The rapid collapse of Silicon Valley’s bank sent shock waves through the US financial system over the weekend — with many wondering how the nation’s 16th largest lending bank, which caters to thousands of innovative technology startups, could fail so spectacularly.
Prior to last week, SVB had $209 billion in assets under management. Its downfall is considered the second largest banking failure in US history.
The roots of the bank’s failure can be traced back to the early days of the coronavirus pandemic, when the Federal Reserve kept interest rates near zero in order to stimulate growth during a sharp economic downturn.
The technology sector benefited greatly from the cheap money that was pouring in, fueling sky-high valuations that analysts warned might be overblown.
SVB was one of the primary beneficiaries of the fortune. In 2021, venture capital-backed startups raised a total of $330 billion — double the amount from the previous year.
In just one year, SVB has seen a 100% increase in the amount of funds deposited into its accounts.
In 2018, SVB had $49 billion in deposits. By the end of 2020, that number had doubled to $102 billion. In 2021, the bank held $189.2 billion.
By the end of 2022, the figure had narrowed slightly to $175.4 billion as customers were affected by a weak market for initial public offerings. Recently, more than 90% of the bank’s deposits were above the federal insurance threshold of $250,000.
SVB has invested liquidity in long-term, high-yield bonds and mortgage-backed securities. When the Fed raises interest rates, the value of those investments plummets.
As revenues in the tech sector have fallen in recent months, the bank has struggled to bridge the large hole on its balance sheet.
JPMorgan has warned that the Silicon Valley bank’s “unrealized losses of $16 billion” could pose serious risks, according to an analyst report reviewed by The Post.
February 27, 2023
SVB CEO Greg Baker sold $3.6 million worth of the company’s stock in less than two weeks before the company disclosed the extent of its losses.
Baker offloaded 12,451 shares — the first time in more than a year that the CEO has sold shares in parent company SVB Financial Group, according to regulatory filings.
Hired Goldman Sachs
Moody’s Investors Service, a risk management agency, told SVB executives that it was preparing to downgrade its credit rating.
The notice from Moody’s forced SVB to turn to Wall Street investment giant Goldman Sachs in hopes of hatching a plan to boost shares and calm investors spooked by liquidity concerns, According to Insider.
Goldman’s efforts weren’t a success — and they weren’t helped by a disastrous conference call last Thursday that the CEO held with clients.
Baker sought to calm investors and tech entrepreneurs, who he admitted were “starting to panic.”
“My request is to stay calm, because that’s what’s important,” Baker told listeners on the call.
“We’ve been supportive of you for the long haul – the last thing we want you to do is panic.”
On the same day, SVB said it would raise $2.25 billion after losing $1.8 billion after tax in various bets on securities.
SVB’s liquidity crisis and attempts to calm investors were widely reported in the media. Then the bank announced that it was trying to sell itself – without success in finding buyers.
Federal Deposit Insurance Corp. took over. on SVB assets, marking the largest bank failure since Washington Mutual during the height of the 2008 financial crisis.
The bank failed after depositors — mostly tech workers and venture capital-backed companies — began withdrawing their money, triggering a run on the bank.
Financial regulators shut down the New York-based Signature Commercial Bank, even as President Biden defended the government’s actions and said taxpayers wouldn’t foot the bill for the bailout.
The federal government has announced a plan to protect depositors’ money and make it complete with the promise that it will not come at the expense of taxpayers.
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