Money Rehab with Nicole Lapin - The Rise and Fall of Silicon Valley Bank

Episode Date: March 13, 2023

The downfall of Silicon Valley Bank, or SVB, marks the biggest failure in the banking system since 2008. Here's what happened, why, and what’s to come.

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It's time for some money rehab. Whew. Holy business news weekend. If you were not glued to the headlines this weekend like I was, let me get you up to speed with the latest with Silicon Valley Bank or SVB. It, of course, made headlines as the biggest bank failure since 2008. But before we get started, I want to acknowledge that this is a rapidly evolving story. I before we get started, I want to acknowledge that this is a rapidly evolving story. I'm recording this Sunday, March 12th, the night before it airs, with the most up-to-date information we have now. But I know there's going to be more information, of course, and more fallout in the upcoming days and weeks, so there will be more to come. But for now, here's an explainer of what the heck happened, why it happened, and what is to come. But for now, here's an explainer of what the heck happened, why it happened,

and what is to come. So interest rates are up. We know that. You all know that. We've been talking about this on the show. In practical terms, hiked interest rates makes it more expensive to borrow money. But this is a new concept for us. Interest rates have been super low since the banking crisis of 2008. Actually, they've been super low for most of this century. And for companies, that means it's been a time of easy, easy money. Tech companies have been able to grow super fast because it's been so cheap to borrow money. But just like your credit card APR has gone up, so have tech companies borrowing costs. So the venture capital funding faucet went from full steam to kind of a trickle. And with less VC funding, startups had to pull money from

the bank. And by the bank, here I mostly mean Silicon Valley Bank. This was a serious shift in customer habits. At the same time, the math on various assets was changing as a result of interest rates going up. The way banks work is that they assume not everyone's going to take their money out at the same time. But because customers were drawing more heavily on their accounts than usual, on March 8th, Silicon Valley Bank sold $21 billion in bonds, mostly treasury bonds, to try and get more liquidity. These were bonds that the bank had held for some time now, and they were earning about 1.8%. Currently, U.S. Treasury bonds are earning over 3%. Now, if someone came to you and said,

I have a used $100 bond earning 1.8%, or you can buy a new $100 bond earning 3%. Which one would you pick? This is not a trick question. Of course you would rather pick the new bond earning a higher interest rate, right? There's just no reason to buy that used bond unless you can buy it for less money than it was originally purchased for, which people actually do. And that is why bond pricing can be so hard to understand. Because it works like a seesaw. As interest rates go up, the price of the bond falls. And this was SVB's problem. If they held onto all of those bonds, they would have gotten all the money they paid for them, plus interest. That's how bonds work. It was a safe and sensible investment. But because they were forced to sell them early, they lost $1.8 billion.

Now, you can't just go out and lose $1.8 billion in customer money. To cover that shortfall, the bank started fundraising in a normal way by going out and doing a public stock offering. Unfortunately, instead of calming concerns about their cash flow, this public stock offering made the market and investors extremely nervous. The CEO, Gregory Becker, did the modern day equivalent of that scene in It's a Wonderful Life where James Stewart gets on the counter and tries to explain to people how banks work. If you don't remember this scene, here's what happens. Stewart admits that customers' money isn't actually in the bank. It's in the mortgage on their neighbor's house or in a loan to help their friend start a business. In the movie, that's enough to calm the panic. But when SVB CEO Becker told investors to stay calm and not panic on a Zoom call, it just didn't have that same charge as the Christmas classic. People did exactly the

opposite. They didn't stay calm, and they panicked. This panic was led in part by Peter Thiel's Founders Fund, which advised startups affiliated with the group to withdraw their funds from SVB. This probably would have been okay if other venture capital funds didn't follow Teal's lead and started giving their startups the exact same advice. Panic began to spread as people and companies lost their faith in SVB. Once that happened, there was no saving the situation. It's a typical bank run because the way banks work isn't that they have stacks of cash beautifully set up in a gorgeous gold vault. They have lent all that money out so that customers could take out mortgages, or they invested in bonds, or they bought tranches of mortgage-backed securities.

