The tech industry moved fast and bankrupted its most prestigious bank

On the last night of its existence, Silicon Valley Bank hosted VC Bill Reichert of Pegasus Tech Ventures, who gave a presentation on "How to Launch Your WOW!" to investors" to about 45 or 50 people. Mike McEvoy, the CEO of OmniLayers, told me about the scene. "It was scary there," he said. He saw several people leave the building during the event, looking sullen.

Roger Sanford, CEO of Hcare Health and a self-proclaimed "professional Silicon Valley gadfly", was also present. "Everyone was in denial," he told me. "The band kept playing."

The next day, regulators shut down the tech industry's iconic bank, the second-largest bank failure in U.S. history, after Washington Mutual in 2008.

What happened is a bit complicated, and I'll explain it later, but it's also simple. A bank run occurs when depositors attempt to withdraw all of their money at once, as in It's a Wonderful Life. And as It's a Wonderful Life explains, sometimes real money isn't immediately available because the bank has used it for other things. It was the immediate cause of the death of the most systemically and symbolically important bank in the tech industry, but to get there, a lot of other things had to happen first.

What is Silicon Valley Bank?

Founded in 1983 after a game of poker, Silicon Valley Bank was a major driver of success in the tech industry and the 16th largest bank in the United States before its collapse. It's easy to forget, based on the hype of tech industry nerds, but the real fuel for startups is money, not brains.

Silicon Valley Bank provided that fuel, working closely with many venture capital-backed startups. Among those who do business with SVB: the parent company of this site. That's not all. More than 2,500 venture capitalists have set up their banks there, as have many tech executives.

It fell in less than 48 hours.

What about Silicon Valley Bank customers?

Sure, Silicon Valley Bank accounts were FDIC insured, but only up to $250,000. This is how FDIC deposit insurance works.

That could be a lot of money for an individual, but we're talking about businesses here. Many have consumption rates of millions of dollars per month. A recent regulatory filing reveals that approximately 90% of deposits were uninsured in December 2022. The FDIC says it is “undetermined” how many deposits were uninsured when the bank closed.

How bad could this get?

Even small cash outages can have dramatic effects on individuals, businesses and industries. So while a very likely outcome is that uninsured depositors will eventually recover, the problem is that they currently don't have access to that money.

The most immediate effect is on the payroll. There are many people who wonder if their next salary will be affected. Some people already know what their salary will be; a payroll services company called Rippling had to notify its customers that some paychecks were not arriving on time due to the collapse of SVB. For some workers, it's rent or mortgage payments, and money that doesn't arrive for groceries, gas or child care.

The problem is access to money.

This is especially difficult for new businesses. A third of Y Combinator companies will not be able to pay payrolls in the next 30 days, according to YC CEO Garry Tan. An unexpected layoff or layoff is a nightmare for most businesses; After all, you can't make sales if the sales force doesn't show up in the office.

Some investors lend money to their companies to pay the payroll. Penske Media, the biggest investor in that website's parent company, Vox Media, told The New York Times that it "is ready if the company needs additional capital," for example.

Of course, another problem is that many investors were also betting on SVB.

Payroll isn't a company's only expense: there are also payments to software vendors, cloud services, and more. I'm only scratching the surface here..

Does it have anything to do with cryptocurrencies?

The SVB failure has nothing directly to do with the ongoing crypto crash, but it could also worsen this crisis. Crypto firm Circle operates a stablecoin, USDC, which is backed by cash reserves, $3.3 billion of which is locked up in Silicon Valley Bank. This stablecoin should still be worth $1, but it broke its ankle after the failure of SVB, plunging as low as 87 cents. Coinbase has stopped conversions between USDC and the dollar.

On March 11, Circle said it "will support USDC and cover any shortfalls using company resources, bringing in outside capital as needed." The value of the stablecoin has largely recovered.

Oh, and bankrupt crypto lender BlockFi also has $227 million in blocked funds.

So if SVB no longer exists, what replaces it?

