There’s Always an Event
Did you ever hear about Silicon Valley Bank before this? The regional banking sector in the stock market isn’t my cup of tea, personally. As a matter of general rule, I don’t like banking as a business model.
Here’s why, by the way… what a bank does is take deposits and build a liability column. Yeah, your deposits are their liabilities, which ought to be ready to release to you at all times even if everyone comes at once, but on the flip side, they use the liability column as collateral to make loans and investments.
SVB (Silicon Valley Bank) had nearly $200B in deposits, so they invested those and made loans with them, but they did it all incorrectly. Here’s the irony of it… if you deposit $100M at a bank today, they take it and put it in 3-month Treasury bonds (which yield 4.75%), and the bank closes down so you call BlackRock, Vanguard, or whomever SVB was using to buy these Treasuries, they’ll tell you that those are under the name of SVB, not yours.
In other words, when one deposits cash in a bank and sees the money is available in their account, the truth is that it isn’t.
The first $250,000 is insured by the FDIC, and the rest (some clients have millions, tens of millions, and hundreds of millions on deposit) are now goign to be “made whole” with s special program, created for this.
Why should you care? After all, we’re not all Silicon Valley folks. The answer is that we should care (a lot).
For one, we should care because what happened to SVB is their bond portfolio got hammered because of the FED rate hikes. What’s actually pretty insane to think about is that the FED’s own balance sheet is suffering from massive losses itself!
Once those assets on the balance sheet were in the red, the bank immediately had an issue: their assets were worth less than their liabilities. It’s a bad situation but not dire or catastrophic. A bank like this could have raised money, received new deposits, rebalanced its portfolio, borrowed money, or cut expenses and would have been fine (for a while).
The bank attempted to do just that and told shareholders of its plans, but once those were made public, depositors withdrew funds at a breakneck pace and a classic run on the bank occurred.
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If you’re not quick or you trust things will be fine, you lose if the FDIC seizes control before getting your money out.
Now, you’re a small tech start-up and you might have 10-499 employees. You can’t pay them or you have to completely stop your core mission of creating disruptive products and services that are the future of America.
The questions that arise next are:
- Are there other banks in a similar situation? Maybe my own bank?
- Have interest rates been hiked too much so we have a cascading effect that is weeks away (another Lehman)?
- Should the government do a TARP (Troubled Asset Relief Program), make the depositors whole, and hope the taxpayer gets their money back like in the 2008 TARP?
We got our answer to that; not TARP, but a bilout for the actual depositors
The SVB bankruptcy is a seismic event for Silicon Valley, but if not contained, it can lead to damage and contagion. And here I thought bank runs were a thing of the past…
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