand for too little goods. The economy was strong prior to Covid and other than the currency deflation, should be the same today.

Yes, you are correct in that this shouldn't be a widespread banking problem due to the specialized nature of the recent bank failures but there are more specialized banks out there.

The real point is that making rate changes this large and this quickly isn't without cost and damage.

In general, from an economic point of view, rapid changes are rarely a good thing. Biden's budget (which is just politics of course) doubles capital gains taxes, greatly increases corporate taxes, greatly increases his recent stock buy back taxes (crazy in itself) and throwing on a minimum "wealth" tax.

Even when a tax or increase is justified, this isn't the way to do it.
 
Last edited:
Nigh on Tomorrow

There are a few things about Matt Stoller's↱ take on the SVB collapse:

Here's my understanding of what happened and what it means. SBV is a moderately large bank with roughly $200 billion of assets. It lends to rich people, private equity and Silicon Valley firms, and is pretty weird as banks go, with a $1B+ loan book outstanding on premium wineries alone. 95% of its deposits are above the Federal Deposit Insurance Corporation limit of $250,000, which means many accounts with funds exceeding that amount are uninsured. That's highly atypical, and makes SVB vulnerable to a bank run.

In 2018 banks under $700 billion of assets succeeded in lobbying Trump and a Republican Congress to get out from bank rules, like needing to have enough cash on hand to pay back depositors easily, known as a liquidity requirement. The Fed then implemented those rules in a bank-friendly way, contra the wishes of then-Vice Chair Lael Brainard, who warned of potential bank problems like SVB in 2019. That's likely one reason SVB got into trouble, because it used its political power to eliminate the regulations that would have forced it to have enough cash on hand to stop a bank run. (SVB CEO Greg Becker sold his bank stock just before the collapse, so the sleaziness hasn't stopped.)

Anyway, in 2019, SVB started piling into bonds, accumulating a portfolio of $100 billion such securities. These bonds go down in value when interest rates go up suddenly, so this was essentially a giant bet on interest rates, made with depositor cash. In 2022, the Fed jacked up interest rates, and ultimately, SVB lost a lot of money. Uninsured depositors started to panic, and the FDIC shut the bank down and is beginning liquidation. Thousands of small firms were locked out of their accounts, and couldn't meet payroll.

Because nearly all deposits are uninsured, and the FDIC has to resolve the bank in a manner that is least costly to the FDIC insurance fund, it doesn't make sense to sell SVB to another bank. It will be wound down. That said, the FDIC knows what it is doing, this isn't 2008 and this is more a temporary inconvenience than anything else. These assets are solid if slightly lower in value, and the losses probably aren't going to wipe out very much of the depositor money. I could be wrong about that, there might be some fraud, but so far I haven't seen indications of it.

First, in contrast to Metzger↗, Stoller expects losses. Second, even accounting for losses and delays, he suggests "the situation is annoying but manageable", and in a way, this suggests something about SVB's clientele in general. To the one, it's the second-biggest bank failure in history; to the other, the situation is annoying but manageable. Better yet, here's the kicker: "The lesson here," writes Stoller, "is that banks should face more stringent regulations," and, well, sure, that would seem a no-brainer. Still, he goes on to suggest, "we need a central bank digital currency so small businesses, nonprofits, and municipalities can keep cash risk-free at the Fed if they want to do that", and something seems off.

For municipalities, nonprofits, and any number of small businesses, sure, "There's no reason to force them to give their cash for safekeeping to gamblers", but part of what made SVB's balance sheet so strange was the amount of venture capital gambling the deposits represented. It just feels like a strange pitch, in the moment.

Nonetheless, the adventure continues. Or something like that.
____________________

Notes:

Stoller, Matt. "An End to Airline Consolidation?" Big. 11 March 2023. MattStoller.Substack.com. 12 March 2023. http://bit.ly/3JaFd8r
 
I wouldn't really call banks "gamblers". The only "risk free" option for banks is to invest in Treasuries, which is what they did. SVB was well within all liquidity requirements and investing in Treasuries is about as risk free as you can get.

A bank has to generate funds some way to be able to stay in business to provide banking services. Banks already are pretty stringently regulated so they pay little to no interest for deposits and (short term rates) and invest at the longer end of the spectrum. At the moment that is inverted however.

