💸 SVB fallout

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Tonight, we're doing a deep dive on the head-spinning collapse of Silicon Valley Bank. Let's get into it.

By Allison Morrow

📉 SVB FALLOUT

The collapse of three American banks in a single week has shaken financial markets around the world, even as regulators worked through the weekend to prevent the crisis from spiraling.

There's a lot to unpack here, so let's start with a quick recap of what the heck happened.

Silicon Valley Bank fails

At the center of the turmoil is Silicon Valley Bank, the go-to lender for tech startups and venture capital firms, which experienced a stunningly rapid capital crisis. A run on the bank. An exodus of investors. Just a total collapse that took less than 48 hours.

There were several factors colliding at once to bring down SVB. In short, the bank was sitting on a powder keg of unrealized losses — about $17 billion worth — at the same time its clients were burning through cash. (As a tech-focused bank, SVB was especially vulnerable to the sector's decline over the past year.)

A panic set in on Wednesday, when SVB announced it had sold a bunch of securities at a loss, and that it would need to sell new shares to shore up its balance sheet. Sensing trouble, high-profile venture capital firms began advising companies to pull their deposits.

Not helping matters for SVB late last week was the collapse on Wednesday of another California bank, Silvergate (the crypto favorite), which suffered its own capital crisis and announced it was winding down operations. Silvergate and SVB weren't really connected, but Silvergate's problems seemed to put some bad juju in the market for banks.

Anyway, on Thursday, SVB shares cratered and panic spread. Customers yanked $42 billion from Silicon Valley Bank on Thursday, leaving the bank with $1 billion in negative cash balance, the company said in a regulatory filing. In other words, the bank owed more to customers than it had on hand. SVB and federal regulators scrambled but couldn't raise enough capital to make up the difference, and the bank was declared insolvent Friday.

Normally, the feds wait to swoop in after the market closes, but the situation at SVB was too dire to wait.

"SVB's condition deteriorated so quickly that it couldn't last just five more hours," wrote Better Markets CEO Dennis M. Kelleher. "That's because its depositors were withdrawing their money so fast that the bank was insolvent, and an intraday closure was unavoidable due to a classic bank run."

Enter the feds...

When a bank collapses, the panic tends to spread quickly (see: 2007-2008), and that could undermine the entire financial system. To avoid that, the Biden administration and federal regulators on Sunday night said they would backstop customers' deposits — even those that weren't insured. The same protections would be in place for customers of Signature, a New York regional lender that regulators shut down Sunday after its customers were apparently spooked by SVB's demise.

At the same time, the Fed announced an emergency lending facility to provide extra liquidity for banks.

It looks a lot like a bailout circa 2008, but the difference here is that shareholders won't be protected — and that's at least partly why Wall Street pummeled regional banks when the market opened Monday morning...

Bank stocks sink

Smaller and mid-size banks that are seen as having similar risks to SVB have been getting pummeled on Wall Street on Monday.

First Republic shares fell more than 60% and were halted multiple times for volatility.
Western Alliance Bancorp's stock fell 45%
PacWest Bancorp fell 20%.
The SPDR S&P Regional Banking exchange-traded fund fell 11%.

In other words: Investors, many of whom had piled into bank stocks on assumption that they would benefit from higher interest rates, are worried about regional banks like SVB and Signature that are disproportionately exposed to tech or other niche industries.

"It's a good thing that we have the backstop, and it's a good thing that the depositors were protected," said Mike O'Rourke, chief market strategist at Jones Trading. "But it doesn't change the fact that there's still problems — you're just basically buying time to sort the problems out in a better way."

He added: "It's a confidence-crisis risk...If we get through the next 24, 48 hours without the regulators having to close any more banks, we should be fine."

What now?

As of Monday evening, regulators were reportedly planning to try again to find a buyer for Silicon Valley Bank, the Wall Street Journal reported, citing people familiar with the matter.

But it's not clear which institution would be willing and able to take it on.

Meanwhile, the tech industry is breathing a sigh of relief after narrowly avoiding what one insider called an "extinction-level event." But, as my colleague Catherine Thorbecke writes, Silicon Valley isn't coming out of this unscathed.

NUMBER OF THE DAY

$620 billion

SVB's collapse put a spotlight on the amount of unrealized losses — assets that have decreased in price but haven't been sold yet — that US banks are sitting on. In brief: Back when interest rates were near zero, US banks scooped up lots of Treasuries and bonds. Now, as the Federal Reserve hikes rates to fight inflation, those bonds have declined in value.

The result is that most banks have some amount of unrealized losses on their books — $620 billion, collectively, at the end of 2022, according to FDIC.

That means banks might find they have less cash on hand than they thought — especially when they need it — because their securities are worth less than they expected.

🏦 BLAME GAME

It didn't take long for the finger-pointing to begin over who's to blame for SVB's collapse. Like any financial catastrophe, there's plenty of blame to go around.

But among tech-industry insiders, Silicon Valley Bank's CEO is being cast as a villain.

My colleague Matt Egan spoke to one Silicon Valley Bank employee who said he was was dumbfounded by how the boss, Greg Becker, publicly acknowledged the extent of the bank's financial troubles before privately lining up the necessary financial support to ride out the storm.

This set the stage for the panic that ensued as customers scrambled to pull their money.

"That was absolutely idiotic," the employee, who works on the asset management side of Silicon Valley Bank, told CNN in an interview. "They were being very transparent. It's the exact opposite of what you'd normally see in a scandal. But their transparency and forthright-ness did them in."

The employee is referring to how Becker and his leadership team revealed last Wednesday it hoped to raise $2.25 billion in capital after notching a $1.8 billion loss on a chunk of securities. That freaked out customers, most of whom are tech startups, who began drawing down their accounts.

"People are just shocked at how stupid the CEO is," the SVB insider said. "You're in business for 40 years and you are telling me you can't raise $2 billion privately? Get on a jet and fly to Kuwait like everyone else and give them control of one-third of the bank."

Silicon Valley Bank did not respond to requests for comment. Becker has reportedly apologized to employees about the situation.

Jeff Sonnenfeld, CEO of the Yale School of Management's Chief Executive Leadership Institute, told CNN he agrees that the bank's leadership deserves criticism.

"Someone lit a match and the bank yelled, 'Fire!' — pulling the alarms in earnest out of genuine concern for transparency and honesty," Sonnenfeld and Steven Tian, CELI's research director, said in an email on Sunday to CNN.

Sonnenfeld and Tian said not only was the announcement of an unsubscribed $2.25 billion capital raise Wednesday night "unnecessary" because Silicon Valley Bank had sufficient capital far in excess of regulatory requirements, but there was no need to simultaneously reveal the $1.8 billion loss.

The one-two punch "understandably sparked widespread hysteria amidst a rush to pull deposits," the two wrote, adding that they could have spaced the announcements out by a week or two and reduced the magnitude.

Read Matt's full story here.