RIP: Silicon Valley Bank Collapses in Chaos

Update:  Another bank was shut down, this time by the New York Department of Financial Services on Sunday; the agency appointed the FDIC as receiver.  New York's Signature Bank was a player in the crypto space, which one commentator labeled akin to a video game.  Federal bank regulators issued a joint statement warning of the dangers in crypto finance.  Among the laundry list of shady practices are: misrepresentations and misleading disclosures by crypto asset companies, trading on open access public networks without adequate governance,  and significant volatility of crypto assets including coins.  

{11.03.2023} It was the 16th largest bank in the United States and the largest bank collapse since Washington Mutual in the Panic of 2008. The Friday run on SNB by its depositors came midst the bursting of the tech start-up/crypto bubble that began last year. The bank's attempt to raise $2.5 billion in additional capital and liquidity triggered a rapid sell-off of its stock beginning Thursday, which extended into the after hours. Trading was halted before trading began on Friday morning, and remains halted. The bank had 17 branches in California and Massachusetts with $209 billion in assets. The fact that it collapsed so suddenly has shocked investors.  Governor Newsom has asked for federal help to "stabilize" the situation.  Once again taxpayers may be asked to subsidized the insatiable greed of the investor class.  No money forgiving student debt, but millions for bailing out the rich.

SNB specialized as the go-to bank for tech and crypto start-ups. It survived the DotCom bust of 2002, but this bubble was bigger. Its stock price hit a "hallucinogenic peak" in November 2022 of over $700 per share. Tech start-ups are intense cash drains. When the bank began to back away from lending to these risky ventures, the drain on its accounts continued while deposits dried up. The bank had to sell assets to meet those withdrawals. When it sold $21 billion in bonds, SNB lost $1.8 billion due to falling market value caused by rising bond yields. (Remember bond yields move inversely to price.)  Interestingly,  SVB Financial, which owns the bank, was rated "investment grade" just prior to the collapse.  On Wednesday Moody's rated it A3; even after the bank announced its bond sale loss, Moody's only reduced its bond rating to Baa1, still investment grade.  Lesson: do not rely entirely on bond rating scores to make investments.  There is market pressure to keep bond rating high.

There are rumors that SNB warned some investors to yank their funds before the bank became insolvent since FDIC insurance is limited to the first $250,000. The FDIC announced that the bank-in-receivership will resume operations on Monday, and that cash will be available to customers. Right now the FDIC does not look like it will suffer a loss for the takeover, as there are sufficient bank assets to pay insured accounts and partially pay sonme uninsured depositors. Bank shareholders, as usual are SOL. Blame it on the Great Techno Bust, or tulips take your pick.