The next few days are shaping up to be critical for Silicon Valley Bank (SVB) customers and its regulators.
The latter shut down the bank, which was the go-to lender for startups and many Silicon Valley businesses, including California wineries and farmers.
SVB’s failure, which was the second-largest of a bank in U.S. history, on March 10, has shaken many investors. It was the result of a bank run, caused by the bank’s announcement that it planned to raise $2.25 billion by issuing new common and convertible preferred shares to shore up its finances, after it sold bonds in its portfolio of investments at a $1.8 billion loss.
About $42 billion of deposits were withdrawn by the end of March 9, according to a regulatory filing. By the close of business that day, SVB had a negative cash balance of $958 million, according to the filing.
The Federal Deposit Insurance Corporation took control and is now the manager of $175 billion in customer deposits, including money from several startups and from some of the biggest names in the technology world.
The regulator also created a new entity, and indicated that unsecured depositors, that is, SVB customers with more than $250,000 in their accounts, will not, for the moment, have access to their money.
This leaves many uncertainties about the ability of many startups to operate in the coming weeks, since their funds are locked up. The FDIC said it will pay uninsured depositors an "advance dividend within the next week."
'There Will Be Bank Runs Beginning Monday'
The question is how much this "advanced dividend" will amount to.
In its website, the federal agency describes an advance dividend as a payment that "gives depositors access to a portion of their uninsured funds," but it doesn't say how this "portion" will be determined.
Depositors do not have to file a claim for their advanced dividend, the FDIC said.
Financier Bill Ackman, founder of hedge fund Pershing Square Capital Management, said in a Twitter post that when the new entity replacing SVB begins operating on March 13, the FDIC will announce that they will immediately pay about 50% of their funds to depositors.
Uncertainty will remain on the other half of their funds. The famous financier therefore concludes that there will be all-out runs on other banks this Monday, which risks accelerating the contagion and causing an even more severe financial crisis than what it is currently.
"From a source I trust: @SVB_Financial depositors will get ~50% on Mon/Tues and the balance based on realized value over the next 3-6 months," the hedge fund manager, who is also a short seller, said on Twitter on March 11. "If this proves true, I expect there will be bank runs beginning Monday am at a large number of non-SIB banks. No company will take even a tiny chance of losing a dollar of deposits as there is no reward for this risk."
He then warned that unless the FDIC does a system-wide deposit guarantee "more bank runs begin Monday am."
The billionaire's reasoning is that a lack of clarity for startups, which are known to burn cash, not knowing when they will be able to access all of their funds, plunges them into uncertainty that will impact their operations in terms of priorities.
The FDIC didn't respond to a request for comment.
Bailout?
Billionaire and investor Mark Cuban issued a similar warning during a Twitter Spaces chat.
"It really is going to depend on how much the advance dividend is. If it's 50%, and you get that by Wednesday, okay, because Wednesday is the 15th. And maybe payroll is a little late, but that covers payroll for at least some percentage," Cuban said.
"And then the next question is how well do they communicate what's happening for the other 50%. If it's all uncertainty and we don't know any type of timeline and there's no ongoing communication, that'll create a smaller contagion, but still a contagion."
Ackman later elaborated about how he sees the FDIC's involvement.
"What should the FDIC do? @FDICgov to guarantee all bank deposits by Sunday night before Asia open and call a time out. Run a process to recapitalize @SVB_Financial while managing liquidation of UST and MBS portfolios to be reinvested in short term UST. Determine the capital hole and raise a ‘fortress’ amount of capital from investors co-led by @generalatlantic @sequoia etc. and smart financial investors to recap bank."
He continued: "FDIC develops a new guarantee regime where large dollar deposit insurance is made available up to sensible limits per account to accommodate business borrowers while 100% guarantee remains in place. Once new deposit insurance regime is employed, 100% guarantee is removed."
The challenge for the FDIC and the politicians is that any guarantee of the borrowers funds might be perceived as a bailout, with taxpayer money being used to protect investors, drawing similarities to the government intervention in the 2008 financial crisis.
UST refers to the U.S. Treasuries held by SVB and MBS refer to the Mortgage-Backed Securities on SVB's investment portfolio. General Atlantic and Sequoia Capital are both investment firms.
For transparency reasons, the investor said that he does not have "any direct exposure" to SVB, nor does his firm, Pershing Square.
"I am personally an investor in some of the less well known, mostly seed stage venture and biotech funds and some early stage startups which may have some exposure to SVB. Collectively, my venture exposure is less than 10% of my assets."
