Silicon Valley Bank (SVB) in Santa Clara, CA, billed itself as “the financial partner of the innovation economy” and had more than $342 billion in deposits — including money from many influential venture capitalists, start-ups and tech firms.
That was before last week happened, when a sudden run on the bank opened the door to the prospect of a larger meltdown in the financial system.
After a weekend scramble, the Biden Administration, the US Treasury, the Federal Reserve, and the Federal Deposit Insurance Corp. (FDIC) devised a way to back up the full value of SVB deposits beyond the federally insured ceiling of $250,000. (The same is true for Signature Bank, which also failed.)
The move, likely to save a lot of tech jobs, came just in time — hysteria was beginning to build quickly. "Depositors will have access to all of their money starting Monday, March 13," the government announced late Sunday.
"No losses associated with the resolution of Silicon Valley Bank will be borne by the taxpayer." Instead, funds will come from the Federal Reserve and the Treasury’s Exchange Stabilisation Fund, which are funded by federal bank fees.
Mind you, people who do business with companies such as Bill.com, which relies on SVB, are still facing trouble.
René Lacerte, Bill.com’s CEO and founder, wrote yesterday that, "even though the government has now stepped in, the timing of the payments in process may take a few days. We continue working with our financial and regulatory partners to make sure all future actions we take will minimise the impact to our customers."
So, who gets the blame? Greg Becker, SVB’s CEO, who sold $3.6 million in company stock mere days before the bank’s collapse, will certainly face a lot of questions. Billionaire venture capitalist Peter Thiel's Future Fund, which led the first run on the bank, is also getting blamed for the collapse.
Behind all this, though, lay financial problems that had been building since 2022. As Rich Falk-Wallace, CEO of Arcana, a digital access research company, explained in a LinkedIn post: "The Fed raised rates, making all long-term debt decline in value, including SVB's assets.” He noted that the bank had already seen billions in losses by December.
Then, last week SVB announced it had sold $21 billion in assets at a 9% loss, spooking depositors and investors even as the bank said it would raise money to offset the losses. And with that, the bank run was on.
SVB couldn't cover the withdrawals and was $1 billion in the hole when the FDIC took over Friday.
President Biden declared afterward that "the American people and American businesses can have confidence that their bank deposits will be there when they need them." He also said that bank oversight regulations, weakened under President Trump, would be re-enforced.
Nevertheless, panic still lurks, and the technology industry is still worried. Who can blame them? Many startups had put all their VC cash eggs into the SVB basket. It wasn't just startups, though.
Roku, the streaming hardware power, had $487 million, approximately a quarter of its cash, in SVB accounts. The $250,000 of FDIC insurance wasn't going to help Roku much! And while networking giant Juniper had only 1% of its funds in SVB, those accounts represented its day-to-day working cash.
You can see how even one bank failure, especially one playing such a prominent role in tech, could have been the start of something bad.
And yet, while bank trading was volatile Monday morning, financial markets seem to be holding steady. Indeed, the NASDAQ 100 Technology Sector was on the rise.
That was exactly the point of the weekend action, according to US Rep. Jeff Jackson (D-NC). "It was repeatedly emphasised that the purpose (and legal basis) of this decision was to limit contagion. No one [in Congress] expressed any disagreement with the fundamental decision by the Treasury Department to make the depositors whole."
Given the political climate in Washington, DC, you might assume finger-pointing was rampant, but Jackson said there’s not (yet) a big debate over whether the government should have bailed out SVB and Signature's customers.
Instead, "the majority of the questions were members seeking reassurance that the steps the Treasury was announcing would be sufficient to stop the contagion.
Questions alternated between Republicans and Democrats and most of us asked some version of the same question: ‘Will this be enough?’ Second, with one exception, everyone treated the situation with the seriousness it deserves. Grandstanding and bickering were present, but basically minimal."
As best we can tell at this point, when push came to shove, the government did what it's supposed to do and focused on solving the problem in front of it.
Beyond dealing with two troubled banks, it may also have prevented an earthquake that could have shaken the tech industry, undermined a lot of start-up companies before they even got, well, started, and stop a panic that could have affected us all.