The collapse of Silicon Valley Bank was caused by a massive run on the bank, with customers initiating withdrawals of $42 billion this week.
The bank was placed into Federal Deposit Insurance Corp. receivership on Friday after the California Department of Financial Protection and Innovation (DFPI) determined the bank had been rendered insolvent.
Prior to the run on the bank, the bank was in “sound financial condition,” according to the DFPI. Customers withdrew $42 billion, leaving the bank with a negative cash balance of $958 million.
Here’s the summary of what happened from the DFPI’s order taking possession of the bank:
On March 8, 2023, the Bank announced a loss of approximately $1.8 billion from a sale of investments (U.S. treasuries and mortgage-backed securities). On March 8, 2023, the Bank’s holding company announced it was conducting a capital raise. Despite the bank being in sound financial condition prior to March 9, 2023, investors and depositors reacted by initiating withdrawals of $42 billion in deposits from the Bank on March 9, 2023, causing a run on the Bank. As of the close of business on March 9, the bank had a negative cash balance of approximately $958 million. Despite attempts from the Bank, with the assistance of regulators, to transfer collateral from various sources, the Bank did not meet its cash letter with the Federal Reserve. The precipitous deposit withdrawal has caused the Bank to be incapable of paying its obligations as they come due, and the bank is now insolvent.
Prior to its collapse, Silicon Valley Bank was the 16th largest bank by assets in the U.S. Federal Reserve data shows the bank had $209 billion in assets as of December 31, 2022.
How It Happened . . .
Peter Thiel’s Founders Fund and several other high-profile venture capital firms (i.e. Coatue Management, Union Square Ventures) advised their portfolio companies to pull money from Silicon Valley Bank on Thursday, responding to panic about the bank’s financial situation in tech startup circles.
They asked on Thursday. By Friday morning, the Bank was dead.
OPINION
It __looks__ like Peter Thiel and some of his Venture Capital buddies, panicked.
When they told their pals to pull money out of the bank over a measly $1.8 Billion loss during the Bank's sale of some Mortgage Backed Securities, that set in motion the collapse of the bank.
Had Thiel and his pals just left things alone, it seems to many people the bank would still be standing.
Now, its a gigantic mess.
As a result of this mess, things can go one of two ways:
1) The mess is contained, FDIC comes in, protects basic depositors, and sells-off the rest of the Mortgage Backed Securities, and ****some**** of the uninsured Depositors get ****some**** of their money back . . . . years from now, OR;
2) The mess is NOT contained and this mess snowballs into a gigantic systemic collapse.
Next week will be telling about which way this will go.
UPDATE 9:25 AM EST (Saturday) --
The Bank of London is exploring the possibility of assembling a Rescue offer for Silicon Valley Bank (SVB) UK as start-up founders warn Jeremy Hunt that its collapse will "cripple" the British tech sector,
Elon Musk just said he is "open to the idea" to buy Silicon Valley Bank and become a digital bank. (HT REMARK: As long as no major U.S. bank is willing to touch it, I wouldn't expect Elon's "golden touch" to stabilize everything.)
China orders its Finance Ministry to sell its US Treasuries at "fastest pace."
Meanwhile, the People's Bank of China has added over 102 tons of gold in 4 months in an attempt to limit counterparty risk in a conflict with the US over Taiwan.