Whatever it was, it's not a vault waiting for you to come and take out your beautiful stacks of money. So if too many customers try to withdraw their money at once, the bank will run out of cash even if they have billions of dollars in perfectly sensible securities that they can't just get too fast enough to meet their customers' demands. So if too many customers try to withdraw their money all at once, the bank is going to run out of cash even if they have billions of dollars in perfectly sensible securities that they just can't get to fast enough to meet their customers' demands. And this was the situation on Friday when the federal government stepped in and froze their funds and took control of the bank. So what happens next? Well, it depends on

who you are in this situation. If you're an employee of SVB, you've been offered time and a half for the next 45 days. Their salaries will be paid by the FDIC, or Federal Deposit Insurance Corporation. If you're a regular person with accounts containing less than $250,000, then you are fine. The FDIC has your back and your money will probably be available to you by the time you're listening to this episode. On Sunday night, the U.S. government stepped in and said that people with money at SVB beyond $250K will be able to recover all their money. Regulators approved plans that would ensure all depositors full access to their money. Now, to be clear, this is not a government bailout like we saw in 2008.

Wall Street, not taxpayers like you and me, will be on the hook for this money. The Treasury Department will act as a backstop only. Now, this is really important. This is an important distinction. Shareholders of the bank won't be protected in this move. It's really just for the people and mostly businesses who had a ton of cash in the bank, really mostly to run their businesses and run payroll out of. We're talking about companies like Etsy, from Roku to Roblox, with millions of dollars in SVB. They should all have access to their money today. I will say I know a ton of people who had money for their companies in SVB, and this was as tense a weekend in financial circles for as long as I can remember.

There were, I'm not going to lie, doomsday vibes, to say the least. I could not believe what I was hearing from some major founders and CEOs, what they were saying, what they were contemplating doing with their company's funds. But again, all of this is averted. This move by regulators won't help company bond or stockholders, but it will make sure that all the companies can make payroll. This decision may have been largely motivated by the collapse of Signature Bank in New York City on Sunday. Fun fact, I used to bank with Signature when I first started my business more than a decade ago. While most of Signature Bank's depositors were small businesses, about a quarter of their depositors were involved in cryptocurrency and its collapse may be more closely resembling the failure of Silvergate

earlier last week than SVB. Whatever the cause, three banks collapsing in one week is not a good look and the Fed may be more inclined to react aggressively to prevent further disaster. Lots of exciting financial moves will happen from here, like hedge funds are reaching out to startups to buy their deposit claims for less than their value so that the startups can get a little funding and the hedge funds can try to recoup more than what they paid for the deposit claims as an investment. Anyway, we'll be digging more into that and all the other tentacles of the story this week on Money Rehab and the rest of the shows on Money News Network. If you're following along with us on financial Twitter or elsewhere, just keep your spidey sense keen to spot motivations

of why certain groups of finance folks or pontificators are saying what they're saying. Although there was a lot of money lost, there is a lot of money to be made from the aftermath of SVB, so chances are that's what's the motivating factor for a lot of what's being put out there. For today's tip, you can take straight to the bank. Do you have more than 250k in cash for yourself, your family, a trust, or for your business? If you do, there are simple ways you can make sure that all of your money is insured, and please do that. The easiest way, if it's not that much over, is to split the money up and have accounts at more than one bank. So if you keep your business account, let's say not that much over, is to split the money up and have accounts at more than one bank. So if you keep your business account, let's say, at one bank and your personal accounts at another

bank, then you can make sure that all of your accounts are insured. If you're dealing with far more than $250K, then look into Intrify, which I will link in the show notes. Intrify is a network of banks that allows you to bank with just one bank while spreading your accounts, all under 250K, over multiple banks to make sure that everything is insured. Money Rehab is a production of Money News Network. I'm your host, Nicole Lappin. Money Rehab's executive producer is Morgan Lavoie. Our researcher is Emily Holmes. Do you need some money rehab? And let's be honest, we all do. So email us your money questions, moneyrehab at moneynewsnetwork.com to potentially have

your questions answered on the show or even have a one-on-one intervention with me. And follow us on Instagram at moneynews and TikTok at moneynewsnetwork for exclusive video content. And lastly, thank you. No, seriously, thank you. Thank you for listening and for investing in yourself, which is the most important investment you can make.