The Daily - The Implosion of Silicon Valley Bank

Episode Date: March 14, 2023

With federal regulators planning to take over the collapsed Silicon Valley Bank, a 40-year-old institution based in California, nearly $175 billion in customer deposits will be placed under the authorities’ control.The lender’s demise is the second-largest bank failure in U.S. history and the largest since the financial crisis in 2008. The debacle raised concerns that other banks could face problems, too.Guest: Emily Flitter, a finance correspondent for The New York Times.Background reading: A run on deposits brought Silicon Valley Bank’s failure.Here’s what to know about the fallout from the lender’s collapse.For more information on today’s episode, visit nytimes.com/thedaily. Transcripts of each episode will be made available by the next workday.

From The New York Times, I'm Michael Barbaro. This is The Daily. Today, we look at what caused the collapse of Silicon Valley Bank and why it required an emergency federal rescue plan for the entire industry. My colleague, Emily Flitter, explains. It's Tuesday, March 14th. Emily, it has been a truly remarkable 72 or 96 hours, depending on how you measure it, in the world of finance. And I think for those of us who lived through the 2008 financial crisis, which also unfolded over a weekend, everything about this feels like deja vu. Like, here we go again.

That's right. I was a banking reporter during the financial crisis in 2008. And the way I started out in these last 72 hours was trying to find all the ways that this wasn't going to be like that. That's how scary that was. Well, we'll get to that. So let's start at the beginning. How we got into the mess we're in.

Where does that start? The precipitator of this crisis starts with a bank in Silicon Valley called Silicon Valley Bank. It's a trendy sort of sexy name that many people may not have heard about, but it certainly was one of those banks that, you know, the CEO was on CNBC and it had a reputation for being associated with innovation and the future and tech bros and things like that. But the bank's origins were much humbler than that. Hmm. Tell me about that. It's a regional bank. It was started in the early 80s, and it didn't grow very quickly originally, but it had a sort of interesting side business, which is that back when it was

legal to do this, it had a venture capital arm. That means that some of the bank's own money was going toward investing in little tech startups. Venture capital is the riskiest kind of investing there is. And a lot of banks are really conservative and they wouldn't dream of doing this. But this bank began to grow in the venture capital world. And eventually, Greg Becker, the head of the venture capital business, took over the bank and he courted the venture capitalists themselves. And the bank ended up just becoming like this central figure in the world of venture capital investing and startups in a way that was so dramatic that there were little companies that had just started out on a prayer and a little idea.

And their founders were saying things like Silicon Valley Bank is so great, it's the only bank that will agree to bank me. Hmm. So what ends up happening to this regional bank closely tied to Silicon Valley and its businesses that has a real taste for risk? businesses that has a real taste for risk. So this bank wants to grow, but there's a barrier to that, or at least something that they see as a barrier, which is that if you're a bank and you have more than $50 billion in assets, you're going to be subject to some extra regulation. Those regulations, which are called the Dodd-Frank financial reform package, put in place after the 2008 financial crisis, make sure that no institution can bring down the entire financial system through risky behavior, through failing somehow and causing a systemic panic. And there are different components to it. There's the component that requires the

banks with $50 billion or higher in assets to adhere to certain capital requirements, to submit to stress tests by the Fed, where the Fed goes in and applies different kind of disaster scenarios and tries to figure out whether their balance sheets are going to stand up to these different scenarios. And the banks also have to come up with living wills, ways to resolve themselves if they do fail that are orderly and don't cause any further damage. Mm-hmm.

So a bunch of these bankers, including the CEO of Silicon Valley valley bank they get together and they start lobbying in congress to roll back this part of the regulation they call their senators and members of congress and they say hey you guys should change the dodd-Frank regulatory package so that these regulations that are designed to control systemic risk only apply to banks that are bigger, like $250 billion in assets or bigger. And Greg Becker is among the most strident CEOs out there trying to get this stuff moved

so that his bank can grow without these extra regulatory burdens. And what exactly was his argument for doing away with these regulations? These banks were saying they weren't a threat to the system. They weren't big enough. And they weren't as powerful as the guys who had already caused a crisis, the biggest banks. Hmm. And does he succeed at convincing them? Eventually, yes.

