(AP Photo/Susan Walsh)
Think of the Kevin Bacon gif from Animal House – you know, where the panicked crowd is rushing past him after the parade, as he tries to keep everyone calm. A little Zen breathing might be in order, considering we have the brainless trust that’s in charge.
The sudden collapse of a little-known, California-based tech lender fueled market chaos on Friday and sparked fears of a wider contagion that some experts worry could upend the US banking sector.
Silicon Valley Bank — a 40-year-old lender to startups and venture capitalists — became the second-biggest bank casualty in US history as it was abruptly shut down on Friday by the California Department of Financial Protection and Innovation, which placed the bank’s remaining assets under the Federal Deposit Insurance Corp.’s control.
SVB’s finances went south at warp speed after it disclosed a $1.8 billion loss on its bondholdings this week. CEO Greg Becker urged investors to “stay calm” and not “panic” on a Thursday conference call — but jittery clients were already scrambling to pull large balances in excess of the FDIC’s insured caps.
Billionaire Peter Thiel’s Founders Fund and other tech luminaries had urged startups to pull their cash or risk losing it entirely ahead of the bank’s failure, which came amid a major slowdown in the initial public offering market this year.
…The crisis prompted ominous warnings from market heavyweights such as the eccentric investor Michael Burry of “The Big Short” fame, who tweeted, ‘”It is possible today we found our Enron.” Hedge fund billionaire Bill Ackman called for a government bailout of the bank.
While SVB’s depositors are tech executives rather than mom-and-pop investors, the chaos unleashed by the bank’s downfall could spread to other institutions and spell trouble for the broader economy.
Part of what happened is explained in this series of tweets. SVB, thanks to the COVID emergency rules adopted by Jerome Powell – who is still in charge of the Federal Reserve – was no longer required to hold any cash on hand to meet its “reserve requirement.”
…That is the amount of funds that a bank holds in reserve to ensure that it is able to meet liabilities in case of sudden withdrawals.
Why that detail matters is because this bank’s problems started with an announcement Wednesday that it was in the middle of a cash crunch and looking at a possible sale as a way of raising funds.
The bank had taken a bath on their bond holdings, due to the rapid interest rate hikes.
Their customers, mostly tech types, had their own problems in the industry (as we’ve posted on here), not to mention that the availability of federal COVID start-up/emergency funds was drying up. So SVB’s depositors were having to withdraw money to keep their own businesses afloat.
…SVB is a major bank for venture-backed companies, and cited cash burn from clients as one reason it was looking to raise additional capital.
However, rising interest rates, fears of a recession and a slowdown in the market for initial public offerings has made it harder for early-stage companies to raise more cash. This has apparently led the firms to draw down on their deposits at banks like SVB.
The problem there was, SVB didn’t have that kind of cash. Thanks to the zero reserve requirement, everything that came in the door for deposits went back out in the form of loans or investments. They were in a hurt locker to cover customer withdrawals in short order. When word made it to the public about the cash crunch, their stock tanked, the sale fell through, and depositors started worrying about their very significant bank accounts. Federal regulators shut them down this morning to prevent a worsening bank run.
SVB Financial, parent of Silicon Valley Bank, was unable to find a buyer before a bank run caused regulators to shut it down.
Sources told CNBC’s David Faber earlier that deposit outflows were outpacing the sale process, making it very difficult for a realistic assessment of the bank by potential buyers to take place.
Police were even called to the branch in Manhattan after panicked depositors rushed to the bank in an effort to pull their money out. We’re talking about some folks trying to pull amounts in the millions out.
Building managers at Silicon Valley Bank’s Manhattan branch reportedly called the police Friday morning after a group of tech founders showed up and attempted to pull out their cash.
Police responded after a group of “about a dozen founders” went to SVB’s Manhattan location on Park Avenue, journalist Eric Newcomer said in a Substack post. One of the founders was former Lyft executive Dor Levi, who provided Newcomer with text updates from the scene.
The incident was the latest indication of growing panic among investors linked to the tech lender, which warned of a cash crunch this week that sparked a run on the bank.
SVB blocked Levi and others who gathered from entering the building. By around 9:20 a.m. ET, building officials “called the police” and a pair of NYPD vehicles had arrived.
This is the branch in Massachusetts.
Shades of 1930’s. This is my bank in Wellesley this morning. Boston Private Bank, recently acquired by Silicon Valley Bank. Ruh, roh.
Better have a George Bailey inside.
Now the regulators also have to worry about “contagion” banks and businesses – does it spread?
What is connected to SVB that is in plain sight as well as hidden, that is going to be thrown into chaos or collapse because of this failure.
“Part of” $9.3 BILLION in the failed bank? That’s a LOT of cha-ching to have to make sure is safe and was “undisclosed” until this happened.
And…well, HO-LEE-CRAP. I’m supposing this qualifies as “spread.”
This is going to be a long weekend, with all the scrambling going on.
Not to mention, the dollar fall-out. Depositors have to be sweating if they weren’t some of the lucky early folks who got in on the rush and got their money out. The Federal Deposit Insurance Company only covers $250K of any depositor’s account. Do you know what percentage of depositors at SVB had $250K or less in their accounts? In some banks, like our Regions here, it’s over 50%.
At Silicon Valley Bank, I’d say they had a pretty well-heeled clientele.
Only 2.7% as of Q4 2022 had $250K or less. Whoa. Dawg.
Literally, fortunes have been lost in this little, “don’t worry about it” bank of the Silicon Valley crowd.
Don’t worry, SVB millionaires. You still have friends in high places. The California hand-out crew is on it.
Probably there’s also going to be some claw-back for SVB executives who sold stock a couple of weeks ago. Did they know the bank was about to implode? There’s going to be crowds with pitchforks who want to know…and federal regulators.
Right now bets are it’s a full federal bail-out on the way, with J.P. Morgan buying SVB at a bargain basement price.
There’s also some gallows humor.
Dominos wobbling like mad – like there’s an earthquake – and this hasn’t even started to really roll.
What this is looking like is the catastrophic implosion of a clubby little ESG/DEI/globalist-centric institution. Where the people who trusted their money to this bank were the same people who ran the bank. They all spoke the approved language, gave money to the approved causes, got outraged by the same manufactured injustices, and worked to steer the rest of the world in the approved direction, tirelessly. While no one watched the business, almost as if such pedestrian concerns were beneath them
My Daddy, Marine Corps pilot and Eastern Airlines Captain, taught at both Flight Safety and Simuflight when he retired. His first lesson to a new class of Gulfstream pilots was always the same. He would write S-F-T-A on the board, ask the class if anyone could tell him what it stood for, as it was the most important lesson they would ever learn as pilots.
No one ever could.
He’d explain. No matter what’s going wrong – or right – in the cockpit, you must always make sure that:
…or the rest doesn’t matter, because you crash.
The SVB executives were all so busy putting the X at the end of Latin, they forgot to “fly” the bank.