In response to the collapse, the FDIC created a new entity, the National Deposit Insurance Bank of Santa Clara, for all of Silicon Valley Bank's insured deposits. It will open on March 13. People who have uninsured deposits will get an early dividend and get a little certificate, but that's no guarantee people will get all their money back.

The FDIC's job is to obtain as many assets as possible from Silicon Valley Bank. This can happen in several ways. One is for another bank to acquire SVB, obtaining the deposits in the process. At best, this acquisition means everyone gets all their money back - yay! And that's the best-case scenario, not only for anyone who wants to get their paycheck on time, but also because the FDIC's primary mission is to ensure stability and public confidence in the US banking system. If SVB's assets can only be sold for, say, 90 cents on the dollar, it could encourage bank runs elsewhere.

Okay, but let's say the acquisition doesn't happen. And? Well, the FDIC assesses and then sells the assets associated with Silicon Valley Bank over a period of weeks or months, with the proceeds going to the depositors. Uninsured deposits rank high on the reimbursement scale, just behind administrative expenses and insured deposits. So even if a sale doesn't happen soon, there's a good chance customers will get their money back, assuming they can stay afloat in the meantime.

Monday morning they had customer service and access to their funds by ATM, debit card or check.

The money for all of this comes, for now, from the FDIC's Deposit Insurance Fund, which has said it will protect all of the institution's depositors. While that leaves out shareholders and "some" unsecured debt holders, it meant most of the bank's customers could resume operations on Monday.

President Joe Biden commented on the situation in an attempt to reassure the public, saying Silicon Valley Bank funds would still be "there when you need them" without requiring a taxpayer-funded bailout. The money used comes not from taxes, but from insurance premiums paid by banks and interest earned on money invested in US government bonds, according to the FDIC.

On Monday, The Wall Street Journal reported that FDIC officials told senators they planned to try again to auction off the failing bank. According to the WSJ, declaring the bank's bankruptcy "a threat to the financial system" now allows for additional flexibility that did not previously exist.

How did we get here?

So it's actually bigger than Silicon Valley startups and venture capitalists. To understand how this happened, we need to talk about interest rates. Since 2008, they've been pretty low, sparking a venture capital boom and some real bullshit (see: WeWork, Theranos, Juicero). There was a lot of foam for a long time, and it got worse during the pandemic when the ticket printer went brrr. actions themselves? Crypto boom? PSPC? Thanks to Federal Reserve Chairman Jerome Powell who opted for the Zero Percent Interest Rate Policy (ZIRP).

So if you're, say, a startup bank, you know what the ZIRP world does to you? Well, my children, according to the latest SVB annual report, bank deposits have increased as IPOs, SPACs, venture capital investments, etc. continued with frenzy.

And because of all these liquidity events, congratulations by the way, nobody needed a loan because they had all this money. It's a bit of a problem for a bank. Loans are an important way to earn money! So, as Bloomberg's Matt Levine further explained, Silicon Valley Bank bought government securities. It was an effective and consistent way for SVB to make money, but it also meant it was vulnerable if interest rates rose.

A good old bank run brought down SVB, and there was no George Bailey to stop it.

What they did ! Powell has started raising rates to rein in inflation, telling Congress this week he hopes to let them go to 5.75%, which is well above zero.

Here's the problem for Silicon Valley Bank. You have a lot of assets that are worth less if interest rates rise. And it also finances startups, which are more numerous when interest rates are low. Essentially, these bankers have managed to get themselves into trouble, which some short sellers have noticed (Too bad the shorts! Even if they're right, they're also screwed because it's going to be hard to cash in their profits).

So, did Silicon Valley just suspend the prisoner's dilemma?

Certainly, this mismatch of risks in itself will not capsize a bank. That's what a good old-fashioned bank run did.

Here's how it happened. When interest rates rose, venture capitalists stopped wasting money. Startups started using more of their money to pay for their expenses, and SVB had to raise funds to make it happen. This meant the bank needed cash, so it sold $21 billion worth of securities, resulting in an after-tax loss of $1.8 billion. He also devised a plan to sell $2.2 billion worth of stock to prop himself up. Moody's downgraded the bank's credit rating.

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