What we're doing today with respect to Dodd-Frank is truly important legislation. So after Trump gets elected and Republicans are in control of both houses of Congress, there's a successful effort in 2018. So I'll be signing now a very, very important bill from the standpoint of people and jobs and loans and getting out there and building a business. To roll back these regulations in a way that opens up the field for banks the size of Silicon Valley Bank to grow and expand and not be subject to this extra kind of scrutiny. Okay, so by 2018, Silicon Valley Bank and its CEO have helped bring about a change that ensures that it will fly below regulators' radar

and their most strict scrutiny for banks and how they organize themselves and use their money. Correct. Silicon Valley Bank and its peers, they get this regulatory rollback and then it is absolute boom times. Times have almost been too good in our culture and in Silicon Valley in particular. Interest rates are still low. The tech sector is booming. Money raining from on high like mana from heaven from the Federal Reserve has fueled a bull run in technology stocks that's

led to hiring booms across these companies, monopoly like businesses generating great cash flows. There's all kinds of money sloshing around for investing in these little startups because interest rates are so low and investors are trying to find any way they can to make lots of money. I want to bring in Greg Becker. He is the CEO of Silicon Valley Bank. Greg, generally, what is the tech M&A environment like right now? You know, I think it's still a healthy environment.

So Silicon Valley Bank goes from having $45 billion in assets in 2016 to $200 billion by the end of 2020. Wow. It's just an incredible expansion. And I believe that will continue. If we do see a dip in 2022 or 2023, I believe it'll be temporary. Silicon Valley Bank's essentially the investment bank for the innovation economy. So they're very well positioned for what we think are great future growth companies. And they're just taking on all kinds of new clients.

They have a specialty business in financing wineries. So when you walk into their office in Menlo Park, the lobby is full of bottles of wine from the vineyards they bank. It's just like it's that scene. So pretty unabashedly, they're courting wealthy clients. Oh, yes. They want to be the bank that serves all of these clients' various needs, whether it's, you know, managing their personal wealth or managing their business accounts or even banking the companies that the clients are investing in. I mean, they're trying to be a one-stop shop

to the point where they discouraged clients from having money at any other institution. And that all contributed to this situation in which the overwhelming majority of Silicon Valley Bank's clients had deposits far in excess of what the Federal Deposit Insurance Corporation insures, which is $250,000. Right, which is this magic number that you know if you walk into a bank that says FDIC insured, means that no matter what happens, you're going to get that money back. That's right. And if you have an account with more than $250,000

in it, if the bank fails, you will only get $250,000 back guaranteed. The rest of that money, it's not certain you're going to get back. But that was a risk that it sounds like lots and lots of people using Silicon Valley Bank were willing to take. It was, and it's a massive failure in risk management by the bank and by some of its customers. For instance, Roku, the company that makes smart TVs, had like half a billion dollars just sitting in a bank account with this bank, uninsured. bank account with this bank uninsured. So what does Silicon Valley Bank do with all of this tens of billions of dollars coming in during this period of breakneck growth and quite low regulation? Well, they put some of it into what they think are pretty safe investments. They're longer dated U.S. government bonds that mature in 20 or 30 years.

And they do that because you can earn more money on the longer dated stuff in an environment in which interest rates are really low. Got it. And of course, interest rates were very low over the past few years. Yes. But at the beginning of 2022, rates started to go up. And the Fed made it really clear that they were going to have to keep raising interest rates again and again and again until they achieved their goal of subduing inflation. And the more interest rates went up, the more pressure there was on the whole startup ecosystem in Silicon Valley. Things that seemed like a good idea when interest rates were near zero, all of a sudden didn't seem like they were going to fly. And startups started to collapse. Tech companies started to lay off workers. Everybody was belt tightening. And that meant that the companies who were Silicon Valley Bank's depositors needed to get some of their cash out.

