Silicon Valley Bank collapses from risky investments

Last week, the Silicon Valley Bank (SVB), a lynchpin for the tech industry, collapsed. Its failure was the result of a number of risky gambles that left them exposed when the economic climate changed unfavorably. When the depth of their financial trouble came to light, panicking clients led to a run on the bank (when many clients withdraw their money out of fear of failure), which prompted intervention by the federal government to prevent the run from causing a series of cascading failures. SVB's collapse has troublesome implications for the tech industry, where it had extremely deep ties. Not only did the bank give loans to many tech startups, it also gave generous mortgages to aspiring entrepreneurs. In an industry where often millions need to be poured into startups before a profit is ever turned, a bank with the willingness to take risks became essential to the fabric of Silicon Valley.

The failure of SVB ultimately came from a bad bet. After spending the late 2010s massively expanding their holdings and services, they still found themselves with relatively little revenue to speak of. To maximize earnings, they decided to use their assets to buy a large number of long-term government bonds with high returns (as opposed to a mixture of short and long-term bonds, which would have lower returns but would be less risky). On Dec. 31, they filed a routine report on their debt holdings, but disclosed them in such a way that obscured the lack of diversity in the bonds they had purchased. Then, a combination of factors made this risky gamble take a turn for the worst. The tech industry hit a slump and Venture Capital firms started slowing their investing; the Fed raised interest rates, which made the bonds they had purchased even less valuable; and a number of startups in need of funds started pulling more money out of their accounts. The company determined that the only way to continue fulfilling this demand was to sell the bonds they had recently bought at a loss.

On March 7, CEO Gregory Becker spoke to investors and clients at a tech conference in San Francisco, projecting confidence and assuring stakeholders that they were in a stable financial position. Unbeknownst to his audience however, Becker had been informed earlier that week by Moody's, a consulting firm that rates the value of bonds, that their bonds were at risk of being downgraded to "junk." They needed to offload these bonds, or wait longer and risk losing even more on their investment.

On March 8, the company announced they were selling these bonds at a steep loss of 1.8 billion dollars, in addition to borrowing 15 billion dollars and implementing a plan to fundraise $2.25 billion by selling new shares. "Banks are loath to take any of those steps — let alone all three at once," the New York Times reported.

The announcement of this plan led many customers to suspect the company was in much deeper trouble than Becker had been letting on. And on March 9, the worst-case scenario comes to pass: Panicking customers, looking to withdraw their assets as soon as possible, instigate a run on the bank — the second largest in US history, just behind the run on Washington Mutual in 2008. Out of $175 billion in total customer deposits, customers withdrew a collective of $42 billion (22.8 percent).

On Friday when the markets opened, the federal government froze trading of SVB stock, and the Federal Deposit Insurance Corporation (FDIC) acquired SVB. Becker was ousted from the board of directors of the San Francisco Federal Reserve (Becker was one of nine private citizens serving on a board tasked with overseeing the branch of the Federal Reserve that covers most of the Western U.S.). It remains unclear whether he voluntarily stepped down or was fired from this position.

The following Sunday, another bank with deep ties to the tech industry, Signature Bank, collapsed and was acquired by the FDIC. The FDIC is only legally obligated to insure $250,000 per depositor — in other words, any amount you deposited over $250,000 isn't guaranteed to be returned to you if your bank collapses. However, in a statement on March 12, the FDIC outlined plans to ignore this cap and ensure that "All depositors … will be made whole" for both SVB and Signature Bank. However, those who owned stock in either bank will not see their assets returned, and upper management at both banks has been removed. The FDIC has been clear to point out that the money given to depositors will not come from taxpayers. The fund which the FDIC uses to repay bank customers is paid into by other big banks, not private citizens — although, of course, should the fund run out the FDIC would have to resort to taxpayer money. These drastic measures were taken to ensure that the collapse of SVB and Signature would not spill over into the rest of the economy and that damage would be contained within the tech industry.