The Silicon Valley Collapse

You’ve probably seen an article or two referencing Silicon Valley Bank and its collapse.  It’s been all over the news and will continue to lead headlines this week.  To be clear, I don’t see this as a reason for a market crash, it’s just another day on Wall Street.  

I’ve spent a lot of time reading up on the events, here’s my 5-minute breakdown:

What is Silicon Valley Bank (SVB):

It’s a bank used mostly by startup & tech companies, which is important to understand.   Deposits grew from $60bil to $180bil in 2022.  It was known as “The Bank for Startups and Venture Capitalist”.  This is not your typical bank or credit union.  

What happened:

Silicon Valley Bank was just closed by US regulators. This marks the biggest bank failure since the 2008 financial crisis.  Coming out of COVID, their size ballooned through deposits.  Interest rates climbed, tech companies began to struggle causing layoffs and a surge in cash burn, and the balloon popped!

Why did it happen?

Like all banks, SVB put most of their deposits to work by investing in bonds.  Their internal risk management & diversification wasn’t adequate, and liquidity issues arose.  As I’ve discussed in multiple client emails, bonds are highly impacted by interest rates.  When the Fed started hiking rates last year to combat inflation, the bonds SVP owned lost principal value.  This is normal for bonds, and if SVP had the luxury of holding these bonds until maturity (1-3 years in the future), they would have been fine!  

A large SVP banking client called Silvergate was tied to the FTX/crypto debacle early this year.  This led to $8 Billion in withdrawals from SVB over a short amount of time.  SVP announced it had sold $22 Billion in bonds/assets (at a large loss) to accommodate liquidity, and planned to sell Billions more in stock to raise additional money. This announcement caused panic for the tech investors and start-ups who had their cash reserves stored there, and everyone attempted to withdrawal their funds all at once.

Banks function like gyms- if every single member showed up to workout at the same time, it would cause major trouble!  That’s the best analogy I can use to describe the events.    

What does this mean?

No one knows for sure, and we will get more answers in the coming weeks.  Again, I chalk this up to usual market drama; a market crash is not imminent.  I’m looking to see if a larger bank (such as Chase) steps in and buys what’s left of SVP.   Our government loves to spend money, so the possibility of a bailout is always in play.  Bank stocks have been hit hard, and SVP stock (ticker SIVB) has been decimated.  *Elite Wealth has never purchased this stock, neither in personal accounts or for clients.    

The focus, in my opinion, needs to be on the security of bank deposits.  A large majority of accounts at SVP are above FDIC levels ($250k).   This is due to payrolls and accounts receivable for the businesses that banked with SVP.  I suspect an announcement on how those impacted will be made whole.  Hopefully, it’s a quick process…

Conclusion:

We don’t know if this is an isolated incident or if it will ripple through the banking system.  There will likely be some collateral damage, but keep in mind SVP is not your typical bank.  And if the Fed is looking for a reason to pump the brakes on pushing interest rates higher, this is it!

On the lighter side…

We all should have seen this coming!  SVB’s Chief Administrative Officer is a guy named Joseph Gentile, who previously served as the CFO for Lehman Brothers in 2007.  You remember the name; Lehman was one of first banks to collapses during the selloff in 2008.  I can’t make this stuff up…the jokes write themselves.  Who hired this guy???  

Oh, and of the 23 Wall Street stock analysts who cover SIVB, how many of them do you think had a “sell rating” on the stock?  ZERO….   In fact, the consensus was to BUY!   Trust the experts, they say!        

Source: https://twitter.com/PeterMallouk/status/1634303552943190017/photo/1

Thanks for reading, and I will continue to update as we get more news.  Being a long-term investor can be hard; we know this.  Today’s headlines become tomorrow’s footnotes.   Stay diversified, tune out the noise, and trust the process.  Always happy to discuss further if you wish!