And so Silicon Valley Bank needed to get its own cash out of those seemingly safe long-term treasury bonds that it had bought. And that's when they made a really bad decision. They decided to sell their entire $21 billion portfolio of these long-dated treasury bonds in one 24-hour period. And they end up taking a $2 billion loss on this decision to sell this portfolio. And the world learns that late on Wednesday last week. And everybody who cares at all about Silicon Valley Bank is suddenly very spooked. And why is everyone so spooked? Because a $2 billion loss, yes, is big. But you just told us that Silicon Valley Bank has $200 billion in assets. So

why ultimately is a $2 billion loss inspiring all this fright? Don't think about the asset size versus this $2 billion loss. Think about the portfolio size, which was only $21 billion. So the message to the people looking at this bank was, this bank has a portfolio of government bonds, which are very safe, which are worth $21 billion, but they need to get rid of it so fast that they're willing to take a whole $2 billion loss on it. That suggests that they really have run out of options for raising cash. Got it. In other words, what looks like panic inside the bank is starting to produce panic outside the bank. That's right. If this bank is having this much trouble raising cash,

the depositors are thinking, well, how am I going to get my cash out if I wait, if I have to get in a long line of people trying to get cash? Developments now on what is becoming a bigger story by the hour. Silicon Valley Bank, the company facing what can only be described as a bank run. And by Thursday, there is a run on the bank. Many of its clients are pulling their money out of their accounts. The bank is trying to reassure its customers that their money is safe. Forty two billion dollars in deposits gets withdrawn.

Shares of its holding company, SVB Financial, are plunging down 34%. The stock crashes. It's just absolute panic. And as you told us earlier, Emily, the vast majority of this bank's clients have way more than the $250,000 that the FDIC insures. So I have to imagine that the intensity of this bank's clients have way more than the $250,000 that the FDIC insures. So I have to imagine that the intensity of this panic is the intensity of a bunch of very rich people worried that a lot of their money will never be seen again. That's absolutely right. And Friday marks the end of a rough week for the banking industry. And by Friday morning, the situation is so bad.

Alarm outside headquarters of Silicon Valley Bank in Santa Clara, California. Withdrawals are happening so quickly that the government steps in and takes over the bank. It's the largest bank to fail since the 2008 financial crisis. Right. And this is the moment when we describe Silicon Valley Bank as failing. It is now officially a failed bank under government control. That's right. And now there's a question of who's next. Is this panic going to spread? And what could possibly stop it? We'll be right back. So, Emily, what happens over the weekend after Silicon Valley Bank has failed and the federal government has stepped in and taken it over? So right after Silicon Valley Bank fails, there are these two competing camps of people,

each of whom have a totally opposite expectation for what's going to happen next. In the first camp, expectation for what's going to happen next. In the first camp, there are people who say, okay, the bank failed. They made some clear, huge mistakes. And the FDIC is going to do what they do best and sort it out and figure out how much money they can give back to the uninsured depositors, and life will go on. Right. In other words, a kind of tough medicine approach that says this bank screwed up and is going to suffer the consequences. And if you have over $250,000 in this bank, you're probably going to get a lot of it back. It might take some time. This is the tough medicine required when people do stupid things. Exactly. And banks have failed throughout the history of the United States. And the FDIC is

very practiced in handling a resolution, even if it's a big one like Silicon Valley Bank. So this was in some ways not uncharted territory. On the other side, though, we were in uncharted territory because this was the first time in history that a bank had failed, especially of this size, whose customers were rich, entitled and extremely online. You already have panicked investors like Bill Ackman begging the government to bail out the banks that are not letting people get their money out of the banks right now. These people had access to social media accounts with tens or hundreds of thousands of followers. The human impact of this, I think, is something I cannot underscore enough. They had a level of sophistication in their ability to talk about their companies, their ecosystem, and what they were demanding that went well beyond the customers of a normal bank.

And they were all wanting the same thing. They were demanding to get all of their money back. Mark Cuban, he's been very active on Twitter, weighing in on these developments. And this camp has really powerful allies, like Mark Cuban, the multi-multi-millionaire investor who owns the Dallas Mavericks. He wrote, the tragedy of SVB is that it's not the wealthy taking the hit. It's the thousands of companies who borrowed from SVB

and were required to keep their cash in SVB. Or former Treasury Secretary Larry Summers. Or the hedge fund manager Bill Ackman. Those entrepreneurs and their employees and vendors are feeling the pain and they are who the Fed should protect. And they're all saying basically that if these Silicon Valley customers don't get made whole, everything is going to descend into chaos. The financial system is going to stop functioning. Regular people are going to lose trust in banks and pull their money out. Other banks are going to fail. I mean, they are painting a really grim picture.

