How fast can you crumble a bank and an economy today? 48 hours. I write about the chilling story of Silicon Valley Bank’s collapse, what it means for all of us.
The last 24 hours have been all about the collapse of US bank ~ Silicon Valley Bank (SVB) but what really is SVB, how bad is it, and what should we expect from the second largest bank collapse in US history and the first bank run of the internet world?
SVB was the 16th largest bank in the US with $200B+ assets at the time of failure, banking 50% of the US tech, VC, healthcare & biotech ecosystem; which has now become its Achilles heel.
SVB: Watching A Bank ‘Speedrun’ in Real Time pic.twitter.com/KcmsmhRsUl
— sam lessin ???? (@lessin) March 10, 2023
SVB customers are high-growth businesses and are products of a low-interest rate environment, where funding was awash. The chart below shows continued spend by SVB customers despite a slowdown in inflows.
To meet its growing liquidity needs, SVB bowed to duration risk, losing nearly $2B from selling $21B+ of medium to long-term securities. SVB quickly attempted to raise $3B in equity to cover its position. Once this became public, panic about the bank’s solvency spread like wildfire. SVB’s stock sunk by 60% on Thursday. Apparently, in the era of Twitter and Reddit, it’s much easier to crumble a bank and the economy.
Notable leaders like Peter Thiel, founder of Paypal & Founders Fund asked customers to withdraw their money from SVB, sparking what will be the end of SVB. You know the rest. If you short SVB and sparked a withdrawal frenzy, you should be smiling to the bank. That is now more of an irony in this case, as everyone will be affected directly or indirectly. In my opinion, it shouldn’t have been SVB, an agelong partner of the innovation ecosystem.
This is all so similar to the FTX situation last year, which the crypto market is still struggling to recover from, although FTX was a grossly criminal situation. Unlike crypto, there is a big brother in the fiat market – the regulators. At the time of writing, the FDIC has seized control of the bank and will be commencing the process of selling down its assets to pay SVB depositors. Let me add that 97% of SVB’s assets are uninsured deposits, exceeding FDIC’s $250,000 payout for insured accounts.
To be fair, another culprit is the Fed. After signaling lower interest rates, and rushing everyone into longer-dated securities, you make a dramatic u-turn and start an aggressive rate hike campaign, leading to significant mark-to-market losses from the fall in bond prices. Anyway, the Fed can mitigate this situation. By cutting rates and starting an aggressive bond purchase ~ QE program, the Fed might be able to save us from ourselves. This is particularly important because just like SVB, many institutions hold a similar investment strategy and are booking losses from falling bond prices. However, the prisoner’s dilemma for the Fed, is sacrificing its fight to keep rising US inflation in check with rate hikes.
What should we expect?
- If we give in to FUD, the immediate order effect will be a widespread test of bank solvency from mass withdrawals which may crumble the US financial system and cause a global economic meltdown just like 2008.
- Mid-month payroll is next week and companies may struggle with salary payment, which is quite chaotic when you recall that 51% of Americans earning over $100,000 a year mostly tech workers, are living paycheck to paycheck. This implies a slowdown in consumer spending, except the US government, steps up with a cash transfer scheme.
- What’s even scarier is the fact that VCs who are the lifeline of the technology market might have been affected by SVB’s collapse. That’s $200B worth of assets, so this is very possible.
- We should be expecting a slower funding market, and steep cost-cutting measures like hiring freezes and layoffs.
- Let me add that one concept I’ve been fascinated with of late, is remote work & global talent. Hiring cheaper and same quality talents from Africa or Asia may prove to be one of the cost-cutting measures, that will make businesses more resilient in a market like this.
- Just to note, SVB’s assets are still very much alive. The authorities will just need some time to sell down the assets if SVB doesn’t find a buyer pretty soon, which is why the Fed should come in and stop falling bond prices.
- This presents a good opportunity for other banks to cannibalize with a lending product backed by SVB deposits. Brex has already swung into action with this. Regardless, it’s a market for the taking, so other players can start their own lending products.
- I’m not sure if crypto or “non-custodial wallets” will reap many gains from this. USDC’s de-pegging after Circle announced that it holds part of its treasury in SVB will likely not age well for web3. I’m actually rooting for Circle, as I am a big fan. Nonetheless, if you were stanning SVB just a few days ago and gave into hope, you’re definitely facing some challenges right now. On the flip side, liquidity line business models may thrive as web 2 & web 3 financial companies grapple with rising liquidity pressures during this period.
- To suffice, holding cash as Bloomberg predicted, and keeping burn low while not compromising productivity will be a winning strategy. All roads do not lead to a good end, so I’d say for the umpteenth time that someone needs to step in and save us from ourselves.