A CBDC (which will probably come about in some form although I'd personally stay away from it) isn't a magic bullet. It would make smaller banks less stable since they are already less diversified as compared to the large money center banks and more reliant on deposits for their funding. It also doesn't solve a lot, there is counterparty risk anytime that you don't have sound money and have control of it yourself (decentralized).

This would mean that even less of their capital was FDIC insured, making bank runs more likely.

The biggest problem with SVB is that it penalizes all the tech start up companies and their employees and the businesses that they are in (innovation) just because a company couldn't refly on the banking system?
 
Seems HSBC will be buying the UK arm of the bank for the hefty price of £1. So all UK customers should be able to access their funds quite soon. Both the UK govt / BoE, and the US govt / Fed have apparently assured depositors that all their funds will be guaranteed.

https://www.bbc.co.uk/news/business-64937251

So hopefully this will just be a blip to the wider economy, even if it brings in tighter banking regulations again, especially for non-standard banks.
 
The Federal Reserve, FDIC, and Department of the Treasury released a joint statement↱ Sunday evening:

After receiving a recommendation from the boards of the FDIC and the Federal Reserve, and consulting with the President, Secretary Yellen approved actions enabling the FDIC to complete its resolution of Silicon Valley Bank, Santa Clara, California, in a manner that fully protects all depositors. Depositors will have access to all of their money starting Monday, March 13. No losses associated with the resolution of Silicon Valley Bank will be borne by the taxpayer.

We are also announcing a similar systemic risk exception for Signature Bank, New York, New York, which was closed today by its state chartering authority. All depositors of this institution will be made whole. As with the resolution of Silicon Valley Bank, no losses will be borne by the taxpayer.

Shareholders and certain unsecured debtholders will not be protected. Senior management has also been removed. Any losses to the Deposit Insurance Fund to support uninsured depositors will be recovered by a special assessment on banks, as required by law.

Finally, the Federal Reserve Board on Sunday announced it will make available additional funding to eligible depository institutions to help assure banks have the ability to meet the needs of all their depositors.

Or, as the saying goes, annoying but manageable.
____________________

Notes:

Department of the Treasury, Board of Governors of the Federal Reserve System, and Federal Deposit Insurance Corporation. "Joint Statement by Treasury, Federal Reserve, and FDIC". 12 March 2023. FederalReserve.gov. 13 March 2023. http://bit.ly/3J8twiN
 
And the Waves Roll On


Click to seek control: Why would you want to … oh, never mind.

Monday rises, and if it is raining, here, at the very least I can tell the sun still exists. Meanwhile, Edward Ongweso Jr.↱ reflects on "the incredible tantrum":

For over a decade, low interest rates have allowed venture capitalists to accumulate huge funds to give increasingly unprofitable firms with unrealistic business models [and] increasingly larger valuations—one 2021 analysis found that not only were 90 percent of U.S. startups that were valued over $1 billion unprofitable, but that most would remain so. Give me tens of billions of dollars and a $120 billion valuation and someday, somehow, I will replace every taxi driver with gig workers paid subminimum wages—or robot taxis paid no wages—while charging exorbitant fares for rides, increasing pollution, and adding to traffic. Or not, and I will sell off all the science-fiction projects I've promised, but still fail to make a profit.

Over the last year, rising interest rates to combat inflation have meant less free money for science-fiction projects, pressuring investors to change their entire approach and actually fund realistic ventures at realistic valuations with realistically sized funds and deals. Drops in valuations meant smaller checks, which meant smaller deposits at Silicon Valley Bank, and more and more withdrawals as startups ran out of cash themselves. It also meant the bonds SVB bought were now worth less than when purchased, so they'd have to be sold at a loss to generate some liquidity, so that clients could withdraw their deposits.

On March 8, the bank's parent company, SVB Financial Group, announced it had sold $21 billion of assets at a $1.8 billion loss and was going to sell $1.75 billion worth of shares to help plug that hole. Its clients began to panic, cratering the bank's stock price, and the following night, depositors tried to withdraw $42 billion, effectively rendering the financial institution insolvent. By Friday the Federal Deposit Insurance Corporation had taken control of SVB.

This was dramatic, but in fact it should have calmed down everyone who had money there—SVB serviced every level of the tech ecosystem, from venture capitalists who stashed their Smaugian hoards there to startups that kept operational cash or payroll or reserves there. The FDIC, after all, has a clear protocol for this that it reiterated in a statement Friday morning: Get all the federally insured depositors their money by Monday, search for a buyer of the bank over the weekend, and if none was found, then auction off the bank's assets and segments of operation.

