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The Next Domino Falls ($SIVB): A Degenerate Bank Flips The Bird To Diversification
Following on the heels of Silvergate, another bank is threatening more contagion with their insolvency. This time, it’s Silicon Valley Bank, the tech concentrated piggy bank.
“Yes, Icarus fell to earth after flying too close to the sun, but what a glorious fall it must have been.”
As of Sunday 03/12, “We are also announcing a similar systemic risk exception for Signature Bank, New York, New York, which was closed today by its state chartering authority. All depositors of this institution will be made whole. As with the resolution of Silicon Valley Bank, no losses will be borne by the taxpayer.
Meanwhile, the FDIC has started an auction for SVB, with final bids due later Sunday afternoon. The result may not come until Sunday evening so stay tuned as I will be updating this as more information comes out.
In Early March, Silicon Valley Bank (SIVB) was taken over by the California FDIC to save the bank and depositors. SIVB had concentrated its customer base in the tech industry and was serving half of all venture-backed companies in the US and 44% of the venture-backed technology and health-care companies that went public last year. SIVB had a loan book that was 56% filled with loans to venture capital and private equity firms. Tech is a volatile sector, and during Fed rate hikes and high inflation, lean tech businesses with funds locked up may not be able to make payroll or cover operating expenses.
The bank had approximately $209.0 billion in total assets and about $175.4 billion in total deposits as of December 31, 2022. Insured depositors will have full access to their insured deposits by Monday morning, March 13, 2023. SIVB's collapse is still a developing story. The author of the article provides a list of some of the well-known names that had funds in the bank and suggests that the CEO's stock sale two weeks prior to the collapse and the fact that SVB Securities’ CAO Joseph Gentile had previously served as the CFO of Lehman Brothers IB in 2007 are worth noting.
Sunday 03/12 (Most recent news at the top of this list)
18:15 EST - Statement from the Federal Reserve Board: “We are also announcing a similar systemic risk exception for Signature Bank, New York, New York, which was closed today by its state chartering authority. All depositors of this institution will be made whole. As with the resolution of Silicon Valley Bank, no losses will be borne by the taxpayer. Shareholders and certain unsecured debtholders will not be protected. Senior management has also been removed.”
Waiting for announcement as to who the SIVB buyer is: Bloomberg reports, the FDIC has started an auction for SVB, with final bids due later Sunday afternoon. The result may not come until Sunday evening
Reported that US banks sitting on unrealized losses of $620 billion.
Bidders on UK ARM include: UAE firms, global sovereign wealth funds
Scott Gallaway predicts Goldman Sachs will step in and buy the clientele to bolster their banking brand and make is synonymous with tech.
Bailout talks dominate social conversations
Bloomberg reports the FDIC and the Federal Reserve are considering creating a fund to allow regulators to backstop more deposits at banks that run into trouble
CZ lists USDC pairs to increase liquidity in an effort to help fellow crypto company Circle - link
So what happened to the Silicon Valley Bank ($SIVB) ?
Short answer: Free or low interest rate money to lend out + bad risk management that resulted in buying treasury bills while interest rates are rising + concentration of sectors = recipe for disaster leading to people not being able to get their money out.
Long answer: Silicon Valley Bank has been taken over by the California FDIC in an attempt to save the bank and depositors. Silicon Valley Bank was at it’s peak the 16th largest bank in the US and did this by concentrating its customer base in the tech industry. According to Bloomberg reporting, SIVB was serving half of all venture-backed companies in the US and 44% of the venture-backed technology and health-care companies that went public last year.
Who has funds in Silicon Valley Bank? (this is getting updated as more comes out)
$RBLX: 5% of cash on hand
$RKLB - almost 8% of cash on hand
Circle $USDC: $3.3 billion
$BILL - had $300 million in cash and $370 million in client funds
Note: This is not all of the accounts at SIVB but only some of the more well known names prone to trigger more contagion. Smaller names may be excluded from this list.
Silicon Valley Bank worked directly with many of the portfolio companies of Sequoia Capital, Accel, Kleiner Perkins, Ribbit Capital, Spark Capital, Greylock and more. In fact, 56% of the bank’s loan book was filled with loans to venture capital and private equity firms.
Here lies the problem as tech is already a volatile sector during Fed Rate hikes and high inflation. But now these lean tech businesses, fresh off of layoffs, have funds locked up and may not be able to make payroll or cover operating expenses.
As of December 31, 2022, Silicon Valley Bank had approximately $209.0 billion in total assets and about $175.4 billion in total deposits. At the time of closing, the amount of deposits in excess of the insurance limits was undetermined.
Directly from the FDIC release on Friday, March 10th 2023
“All insured depositors will have full access to their insured deposits no later than Monday morning, March 13, 2023. The FDIC will pay uninsured depositors an advance dividend within the next week. Uninsured depositors will receive a receivership certificate for the remaining amount of their uninsured funds. As the FDIC sells the assets of Silicon Valley Bank, future dividend payments may be made to uninsured depositors.”
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A Culture of Risk
Here is an interesting excerpt from a 2020 Seeking Alpha article referencing $SIVB:
Someone Always Knows
Just like ANY situation similar to this, someone ALWAYS knows first. Bloomberg reported that Greenoaks Capital was telling portfolio companies to move funds from Silicon Valley Bank ($SIVB) as early as November 2022. The thesis put forward was that these banks could potentially face a shortfall and be required to provide customers with higher interest rates due to a sequence of rate hikes by the US Federal Reserve. Those rumors will boil up and over time the bank run happens as depositors learn about rumors and seek to pull their money.
Two weeks prior to the collapse of $SIVB, the CEO sold $3.57 million of stock. Since the rumors were going on since November in the VC community, the timing of this is probably not a coincidence. Hopefully this is also included in the aftermath report and gets followed up on but these things always seem to slip through the cracks.
SVB Securities’ CAO Joseph Gentile served as the CFO of Lehman Brothers IB in 2007. That is too close for comfort if you ask me, seems like he sold the top.
The dominos have only just begun to fall. This is still a developing story but updates are going to be put at the top to make them easier to access when coming back to the story. Make sure to share this story and bookmark it to continue to get updates.