{"id":10156,"date":"2023-03-10T18:44:26","date_gmt":"2023-03-10T23:44:26","guid":{"rendered":"https:\/\/navesinkinternational.com\/?p=10156"},"modified":"2023-12-20T02:53:19","modified_gmt":"2023-12-20T07:53:19","slug":"rip-svp","status":"publish","type":"post","link":"https:\/\/navesinkinternational.com\/2023\/03\/10\/rip-svp\/","title":{"rendered":"RIP SVB"},"content":{"rendered":"<p><img fetchpriority=\"high\" decoding=\"async\" class=\"wp-image-10194 alignright size-medium\" src=\"https:\/\/navesinkinternational.com\/wp-content\/uploads\/2023\/03\/candle-RIP-SVB-300x203.jpg\" alt=\"\" width=\"300\" height=\"203\" srcset=\"https:\/\/navesinkinternational.com\/wp-content\/uploads\/2023\/03\/candle-RIP-SVB-300x203.jpg 300w, https:\/\/navesinkinternational.com\/wp-content\/uploads\/2023\/03\/candle-RIP-SVB-480x325.jpg 480w, https:\/\/navesinkinternational.com\/wp-content\/uploads\/2023\/03\/candle-RIP-SVB.jpg 518w\" sizes=\"(max-width: 300px) 100vw, 300px\" \/>Silicon Valley Bank, aka SVB, defaulted on Friday. At <span style=\"text-decoration: underline;\"><strong>$212 bn of assets<\/strong><\/span>, it is the largest failure since 2008, and probably one of the fastest &#8211; it went from rumor to belly-up in only two days.<\/p>\n<p>&nbsp;<\/p>\n<p>Here is an explanation of the events.<\/p>\n<p>&nbsp;<\/p>\n<h3>The events<\/h3>\n<p>As its name indicates, Silicon Valley Bank is a bank for the Silicon valley. <span style=\"text-decoration: underline;\"><strong>Many of its clients are small start-ups<\/strong><\/span>, who rely on their investors&#8217; cash to pay their employees and fund their growth. The bank apparently has business relations with <span style=\"text-decoration: underline;\"><strong>nearly half the start-ups<\/strong><\/span> of the region.<\/p>\n<p>There are several concomitant factors:<\/p>\n<ul>\n<li>After a 30% market drop at the start of COVID, the low-rate environment has fuelled a market rally. The S&amp;P went from a low of 2,300 to a top of 4,700.<\/li>\n<li><img decoding=\"async\" class=\"wp-image-10177 alignleft size-medium\" src=\"https:\/\/navesinkinternational.com\/wp-content\/uploads\/2023\/03\/1M-T-Bill-300x119.jpg\" alt=\"\" width=\"300\" height=\"119\" srcset=\"https:\/\/navesinkinternational.com\/wp-content\/uploads\/2023\/03\/1M-T-Bill-300x119.jpg 300w, https:\/\/navesinkinternational.com\/wp-content\/uploads\/2023\/03\/1M-T-Bill-480x191.jpg 480w, https:\/\/navesinkinternational.com\/wp-content\/uploads\/2023\/03\/1M-T-Bill.jpg 704w\" sizes=\"(max-width: 300px) 100vw, 300px\" \/>The restart of the economy caused inflation, and the central bank started to raise rates again. <span style=\"text-decoration: underline;\"><strong>The short-term interest rates have risen<\/strong><\/span>, from virtually zero to over 4.8%.<\/li>\n<li>The <span style=\"text-decoration: underline;\"><strong>equity markets dropped<\/strong><\/span>, dropping to a low of ~3,600 or -25%.<\/li>\n<li>The rumors of a further rate rise, a further market downfall, and the risks of recession have covered all the headlines.<\/li>\n<li>Who wants to invest in equities and start-ups right before an economic crash? <span style=\"text-decoration: underline;\"><strong>Investors have stopped funding start-ups<\/strong><\/span> &#8211; slow down of IPOs and private equity offerings.<\/li>\n<li><span style=\"text-decoration: underline;\"><strong>Those start-ups have used their cash<\/strong><\/span>, drawing altogether large amounts from SVB. Some failed.<\/li>\n<li>SVB was using the cash deposit and investing into long-term debt. <span style=\"text-decoration: underline;\"><strong>The thrift was positive last year<\/strong>. <strong>It is now negative<\/strong><\/span>, due to the recent inversion. <span style=\"text-decoration: underline;\"><strong>The bank was accruing running continuous losses<\/strong><\/span>.