‘Stay Calm,’ It’s Just A Bank Run

“Stay calm.”

That was Silicon Valley Bank CEO Greg Becker’s exhortation to VCs during a call on Thursday, when the lender’s shares plummeted some 60% amid what looked like the beginnings of an old fashioned bank run.

Peter Thiel and other high-profile VCs had suggested their portfolio companies pull money from the bank out of an abundance of caution after a “mid-quarter update” found SVB announcing the sale of its AFS book and unveiling a $2.25 billion capital raise, most of which is common stock ($1.25 billion and then $500 million in restricted common to General Atlantic in a private placement).

Admittedly, this situation spiraled faster than I’d anticipated, but… well, what can I say? That’s bank runs for you.

The AFS sale involved offloading $21 billion in Treasurys and MBS, presumably at less-than-favorable prices — the bank estimated the realized loss at $1.8 billion. The update said the AFS portfolio was “reconstructed” with short-duration fixed-rate Treasurys.

Union Square Ventures reportedly advised portfolio companies to keep only “minimal funds in cash accounts” at SVB, and several founders told Axios they were moving money out. One said he had wires “stuck in limbo for over two hours” before they finally went through.

In a November email reviewed by Bloomberg, Greenoaks Managing Partner Neil Mehta cautioned founders on banks including SVB, warning that the juxtaposition between the high rates offered to customers on deposits and low-interest, long-term loans could be perilous. “In the worst cases, you want to be first to pull deposits rather than last,” Mehta wrote. A source who spoke to Bloomberg for the linked article said “more than a dozen” of Greenoaks’s companies pulled $1 billion from SVB.

Moody’s downgraded the bank in response to the actions it took this week. “Though the balance sheet restructure is supportive of reversing some of the negative trends of 2022, Moody’s does not think that SVB’s financial profile is likely to revert to its historically strong levels over the next 12 to 18 months” the ratings agency said, on the way to briefly summarizing how we got here. “Rising interest rates and increased macroeconomic uncertainty coupled with declining venture capital investment activity and high cash burn among SVB’s clients have created challenging conditions for the firm,” Moody’s went on.

Garry Tan, CEO of storied incubator Y Combinator, told his network that “credible problems of solvency” should be taken seriously. Startups shouldn’t expose themselves to more than $250,000, he added, in a reference to FDIC coverage. Another venture firm quoted by Bloomberg Thursday was even more direct. “What’s important to understand is that banks all have leverage and they use deposits, so almost by definition any bank with a business model is dead if everyone moves,” Tribe co-founder Arjun Sethi told his own flock.

Conceptually, this isn’t unlike the Silvergate saga, which I politely declined to cover because it’s another tale of crypto gone wrong, and I’m tired of telling that story. Both banks were bound up with hot, speculative markets gone cold, and their depositors are commensurately fidgety and excitable. The wheels are coming off a little bit in tech (and they fell off entirely in crypto), so I imagine client cash needs are elevated.

If you’re a bank, you can’t not hand over people’s money when they want it, and all banks borrow short to lend long, which raises the specter of asset sales in the event people don’t stop beating down the door. Depending on what those assets are, you might be looking at mark-to-market losses, and that’s assuming you can sell what you have at all. And around we go.

SVB is a bigger deal than Silvergate, though, something Bill Ackman underscored late Thursday evening, when he suggested America should bail it out.

“The failure of  SVB could destroy an important long-term driver of the economy as VC-backed companies rely on SVB for loans and holding their operating cash,” Ackman said, adding that,

If private capital can’t provide a solution, a highly dilutive government preferred bailout should be considered. After what the Feds did to JPMorgan after it bailed out Bear Stearns, I don’t see another bank stepping in to help SVB. The government could also guarantee deposits in exchange for a dilutive warrant issuance and other covenants and protections. If SVB is indeed solvent, this would buy time to enable [them] to restore the franchise and raise new private capital.

It’s difficult for me to imagine Congress being especially amenable to that, and I don’t know how public opinion would sway when it comes to bailing out Silicon Valley, the only place with more rich people than Wall Street.

In any event, this is a problem — I don’t see any use sugarcoating it. Bank shares as a group suffered an anomalous drop Thursday. Were it not for the volatility around the pandemic, it would’ve counted as one of the worst collective sessions since the financial crisis.

Although there’s plainly no risk to the country’s largest financial institutions, the read-through of the above for smaller banks isn’t great.

At the least, these kinds of headlines could compel lenders to dangle higher rates to depositors, which in turn means compressed interest margins. Depending on how acute the situation is, the pressure could eventually prompt dilutive capital raises.

So… what? What’s next? Well, I don’t know actually. The SVB story could either snowball or be “last week’s news” by next week. Honestly, I’m not sure which outcome is more likely at this juncture. As noted above, the situation appears to be deteriorating very rapidly.

Becker, on the same call with VCs, said the bank has “ample liquidity with one exception: If everyone is telling each other SVB is in trouble, that would be a challenge.” He implored clients to “support us just like we supported you.”