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Why didn’t anyone step in to save Silicon Valley Bank?
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Yellen: No federal bailout for collapsed Silicon Valley Bank
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WILMINGTON, Del. (AP) — Treasury Secretary Janet Yellen said Sunday that the federal government would not bail out Silicon Valley Bank, but is working to help depositors who are concerned about their money.
The Federal Deposit Insurance Corporation insures deposits up to $250,000, but many of the companies and wealthy people who used the bank — known for its relationships with technology startups and venture capital — had more than that amount in their account. There are fears that some workers across the country won't receive their paychecks.
Yellen, in an interview with CBS' “Face the Nation,” provided few details on the government's next steps. But she emphasized that the situation was much different from the financial crisis almost 15 years ago, which led to bank bailouts to protect the industry.
“We’re not going to do that again," she said. "But we are concerned about depositors, and we’re focused on trying to meet their needs.”
With Wall Street rattled, Yellen tried to reassure Americans that there will be no domino effect after the collapse of Silicon Valley Bank.
“The American banking system is really safe and well capitalized," she said. "It’s resilient.”
Silicon Valley Bank is the nation’s 16th-largest bank. It was the second biggest bank failure in U.S. history after the collapse of Washington Mutual in 2008. The bank served mostly technology workers and venture capital-backed companies, including some of the industry’s best-known brands.
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Silicon Valley Bank began its slide into insolvency when its customers, largely technology companies that needed cash as they struggled to get financing, started withdrawing their deposits. The bank had to sell bonds at a loss to cover the withdrawals, leading to the largest failure of a U.S. financial institution since the height of the financial crisis.
Yellen described rising interest rates, which have been increased by the Federal Reserve to combat inflation, as the core problem for Silicon Valley Bank. Many of its assets, such as bonds or mortgage-backed securities, lost market value as rates climbed.
“The problems with the tech sector aren’t at the heart of the problems at this bank,” she said.
Yellen said she expected regulators to consider “a wide range of available options,” including the acquisition of Silicon Valley Bank by another institution. So far, however, no buyer has stepped forward.
Tom Quaadman, executive vice president of the U.S. Chamber of Commerce’s Center for Capital Markets Competitiveness, said in a statement that “we urge the administration to facilitate a quick acquisition, guaranteeing all bank depositors have access to their cash.”
Regulators seized the bank's assets on Friday. Deposits that are insured by the federal government are supposed to be available by Monday morning.
“I’ve been working all weekend with our banking regulators to design appropriate policies to address this situation," Yellen said. "I can’t really provide further details at this time.”
House Speaker Kevin McCarthy, R-Calif., told Fox News Channel's “Sunday Morning Futures” that he hoped the administration would announce the next steps as soon as Sunday.
“They do have the tools to handle the current situation, they do know the seriousness of this and they are working to try to come forward with some announcement before the markets open,” he said.
McCarthy also expressed hope that Silicon Valley Bank would be purchased.
“I think that would be the best outcome to move forward and cool the markets and let people understand that we can move forward in the right manner,” he said.
Sen. Mark Warner, D-Va., said in an interview with ABC News' “This Week” that he was concerned that the bank's collapse could prompt nervous people to transfer money from other regional banks to larger institutions.
“We don’t want further consolidation,” he said.
Warner suggested there would be a “moral hazard” in reimbursing depositors in excess of the $250,000 limit and said an acquisition would be the best next step.
“I’m more optimistic this morning than I was yesterday afternoon at this time," he said. "But, again, we will see how this plays out during the rest of the day.”
He added: "What we’ve got to focus on right now is how do we make sure there’s not contagion.”
President Joe Biden and Gov. Gavin Newsom, D-Calif., spoke about “efforts to address the situation” on Saturday, although the White House did not provide additional details on next steps.
Newsom said the goal was to “stabilize the situation as quickly as possible, to protect jobs, people’s livelihoods, and the entire innovation ecosystem that has served as a tent pole for our economy.”
Associated Press reporter Hope Yen contributed to this report from Washington.
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Short sellers make $500 million on Silicon Valley Bank's collapse: Report
"SVB Financial Group’s record plunge on Thursday minted short sellers roughly half a billion dollars in paper profits, according to a report.
However, they now a face a challenge: how to close their positions.
On Thursday, the stock of SVB plunged by about 60 per cent as concerns mounted over the bank's operation, netting traders who bet against the stock a one-day mark-to-market profit of roughly $513 million, a Bloomberg report said.
