We Just Witnessed The Second Largest Bank Failure In US History: RIP Silicon Valley Bank

Don’t freak out BUT we just witnessed the second-largest bank failure in US history… so go call your mom.

Yesterday, after a chaotic 48-hours, Silicon Valley Bank was taken over by regulators.

Let’s start with the basics…since most people outside of Silicon Valley have never heard of Silicon Valley Bank. And for good reason. It caters to a VERY specific clientele… which is part of the problem (remember to diversify yo bonds, kids). It offers banking services to lots of startups, gives loans that more missionary banks might pass on, and hopes to manage tech bros fuck you money when they exit.

Business was booming until the Fed started raising interest rates to tackle inflation (friendly reminder: this is the reason a dozen eggs will cost you your firstborn). That forced many of the players making it rain on startups to rethink their strategy (aka stop giving money to unprofitable businesses).

That means the Pied Pipers and Aviatos of the world have been burning through the cash they have like they're Russ Hanneman at a McLaren dealership (spoiler: they're burning money fast) to keep growing and paying the bills.

As one might expect, Silicon Valley Bank has had issues keeping deposits in its coffers. Not great, Bob.

To keep up with the outflows, SVB was forced to sell a f*ck ton of securities ($21B) at a $1.8B loss. Many of those securities were relatively safe debt, like Treasurys. The problem is that the Fed has been raising rates. Which means the value of the debt SVB is holding (with relatively lower interest rates) is worth less. So when they were forced to sell, they got bent over and shown the 50 states.

All of this led to fears about the stability of the bank. And by Wednesday night it looked to raise roughly $2.25B via an equity offering to shore up its balance sheet… but nobody was dumb enough to bite.

In between the time it mentioned the plan and found out investors would rather give their money to SBF than to them, shares of SVB had fallen off a cliff and prominent tech douchelords began raising red flags and recommending portfolio companies pull their funds from the bank. And this, ladies and gentlemen, is what we call a bank run.

CNBC - All told, customers withdrew a staggering $42 billion of deposits by the end of Thursday, according to a California regulatory filing.

By the close of business that day, SVB had a negative cash balance of $958 million, according to the filing, and failed to scrounge enough collateral from other sources, the regulator said.

And yesterday things got so bad that SVB decided to just sell itself outright before it could collapse. It appears it should have read the room because there was very little interest. Which is when the state is California and the FDIC stepped in. The Regulators went full Jon Taffer on ‘em and shut down the bank to stop the bleeding. 

AKA the bank failed.

So, everyone/entity with less than $250k in the bank will get their cash back this week. Because that's how FDIC insurance works. The poor bastards with more than that in any one account may be shit out of luck and will likely have to deal with the government, which now owns the bank.

It's still pretty unclear what happens next. A larger bank could step in and buy SVB or it could unwind, thus tying up everyone's money for longer.

Probably the most immediate impact will be on all of the startups that have fat stacks of cash tied up in SVB that need to make payroll next week…

Other bank stocks with similar exposure also got rekt on Friday, but the thought is that it won't be a clusterfuck like 2008 (also, that was a credit crisis).

PS - Want more business and markets news? Follow me (@JPMorinChase) and @BarstoolFinance on Twitter for real time news and commentary. I also write The Water Coolest, Barstool's daily business and markets newsletter. It hits your inbox at 6 AM and covers all stories you need to know (not just SBF news). JOIN NOW >