<\/li>\n<li>Worse, SVB had to sell those bonds to fund the cash withdrawals. It was <span style=\"text-decoration: underline;\"><strong>forced to liquidate large bond positions<\/strong><\/span>.<\/li>\n<li>Since the long-term rates have also risen, those bonds are sold apparently below their accounting value &#8211; generating <span style=\"text-decoration: underline;\"><strong>losses, if not mark-to-market losses<\/strong><\/span>. The announcement of the share offering notably had this sentence, mentioning &#8216;tax losses&#8217;:<\/li>\n<\/ul>\n<p><img decoding=\"async\" class=\"wp-image-10165 aligncenter size-full\" src=\"https:\/\/navesinkinternational.com\/wp-content\/uploads\/2023\/03\/Tax-Loss.jpg\" alt=\"\" width=\"660\" height=\"83\" srcset=\"https:\/\/navesinkinternational.com\/wp-content\/uploads\/2023\/03\/Tax-Loss.jpg 660w, https:\/\/navesinkinternational.com\/wp-content\/uploads\/2023\/03\/Tax-Loss-300x38.jpg 300w, https:\/\/navesinkinternational.com\/wp-content\/uploads\/2023\/03\/Tax-Loss-480x60.jpg 480w\" sizes=\"(max-width: 660px) 100vw, 660px\" \/><\/p>\n<ul>\n<li>The bond sale losses added to the <span style=\"text-decoration: underline;\"><strong>downgrades losses of SVB&#8217;s loans<\/strong><\/span> (and possible equity investments) in its start-up borrowers.<\/li>\n<li><img loading=\"lazy\" decoding=\"async\" class=\"wp-image-10166 alignright size-medium\" src=\"https:\/\/navesinkinternational.com\/wp-content\/uploads\/2023\/03\/SVB-Chart-300x177.jpg\" alt=\"\" width=\"300\" height=\"177\" srcset=\"https:\/\/navesinkinternational.com\/wp-content\/uploads\/2023\/03\/SVB-Chart-300x177.jpg 300w, https:\/\/navesinkinternational.com\/wp-content\/uploads\/2023\/03\/SVB-Chart-1024x604.jpg 1024w, https:\/\/navesinkinternational.com\/wp-content\/uploads\/2023\/03\/SVB-Chart-768x453.jpg 768w, https:\/\/navesinkinternational.com\/wp-content\/uploads\/2023\/03\/SVB-Chart-1080x637.jpg 1080w, https:\/\/navesinkinternational.com\/wp-content\/uploads\/2023\/03\/SVB-Chart-980x578.jpg 980w, https:\/\/navesinkinternational.com\/wp-content\/uploads\/2023\/03\/SVB-Chart-480x283.jpg 480w, https:\/\/navesinkinternational.com\/wp-content\/uploads\/2023\/03\/SVB-Chart.jpg 1241w\" sizes=\"(max-width: 300px) 100vw, 300px\" \/>To maintain its capital ratios, SVB announced <span style=\"text-decoration: underline;\"><strong>a capital raise, which didn&#8217;t go too well<\/strong><\/span> as its stock price kept on falling. The bank&#8217;s stock dropped 60%.<\/li>\n<li>It eventually tried to <strong><span style=\"text-decoration: underline;\">look for a buyer altogether<\/span>, <\/strong>an effort which <span style=\"text-decoration: underline;\"><strong>failed as well<\/strong><\/span>.<\/li>\n<li><span style=\"text-decoration: underline;\"><strong>A classic run on the bank followed<\/strong><\/span>. Many start-ups pulled their deposits.<\/li>\n<li><span style=\"text-decoration: underline;\"><strong>The company became belly-up two days after announcing its capital raise<\/strong><\/span>.<\/li>\n<\/ul>\n<p>The <span style=\"text-decoration: underline;\"><strong>FDIC has now stepped in<\/strong><\/span> and taken control of SVB&#8217;s assets. The insurer has already created a new bank and transaction facilities, and will keep on honoring up SVB&#8217;s transactions and withdrawals to $250,000 per account, starting on Monday.