The stock fell another 63 per cent in premarket trading Friday before being halted, with the Federal Deposit Insurance Corp. ultimately announcing that it had seized the bank.
As per the report, SIVB’s closure gives short sellers a windfall profit, but now they have to go through the sometimes-difficult process of liquidating their positions and realising their mark-to-market profits, said S3 Partners head of predictive analytics Ihor Dusaniwsky.
“With stock borrow financing costs accruing daily, even on weekends, even though trading is halted there is a continuous reduction of profits until short sellers close out their positions and return their borrowed shares.”
On Wednesday, the SVB Financial Group announced that it was raising $2.25 billion in a share sale. It said in an investor prospectus it needed the proceeds to plug a $1.8 billion hole caused by the sale of a $21 billion loss-making bond portfolio consisting mostly of US Treasuries.
The portfolio was yielding it an average 1.79 per cent return, much lower than the current 10-year Treasury yield of around 3.9 per cent, according to Reuters.
Following this, the 16th largest bank in the US failed following a run on deposits after its parent company's share price crashed a record 60 per cent on Thursday.
The Silicon Valley Bank episode marks the second-biggest US commercial bank failure since Washington Mutual, which collapsed at the peak of the 2008 financial crisis."
For nearly 2 months, a short seller was warning on Twitter that Silicon Valley Bank was about to blow up. ‘It was sitting there in plain sight.’
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The problems that triggered SVB Financial Group Inc.’s death spiral were hiding in plain sight in the firm’s earnings reports.
That’s according to short seller William C. Martin, who warned his Twitter followers about the balance-sheet issues for almost two months before the parent of Silicon Valley Bank blew up in the blink of an eye this week.
The tweets started on Jan. 18, the day before SVB reported earnings, when Martin’s account posted a prescient thread that began: “Investors have rightfully been fixated on $SIVB’s large exposure to the stressed venture world, with the stock down a lot. However, dig just a little deeper, and you will find a much bigger set of problems at $SIVB.”
— Raging Capital Ventures (@RagingVentures) January 18, 2023Silicon Valley Bank $SIVB reports earnings tomorrow
Investors have rightfully been fixated on $SIVB's large exposure to the stressed venture world, with the stock down a lot.
However, dig just a little deeper, and you will find a much bigger set of problems at $SIVB… 1/10
The posts by Martin, the former manager of a now-closed hedge fund that peaked with about $1 billion in assets, went on to detail how SVB had ratcheted up its portfolio of securities by 700% near the “generational top in the bond market.”
When the bank experienced an increase in withdrawals from depositors this year, deep losses on sales of some securities created a hole in the balance sheet that triggered its spectacular failure in just two days this week, as a run on the bank erupted among its clientele of mostly young tech companies.
Martin said he initially started analyzing SVB out of suspicion that he’d find weakness in its book of loans to Silicon Valley startups. Instead, he realized how vulnerable the firm’s fixed-income investments had left it following a year of deep losses in the bond market.
“They had bought all these mortgages at the top of the market and were sitting on a massive unrealized loss,” he said in an interview. “And it was sitting there in plain sight. There were a number of other banks and insurance companies with similar issues, but I haven’t seen anyone anywhere near the scale of Silicon Valley Bank.”
Losses on the asset side of the bank’s balance sheet were more alarming in light of signs of trouble on the liabilities side: Its deposits were at risk of disappearing amid a cold snap in the once red-hot world of startups. Many of SVB’s customers were now burning cash rather than raising fresh funds thanks to the largess of the VC industry.
“When you layer on the fact that their primary depositors were venture- backed companies, so they were seeing outflows on deposits, it seemed from a short perspective, a pretty good setup,” Martin said.
Martin, who managed a Princeton, New Jersey, hedge fund called Raging Capital for 15 years before closing it and starting a family office, said he began shorting the stock in January. He said it was his largest short position for his family office Raging Capital Ventures, but he declined to say how much money he made on the trade: “It’s a nice win, but I prefer not to talk about specifics,” he said.
With the short position in place, he took to Twitter to make his case — including one post in which he described the bank’s “‘Hold to Maturity’ accounting trap,” referring to a bookkeeping maneuver that allows banks to avoid mark-to-market losses on bonds it doesn’t plan to sell.
— Raging Capital Ventures (@RagingVentures) January 18, 2023$SIVB's HTM securities had mark-to-market losses as of Q3 of $15.9 b…compared to just $11.5 b of tangible common equity!!
