Silicon Valley Bank was a financially stable company that posted a request for money on Wednesday.
Within 48 hours, the venture capital community that SVB had helped and supported had caused a panic that killed the bank.
Bank regulators seized SVB’s assets on Friday and subsequently closed the bank. This was the second-largest bank failure in American history, and the greatest since the 2008 financial crisis. Late on Wednesday, the company shocked investors by saying that it needed to raise $2.25 billion to fix its balance sheet. This was the start of a downward spiral for the company. A reputable bank that had done well with the help of its tech clients suddenly went out of business.
Even though the dust is starting to settle on the second bank wind-down that was announced this week, members of the venture capital community are still upset about the role that other investors played in SVB’s failure.
Ryan Falvey, an investor in financial technology, told CNBC that the “hysteria” that led to a bank run was caused by venture capitalists. This will go down in history as one of the worst cases of a sector “cutting off its nose to spite its face.”
This is the latest effect of the Federal Reserve’s rate-hiking campaign, which was the most aggressive in the past 40 years and was done to fight inflation. People are worried that startups won’t be able to pay their employees in the next few days, that venture capitalists won’t be able to get funding, and that an already struggling industry will go down even further.
Higher rates have caused problems, which in the end led to the end of SVB. SVB ran out of money because its startup clients withdrew money to keep their businesses going in the cold environment for initial public offerings and private fundraising. The bank reported on Wednesday night that it had lost $1.8 billion because it had sold all of its bonds.
Sources familiar with the situation say that there was another wave of withdrawals on Thursday when venture capital firms told the companies they had invested in to move their funds because of the urgent need for new capital after the collapse of the crypto-focused Silvergate bank. If there was a bank run at SVB, startups that couldn’t get to their deposits would be in danger of going out of business.
Thursday afternoon, SVB customers said that CEO Greg Becker’s request to “stay calm” didn’t make them feel safe. By the end of regular trading, the stock price had dropped 60% over and over again. One person in the conversation pointed out that Becker couldn’t say for sure that this was the last time the bank would need money.
Deathblow
A California regulatory filing shows that people withdrew a staggering $42 billion in deposits by the end of Thursday.
The statement says that by the end of business that day, SVB had a negative cash balance of $958 million and had not been able to get enough collateral from other sources.
Falvey, a former employee of SVB who is now a fund manager, said that the interconnected structure of the tech investment community was a factor in the bank going out of business in 2018.
In the past few days, big funds like Union Square Ventures and Coatue Management have sent mass emails to the entrepreneurs on their lists, telling them to take their money out of SVB because they are afraid of a bank run. He said that social media added to a feeling of fear that was already strong.
Falvey said that telling people to “get their deposits out” because the project is doomed to fail is like yelling “fire” in a crowded theatre. “It’s a self-fulfilling prophecy,” said one person.
Spencer Greene, a partner at TSVC, ripped into investors who “were wrong about the facts” when it came to SVB’s position.
I don’t think there was a liquidity problem until a couple of ventures capitalists brought it up “Greene remarked. They did things without thinking, and their actions made them even worse.
‘Business as usual’
On Thursday night, some SVB customers got emails telling them that the bank was running normally.
In an email to a customer, an SVB banker says, “I’m sure you’ve heard a lot about SVB in the markets today, so I wanted to give you some background.” CNBC was given a copy of the message.
Here at SVB, nothing has changed “The banker put his clients’ minds at ease. I’m sure you have some questions, and I want you to know that I’m here to answer them all.
David Faber of CNBC said on Friday that SVB gave up on trying to sell shares because their value kept going down. He said that instead, it was trying to find someone to buy it. Faber said, however, that the process of selling was complicated by the flow of money and, in the end, failed.
James Falvey, a consultant for the financial crisis who used to work for Wells Fargo and saw SVB’s mid-quarter statement on Wednesday, is optimistic. He told everyone that the bank was in good financial shape and had enough money to pay back their deposits in full. When there were a lot of rumors, he told the companies in his portfolio to keep their money at SVB.
Those who left their money at SVB after the bank run that caused it to be seized won’t be able to get it back for an unknown amount of time. When most of the savings held by SVB, which were not guaranteed, will be made available is not known. The insured deposits could be given back as early as Monday.
The California financial regulator has stated, “The Bank cannot pay its loans when they come due.” No further funds are available, as “the bank is dry.”
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