Silicon Valley Bank

SVB has collapsed and many people are asking why and what are the ramifications.

Noah Smith does a great job of explaining the situation.

As does this Tweet Thread from Morning Brew Daily.

I am not an economist so take what I say with a grain of salt. But I do consider myself fairly well informed with pretty good common sense. This situation interests me so I'm going to use this space to put down my thoughts in the hope others would find them worthwhile.

It has been widely reported that between 95-97% of the deposits at SVB are not FDIC insured because they are more than $250,000. To me this is good news. The FDIC insurance was meant to protect the everyman who trusts their funds with the banks. When you see people in queues at SVB locations waiting to get their money out - because of the FDIC insurance these people will be made whole. No regular folk will be wiped out. The larger depositors made a business decision and took that risk.

As far as what caused this - Occam's Razor suggests it was incompetence. First the incompetence of the Biden Administration thinking they could print billions in new money without any ramifications such as inflation and rising interest rates. And then the incompetence of the people running SVB who did seem not to have seen the rising interest rates coming or if they did see it coming - did not do enough to minimize risk. SVB was over invested in treasury bonds which are sensitive to interest rates and when those rates went up they had not properly balanced their portfolio of investments to account for this.

There potentially may be a very real case of "Go Woke - Go Broke" going on here. Just last year SVB announced they were committing "$5 billion in sustainable finance and carbon neutral operations to support a healthier planet." They were also very proud of their Diversity, Equity, and Inclusion policies. And when ESG scores become more important than actual financial return can you really be surprised when it fails? Could the people running SVB have been more concerned with their societal impact than how exposed they were to rising interest rates?

Many people will refuse to see the above as potentially contributing to the collapse and instead they will look for a villain to blame. First up will be Peter Thiel who withdrew all of his Founders Fund money out of SVB by Thursday and recommended others do the same. What Thiel did was smart business. He saw a problem and minimized his fund's exposure and risk. Compare Thiel's actions to SVB CEO Greg Becker who sold $3.5 million of company stock back on February 27th. Who is the real villain? Becker was in a position to right the ship but instead loaded up a lifeboat with all the cash he could grab.

As an aside - don't be surprised to see all the usual suspects try to somehow blame SVB's collapse on Donald Trump. Just you see. Me? I prefer to blame Jim Cramer. The guy’s a Mush.

The bigger question is will the collapse of SVB spread to the rest of the banking, financial, and other sectors of the economy? There cannot help but be ramifications (like Roku) but will these be minor or major disruptions?

Hopefully this will be a wakeup call for other banks to check their exposure and over reliance on treasury stocks plus to jettison any ESG investment policies in favor of reliable ROI.

Hopefully this will also be an isolated situation because of SVB's unique model. The bank was largely involved in Silicon Valley startups and venture capital funding. This was great during the pandemic when there were a lot of Series A rounds and SVB deposits grew from $60 billion in 2020 to $189 billion in 2022. Not so great when many of these same startups had to start burning through their "runway" by withdrawing funds from SVB to make payroll and pay other expenses. Most banks don't have these opportunities or problems.

They say that 90% of startups fail but with the SVB collapse you may see an uptick in that number. Hopefully that uptick is only temporary.