Envisioned over a poker game in 1983 between Bill Biggerstaff and Robert Medearis, Silicon Valley Bank opened its first office in Santa Clara, providing banking services to venture-backed startups and Valley stalwarts like Bay Networks and Cisco Systems. Famously known as the best bank for startups, 56 percent of its loans at the end of 2022 were secured by its limited partner commitments. The deep entrenchment of a bank which went public on NASDAQ in 1988, raising an astonishing $6 million, a commendable feat in that era might we add, was turning out to be the second-largest failure of a financial institution in U.S. history. The SVB collapse on Friday sent shockwaves across the market.
The Ordeal: Silicon Valley Bank Collapse:
Ever since the Great Recession of 2008, taxpayers had been worried for the safety of their finances fearing collapses and market crashes, because while the recession was officially at its end by June 2009, the aftermath effects were felt for much longer. Unemployment rates could not return to their pre-recession levels until 2014 and median household incomes recovered by 2016.
Abandoning the preliminaries to the ordeal of the present financial market, the economy is facing inflation-induced woes, not without bracing investors for a potential onset of recession due to the Federal Reserve’s contemptible attempts at slowing economic growth. 2022 proved to be the year of deepening economic crisis with the S&P 500’s steep decline of over 19.4 percent, marking its worst year since the financial crisis of 2008.
Every company-financial crisis that occurred in 2022, spurred collapse-contagion fears, including the November 2022 scandal – FTX bankruptcy. Every investigation of a scandal leaves no stone unturned but yet cannot stop the severe repercussions. The aftermath of the FTX collapse left investors worried about the future of cryptocurrency.
With these precedents, investors have been wary yet hopeful; crippled yet dependent. The latest scandal has left taxpayers flabbergasted. Silicon Valley Bank faced a sudden capital crisis and bank run and was taken over by federal regulators after collapsing on Friday morning. The go-to bank for US tech startups, deeply embedded in the industry, was hinging on incapacitating. SVB account holders, fearing the loss of their hard-earned money, frantically rushed to ATMs to retrieve funds.
Amidst the crestfallen conditions of the market, by virtue of tech layoffs and lesser economic spending, the startup-focused lender SVB’s collapse implored account holders to take to Twitter to share their lamentings and call for relief.
The SVB Collapse Big Picture: The Beginning, Middle, and End?
One of the key reasons why Silicon Valley Bank was so deeply seeded into startups was because of its speciality – venture debt. With several divisions intertwined with the startup world, SVB was also an investor in several blue chip funds, tech startups, and health startups. SVB claims it banks a major half of all U.S. venture-backed health and tech startups.
By not only financing ventures but even providing venture debts and loans to the VC firms, Silicon Valley Bank was dependent on trusting the assessment of the VCs backing the company.
The Federal Reserve’s aggressive move to raise interest rates a year ago, to curb inflation combined with the higher borrowing costs, snipped the throttle of tech stocks that were benefiting SVB. These rates were causing harm to the value of long-term bonds that financial institutions like Silicon Valley bank devoured during the period of near-zero interest rates.
Simultaneously, the well of venture capital was drying, coercing startups to diminish funds held by SVB. So, the bank was treading on heaps of unrealized losses in bonds, and the speed of customer withdrawals was escalating.
How Did It Happen?
In a matter of 48 hours, the reign of Silicon Valley Bank as the 16th largest bank in the United States and its reputation as the go-to bank for various industry startups such as Y Combinator who launched DoorDash, AirBnb, and DropBox, descended into cinders.
On Wednesday, the descent of SVB loomed ahead when the financial institution announced that it was compelled into selling a quantum of securities at a loss and that it would be selling $2.25 billion in new shares to even out the balance sheet. The venture capital industry, eminent for its close-knit connections and a penchant to broadcast opinions and information at the velocity of light, swiftly advised companies to withdraw their money from the bank, triggering panic, mayhem, and eventually the bank’s collapse.
The stunning event unfolded even more dramatically, when Silicon Valley Bank’s stock crippled to an unimaginable low, taking down other banks with it. Several bank stocks including PacWest Bancorp, Signature Bank, and First Republic were halted on Friday morning after SVB abandoned its efforts to quickly find a buyer or raise capital.
Why Are Taxpayers Appalled?
While everyone connected to the bank and any institution affected by Silicon Valley Bank’s collapse would face enormous toil on their deposit, the repercussions of this fall came across as a shock to many because:
> The collapse was too swift – hours before its closure, industry analysts were sanguine that the bank was a good investment despite its previous day’s stock drop of 60 percent.
> The traditional ritual of processing annual bonuses in Silicon Valley Bank for the previous year, occurs on the second Friday of March, an anonymous source told CNBC.
SVB employees received their annual bonuses for 2022, on Friday just mere minutes before the government took control of the institution.
Making a Move: The Predicament of Federal Regulators:
The Federal Deposit Insurance Corp (FDIC), U.S. Treasury and the Federal Reserve, issued a joint statement:
“No losses associated with the resolution of Silicon Valley Bank (SVB) will be borne by the taxpayer.”
Billionaire investor Pershing Square’s CEO Bill Ackman lauded this intervention of the U.S. Government to protect depositors as a move to ‘restore confidence’ in the banking system. In a series of tweets, Ackman noted that amidst the implosion of the SVB collapse, the government did the right thing and that this was not a ‘bailout’.
“The Federal Reserve should IMMEDIATELY buy all the securities and debt that the bank owns at near par, which should be sufficient to cover most deposits. If the Fed doesn’t own it, trusting the banking system becomes an issue.”
– Dallas Mavericks owner, billionaire Mark Cuban wrote in a Twitter chain
ChatGPT owner, OpenAI’s head Sam Altman also answered the pleas of people by offering emergency funding to startups to pay their employees and face times of peril, with little ease, according to Reuters.
While the Silicon Valley bank collapse could have a severe plausible domino effect on other U.S. banks, as well as international banks, many VCs and entrepreneurs are despondently hoping for SVB to survive this mayhem, with minimum ruin.
