🏦What the SVB? How One Bank went Bust in 36hrs – and Why You Should Care!

You’ve probably never heard of SVB aka Silicon Valley Bank until now. Or at least I hadn’t heard of it till I saw its name splashed all over the news! SVB was a lender to those flashy, growth-on-steroids, unprofitable companies.

Its special client base was VC-backed start-ups. The kind of stuff Silicon Valley is home to and most proud of! If assets were placed on a spectrum, the sort of biz SVB loaned money to was at the very-high end of the scale. High risk, but potentially very high reward. Sounds great, until it wasn’t.

See, up until now it made total sense for deep-pocketed investors to loan to these kinds of companies. It was so cheap to beef up with borrowing with rates so low that it was a no-brainer.

After all, these risky start-up fellas were promising huge returns (aren’t they always??) but more importantly, they didn’t need to compete with cash and bonds. It’s like running a race when your competitors are blindfolded. They barely stand a chance. Cash was seen as trash and bonds were basically so boring no one wanted to touch them. So they got all the funding they need for (almost) as long as they needed.

Free money? More risk all-around!

Investors happily dished out money to endless funding rounds in the hope of meeting the pot of gold at the end of the rainbow. Trouble is, cash is now no longer trash and bonds are anything but boring! T-bills (the safest bonds out there) are yielding nearly 5%! That’s a nice bit of risk-free return right there.

A stack of one dollar bill
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So, it’s no surprise then that these start-ups are now struggling to get the funding they need. The incentive for holding stocks (measured by the risk premium) is getting much smaller as bond yields rise! And for holding start-ups, the opportunity cost is now so high you can practically kiss that goodbye.

This makes so much sense. Why take on crazy amounts of risk (we all know more than 90% of start-ups fail) when you can simply earn 5%+ in a money market fund, t-bill and even earn a good few percent in cash? Not a decimal point anymore! It no longer pays to take on this much risk. Not right now anyway. 

SVB piled customer cash into MBS

In 2019 SVB had $60bn in deposits and come 2022 this had ballooned to $190bn! This was down to the huge fundraising boom we saw during the pandemic which saw start-ups put loads of their freshly-raised capital into SVB. SVB find itself with all this money – what to do with it?

They decided to buy mortgage-backed-securities “MBS” (aka the stuff that brought on the ’08 crisis – oh the irony) $80bn went into MBS yielding 1.5%. They did NOT see (or hedge) the possibility that rates would actually rise, in fact to well over 4% (I mean who would’ve thought??). 1.5% was okay in 2020 since fed rate was 0% but went it rose, SVB found itself in hot water.

SVB said look we’re having a liquidity crunch. We need to sell some MBS and do a capital raise. This is what caused VCs to tell their founders to pull money. Word got out that SVB could be in trouble and start-ups started pulling their deposits. Which meant SVB had to sell its shares, sell its assets and now try to sell itself to meet crazy demand. 

Credit card at checkout point
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Btw, this comes literally 1 day after the crypto lender Silvergate went belly-up after the same thing happened to their guys! The crypto companies it lends to had to withdraw deposits thanks to falling crypto prices. Yikes. 

Its balance sheet is an unbalanced disaster

SVB is in pretty rough shape. Ha, putting it lightly there. Its balance sheet is in tatters. Its unrealised losses are ~$620bn, up from $8bn a year ago! Silicon Valley Bank’s failure puts it 2nd place for the largest bank failure in US history. What a prize, huh. And the largest bank failure since ’08. Wanna laugh? Jim Cramer said just 1 month ago that SVB was a buy. Oh, and the CEO of SVB sold $3.57mn of stock over the last 2 weeks. Coincidence? Hmmmm.

If things could any weirder, SVB’s chief risk officer was the MD at Deutsche Bank during the crisis of ’08 AND also led credit ratings in ’07. Oh, and also, SVB had no official chief risk officer for 8 months meanwhile the VC was busy spiralling outa control! Get this: SVB’s chief administrative officer was ALSO the CFO of Lehman Bros Global Investment Bank when it went belly-up.

Consumer withdrawing cash from a local bank
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We all knew the Fed would keep raising interest rates till something gives. 2 lenders collapsing in the space of 2 days sure feels like something cracking, if not snapping. And when it comes to a market crash, it’s always the riskiest stuff that fall first. Banks lending to the riskiest companies seems like a good place to start!

But let’s not forget that growth stocks and crypto are already in a bear market. Have been for over a year now! I know it doesn’t feel like but the peak was around Nov 2021. Then it all went downhill from there! 

Money now costs something!

The message here is that the era of free, no-strings-attached money is over. Gone are the days where you can borrow money for next to nothing. There’s now a much bigger price attached to money which on the flip side means investors are finally getting a return for holding cash (and bonds).

Ever since ‘08, interest rates were held to the ground like glue. Now, they’re finally showing resistance! Interest rates are above 4% and they’re climbing. The reality check is here. And stocks aren’t gonna like it.

Banks going bust and stocks crashing 90% are not the norm. They’re the result of being too much air in the system. We all got ahead of ourselves. Everyone thought interest rates would remain in paradise forever. But then inflation came to bite us in the backside and we didn’t know what hit us. 

Don’t fight the Fed! Powell fighting inflation is like a dog with a bone. He won’t give up till he gets what he came for. Even if that means making ~2 million Americans jobless. If that’s what it takes, that’s what he’ll do.

Dollar bills wrapped in red tape
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There are dozens if not hundreds of start-ups that were planning to use their cash held by SVB to meet their payrolls next week! If they can’t get their hands on THEIR cash, the knock-on effects will be scary. CEO of Y Combinator said “this is an extinction level event for startups and will set them back by 10 years of more”.

If deposits aren’t covered, panic WILL spread. Bank runs = contagion. It’s not an isolated thing. If those guys who held cash with SVB don’t receive their money, people will start pulling their money from other banks – why take the risk of more banks going bust? This is how trouble spreads. And fast.

But is it the Fed’s job to step in? My guess is they’ll do something to calm everyone but if they keep bailing out every bank that went bust, everyone would take on risk since they knew the Fed would have their back!

Hopefully contagion doesn’t spread like wildfire and that the damage is mostly contained. But either way, interest rates are sending some things up in flames!

See ya on the other side!

Disclaimer: This blog is not investment or financial advice. It is my opinion only. This blog is not a personal recommendation to buy/sell any security, or to adopt any such investment strategy. Always do your own research before you commit to any investment