Silicon Valley Bank collapse worst since Great Recession, some worry it could spread

A run took place on Silicon Valley Bank (SVB) this week and within 48 hours the bank defaulted and was shut down by the Federal Deposit Insurance Corporation (FDIC) on Friday, marking the second-biggest bank failure in US history.

(Video Credit: CBS Evening News)

It is the largest default since the Great Recession 15 years ago when Washington Mutual hit the skids. Many experts and economists are blaming out-of-control inflation and interest rates under the Biden administration. There is growing fear this bank default could spread to other banks as well.

On March 8th the bank surprised everyone by trying to raise $2.5 billion to plug a hole in its balance sheet. That reportedly started the run. The bank catered to venture capitalists and over 90% of accounts allegedly had over $250,000 in them. The FDIC only covers up to $250,000, so a lot of money may be lost, causing businesses to close their doors next week and resulting in employees going unpaid.

The line for people to get their money out of the bank on Friday was 50-people-deep. They were told by an FDIC representative at the door to the bank that they could not get their money out of the bank currently.

“This is an extinction-level event for startups,” Y Combinator CEO Garry Tan proclaimed, according to Fox Business. “I literally have been hearing from hundreds of our founders asking for help on how they can get through this. They are asking, ‘Do I have to furlough my workers?’”

(Video Credit: KPIX CBS SF Bay Area)

“This was a hysteria-induced bank run caused by VCs,” Ryan Falvey, a fintech investor at 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.”

Customers withdrew a staggering $42 billion of deposits by the end of Thursday, according to a California regulatory filing.

The tech sector had already been experiencing a blood bath with thousands and thousands of white-collar employees finding themselves out of work with no options. This development will pour gasoline on that fire.

SVB suffered from the decline in the value of technology stocks, as well as industry layoffs during the tanking of the tech sector. The 40-year-old bank was so prominent that it was considered an ideal starting point to fund early-stage startups. It was the 16th largest bank in the country.

The bank was connected to a number of Silicon Valley industries and startups. Y Combinator, an incubator startup that launched Airbnb, DoorDash, and DropBox, regularly referred entrepreneurs to them. And there are many, many more.

Just hours before the bank imploded, some industry analysts were hopeful that it was still a good investment.

The bank’s shares plummeted 60% on Friday morning. They had already fallen 60% the day before. SVB hastily sold off $1.75 billion in shares to compensate for declining customer deposits but it did not prevent it from defaulting.

Prominent funds including Union Square Ventures and Coatue Management sent out emails to their entire rosters of startups in recent days, instructing them to pull their funds out of SVB due to concerns of a bank run. Social media only made things worse.

“When you say, `Hey, get your deposits out, this thing is gonna fail,′ that’s like yelling fire in a crowded theater,” Falvey said, according to CNBC. “It’s a self-fulfilling prophecy.”

At the end of 2022, SVB reportedly had $209 billion in total assets. Its total deposits amounted to $175.4 billion.

The FDIC will allegedly make good on the insured $250,000 limit on Monday.

Treasury Secretary Janet Yellen is watching SVB “closely” according to the White House. But the White House is laughably claiming that post-2008 reforms will prevent a further economic meltdown. That is unlikely given what just happened to SVB.

“Our banking system is in a fundamentally different place than it was, you know, a decade ago,” Cecilia Rouse, the chair of the White House Council of Economic Advisers stated. “The reforms that were put in place back then really provide the kind of resilience that we’d like to see.”

Investor and “Shark Tank” star Kevin O’Leary had his own take on the SVB collapse during an interview with Fox Business host Neil Cavuto on Friday. He blamed it on the board and management of the bank.

(Video Credit: Fox News)

“The management here bet billions of dollars when we had historically low rates basically sitting under 2%,” he noted. “They bought long paper and then all of a sudden the Fed jacked up the rates, their cost of borrowing was 4%. They were losing the spread, they were losing 30%. So they brought in all their old debt, lost $2 billion. Assume they can go to the market to raise it. Got a lead order from General Atlantic for half a billion. That’s not enough. They were in a quiet period. They’re not allowed to talk about it. And every one of our companies was pulling out cash by the millions. And they couldn’t even make a comment because they’re in a quiet period.”

“The first thing we did in our portfolio, yesterday was to go to all our CEOs and say, what’s our exposure to Silicon Valley Bank right now? How much have you gotten out? How much are you leaving in, if any?” O’Leary recounted, stating, “We’re fortunate we were able to get out all of it except $10.1 million. And that may sound like a lot of money, but in the context of a portfolio, luckily it’s not that much. I don’t know if we’ll ever see that again.”

He told all of his portfolio companies that he no longer wants to see more than 20% of any liquid assets in any one institution.

“People felt that way about Bear Stearns,” he commented. “They felt that way about Lehman Brothers. Banks blow themselves up all the time because of weak management or management mistakes. This happens. So you need diversification, not just of your holdings in terms of portfolio assets. You need institutional diversification.”

O’Leary pointed out that Silicon Valley Bank told many startups that if they wanted to attract good loans, they had to have all of their deposits with the Silicon Valley Bank. That turned out to be disastrous.

“So many of these startups, it took down 10, 20, 30 million from venture capitalists like me, put it all in that one bank to attract and get these loans from the Silicon Valley Bank,” O’Leary said. “That was the hook they had. I think that should be made illegal. That’s a marketing strategy, that forces an over-concentration. And I’m sure the regulators will look at that.”

He called the collapse an “absolute mess” and warned it was an important lesson for every company, not just start-ups and the venture community.

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