Who Picks Up the Pieces of Silicon Valley Bank?

Silicon Valley Bank (SVB) failed on Friday. It was the 16th largest bank in the USA. SVB gave loans to startups and the terms of the loans required the startup to keep deposits with SVB. Venture Capitalists for decades would require that startups use SVB and other “standard” best practice legal and financial structures.

SVB is deeply connected to 50% of new and old venture startups. Roku is publicly traded but grew from venture startup roots. Roku had almost $500 million in deposits at SVB.

Think about the dot.com (dot bomb bubble) internet crisis of 2000 and 2001. In the current situation, the crash in technology stock valuations hit companies with 80-90% drops in 2022. Now, there deposits are in jeopardy. If there is no intervention, those companies will not make payroll over the coming two weeks and beyond.

The gov’t has about 48 hours to fix a-soon-to-be-irreversible mistake. By allowing @SVB_Financial to fail without protecting all depositors, the world has woken up to what an uninsured deposit is — an unsecured illiquid claim on a failed bank. Absent @jpmorgan @citi or… https://t.co/SqdkFK7Fld

— Bill Ackman (@BillAckman) March 11, 2023

This will crater the San Francisco Bay Area and other startup-focused regions (Los Angeles, San Diego, Boston, New York etc..). Startups, venture capital, connected lenders, Napa wine region wineries, and even relatively mature previously venture-backed larger companies like Roku.

This puts First Republic at risk as well. There would be a spread of bank and financial failures. Also, this is the tip of the iceberg. Other banks and financial companies (insurance companies, pension companies) lost money on longer-term bonds and longer-term mortages and mortgage-backed securities. If a bank has given out fixed 15-year and 30-year mortgages from a 2021 or earlier then they are mostly locked in at 3%. However, now those instruments are adjusted to 5-7% interest rates of today. Financially those are marked down to 70% of principle value, especially of those were sold today. The one million dollar thirty year mortgage with 3.5% could be sold at say 700,000 so that the new owner would be getting 5% return.

California Governor Gavin Newsome and other California politicians will have to find ways to salvage this (this weekend or Monday) for multiple reasons. The groups impacted are their donors. National democrat politicians are similarly dependent on the impacted group as donors.

The other major reason is not doing something will economically crater the Venture capital and San Francisco Bay Area businesses and real estate.

The other major reason is that most of the banks and financial institutions are far weaker than people think.

Globally, there are a lot of fragile companies and countries. China had a real estate and debt crisis. China’s solution is that almost no one is allowed to sell a house or sell stocks. The owner must keep paying their mortgage. Stock sales are limited. Prices are not allowed to crash because people cannot sell. People cannot get off the economic roller coaster because they are locked in at gunpoint.

Europe and Japan have aging populations and weak economies.

Energy prices and food prices are up because of war and supply chains.

The UK had to bail out pension funds because they had devalued bonds and other financial instruments.

The world cannot withstand more of the high-interest rate to stop inflation medicine.

Therefore, the “just let the regular financial bankruptcy process” happen to SVB is not what will happen. California, technology industry, the US financial system and the world have significant risks of collapse.