Silicon Valley Bank

[Yazata]

The 16th largest bank in the US just went into FDIC receivership today. While most people have never heard of it until now, it's actually very prominent with the venture capital crowd. The bank's customers include hundreds of companies, most of whom have accounts larger than the $200,000 that's federally insured. Apparently the uninsured depositors will have claims in bankruptcy court, but are apt to only be paid pennies on the dollar.

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So there's fear that starting next week, lots of smaller startups won't be able to make their payrolls. And not just small companies: Cnbc reports that Roku (the video streaming company) has 26% of its cash and cash equivalents in SVB. Things could get ugly out there next week, with layoffs and even companies going out of business all over the place. Lots of anxiety.

The graphic below is from the SVB webpages:

https://www.svb.com/venture-funded

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[confused2]

Yaay, bailouts mean big bonuses for bankers.

[Yazata]

Silicon Valley Bank's big problem was reportedly the fact that so much of its 'Tier-1' capital was invested in long-dated US Government Treasury Bonds. Supposed to be the safest investment possible, but with essentially zero yield due to years of low interest rates. Banks were pressured to do this after so many mortgage backed securities based on 'sub-prime' mortgage loans went bad in 2008. So SVB was doing the 'safe-and-sane' thing that the government bank regulators told them to do.

The problem with 'safe-and-sane' Treasuries is that the price of bonds is inversely correlated with interest rates. As interest rates go up, the market value of the bonds (if they are sold before maturity) goes down, because investers can get better yields elsewhere. So as the Fed tackled inflation with interest rate increases, the value of Silicon Valley Bank's bond portfolio dropped. Meanwhile, the increased cost of loans and the business slowdown meant that many of the small start-ups that were the bank's customer base started making larger withdrawls than previously to fund their ongoing operations. Then as SVB faced a crunch and had increasing trouble meeting the withdrawls, a panicky bank-run started which crashed the whole thing.

Besides the ripple effects that the failure of SVB will have throughout the start-up culture of Silicon Valley, as small companies are unable to meet their payrolls or pay their suppliers, there's also worry about other smaller banks which might be facing similar bond-value/liquidity problems. There's lots of anxiety here in Silicon Valley right now.

Well, Signature Bank has just been shut down today (Sunday). This is a "private client" bank with 38 offices in the new York area and in California that specialized in large accounts and wealthy clients. Apparently their average client had ~$20 million and customers have to have had more than $250,000 in their accounts to do business there. Which means that FDIC depositor insurance (capped at $200K) might not be all that applicable. The bank has about $85 billion in deposits, reportedly, making this the 3'd largest bank failure in US history, behind the 2008 failure of Washington Mutual (the biggest) and Friday's SVB failure (second).

Unclear to me if today's Signature bank failure had anything to do with Silicon Valley Bank apart from increased panic withdrawls pushing it over. Signature was reportedly deeply into crypto-currency and its failure may conceivably have had something to do with losses in the huge FTX fraud as well.

What is clear is that everyone is going to be watching what happens with the banks on Monday morning when they reopen after the weekend. Will more fail? Will there be bank runs?

It's interesting how the 2008 bank failures started at the bottom-up, with "sub-prime" homeowner loans to lower income borrowers, who couldn't make their mortgage payments in the recession. These latest failures are starting at the other end: top-down, with a prominent bank serving venture capital start-ups and a big "private client" bank for wealthy clients.

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Our wonderful and always-benevolent government is leaping into vigorous action, promising to employ magic and pixie-dust to make all client accounts whole while not costing the tax-payer a single cent! (Presumably by pulling money out of their butts and distributing it to their well-connected friends and political allies.)

It is kind of extraordinary to see them moving so fast, within hours, putting out what they hope is a reassuring message to the nation that they are on the job. (When Silicon Valley and the "private client" rich cash in political favors, Washington jumps to attention.)

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