Luckily, regulators do not force $SIVB to mark HTM securities to market. But the bank would be functionally underwater if it were liquidated today. 5/10 pic.twitter.com/WoM5789o4X
The tweets have garnered a lot of attention now that a top 20 US bank with more than $200 billion in assets is under receivership with the Federal Deposit Insurance Corp.
Yet not everyone heeded Martin’s warnings in time.
“Two of my very good friends have meaningful dollars locked up there despite my advice,” he told Bloomberg. “So it’s a shame. I never thought it was going to play out this quickly and even to the extent that it did.”
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The 5 most pressing questions answered about Silicon Valley Bank’s collapse
Measured by sheer speed and violence, the stunning crash of Silicon Valley Bank has left even those who’ve lived through decades of ups and downs in the market floored. On Wednesday, SVB was a 40-year old Valley institution, quietly banking (by some estimates) half of the Valley’s startups. By Friday, it was done, shut down by California regulators. Now startups, VCs and analysts are piecing together how the bank run happened, why no one could stop it, and who is at risk next.
How did the Silicon Valley Bank run happen?
SVB Financial, parent company of embattled Silicon Valley Bank, shocked many when it announced plans March 8 to strengthen its financial position. SVB said it sold nearly all of a $21 billion securities portfolio at a loss of nearly $2 billion. SVB also said it was seeking to raise $2.25 billion, by offering $1.75 billion in a share sale. General Atlantic, a private equity firm, also agreed to buy $500 million in stock. Goldman Sachs served as underwriter on both transactions. The $2.25 billion stock sale ended up getting pulled, SVB said in a March 10 statement. Goldman and General Atlantic declined comment.
The attempted stock sales spooked the venture community, with several funds withdrawing their money from SVB. For example, Peter Thiel’s Founders Fund, Union Square Ventures and Coatue Management told their companies to pull their money from SVB to avoid getting caught up in a potential bank failure, CNBC reported. Investors and depositors ended up withdrawing $42 billion in deposits from the SVB, which caused the bank to end March 9 with a negative cash balance of about $958 million, according to a March 10 filing from the Commissioner of Financial Protection and Innovation. SVB stock plunged 60%, closing Thursday at $106.04. Founders Fund and Union Square did not return messages for comment. Coatue declined to comment. SVB did not return messages for comment.
On Friday, SVB was rumored to be seeking out a buyer. However, large banks were not expected to be interested in SVB due to its loan portfolio, which is heavily skewed toward VC. Venture or private equity funds made up about 56% of its global banking portfolio in 2022, per the company’s 2022 annual report, Fortune reported.
The California Department of Financial Protection and Innovation then shut SVB down on Friday, appointing the Federal Deposit Insurance Corp as receiver. The FDIC created the Deposit Insurance National Bank of Santa Clara, a temporary bank. As receiver, the FDIC will dispose of the SVB assets, according to a statement. The Nasdaq, which treats an FDIC receivership as the functional equivalent to a bankruptcy, halted SVB’s stock on Friday.
SVB had $209 billion in assets as of Dec. 31, according to the FDIC. This means SVB is the biggest bank failure since 2008 when Washington Mutual collapsed with $307 billion in assets. JPMorgan ended up buying WaMu for $1.9 billion. SVB was still looking for a savior by Friday afternoon. A deal could involve selling the company’s assets piecemeal or as a whole, Bloomberg reported. The goal is to complete a deal by Monday, the story said.
Why didn’t anyone step in to save Silicon Valley Bank?
Late Thursday and into Friday morning, there were rumblings that a white knight might step in to acquire SVB—making it a Merrill Lynch rather than a Lehman moment. At best, it looks like SVB could become another Washington Mutual. Several banks were expected to be interested in SVB. “SVB has a great balance sheet. Just a sh***y situation with a run,” one venture capital executive said. The best buyer is JPMorgan, one of the world’s biggest banks that has been buying up fintechs, according to three banking and VC executives. Other potential bidders included Citi and Wells Fargo, the people said. But a buyer as of Friday had yet to materialize. “Big banks will not touch [SVB]. Too much bad debt exposure to the VC world,” one of the bankers told Fortune.
It’s 2023. Don’t regulators have any way to stop bank runs?
While you might assume there’s an A.I. bot that can stop modern bank runs, some are arguing the opposite is true: Digital portals for withdrawals and social media to fuel the panic may have made things worse. During most previous bank runs depositors at least had to show up in person (or later call) to ask for their money back, somewhat stretching out the process.
