c. 50% of Silicon Valley's smaller and even bigger startups had their banking at SVB. Also many of the founders and CEOs of such startups had their personal accounts, investment accounts and loans at SVB. So highl concentrated risk to one pool of clients. This also included active daily accounts of such companies, for their daily expenses, payrolls and other transactoins (i.e. not just idle money, but in daily need of access/use)
SVB had a maturity and liquidity issue, they had to offload assets, this is a sign of weaknes, bigger banks smelled blood, VCs understood that this spells trouble, if SVB's liquidity/solvency situatoin detoriatates
Due to 2), Silicon Valley insiders/super-connectors like Peter Thiel, and many other VCs as well as JP Morgan (the bank) advised clients to pull their money out of SVB. This is bankers' rule number 1: "Never panic, but always panic first, before others." This was the start of a deposit bank run, worsening their liquidity and solvency problems.
As chatter got out that people were coming out of the SVB branches with bags full of cash and emptying their accounts, things got out of hand and bank run accelerated fast.
By the end of the day FDIC had taken control of SVB due to insolvency.
Problem summarised: 93% of depositors at SVB had MORE deposits than the FDIC guaranteed $250 000 USD. Some companies had deposits in hundreds of millions. If SVB goes down, first to lose all money are stock holders, then bond holders, and if that isn't enough to cover losses, then the depositors.
So, SVB will be for sale during this weekend and everybody will try and get their assets for ten cents on the dollar, while making sure that the insolvency issue isn't leading to them, if they buy SVB operations.
IF during weekend, there is no buyer for the operations of SVB (hence, no required extra liquidity to cover outflows and future transactoins), then FDIC will retain control and start unrvaling the whole seniorage of debts, deposits and other claims. This will take time (weeks). If this happens, all assets and transactions will be frozen and startups will start laying off people and folding, becaues they donm't have access to their own deposits at SVB. Individuals caught in this with their own savings, will get desperate.
IF SVB is not bought and smootly transitioned, this will lead to contagion: everybody will start looking at the dominos of startups and other potentials losses from the haircuts of SVB assets/loans/credits/deposits. Banks will go into "defence mode" and will reduce transactions with "potential contagious entities" to protec themselves. This will drive up the overnight banking rates.
If this continues, reduced interbank liquidity will find the next weak link, which will have a liquidity/insolvency issue and that link will break, causing another domino cascade.
... Until the FED steps in.
This has all the hallmarks of a prepared narrative, a small but big enough crisis that may enable Fed to open the spigots once again.
But the time is not yet.
There will need to be more contagion, more collateral damage, more headlines , more fear and then they will step in.
If they are able to contain this for now, then the next time this will happen is by summer/early fall of '23 at the latest.
Enjoy the ride. Be ready to buy real assets on the cheap. 100% liquid non-counterparty-risk cash is king.
My take:
c. 50% of Silicon Valley's smaller and even bigger startups had their banking at SVB. Also many of the founders and CEOs of such startups had their personal accounts, investment accounts and loans at SVB. So highl concentrated risk to one pool of clients. This also included active daily accounts of such companies, for their daily expenses, payrolls and other transactoins (i.e. not just idle money, but in daily need of access/use)
SVB had a maturity and liquidity issue, they had to offload assets, this is a sign of weaknes, bigger banks smelled blood, VCs understood that this spells trouble, if SVB's liquidity/solvency situatoin detoriatates
Due to 2), Silicon Valley insiders/super-connectors like Peter Thiel, and many other VCs as well as JP Morgan (the bank) advised clients to pull their money out of SVB. This is bankers' rule number 1: "Never panic, but always panic first, before others." This was the start of a deposit bank run, worsening their liquidity and solvency problems.
As chatter got out that people were coming out of the SVB branches with bags full of cash and emptying their accounts, things got out of hand and bank run accelerated fast.
By the end of the day FDIC had taken control of SVB due to insolvency.
Problem summarised: 93% of depositors at SVB had MORE deposits than the FDIC guaranteed $250 000 USD. Some companies had deposits in hundreds of millions. If SVB goes down, first to lose all money are stock holders, then bond holders, and if that isn't enough to cover losses, then the depositors.
So, SVB will be for sale during this weekend and everybody will try and get their assets for ten cents on the dollar, while making sure that the insolvency issue isn't leading to them, if they buy SVB operations.
IF during weekend, there is no buyer for the operations of SVB (hence, no required extra liquidity to cover outflows and future transactoins), then FDIC will retain control and start unrvaling the whole seniorage of debts, deposits and other claims. This will take time (weeks). If this happens, all assets and transactions will be frozen and startups will start laying off people and folding, becaues they donm't have access to their own deposits at SVB. Individuals caught in this with their own savings, will get desperate.
IF SVB is not bought and smootly transitioned, this will lead to contagion: everybody will start looking at the dominos of startups and other potentials losses from the haircuts of SVB assets/loans/credits/deposits. Banks will go into "defence mode" and will reduce transactions with "potential contagious entities" to protec themselves. This will drive up the overnight banking rates.
If this continues, reduced interbank liquidity will find the next weak link, which will have a liquidity/insolvency issue and that link will break, causing another domino cascade.
... Until the FED steps in.
This has all the hallmarks of a prepared narrative, a small but big enough crisis that may enable Fed to open the spigots once again.
But the time is not yet.
There will need to be more contagion, more collateral damage, more headlines , more fear and then they will step in.
If they are able to contain this for now, then the next time this will happen is by summer/early fall of '23 at the latest.
Enjoy the ride. Be ready to buy real assets on the cheap. 100% liquid non-counterparty-risk cash is king.