This past week saw the dramatic collapse of Silicon Valley Bank also known as SVB. Until Thursday, SVB had been the nation’s 16th largest bank. A leading tech lender, it was based in Menlo Park, California, and employed over 6,500 people. Regulators led by the California Department of Financial Protection and Innovation shut the bank down on Friday, and the Federal Deposit Insurance Corporation (FDIC) was appointed the receiver. The collapse, the largest since the 2008 financial crisis, moved a decline in the S&P 500 by 3.3% over the last two trading days of the week.
On Thursday, clients of SVB withdrew $42 billion in deposits, leaving a negative cash balance below $1 billion. Only a day before, SVB, in a public filing, disclosed it believed it had $180 billion of available liquidity to stem the outflows from a total of $169 billion in deposits. It didn’t have it. Regulators stepped in after the run on deposits turned cash balances negative.
From 2020-2021, SVB’s assets grew by 84% and deposits grew by 100%. These deposits were invested in long term Treasury securities which lost value as interest rates climbed. At the same time, depositors left SVB seeking higher yields on their deposits. Last week, liquidity became the critical issue and efforts by SVB management to solve that problem failed. It is important to remember that while regulators supervise banks, executives run them. The failure of the bank rests solely on the shoulders of CEO Greg Becker and his team. We shouldn’t blame the government or other watchdogs, although it doesn’t appear they were paying enough attention. (Full disclosure: SVB’s General Counsel was my colleague and attorney for four years).
The FDIC insures depositors with up to $250,000 in cash at a bank. Depositors with more than that at SVB will get receivership certificates for the uninsured balances, meaning they won’t get their money out soon. Uninsured deposits at the end of last year, carried in the SVB annual report, totaled $151 billion.
Friday’s bank run also created questions about other names including First Republic Bank (NYSE: FRB) which holds an estimated $120 billion in uninsured deposits and Signature Bank (NASDAQ: SBNY) which holds another estimated $80 billion in uninsured deposits. Will the closure of SVB affect their operations? Could we face a cascade of bank failures?
Uninsured deposits at SVB are simply uninsured. That means that money is theoretically lost. But there are several ways depositors of uninsured funds could still recover their money. One way is to wait for an orderly wind down of the bank which might take a year. From that wind down, they might be repaid some percentage of their holdings, likely 50 %, similar to what was paid on the IndyMac Bank failure in 2008. Alternatively, they could sell their uninsured deposits now to hedge fund buyers whose offers are said by the Financial Times to be quoted in the range of 55 to 65 cents on the dollar. Or they could wait for a federal bailout through a federally subsidized takeover by a friendly bank. The last option offers nearly a full recovery of funds.
Already depositors are calling for the federal government to step in. As of Sunday morning, the U.K. chancellor Jeremy Hunt had stepped in with offers to provide liquidity to SVB borrowers based in the U.K. Remember the new U.K. Prime Minister Rishi Sunak is a Stanford MBA who has vowed to make Britain “the next Silicon Valley.” Britain’s efforts are meant to stir a U.S. federal response and the pressure is on for the federal government to respond.
Which brings us to Vermont and our senior Senator Bernard Sanders, who is Chairman of the Health, Education, Labor, and Pensions Committee.
While Senator Sanders publicly stood against the Wall Street bailout of 2008, he was on both sides of the auto bailout of 2009. Nevertheless, we should expect him to be against a federal bailout of SVB or a federally subsidized bank rescue of SVB. A federal bailout of SVB would only benefit the rich with money coming from the middle class, and progressives oppose structural inequalities like that right?
But SVB is different. It was a major tech lender. And tech has been among the major funders of the far left. And tech -through FTX- has been very helpful to progressive candidates in Vermont like Congressperson Balint. But as we have seen, progressives haven’t held Congressperson Balint responsible for paying back stolen funds which benefitted her, nor have they held FTX responsible for stealing them in the first place.
Senator Sanders built his national reputation in his presidential campaigns by attacking opponents for supporting the Wall Street bailouts of 2008. It would be politically impossible for him to endorse the bank bailout of SVB. But now tech is in trouble not just the banks. Tech is vitally important to the far left for financial backing and for social media.
Because of the invective brought to the public debate by Senator Sanders about bank bailouts in 2008, JP Morgan was heavily penalized for its rescue of Bear Stearns. Senator Sanders made sure regulatory fines and lawsuits proceeded and JP Morgan lost $19 billion in the process. Morgan’s chief executive has said they would never do something like the Bear Stearns rescue again. So, to get any bank to step up to rescue SVB, the federal government will have to give assurances that the rescuer won’t be punished if the rescue is ultimately successful. And there will have to be lots of financial incentives to make any bank take the risk.
The uninsured tech depositors want their uninsured deposits back. Britain is leading the way on caving, hoping to pull the US into the bailout. The Federal Reserve is working this weekend to create options. But the bailout this time won’t be led by the feds, that’s too politically risky. It will be led by a bank. And that bank will get a sweet deal to save SVB.
Will Senator Sanders block the SVB bank rescue deal on principle? He should, and everything he has told us for fifteen years demands he block the deal. He has the absolute power to stop it. But SVB and its far-left depositors want their money; they are pleading failure to make them whole would result in an extinction event for tech companies. At the same time, Senator Sanders has the unique ability to make the rescue bailout happen and to save what the far left calls the innovation ecosystem.
Will the self-proclaimed champion of the working man reverse course and bail out wealthy tech depositors and political allies through an expensive government-backed bank rescue? Or will he let the uninsured depositors lose their money and refuse to let the federal government be used by the wealthy to cover their investment mistakes? We know he will speak against a bailout at the start. But his major funders and allies desperately need his help. One thing is certain. If SVB is ultimately rescued by the federal government or by another bank subsidized by the federal government, then Senator Sanders was behind it, no matter how much he protests he wasn’t.
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