Silicon Valley Bank Fails After Run by Venture Capital Customers
Category: Stock Market & Investments
Via: hallux • last year • 8 commentsBy: Rob Copeland, Emily Flitter and Maureen Farrell - NYT
S E E D E D C O N T E N T
If there is one enduring axiom in banking, it is this: Don’t run out of money.
Silicon Valley Bank, a lender to some of the biggest names in the technology world, did just that on Friday, becoming the largest bank to fail since the 2008 financial crisis. The move put nearly $175 billion in customer deposits, including money from some of the biggest names in the technology world, under the control of the Federal Deposit Insurance Corporation .
It was an extraordinary denouement less than two days after the bank shocked Wall Street and its depositors with emergency moves to raise cash and stave off a collapse in the face of withdrawal requests and a precipitous decline in the value of its investment holdings. The bank as of Friday morning was working with advisers on a potential sale, a person with knowledge of the negotiations said, and had halted trading in its shares in the wake of a rapid fall.
The F.D.I.C. created a new bank, the National Bank of Santa Clara, to hold the deposits and other assets of the failed one. The regulator said in a news release that the new entity would be operating by Monday and that checks issued by the old bank would continue to clear.
But for customers with deposits totaling more than $250,000, the news was grim. Customers with accounts that surpassed that amount — the maximum covered by F.D.I.C. insurance — would be given certificates for their uninsured funds, meaning they would be among the first in line to be paid back — though potentially only partially — with funds recovered while the F.D.I.C. holds Silicon Valley Bank in receivership.
Shares of both First Republic and Signature Bank in New York were down more than 20 percent in trading on Friday. Larger banks were more insulated from the fallout. After a slump on Thursday, shares of JPMorgan, Wells Fargo and Citigroup all nudged higher on Friday.
The decline in bank stocks doesn’t necessarily mean that other banks are grappling with the same issue.
Silicon Valley Bank’s spiral accelerated with incredible speed this week, but its troubles have been brewing for more than a year. Founded in 1983, the bank, based in Santa Clara, Calif., was a go-to lender for start-ups and their executives.
Though Silicon Valley Bank advertised itself as a “partner for the innovation economy,” it was being shaken by decidedly old-fashioned decisions. To compete with bigger names, it had long boasted of looser lending standards for fledgling companies, and offered to pay higher interest rates on deposits than its larger rivals.
Flush with cash from high-flying start-ups, it bought huge amounts of bonds more than a year ago, just before the Federal Reserve began to raise interest rates. Like its peers, Silicon Valley Bank kept just a fraction of the deposits on hand and invested the rest with the hope of earning a return.
In particular, the bank put customer deposits into long-dated Treasury bonds and mortgage bonds which, while interest rates were low, promised modest, steady returns.
That had worked well for years. The bank’s deposits doubled to $102 billion at the end of 2020 from $49 billion in 2018. One year later, in 2021, its coffers were at $189.2 billion as start-ups and technology companies enjoyed heady profits during the pandemic.
When the Federal Reserve began raising rates last year, however, those holdings became less attractive because newer government bonds paid more in interest. That might not have mattered so long as the bank’s clients didn’t ask for their money back.
But at the same time as interest rates were rising, the environment for start-up funding dried up, putting pressure on the bank’s clients — who then began to withdraw their money. To pay those redemption requests, Silicon Valley Bank had to sell off some of its investments at exactly the wrong time. In its surprise disclosure on Wednesday, the bank admitted that it had lost nearly $2 billion when it was all but forced sell some of its holdings.
The upheaval raised uncomfortable parallels to the 2008 financial crisis — the last time a bank of this magnitude unraveled. Then, as now, what had seemed to be a hot economy suddenly cooled, pressuring banks.
“It’s the classic Jimmy Stewart problem,” said Sheila Bair, former chair of the Federal Deposit Insurance Corporation, a primary bank regulator, referring to the actor who played a banker trying to stave off a bank run in the film “It’s a Wonderful Life.” “If everybody starts withdrawing money all at once, the bank has to start selling some of its assets to give money back to depositors.”
A bank spokeswoman did not respond to a request for comment. Representatives for the Federal Reserve and F.D.I.C. declined to comment.
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Move over Netflix, Stephanie Ruhle will have a field day with this story tonight.
Thank goodness I only had $249,999,00 deposited with them.
White bank speak with forged cheque.
bankers taking a financial bath, how sad...
love your empathy for those clients who may have to take huge losses
Silicon Valley Bank is a victim of Biden's spending policies. The bank didn't break any laws. The bank wasn't trying to game the system, either. The bank did what it was supposed to do; place deposits in secure, low risk assets.
It's not the bank's fault that Biden's spending devalued those secure, low risk assets. Biden drove the value of government bonds off the cliff. Now those who relied on the security of government bonds are left holding the bag.
meh, there's still plenty of ledges on tall buildings available for the wealthy... /s
Grins and giggles won't avoid the double whammy. Biden's spending policies have also bumped up against the government debt limit. The government can't bail out anyone.
Biden may have brought on another Great Recession. The last one was so much fun, Biden must think we should do it again.