And yes, there are lots of lots of laws governing banks along with 50 state agencies and several federal agencies. Then there’s the FDIC, which was created in 1933 to insure deposits in U.S. banks and thrifts (up to $250,000 per account holder) in the event of bank failures. But the main way regulators try to prevent bank runs is before they happen. And plenty of questions will also be asked about the Dodd-Frank Wall Street Reform and Consumer Protection Act, a law that was passed after the 2008 financial crisis to prevent the excessive risk-taking that led to blowups like Lehman Brothers and Washington Mutual. Dodd-Frank was enacted to guard against an SVB-type blowup. But fault for this might lie with small banks themselves, who after Dodd-Frank went into effect, complained that the stricter regulations were excessively costly for them, according to a report from the Federal Reserve Bank of Philadelphia. In 2018, President Donald Trump signed a bill that raised the threshold for when companies qualify as a “systemically important financial institution” or SIFI, meaning the bank would be subject to annual stress testing and other regulatory requirements, to $250 billion in assets from $50 billion in assets. Greg Becker, SVB’s CEO, in 2015 urged the government to increase the threshold, arguing it would otherwise lead to higher costs for customers and “stifle our ability to provide credit to our clients,” Bloomberg reported. SVB had about $212 billion in total assets as of December 2022, up from $56.9 billion at the end of 2018, meaning it was exempt from the stricter regulations.
Then there’s the Basel Accords, an international regulatory framework, that was developed to make sure banks hold enough cash reserves to meet their financial obligations and survive in financial and economic distress, according to the Corporate Financial Institute. In September 2022, the Federal Reserve reaffirmed its commitment to Basel III standards, which required banks to hold considerably higher capitalization levels and wider liquidity buffers, a PwC report said. European banks were required to implement Basel III but only the largest U.S. banks were subject to full Basel NSFR requirements, the Financial Times said. SVB didn’t have to adhere to Basel III. The bank said in its most recent 10K filing: “Because we are a Category IV organization with less than $250 billion in average total consolidated assets, less than $50 billion in average weighted short-term wholesale funding and less than $75 billion in cross-jurisdictional activity, we currently are not subject to the Federal Reserve’s LCR or NSFR requirements, either on a full or reduced basis.”
Academic journals are rife with articles about how the system can better protect against bank runs. But generally the political conversation seems to toggle between ‘we need more regulation’ and ‘regulation is too costly and strangles competitiveness.’
What can Silicon Valley bank depositors get back?
Nearly all, or 89% of SVB’s liabilities are deposits, according to the Wall Street Journal. This is higher than some bigger banks, like Bank of America, where 69% of its liabilities are deposits. The lack of IPOs means SVB clients weren’t getting new funds from public offerings or fundraisings, the Wall Street Journal said. Total deposits dropped nearly 9% to $173.1 billion at the end of 2022, according to the SVB annual report.
The FDIC said Friday that all insured depositors will have full access to their insured deposits no later than the morning of Monday, March 13. However, most of SVB’s deposits are uninsured. (According to SVB’s 2022 annual report, the bank reported $173.1 billion in total deposits as of Dec. 31. About $151.5 billion, or 88% of total deposits, was uninsured.) FDIC said it would pay uninsured depositors an advance dividend within the next week. They will also receive a receivership certificate for the remaining amount of their uninsured funds. Uninsured depositors may also get future dividend payments as the FDIC sells off SVB assets, the statement said.
Who else is at risk?
Just like during the Financial Crisis in 2008, there’s a sense that there will be plenty more shoes to drop as the contagion from SVB spreads.
SVB’s collapse impacted other banks Friday, while many larger institutions, whose deposits are more diversified, remained unscathed. Shares of First Republic Bank, a bank and wealth company with $212.6 billion in total bank assets as of Dec. 31, fell nearly 15% Friday, while Western Alliance Bancorp, a regional bank holding company with more than $65 billion in assets, plunged 21%. Both banks attempted to calm investors Friday, saying their liquidity and deposits remained strong. In contrast, shares of JPMorgan rose more than 3% to close at $133.65, while Bank of America shed 27 cents to $30.27 and Wells Fargo added 23 cents to end at $41.36 Friday.
One consequence of the SVB implosion is its impact on startups that have their assets, or deposits, with the bank, according to Dan Dolev, a senior analyst in fintech equity research at Mizuho Securities USA. “We don’t know what the exposure is of some of the startups,” Dolev said. Etsy, Roku, and Roblox are just a few of the companies that have already warned of exposure to SVB.
But as we’ll see in the coming days and weeks, they certainly won’t be the last.
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