How the Silicon Valley bank imploded

A previously respected and historically rather dull bank with such deep ties to the tech and venture worlds that it literally called itself “Silicon Valley Bank” was shut down suddenly and dramatically. a surprising conclusion to one one of the fast-moving, internet-based banking runs of the 21st century. The question now is whether this is just a one-off disaster or a sign of larger economic problems yet to be uncovered. Nobody, it seems, has the answers.

It had long been rumored that something might be wrong at Silicon Valley Bank, but the rollercoaster really got going on Wednesday. On that day, the company announced a number of decisions: It had sold $21 billion in investments (basically everything it could) at an after-tax loss of $1.8 billion, it borrowed $15 billion and planned a fire sale of stock to raise another $2.25 billion. At stake was – what else? – Inflation, which drove down the value of long-term bonds and mortgage-backed securities that the bank bought during the boisterous easy-money era. Now startups were less solvent and started withdrawing more money from their accounts, which meant the bank needed more liquidity, i.e. real money, to withdraw.

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Of course, banks don’t keep all the money they deposit in a Scrooge McDuck style money vault. If, for some reason, an unusually large number of depositors want to withdraw their money, that’s a problem of its own, even if the bank is healthy and hasn’t done anything wrong by not having the money on hand to give it to them.

As rumors of this event spread, panic set in, and quickly, wiping $10 billion off the bank’s value on Thursday, prompting startups and organizations of all kinds to withdraw their money. Hoping to calm the situation, the bank’s CEO, Greg Becker, took a call Thursday, essentially asking venture capitalists to “keep calm” and “support us as we support you through these challenging times.” have”. The bank, so the argument goes, has solved the liquidity problem and is on solid ground.

That said, with one theoretical exception, Becker said, “If everyone says the SVB is in trouble, that would be a challenge.”

Unfortunately for Becker, everyone started telling each other that SVB was in trouble. The classic problem of bank run continuation has probably, perhaps even comically, been exacerbated by the speed at which information moves on the Internet, which Silicon Valley Bank played no small role in developing. “The SVB thing is compounded by the fact that such a large proportion of their users are on Twitter all day.” wrote venture capitalist Jay Ganatra. “Increasing the panic in a way that hasn’t actually happened historically and probably wouldn’t if they were catering to a less thoughtful segment.” Another person put it more simply: “Encouraging a bank run for retweets is wild.” Nevertheless, the memes persisted, as did the WhatsApp groups and signal groups and text messages, all of which led to the feeling that quiet wasn’t an option.

Concerned that the bank might go bankrupt, top venture funds like Union Square Ventures and Peter Thiels start-up fund specifically told their respective contractors to get their money out of Silicon Valley Bank, or at least get their accounts down to less than $250,000, after which all of their balances would be FDIC insured. “SVB is in a severe liquidity crisis,” said Union Square Ventures allegedly told his portfolio companies in an email. “DO NOT accept offers from SVB to keep your money there even if you are charged 5% interest.” The entrepreneurs listened. said one Startup CEO on Twitter: “Every company I know is scrambling to get their cash balances below 250,000 and the rest of the cash off the platform or into big bank funds asap.” (Weirdly, some seemed to suggest that people deposit their money fintech startups they are invests in– must always try to make money!)

On Thursday night, after the bank’s share price fell a staggering 60 percent in one day, a venture capitalist predicted to me that there was a “50-50 chance” that the bank would go bust. On Friday morning, that guess looked optimistic as the sell-off continued into the premarket hours, Trade this stock was then stopped and reports inevitably surfaced that the company was Search for a buyer after failing to raise last-minute capital. Banking analysts at JPMorgan said it remains an attractive asset, calling SVB a “world class‘ Company that looked ‘very attractive’ at its current valuation.

But Deposits reportedly continued to run out at breakneck speed and California regulators decided that they had seen enough and announced that they would close the bank immediately. Insured deposits (that is, up to $250,000) appear to be available through Monday morning, and individuals and organizations with uninsured deposits need to see what the company’s assets are being sold for.

It’s important to remember in such a fast-moving situation that nobody really knows what they’re talking about, or at least can’t predict the future, myself included. But amid the panic that isn’t over yet, is this an unfortunate series of events with a limited impact, or a broader threat to the tech and/or financial sectors? As of Friday morning, two other smaller banks, PacWest Bancorp and First Republic Bank, Trading has also reportedly ceasedwhich was attributed to trading volatility, i.e. lots of people trying to buy and sell.

Silicon Valley Bank, which was the 16th-largest in the country by assets, was a mainstay of Silicon Valley for decades, positioning itself as more than a run-of-the-mill bank, providing banking services and advisory to late-stage venture-funded startups and companies like. The bank has claimed nearly half of all recently publicly listed tech and healthcare venture capital companies as customers, and venture capitalists such as Andreeson Horowitz and Kleiner Perkins have also banked there. “Founders have been supporting for over 35 years” so the company.

As a result, many People In The industry had called for rallying around the SVB, presumably by keeping their money there, or at least not raising hell on Twitter. “SVB is the most important investor for tech startups and the biggest supporter of the community. Now is the time to support them.” said venture capitalist Villi Iltchev. Of course, that’s a bit odd at first (gathering behind a bank?), but understandable, since business leaders love nothing more than money and security, and the bank’s demise in Silicon Valley would most likely result in less of both.

Before the company collapsed, people were clamoring for the authorities to intervene, albeit in a different way, arguing that SVB’s collapse could spread to the entire financial sector and hamper tech innovation. A CEO said all that was needed was for the Federal Reserve to make “some reassuring comments.” Bill Ackman, the billionaire manger, went further, saying that if private markets can’t handle it, a bailout may be in order. Of course, that pissed people off, and you can understand why. This is an industry where reporters call VCs for bank run offers, only to reach them by gondolas on top of a mountain in Aspen.

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