going to fail. I mean, they are painting a really grim picture. Okay, so this is the second camp, and they do not want this bank failure to proceed like a traditional bank failure. Basically, they're predicting that if Silicon Valley bank depositors are not given access to all their money, even beyond the FDIC insurance of $250,000, that there could be runs on many banks across the country. That's right. They're saying this problem is not contained in Silicon Valley Bank. It's not just one bank that made a series of bad decisions. It's going to be everywhere unless the government does something very drastic. Right. So I think, Emily, that that brings us to Sunday, this moment of truth, when we learn whether the federal government is going to side with the first camp that says, now that we've taken over the bank, that's all we have to do. And depositors who don't have insurance for a lot

of their money are going to suffer, or whether the government is going to side with the second camp and basically come up with a special rescue operation for these uninsured depositors. So describe what happens. Well, so by the time Sunday rolls around, there is that question, what is the government going to do? Just let the uninsured depositors twist in the wind in this one bank or bail them out. But that's not all. The question also is how is the government going to respond to the escalating panic that has been generated and stoked by these guys on social media. And the government basically decides to throw a lot of the tools that they have at this problem, agreeing with these tech bros that this is a big deal and it could spread and cause a wider panic in the financial system if they don't take drastic action.

Interesting. And what is that action? The action they take is this. First of all, and this is in a sense the least surprising thing, if you agree that this is a spreading financial panic, is that they do make Silicon Valley's depositors whole, even those who didn't have insurance on their deposits. And when you say make them whole? Meaning no matter how much money you had in a bank account at Silicon Valley Bank, which failed, you will get all of your money back.

In other words, they make an exception to the normal FDIC cap of $250,000. That's right. It doesn't matter. You could have $2 million. You could have $20 million. You could have $500 million. You're getting your money back from this bank, however much you had in deposits there.

So that's not all. The government takes over another bank. Signature Bank is a regional lender based in New York. Its name has been in the mix of these regional banks that are being targeted by investors. Their stock prices are sinking and there's questions about whether depositors trust them. And the government said, in addition to making Silicon Valley bank customers whole, we're also going to make signature bank customers whole. Got it. So at this point, the government now controls two banks and it's made exceptions to its normal FDIC insurance caps to both of them. That's right. And finally, the government announces that banks now have two ways to get almost instant cash from the Fed at almost no borrowing cost. And the message is this. Banks, if you need cash, if your depositors want

their money, come to us. We'll give you the cash. It's a very safe lending program that we have. Just don't do what Silicon Valley Bank did and sell your assets at a fire sale and cause a panic. that's at a fire sale and cause a panic. Got it. And Emily, who is paying for these three rather extraordinary actions that the government has just taken? So this is what I think the Biden administration would say is the beauty of this program. Taxpayers are not paying for any of this.

Making depositors whole actually requires the banks themselves as a group to shoulder the cost of. And the way they do that is kind of like a condo board or a co-op board assessing all of the residents of a building fees. You pay into a central pot and that pot of money goes toward fixing things. If your boiler breaks, if you have to renovate a common area, the same thing applies to deposit insurance. Banks all pay into a central fund and then when one of them fails, that's the money that's used to make depositors whole. And then later, they're actually going to have to recoup that and replenish the fund through special assessments of banks,

just as if when you have a huge project in your condo or your co-op, you end up having to pay a special assessment at some point in the future to make that up. Got it. So unlike in 2008, when the government ended up bailing out big banks, this is not a taxpayer bailout of banks. This is so far a bank bailout of banks. Absolutely. That's what it is. And so how do federal regulators, how does the Biden administration end up justifying such unusual and aggressive

actions really across this entire industry? What the government did was they invoked the possibility that these two banks posed systemic risk to the system. That is the concept whereby if one thing goes bad in the financial system, everything goes bad and it destabilizes everything. And regular people can't do regular financial business. So the FDIC actually said on Sunday night that they were using a systemic risk exception to the $250,000 limit on deposit insurance to make the depositors at these two institutions whole. So this feels like a really important question. Given that the government is now saying that what happened here amounts to systemic risk, I'm now wondering, did our government kind of get

bullied into reaching that conclusion by that second camp you described, by these wealthy depositors and their allies in tech who have a lot at stake here and seem to deliberately fan the fear of a systemic risk that would require the kind of rescue the government just released. In other words, the failure of Silicon Valley Bank might not have been a systemic risk to the banking sector, but a lot of people involved in this turned it into a systemic risk over the past few days. I think that is a really plausible explanation. When you look at the industry that was stamping its feet and trying to get this exception and prophesying doom and gloom if they didn't get it, these are the people whose job it is to take the biggest risk, to pick companies that are almost certain to fail.