<\/p>\n<p>Any small company or individual with more than this amount will become a <span style=\"text-decoration: underline;\"><strong>first-line creditor<\/strong><\/span> in the bankruptcy proceedings. That will not be pleasant for many: uncertainty, delays, and very likely losses down the road.<\/p>\n<p>The FDIC has not yet confirmed the amount, but apparently\u00a0<span style=\"text-decoration: underline;\"><strong>90% of the bank&#8217;s assets are uninsured<\/strong><\/span>.<\/p>\n<p>&nbsp;<\/p>\n<h3>The questions<\/h3>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"wp-image-10163 alignright size-medium\" src=\"https:\/\/navesinkinternational.com\/wp-content\/uploads\/2023\/03\/Silicin-Valley-Bank-300x200.jpg\" alt=\"\" width=\"300\" height=\"200\" srcset=\"https:\/\/navesinkinternational.com\/wp-content\/uploads\/2023\/03\/Silicin-Valley-Bank-300x200.jpg 300w, https:\/\/navesinkinternational.com\/wp-content\/uploads\/2023\/03\/Silicin-Valley-Bank-768x512.jpg 768w, https:\/\/navesinkinternational.com\/wp-content\/uploads\/2023\/03\/Silicin-Valley-Bank-980x654.jpg 980w, https:\/\/navesinkinternational.com\/wp-content\/uploads\/2023\/03\/Silicin-Valley-Bank-480x320.jpg 480w, https:\/\/navesinkinternational.com\/wp-content\/uploads\/2023\/03\/Silicin-Valley-Bank.jpg 1024w\" sizes=\"(max-width: 300px) 100vw, 300px\" \/>A few questions arise<\/p>\n<ul>\n<li><strong><span style=\"text-decoration: underline;\">Why did SVB wait for so long to raise equity<\/span>?<\/strong> It is their lack of action in the past, combined with the announcement, which generated the bank run. There&#8217;s a Chief Risk Officer who will not get a job anytime soon.<\/li>\n<li><span style=\"text-decoration: underline;\"><strong>Why did the sale of bonds create a <em>tax<\/em> loss<\/strong><\/span>?\u00a0 $1.8 bn of <em><span style=\"text-decoration: underline;\">tax<\/span> <\/em>losses on a $21 bn sales, aka 8.5%, indicates that the bond mismarking were probably much bigger (at 25% tax, the bonds would have been 35% mismarked). <span style=\"text-decoration: underline;\"><strong>A proper valuation<\/strong><\/span> would have forced the bank to realize its losses as the long-term yield rose, not when it sold those bonds.<\/li>\n<li>More importantly, <span style=\"text-decoration: underline;\"><strong>who else will be hurt by the losses<\/strong><\/span>? What contagion can we expect?\n<ul>\n<li><span style=\"text-decoration: underline;\"><strong>Many start-ups will go belly-up<\/strong><\/span>.<\/li>\n<li>Many investment <span style=\"text-decoration: underline;\"><strong>PE\/VC funds will have to declare losses<\/strong><\/span>. Their investors could have financial difficulties.<\/li>\n<li>Did SVB owe large sums to <span style=\"text-decoration: underline;\"><strong>other important financial companies<\/strong><\/span>? Nobody knows yet.<\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<p>&nbsp;<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"wp-image-10171 alignright size-medium\" src=\"https:\/\/navesinkinternational.com\/wp-content\/uploads\/2023\/03\/Graveyard-angel-300x200.jpg\" alt=\"\" width=\"300\" height=\"200\" srcset=\"https:\/\/navesinkinternational.com\/wp-content\/uploads\/2023\/03\/Graveyard-angel-300x200.jpg 300w, https:\/\/navesinkinternational.com\/wp-content\/uploads\/2023\/03\/Graveyard-angel-480x320.jpg 480w, https:\/\/navesinkinternational.com\/wp-content\/uploads\/2023\/03\/Graveyard-angel.jpg 640w\" sizes=\"(max-width: 300px) 100vw, 300px\" \/>So far, financial analysts are saying that SVB was unique, and <span style=\"text-decoration: underline;\"><strong>no financial contagion is to be expected<\/strong><\/span>. The big banks\u00a0will not be impacted much.<\/p>\n<p><span style=\"text-decoration: underline;\"><strong>But Silicon Valley will suffer for sure<\/strong><\/span>. Some angel investors will become graveyard gnomes.