Silicon Valley Bank (SVB) failed on Friday. It was the 16th largest bank in the USA. SVB gave loans to startups and the terms of the loans required the startup to keep deposits with SVB. Venture Capitalists for decades would require that startups use SVB and other “standard” best practice legal and financial structures.
SVB is deeply connected to 50% of new and old venture startups. Roku is publicly traded but grew from venture startup roots. Roku had almost $500 million in deposits at SVB.
Think about the dot.com (dot bomb bubble) internet crisis of 2000 and 2001. In the current situation, the crash in technology stock valuations hit companies with 80-90% drops in 2022. Now, there deposits are in jeopardy. If there is no intervention, those companies will not make payroll over the coming two weeks and beyond.
The gov’t has about 48 hours to fix a-soon-to-be-irreversible mistake. By allowing @SVB_Financial to fail without protecting all depositors, the world has woken up to what an uninsured deposit is — an unsecured illiquid claim on a failed bank. Absent @jpmorgan @citi or… https://t.co/SqdkFK7Fld
— Bill Ackman (@BillAckman) March 11, 2023
This will crater the San Francisco Bay Area and other startup-focused regions (Los Angeles, San Diego, Boston, New York etc..). Startups, venture capital, connected lenders, Napa wine region wineries, and even relatively mature previously venture-backed larger companies like Roku.
This puts First Republic at risk as well. There would be a spread of bank and financial failures. Also, this is the tip of the iceberg. Other banks and financial companies (insurance companies, pension companies) lost money on longer-term bonds and longer-term mortages and mortgage-backed securities. If a bank has given out fixed 15-year and 30-year mortgages from a 2021 or earlier then they are mostly locked in at 3%. However, now those instruments are adjusted to 5-7% interest rates of today. Financially those are marked down to 70% of principle value, especially of those were sold today. The one million dollar thirty year mortgage with 3.5% could be sold at say 700,000 so that the new owner would be getting 5% return.
California Governor Gavin Newsome and other California politicians will have to find ways to salvage this (this weekend or Monday) for multiple reasons. The groups impacted are their donors. National democrat politicians are similarly dependent on the impacted group as donors.
The other major reason is not doing something will economically crater the Venture capital and San Francisco Bay Area businesses and real estate.
The other major reason is that most of the banks and financial institutions are far weaker than people think.
Globally, there are a lot of fragile companies and countries. China had a real estate and debt crisis. China’s solution is that almost no one is allowed to sell a house or sell stocks. The owner must keep paying their mortgage. Stock sales are limited. Prices are not allowed to crash because people cannot sell. People cannot get off the economic roller coaster because they are locked in at gunpoint.
Europe and Japan have aging populations and weak economies.
Energy prices and food prices are up because of war and supply chains.
The UK had to bail out pension funds because they had devalued bonds and other financial instruments.
The world cannot withstand more of the high-interest rate to stop inflation medicine.
Therefore, the “just let the regular financial bankruptcy process” happen to SVB is not what will happen. California, technology industry, the US financial system and the world have significant risks of collapse.
Brian Wang is a Futurist Thought Leader and a popular Science blogger with 1 million readers per month. His blog Nextbigfuture.com is ranked #1 Science News Blog. It covers many disruptive technology and trends including Space, Robotics, Artificial Intelligence, Medicine, Anti-aging Biotechnology, and Nanotechnology.
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7 thoughts on “Who Picks Up the Pieces of Silicon Valley Bank?”
I don’t disagree, but you left out Israel imploding over its authoritarian turn. Those threats by the tech companies and military are serious. Between SVB and Netanyahu, a lot of great engineering talent may be about to his the market. Any solvent startup could snag a bonanza.
And, yes, raising rates is entirely the worst thing to do in this environment. For one thing, raising the cost of capital is per se inflationary. *You’re raising the cost of money itself with higher rates.* The post-Covid inflation is caused by supply chain shocks and corporate cartels. The response should be investment in the supply chain (including minerals and mining – which needs *cheaper* capital, not more expensive). On the other hand, when we have had cheap money, it has been diverted into speculative excess like derivatives and various unproductive rent-seeking enterprises like private equity buying up apartment buildings and increasing vacancies just to jack up rents. Unless we break up corporate concentration, we won’t restore competition in markets.
Labor isn’t causing inflation; in fact, relative wages are *falling*. Companies jack up prices because they can and because raw inputs like food and energy are rising. War and global warming aren’t the only causes. Corporate boards have been disinvesting in R&D and supply chain resiliency for years via outsourcing and stock buybacks. This has to stop.
Silicon Valley Bank bet the customers’ money on US Treasury bonds and lost the money. All banks bet the customers’ money. Most bet on the same US Treasury bonds and lost it too. That’s what bankers do. The difference is customers aren’t lined up outside of Wells Fargo asking for the money that is not there. You see, you money is safe as long as you don’t ask for it. Me, I don’t invest in long term US Treasury bonds because they aren’t safe. I don’t keep much money in banks either. They would just gamble it away.
Didn’t the Obama administration institute reforms that would prevent this sort of thing from happening ? Yet it happened anyway. If the taxpayer has to once again foot the bill for what looks like incompetence, then we are slowly building a class of institution that are immune from failure.
Unfortuantely, The Trump adinistration revoked many of the reforms in order to give his donnors more leeway to fleese America. In 2018, Trump signed into law a bill that rolled back provisions in the Dodd-Frank Act and loosened oversight over banks.
Alex Berenson gets it too.
Every financial disaster that has occurred within living memory has been due to moral hazard. The only way to prevent moral hazard is to never, ever bail out anybody ever. Besides, this kind of failure is the natural self-correction inherent to free market capitalism.
The one bank that helps tech is the one they let fail—great.
Karl Denninger has perspective on this:
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