Silicon Valley Bank appears to have imploded within 24 hours, leaving Silicon Valley in a state of shock.
Why it matters: SVB is a cornerstone of the tech and life sciences startup economy. It's also America's 16th largest bank, and its failure would be the biggest since Washington Mutual.
- Yes, failure feels like a real option right now. Banks rely as much on confidence as on capital. Fairness has nothing to do with it.
- A more likely scenario is that a large bank like JPMorgan, or even Bank of America, steps up to buy or backstop SVB at a firesale price.
Timeline: Yesterday morning, SVB announced a $2.25 billion balance sheet bolstering plan, after rising interest rates had sparked losses on its Treasury and mortgage-backed securities portfolios. It all felt fairly orderly.
- Traders reacted very badly, wiping out more than 60% of SVB's market value.
- Depositors, and many of their venture capital backers, panicked. This led to a bank run, the exact extent of which we still don't know.
- To complete the unvirtuous cycle, SVB shares kept swooning in today's premarket (before trading was halted). Within the past hour, CNBC reported that the share sale had failed and SVB is actively seeking a buyer.
Behind the scenes: We're still in the war fog phase, but there seems to be plenty of blame to go around:
SVB appears to have not fully appreciated the diverging dangers of rising rates and falling venture capital investment levels. But, more importantly, its response yesterday was miserable.
- It mostly kept quiet, citing restrictions around the planned stock sale, but when Greg Becker spoke, he conceded that some clients are "starting to panic." Moreover, it emboldened liquidity concerns by being very slow in processing certain wire requests.
- Speaking of silence, General Atlantic refused to say a word, just hours after announcing an agreement to invest $500 million.
Several VC firms, including Coatue and Founders Fund, told portfolio companies that they should consider pulling their money. Others, like Sequoia Capital, urged diversification.
- It was understandable prudence — FDIC insurance only covers $250,000 of a client's deposits — but also fed the hysteria.
- Some critics of those firms note that the U.S. government would never let depositors lose their money (welcome back, too big to fail), although the counter is that even a bailout could involve disruptions to expenditures like payroll.
- Also worth noting that the run appears to mostly have been on deposits, as credit line covenants would discourage terminations.
SVB rivals, and wannabe rivals, pounced. Some publicly, but most privately. Several founders tell me about how bankers were lighting up their inboxes with incentives to move money.
- That said, there is still some contagion fear (even if that doesn't seem to make much sense). First Republic Bank, for example, saw its shares fall 16.5% yesterday, and were off another 31% at this morning's open.
The bottom line: The past 24 hours has reshaped the tech and life sciences ecosystem. Imagine what it might look like by tomorrow.