And yet what followed were increasingly baffling online tantrums from prominent investors who either didn't seem to understand the well-established process or were trying to shift blame for the momentary crisis onto anyone they could.

Inasmuch as the SVB collapse might turn out to be an annoying but manageable disruption, an unavoidable implication is that a lot of high-level blame-gaming and politicking over the weekend was not simply wrong, but dishonest. Per FDIC↱, the SVB bank failure is number 562 in the U.S. since 2001; so, yes↑, "they do this all the time", "and have a lot of practice at it", and↑, "the FDIC knows what it's doing".

Five hundred sixty-two. "It would be easy enough to simply dismiss these tweets as the ravings of idiots," Ongweso suggests, "but it was actually instructive, a glimpse into how reckless venture capitalists are in pursuit of something they want, so long as it doesn't bear any risk to them."

Moreover, "The risk introduced to SVB by overreliance on low interest rates in both its depositor base and portfolio investments is the same risk embedded in the core of the venture capital model":

Venture capitalists have had a decade of negative to zero real interest rates to build the future through their intrepid noses for value, so what did they give us? We got benefits largely limited to the realm of consumer goods and services, like cheap on-demand delivery and ride-hail (so long as you ignored the exploitation that powered them) and cheap streaming services (until they began hiking prices), namely. But what were the costs? Startups that revolutionized the militarization of our border and our migrant deportation operations, helped weaponize robots, offered A.I. services that exploit invisible underpaid workers in the Global South, and roiled urban transit, rental, and restaurant markets. These projects and others generated billions for investors who got in on an early fundraising round, but they also degraded the quality of life for people across the world.

That might be a particularly contemporary political focus, but, again, something goes here about SVB's clientele. But insofar as VC is overconcentrated within too small a network, such that "these are structural deficits that fundamentally undercut venture capital's ability to actually provide social utility", we must remember that the first priority and ultimate goal of venture capital is profit. And if that turns toward weaponizing capital "to crush the competition and corner a market", there might seem some tension between free enterprise and free markets, but we can, at least, dismiss croscutting notions↗ that capitalism "isn't about 'freedom'"; the SVB collapse does did not happen the way it did without freedom from certain regulatory burdens.¹

There is also some chatter emerging about the breadth and depth of unrealized losses, with an investment firm grabbing a lot of melodramatic attention; banking stocks performed so poorly today, some trading was halted, but the Dow managed a black-ink finish to the trading day. Meanwhile, as First Republic draws a lot of that attention for taking the biggest hit on the stock market, it does not seem to share a similar risk exposure to run as SVB. With so much of the financial world hinging on how any number of individuals might feel, today, it can be easy enough to doubt whether the doomsayers actually want to recover, or would rather things burn down, now, because it makes for a better rebuilding. Or, perhaps that is a bit melodramatic in its own.
____________________

Notes:

¹ See Dayen, above↑, in re 2018 banking legislation. Per Onswego, venture capital as an industry, "works to rewrite laws and regulations, as VC-backed firms tried to do for the gig economy and the crypto industry", and this seems a pretty straightforward proposition. But what does that really mean? See also, Onswego 2022↱, "for many of [Vision Fund's] portfolio companies to earn their first profit, or to sustain those they were beginning to enjoy, they'd need more than cash to burn—they'd need to restructure society to realize profits that were previously illegal because of basic laws protecting workers and consumers."​

Federal Deposit Insurance Corporation. "Bank Failures in Brief — Summary 2001 through 2023". 10 March 2023. FDIC.gov. 13 March 2023. https://www.fdic.gov/bank/historical/bank/

Onswego Jr., Edward. "How One Billionaire With a 300-Year Plan Fueled the Popping Tech Bubble". Motherboard. 2 June 2022. Vice.com. 13 March 2023. http://bit.ly/3YE6ZQA

—————. "The Incredible Tantrum Venture Capitalists Threw Over Silicon Valley Bank". Slate. 13 March 2023. Slate.com. 13 March 2023. http://bit.ly/3JgsOjx


 
It was good to see the Fed bailout Main Street not Wall Street for a change. Too bad that did not happen in 2008.

Saw an article that the shareholders are starting a class action suit against the parent company. That could be interesting.
 
Back
Top