Editor’s Update: California state regulators shut down Silicon Valley Bank during market hours on Friday, creating mayhem in the stock market’s banking sector. The Federal Deposit Insurance Corporation (FDIC) has been appointed the receiver at the bank. The FDIC issued a statement on Friday indicating that only insured depositors (those with $250,000 or less at the bank) will have full access to their money by Monday. As of December 31, Silicon Valley Bank had $209 billion in assets and $175 billion in total deposits, making it the second largest bank failure in U.S. history, after Washington Mutual which failed in September 2008 during the Wall Street financial crisis. Tragically, according to SEC filings, more than $150 billion of Silicon Valley Bank’s deposits were uninsured, leaving hundreds of the tech startup companies it served unsure of how to make payroll next week.
By Pam Martens and Russ Martens: March 10, 2023 ~
Bank depositors were already nervous after federally-insured Silvergate Bank (ticker SI) announced on Wednesday evening that it was closing and liquidating. Its publicly-traded stock had already lost over 90 percent of its market value over the prior 12 months at that point.
Silvergate had made the fatal decision several years ago to become the go-to bank for crypto companies, including scandalized Sam Bankman-Fried’s collapsed house of frauds, FTX and Alameda Research. As details of its questionable activities related to Bankman-Fried’s enterprises emerged, 68 percent of its deposits related to crypto companies took flight in just the last quarter of 2022. After Silvergate confirmed in an SEC filing on March 1 that an investigation of its conduct was underway at the U.S. Department of Justice, and that it had doubts about its ability to continue as a going concern, its fate was sealed.
Now, for the second time in less than two weeks, depositors are panicking over the fate of another federally-insured bank. This time it’s Silicon Valley Bank (ticker for holding company is SIVB) which, like Silvergate Bank, had become a go-to bank for a special niche customer. Instead of crypto, its niche was venture capital outfits and private equity firms.
Silicon Valley Bank is not a small bank. According to its regulatory filings, as of December 31 it held $161.4 billion in domestic deposits and $13.9 billion in foreign deposits.
The bank panicked investors and depositors alike on Wednesday when it said it would issue $2.25 billion more in stock (thus diluting other stockholders) and that it had taken a $1.8 billion loss on substantially all of its available-for-sale bonds. The stock price reacted by plummeting yesterday, closing down 60.41 percent in one trading session. In premarket trading this morning, the shares were down another 40 percent at one point.
As for the potential for a continuance of a depositor run this morning, the bank is likely feeling the pain from the following paragraph that appeared in the Wall Street Journal last night:
“Garry Tan, president of the startup incubator Y Combinator, posted this internal message to founders in the program: ‘We have no specific knowledge of what’s happening at SVB. But anytime you hear problems of solvency in any bank, and it can be deemed credible, you should take it seriously and prioritize the interests of your startup by not exposing yourself to more than $250K of exposure there. As always, your startup dies when you run out of money for whatever reason.’ ”
The figure, $250,000, refers to the amount of federal deposit insurance per depositor, per insured bank.
Unfortunately, the bank panic spread quickly yesterday to other banks – both large and small. PacWest Bancorp (ticker PACW) lost 25.45 percent of its market value by the closing bell yesterday while First Republic Bank (ticker FRC) fell by 16.51 percent. Mega banks on Wall Street were also not immune to the fallout: Bank of America (ticker BAC) lost 6.20 percent while the largest bank in the U.S., JPMorgan Chase (ticker JPM) – which is also battling lawsuits and escalating press about its ties to deceased child sex trafficker Jeffrey Epstein – fell by 5.41 percent.
The Federal Deposit Insurance Corporation (FDIC), whose Deposit Insurance Fund (DIF), has to make good on deposits at insured U.S. banks in the event of a bank failure, noted in February that unrealized losses at U.S. banks for bond holdings totaled $620 billion at the end of the fourth quarter of last year. When interest rates rise, as they have dramatically over the past year, the current market value of bonds issued at lower locked-in interest rates fall. That is typically not a problem for banks – unless there is a stampede by depositors to get their money out of the bank and the bank is forced to sell the bonds at a loss to raise liquidity.