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.
Nothing to see ere. Move along.
These same folks could hardly wait to FORCE Oklahoma and Texas banks to fold back in the great crash in the oil fields.
Let Silicon Valley Bank fold and their employees and uninsured depositors learn to code.
The vaccine will prevent the virus
...
It is possible that the collapse of SVB could actually help the stock market. It could force the Fed to stop raising interest rates.
But that will not stop our gov from spending. This is a real rock and hard spot situation. Time for some pop corn.
Well, that is some major gas-lighting. Plus, I’ve heard this tune before. Back in 2008 just before the tax-papers had to bail out several banks and businesses.
The fact that this bank’s troubles were hidden from investors and depositors until today shows me that there is more trouble ahead in the financial sector. When Janet Yellen testified there were several banks they were “keeping an eye on” she didn’t say which ones, but I believe she mentioned the tech sector. I suspect this is not the only shoe to fall.
Stopping increases in the interest rate would do great things for the stock market, but awful things for inflation.
I’m getting an awful 2008 or even 1970’s feeling here. I’m afraid there is no soft landing in our near future.
USDC Stablecoin is dropping now. Down 10% now. Trading suspended.
What exactly triggered the SVB meltdown?
Was it a run in the bank? And if so, what caused it?
You can go to 8 Feb (CNBC segment) and see the ‘leak’ starting on public attention spiraling. I would make a guess that already by late December....insiders to the bank were in distress.
This article sounds like an “equity” hire airline pilot announcing on the loud speaker that the passengers need not worry about the bumpy ride—what they should be worried about is that the pilot has never landed a plane before....
;-)
Why do we "need" that?
Because a number of companies have a lot of money in that bank they need back. Don’t think for moment that calls were not made and favors are being called in to have deal ready for some sort of bail out by Monday to sort it all out. The Fed will be expected to step in and make something happen under the guise that the entire banking sector needs to be stable.
All the banks are sitting with Bond Portfolios that are going under water because of Rate Hikes and will not be able to unload them except at a loss. Powell is now in a really tight position, he will be under Big Pressure for no more rate hikes and even possibly a rate cut to stabilize the mess of our own making. No good choices here.
My understanding from both Steven Van Metre and Cathie Wood is that a lot of banks are sitting on unrealized losses due to the unprecedented rate hikes.
But what caused started it with SVB was two things. SVB is highly concentrated with customers in Venture capital and their start up clients. Venture is perceived to have too much risk right now, so people were withdrawing their deposits.
And the bank was offering lower interest rates than money markets, so depositors were also shifting deposits from the bank to money markets.
This forced the bank to sell some of the assets that were underwater due to the rate hikes. When they did, they had to recognize a huge loss. And they tried to raise capital to get their capitalization ratio back up.
The market saw that and panicked.
Not sure what caused the other bank, but their clients were heavily crypto. And they were under some of the same interest rates are better elsewhere pressure that SVB was.
SVB announced the need to raise capitals Wednesday.
There was a large 10%? drop in the price of the stock on Thursday. Not sure how many deposits were withdrawn.
But on Friday the stock literally crashed and the FDIC stepped in and took over.
Peter Thiel? who has a lot of venture capital relations, ordered everyone of his funds out of the bank.
So yeah it was a run.
A deep Recession or even a Depression will certainly take care of Washington’s inflation problem. ‘That’s for sure. That’s for danged sure.’
Explain to me again why I need to pay gambling debts for the wealthy and make those uninsured losses “whole.”
In your benevolence and endless supply of currency, do you think you could find a little extra make the losses to my portfolio whole? I sure would appreciate it.
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