Posted on 03/10/2023 9:00:00 PM PST by SeekAndFind
Last week I warned that it already felt like a recession in Silicon Valley, where Patagonia fleece vests are practically the corporate uniform for founders and venture capitalists alike. Now the chill in the California air is clear to everyone.
The questions now revolve around how long “tech winter” lasts and how far it spreads as contagion from the Silicon Valley Bank collapse becomes a real concern. Will this be another Lehman Brothers meltdown threatening the entire system or just another of the long line of banks that hit a pain point and required regulators to intervene?
The Fed itself never considered Silicon Valley Bank to be too big to fail. We know this because despite being one of the biggest banking stocks, the operation itself never made the list of systemically important institutions that get stress tested every year.
And Silicon Valley Bank should have passed that test with flying colors. Whatever happened here looks more like bad communication than anything else . . . only a few weeks ago, management was doing investor events with the usual amount of confidence.
More information will come out as the regulators go over the books and figure out when it all went wrong. If I were guessing today, I’d suspect that customers who had watched crypto bank Silvergate (SI) wind down decided not to push their luck . . . but when they all made a run on their deposits at once, they crashed their own bank.
As a result, Silicon Valley Bank never even got a chance to show us whether its recapitalization plan would help it weather the kind of “Patagonia fleece vest recession” I’ve been talking about recently. But while times are tough in Silicon Valley, management seems as surprised by this as we were.
According to the fateful shareholder letter that went out a few days ago, the problem is actually with the entrepreneurs and venture capitalists that draw on lines of credit to fund unprofitable operations. SVB thought they’d cut costs to conserve cash, but that just didn’t happen.
Maybe those entrepreneurs are spending $5 billion more this quarter than their bankers initially expected . . . but the overall number showed no sign of going down this quarter until people started pulling their accounts. That’s the “elevated client cash burn” that scared shareholders.
We’ll just have to see. But ironically enough, the bank seemed resilient enough to survive an actual economic downturn. At worst management thought 0.35% of the loan portfolio would go bad this year.
Passing the stress tests required larger institutions to watch 6.4% of their loan books disintegrate. And that was a “severe” scenario that reflected unemployment shooting to 10% . . . no hint of that on the horizon yet.
All in all, Silicon Valley Bank’s failure may be only a blip. But we need the FDIC to move fast here to liquidate its assets and make uninsured depositors whole. Otherwise, $250,000 isn’t going to stretch far when it’s time to make payroll.
Here’s an interesting angle for crypto stablecoins:
“Cryptocurrency firm Circle Internet Financial told the Globe that SVB was one of six banks it has used to hold the $11 billion of cash reserves for its USDC stablecoin, in addition to $32 billion kept in US Treasuries, according to its filing. Other companies, including Flywire and AirSculpt Technologies, filed disclosures indicating they have loans from the bank.”
Here's a similar take; https://www.cnbc.com/2023/03/10/silicon-valley-bank-collapse-how-it-happened.html
???????????????
Bush cranked up the printing presses to prevent depression.
fubo cranked them into overdrive
In 2010 the fed should have been raising interest rates, but nOOOOOO...
fubo kept it going.
Then came President Trump.
He could have slowed down the presses, but did he??
nOOOOOOO....
Now there is no choice but to slow it down, and we all pay the price.
We are paying the price for the bush/mccain depression level event of ‘06.
Keep your eye on Republic bank and Wells Fargo.
Let Silicon Valley Bank fold and their employees and uninsured depositors learn to code....
But what about the domino effect when those companies wont be able to make payroll. It sounded like alot of business accounts were involved.
yea sounds like no soft landing. Rock and hard place.
But we need the FDIC to move fast here to liquidate its assets and make uninsured depositors whole.
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I certainly hope this is not the plan. Of course ... I think that would be vewwy wayciss. And just bad policy too.
“filed disclosures indicating they have loans from the bank.”
Yup—loans from failed banks are always fun.
The creditors of the bank want those loans paid back—immediately.
Lawyers have a field day with this stuff.
Uninsured depositors get to wait and wait and wait—while the liquidation process moves forward.
Many of these depositors were high tech “flyers” who could barely make payroll.
By the time their cash is available its only use may be to pay their creditors in their bankruptcy proceedings.
That is what “financial contagion” is all about—businesses depend on cash flow—when they run out of cash they die—no matter who owes them money.
Thanks.
Here’s a good article with more details.
https://www.cnbc.com/2023/03/10/silicon-valley-bank-collapse-how-it-happened.html
I understand. I am not saying I support bailing out the bank. All I was saying is that a lot of powerful people are going to use whatever influence they have to prevail upon the Fed and the FDIC to bail this bank out and will use whatever reasons they can come up with to justify it. So let’s see what happens Monday morning.
I will watching the futures market tomorrow night with great interest.
“But what about the domino effect when those companies wont be able to make payroll. It sounded like alot of business accounts were involved.“
Scr*w ‘em. Let the market work it through. These people think they are smarter than anyone else. They put their money in this bank knowing the risks. A big dose of reality served to these California genius’s, will be good for everyone.
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