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How will the Silicon Valley bank mess Change the Industry?

Arthur Hanson

Well-known member
They were one of the very few banks that would take pre IPO shares as collateral. How much impact do Semiwiki reader and of what type will this have on the industry? Also there were a lot of interesting to say the least transactions in the weeks before the collapse. The capital flows in the tech sector are definitely going to change. There was also much inside information used the weeks preceding the collapse. It will be interesting to see in any jail time and significant claw backs in lawsuits result. I personally hope the bank is bought by a larger player, but finance will never be the same in Silicon Valley. There will definitely be some serious and large changes on the financial end. Any additions and comments sought and welcome.
 
If you go to their website there's not even one mention of the fact they've been seized by the FDIC yet.
 
I contacted them a year ago. Their facade was located a block from our office in Tempe. Catchy name. Window dressing. Avoided them.
 
So far, assets of SVB are thought to exceed liabilities, so it looks like depositors with balances that exceed the FDIC insurance limits may get most or all of their funds back. Eventually. Stockholders, of course, will likely see massive if not total losses. A lot of startups are probably going to miss some payroll cycles, and will likely focus on keeping medical benefits paid up. I highly doubt there was any legal wrong-doing by the bank, just some poor decision-making. As for finance never being the same in the startup world, it might be a good thing.
 
If someone does not bail them out Silicon Valley will suffer, absolutely. Other small banks will follow. We have quite a few around here.

As of December 31, 2022, Silicon Valley Bank had approximately $209.0 billion in total assets and about $175.4 billion in total deposits. At the time of closing, the amount of deposits in excess of the insurance limits was undetermined. The amount of uninsured deposits will be determined once the FDIC obtains additional information from the bank and customers. Customers with accounts in excess of $250,000 should contact the FDIC toll–free at 1-866-799-0959.
 

Silicon Valley Bank (SVB) was thriving. Credit losses are fairly low. Its deposits TRIPLED from 2019 to ‘21.

How’s that a problem? It sounds great, right?

1. When banks accept deposits from clients, they OWE the client that money. So deposits are liabilities to the bank. Liabilities cost money……”cost” both to serve those clients (branches, tellers etc ) and any interest the bank pays you on your checking account (deposit).

2. To pay for the cost of those liabs, banks turn them into assets: lending deposits as small business loans, mortgages, etc.
If a bank can’t lend deposits responsibly, it often uses excess to BUY loans or “securities,” like US Treasuries & Mortgage Backed Securities (MBS)

3. As mentioned above, from 2019-2021, the deposits tripled! SVB needed to take those funds & acquire “assets” to pay its costs.

4. Much of the $ was from VC-backed companies that needed a place to deposit the $ they raised. Those are big deposits.

5. Deposits were pouring in too fast to lend responsibly. SVB recognized that. Rather than make dumb loans, SVB bought assets guaranteed by the US government - Treasuries and MBS. BUT, it bought long duration. Often 10+ year bonds.

Mistake!

6. When rates rise, fixed income prices fall.
A general rule of thumb is for every one year of “duration,” each 1% interest rate move impacts the price of the bond by:

1% x Duration

A 1% move on a 9 yr duration bond is ~9% +/- on the bond price.

But banks are levered…

7. Remember: banks generally acquire assets by using deposits (liabilities) as the capital source.

And banks like SVB are levered 10:1 or more: owing $10+ for every $1 of shareholder equity.

If you’re levered 10x, a 10% loss on assets is a 100% wipeout.

8. So SVB bought high quality assets, but it bought tons of them with LONG duration at LOW interest rates.

When the Fed raised rates, those assets declined in value…

…1% x Duration.

Those losses, multiplied through the leverage at SVB, caused a big problem!

9. SVB now has a mark-to-market hole in its balance sheet. It’s “just” mark-to-market: as long as its liabilities are sticky (ie, depositors leave their money SVB), it will ultimately be fine.
But that’s a big “if.”

10. Technically, if all the depositors ask for their $ back at once, SVB needs to sell those bonds at the mark-to-market value, crystallizing what could have been a temporary loss. And if those losses are big enough, it may not have enough money to pay out all depositors.

11. But that situation rarely happens. However, once it starts, game theory kicks in: NOBODY wants to be the last depositor at a bank.

12. Which brings us to today. SVB has large depositors. Large depositors aren’t fully insured by the FDIC - they have an incentive to find HIGHLY sound banks. Once a whiff of issue pops up, large depositors run…“bank run.”

13. As a bank’s deposits go in reverse, it has to sell assets. The FHLB steps in to help turn its less liquid assets into more liquid.
 
When did that "bank" get the FDIC insurance? Did they have it from the beginning? I don't remember why I backed away from them. They reminded me of that young guy at Barklay's bank back in the 90s. They didn't seem like a conservative bank. I spoke to somebody in Tempe.
 
Imagine what's going through the mind of SVB's chief risk officer, who joined the bank in "late 2022".


And, as I suspected would be the case, no federal bail-out:

 
My thoughts:

Shareholders and unsecured debt holders will most likely see a total loss. Uninsured depositors will probably get most if not all of their money back. At worst I could see a 10-15% haircut. At best the bank will be bought by a larger institution or consortium and depositors won’t be impacted at all.

However no matter what it’ll make it even harder for startups to raise capital in the future.

For the broader banking system it’s hard to evaluate the scope of the impact. There are likely other banks out there with similar balance sheet issues, but perhaps not as acute. This could be the canary in the coal mine in terms of exposing the systemic risks of raising rates too quickly.
 




Mark Cuban Had Millions at Failed Silicon Valley Bank
 
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Interest rates rising too quickly? The interest rates are still negative. In theory, it needs to be above the inflation rate... with housing included in that index.

The government will continue spending, another war will soon start soon, and more monopolies causing higher prices, then the interest rates will be...

ah screw it. Keep printing. Sha la la la la la live for today...
 
Interest rates rising too quickly? The interest rates are still negative. In theory, it needs to be above the inflation rate... with housing included in that index.
The government will continue spending, another war will soon start soon, and more monopolies causing higher prices, then the interest rates will be...
ah screw it. Keep printing. Sha la la la la la live for today...

 
And now the FDIC has decided that all depositors will have full access to their deposits on Monday.


 
And now the FDIC has decided that all depositors will have full access to their deposits on Monday.

Crisis adverted:

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.
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.
 
Answering one of Arthur's original questions, will there be any jail time involved, apparently one issue has been identified. Apparently the CEO of SVB created a Rule 10b5-1 stock sale on February 7, 2023. The question is, did he know about the upcoming issuance of new stock to raise capital when he dated the sale for February 27. If he did, as one expert put it, it could be material, meaning it would be trading on insider information. The SEC is known to be unforgiving in cases of insider information. Personally, I can't believe the CEO would be that naive, but I'm sure we'll be hearing about this in the press a lot.

 
Interest rates rising too quickly? The interest rates are still negative. In theory, it needs to be above the inflation rate... with housing included in that index.

The government will continue spending, another war will soon start soon, and more monopolies causing higher prices, then the interest rates will be...

ah screw it. Keep printing. Sha la la la la la live for today...

We may reach double digit rates by the end of the decade, unless central banks push pretty much right now to score more deposits, and cull credit to meme companies.

It's very complicated to explain, but somewhat high rates always been beneficial for manufacturing. That's counterintuitive, but been proven to be true all across Asia in past few decades.
 
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