<\/p>\n<p>&nbsp;<\/p>\n<p>PS: The rumor is that $2bn of SVB withdrawals went to Brex, another Silicon Valley bank. That bank may enjoy the new cash flow, but it probably has a bunch of loans with other local start-ups&#8230; <span style=\"text-decoration: underline;\"><strong>Bis repetita<\/strong><\/span>?<\/p>\n<p>&nbsp;<\/p>\n<h4>Sources:<\/h4>\n<ul>\n<li>SVB announcement, March 8, 2023: <a href=\"https:\/\/ir.svb.com\/news-and-research\/news\/news-details\/2023\/SVB-Financial-Group-Announces-Proposed-Offerings-of-Common-Stock-and-Mandatory-Convertible-Preferred-Stock\/default.aspx?utm_source=newsletter&amp;utm_medium=email&amp;utm_campaign=newsletter_axiosprorata&amp;stream=top\" target=\"_blank\" rel=\"noopener\">SVB Financial Group &#8211; SVB Financial Group Announces Proposed Offerings of Common Stock and Mandatory Convertible Preferred Stock<\/a><\/li>\n<li>The New York Times, March 10, 2023: <a href=\"https:\/\/www.nytimes.com\/2023\/03\/10\/business\/silicon-valley-bank-stock.html\" target=\"_blank\" rel=\"noopener\">Silicon Valley Bank Fails After Run by Venture Capital Customers &#8211; The New York Times (nytimes.com)<\/a><\/li>\n<li>CNBC, March 10, 2023: <a href=\"https:\/\/www.cnbc.com\/2023\/03\/10\/silicon-valley-bank-financial-in-talks-to-sell-itself-after-attempts-to-raise-capital-have-failed-sources-say.html\" target=\"_blank\" rel=\"noopener\">Silicon Valley Bank fails to find buyer as run on bank outpaced sale process (cnbc.com)<\/a><\/li>\n<li>CNN Business, March 10, 2023: <a href=\"https:\/\/www.cnn.com\/2023\/03\/10\/investing\/svb-bank\/index.html\" target=\"_blank\" rel=\"noopener\">Silicon Valley Bank collapses after failing to raise capital | CNN Business<\/a><\/li>\n<li>The Verge, March 10, 2023: <a href=\"https:\/\/www.theverge.com\/2023\/3\/10\/23634012\/fdic-shut-down-silicon-valley-bank-startup-venture-capital-cash\" target=\"_blank\" rel=\"noopener\">FDIC shuts down Silicon Valley Bank &#8211; The Verge<\/a><\/li>\n<\/ul>\n","protected":false},"excerpt":{"rendered":"<p>Silicon Valley Bank (SVB) defaulted on Friday. At $212 bn of assets, it is the largest failure since 2008, and probably one of the fastest &#8211; it went from rumor to belly-up in only two days.<br \/>\nHere is the explanation, and the first questions.<\/p>\n","protected":false},"author":1,"featured_media":10194,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[12,11],"tags":[386,391,431,269,429,430],"acf":[],"_links":{"self":[{"href":"https:\/\/navesinkinternational.com\/wp-json\/wp\/v2\/posts\/10156"}],"collection":[{"href":"https:\/\/navesinkinternational.com\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/navesinkinternational.com\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/navesinkinternational.com\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/navesinkinternational.com\/wp-json\/wp\/v2\/comments?post=10156"}],"version-history":[{"count":2,"href":"https:\/\/navesinkinternational.com\/wp-json\/wp\/v2\/posts\/10156\/revisions"}],"predecessor-version":[{"id":13108,"href":"https:\/\/navesinkinternational.com\/wp-json\/wp\/v2\/posts\/10156\/revisions\/13108"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/navesinkinternational.com\/wp-json\/wp\/v2\/media\/10194"}],"wp:attachment":[{"href":"https:\/\/navesinkinternational.com\/wp-json\/wp\/v2\/media?parent=10156"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/navesinkinternational.com\/wp-json\/wp\/v2\/categories?post=10156"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/navesinkinternational.com\/wp-json\/wp\/v2\/tags?post=10156"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}