Why Silicon Valley Bank Collapsed

Every Friday we host a live 1:1 discussion via discord with Moby Premium members at 12pm EST. 

This gives you the opportunity to ask us any questions you have on the markets, the economy, crypto, and more!

This week's recording was a little different, as the news about Silicon Valley Bank shutting down hit roughly 5 minutes before our live recording session.

In this article, we'll do more coverage based on what went down this weekend. 

Here are the 4 key things we went over: 

• The general overview of Silicon Valley Bank's fast demise

• Which companies are the most affected by the collapse

• How regulators can limit contagion from spreading this week

• A quick update on the Ukraine conflict

And if you're too busy to listen to the entire recording, below we included a compact summary of what went down.

To get all the juicy details, just listen to the entire recording. And now, onto the summary👇

Overview:

This week is all about Silicon Valley Bank and how such a robust banking institution can collapse so quickly (hint: no one is EVER safe from a bank run). 

We're going to get a chance to better understand how interest rates put unique pressure on specialty and regional banks and why maybe it's a bad idea to have all your customers be companies linked by a few hundred venture capitalists. 

There's a lot more to cover here, so let's dive through the details.

A Quick Summary of How SVB Failed:  

So yeah, unless you've been living under a rock for the past few days you've probably heard about America's 20th-largest bank completely imploding overnight.

There's lots of really detailed reporting out there about exactly how SVB failed, so what we'll do here is oversimplify a bit and give you more of a digested look into the collapse. 

SVB is a huge deal -- at least they are to the Moby team since we're a bunch of tech/finance veterans.

Silicon Valley Bank is the premier banking service if you're in the top tier of the tech industry. Every one of the best startups banks with SVB and they offer(ed) lots of cool services to founders and VCs alike. 

This made SVB a huge amount of money over the last twenty years as they financed and provided infrastructure for the meteoric rise of the tech world coming out of Silicon Valley.

They did an awesome job building their business into the 20th largest bank in America. 

But being a specialty bank is actually pretty risky, simply because you're technically always at risk of a bank run when you're a bank. 

We'll get into that a little more in a bit though. 

Anyway, so SVB didn't do the best job managing their risk once the Fed started raising rates.

They have a bunch of mortgage-backed securities & bonds that they bought when interest rates were low.

While those securities would mature in time and eventually become valuable -- a security with a 1% return in an environment where interest rates are over 4% isn't really worth much of anything to trade. 

But as long as SVB maintained deposits, they would be fine. However, as they kept reporting their earnings, it became clear that the bank was technically insolvent starting in September.

A few newsletters started reporting on this in earnest in February and then things started picking up quickly from there. 

Remember, SVB is primarily a bank for startup companies. Startups get cash from VCs and store their money there.

The silicon valley founder scene is actually pretty small and insular. So when rumors start flying that SVB may be technically insolvent -- those rumors can turn into a wildfire VERY quickly. 

Things came to a head this week when more and more cautious founders started pulling money out of SVB.

In order to stem the bleeding, SVB sold some assets off its balance sheet at a loss.

This simply added more fuel to the fear driving people out of SVB. Then on Thursday Peter Thiel and his founder's group basically ordered their entire portfolio of companies to take all of their money out of Silicon Valley Bank. 

Thiel may not be the nail in the coffin here, but he's definitely the most high-profile person who was accelerating the bank run. 

Because after that we just had a good old-fashioned run on Silicon Valley Bank. Too many companies tried to pull their money out and the bank completely failed in less than a day.

The government has seized control of SVB and its assets and as we write this we are currently waiting on the results of an auction the government is holding to sell off SVB to a larger bank that would guarantee depositors' accounts. 

The Fallout From SVB's Collapse:

Right now the market is currently fleeing certain regional banks. First Republic Bank, a San Francisco-based regional, is down over 60% after losing 30% in value during the initial SVB fallout on Friday. 

This is despite the fact that the FDIC and Fed had announced that depositors in SVB will have full access to their deposits -- even depositors that were uninsured.

This is a solid, balanced strategy that allows SVB to fail without causing a massive contagion event. 

But confidence in the regional banking sector has clearly been shaken -- leading to the next few days being reasonably critical for the future of this market. 

Basically, if other regional banks like First Republic also go down entirely thanks to shaken confidence, the only real result will be a lot of consolidation in banking.

We'll go from a bunch of specialist banks and some titans to just the top 4 or so banks running everything.

It's hard to say if this will be a good or bad thing for the market overall, but our economy writ-large benefits from more competition generally. 

This situation is rapidly evolving though, so we'll keep you posted as the markets open and we learn more. 

Wrapping this Up:

While SVB is going to be the only thing the financial press talks about for a while -- there's still a LOT going on in the economy right now.

The US is spending more per year on supporting Ukraine than it did on its own invasion of Afghanistan and that's a really important lens to look through as we understand how the global order is shifting during the 2020s. 

Meanwhile, we're still watching for a really important CPI report that will drop on Tuesday and give us a better sense of whether or not inflation is finally getting more under control. 

All-in-all, this SVB collapse is very much a product of hawkish Fed policy (and pretty inane risk management on the part of a too-specialized executive team).

But this collapse may not help stem the tide of inflation at all.

We might be only at the beginning of what becomes a pretty hard landing orchestrated by the Fed. We'll have to see.