That's what the startup world is. It's investing in things that you know you could lose all of your money in. This same group of people turned around and said, if we aren't made whole, the entire financial system could collapse and the economy could be thrown into a recession. The problem is that the inherent understanding of how the banking system works is now going to include the anticipation that if any bank fails, even if they're kind of small or just not enormous, that all of the depositors are going to get bailed out. And that's going to change a lot of decisions that people who are bank customers make about the risk that they want to take. Right. Among other things, it would seem to increase everyone's appetite for risk because

the risks that were taken by Silicon Valley Bank were never punished here. That's right. And even if it doesn't increase the risk appetite of a person who says, I want to go out and do all kinds of outrageous things with my money. It just might make more people careless. So we're talking to you on Monday afternoon. This plan has been out in the world for about half a day. The market here in New York has been open for around six or seven hours. Where do things now stand with this plan? Has it done its stated goal of calming everything down and stopping these runs on banks that everybody was so afraid of? I can't say yet for sure that it stopped the run by depositors or that there even was a run

on another bank to the extent that there was on Silicon Valley Bank. What I can say is that even though the stocks of the regional banks have continued to lose value, they're not hurtling down towards zero the way they were on Friday. Friday was so bad in the stock market that several of these banks actually had trading in their shares halted. And we haven't seen that today. So I think we're in a place where the regulators and investors and depositors are going to watch and see what happens and see if maybe we've gotten to the crest of this. Emily, I'm struck by the fact that just five years ago,

as you recounted earlier in this conversation, Silicon Valley Bank and its CEO led this charge to roll back regulations that might have required much greater government scrutiny of its finances and its risk-taking. And perhaps that would have prevented the bank from taking the kind of risk that it did and that led us to this place. Are officials now looking back at that 2018 decision with any regret? I think that there is definitely a growing understanding that's being publicly voiced out there that the 2018 regulatory rollback may have created a problem that is beyond one bank. It may have given rise

to an entire class of banks that are too big to ignore and yet are functioning outside of an oversight system that was designed after the 2008 financial crisis to prevent another industry-wide panic from bringing down the economy and the financial system. It's an interesting phrase you use, too big to ignore, because the whole idea was that there were banks that were too big to fail, and they were regulated one way, and there were banks that were too small to worry about, and they were regulated differently. And from what you're saying, and what sounds like these officials are now saying, there might be this new class of banks, right, that are... Right, that are big enough that we have to worry about them. After the financial crisis, there was this idea that some banks were too big to fail,

like J.P. Morgan, Citi, but those were the exception, and the rest of the banks actually still had room to fail. But what these last couple of days have shown us is that maybe there is less of a difference between the biggest banks and some of these less big banks. We're now in a world where, whether it's caused by irrational fear or something else, the failure of just one of these smaller banks can threaten the entire system.

And that's shocking and potentially very scary. Well, Emily, thank you very much. We appreciate it. Thank you. Today, thanks to the quick action of my administration over the past few days, Americans can have confidence that the banking system is safe. Your deposits will be there when you need them. On Monday, President Biden sought to assure Americans that the banking

sector remained healthy, but investors seemed unconvinced. The stock price of many regional banks plunged, with several losing about half their value, including Western Alliance Bank in Arizona and First Republic Bank in New York. We'll be right back. Here's what else you need to know today. On Monday, President Biden announced a landmark agreement with the leaders of Britain and Australia to develop

fleets of nuclear-powered attack submarines that the three nations would ultimately use to counter the growing military might of China. The deal is designed to prepare for a potential armed crisis over Taiwan, the democratic island with de facto independence that Chinese leaders claim as their own. As part of the deal, the United States is sharing the nuclear technology behind its submarines for the first time in 65 years. Today's episode was produced by Claire Tennisgetter, Carlos Prieto, and Asta Chaturvedi. It was edited by Mark George and Lisa Chow, contains original music by Marion Lozano,

Alicia Baetube, and Dan Powell, and was engineered by Chris Wood. Our theme music is by Jim Brunberg and Ben Lansford of Wonderly. That's it for The Daily. I'm Michael Barbaro. See you tomorrow.