July 13, 2024

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The failure of the Silicon Valley bank led to investors calling for government aid

The failure of the Silicon Valley bank led to investors calling for government aid

Employees stand outside the Silicon Valley Bank (SVB) headquarters on March 10, 2023 in Santa Clara, California.

Justin Sullivan | Getty Images

Big names in Silicon Valley and the financial sector are publicly calling on the federal government to pressure another bank to take over the assets and liabilities of the Silicon Valley bank after the financial institution failed on Friday.

The FDIC will cover up to $250,000 per depositor and may be able to start paying those depositors as early as Monday.

But the vast majority of SVB’s clients were companies with more than they had on deposit with the bank. As of December, more than 95% of the bank’s deposits were uninsured, according to regulatory filings. Many of those depositors are startups, and many worry that they won’t be able to file for payroll this month, which in turn could lead to a wide wave of failures and layoffs in the tech industry.

Investors are worried that these failures could reduce confidence in the banking sector, especially medium-sized banks with deposits of less than $250 billion. These banks are not considered “too big to fail” and do not have to undergo regular stress tests or other safety valve measures that were passed in the aftermath of the 2008 financial crisis.

Venture capitalist and former technology CEO David Sachs has called on the federal government to push another bank to buy SVB assets, Writing on TwitterWhere is Powell? Where is Yellen? Stop this crisis now. Declare that all depositors will be safe. Place SVB with one of the first four banks. Do it before Monday’s opening or the infection will spread and the crisis will spread.

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VC Mark Suster agreed, in a tweet, “I guess that’s what they’re working on. I’m expecting statements by Sunday. We’ll see. I sure hope so or Monday’s going to be rough.”

Investor Bill Ackman made a similar argument in A Lengthy tweethe writes, “The government has about 48 hours to fix a mistake soon that is irreversible. By permitting @employee To fail without protecting all depositors, the world has woken up to what an unsecured deposit is – an illiquid, unsecured claim in a failing bank. absent @employee @employee or @bank of america Getting an SVB before opening on Monday, a possibility I think unlikely, or the government not insuring all SVB deposits, the giant sucking sound you’ll hear would be a withdrawal of all uninsured deposits from all but the ‘systemically important’ banks (SIBs )”.

Benchmarking partner Eric Vecheria books“If SVB depositors are not completed, corporate boards will have to insist that their companies use two or more of the Big Four banks exclusively. Which will crush the smaller banks. And will make the too big to fail problem even worse.”

Since its founding nearly 40 years ago, SVB has become a hub for financing in the technology industry, particularly for startups and the venture capitalists who invest in them. The company has been known for expanding banking services to early-stage startups that would otherwise struggle to obtain banking services elsewhere before generating stable cash flow. But the company itself has run into cash flow problems this year as startup funding dried up and its assets were locked up in long-term bonds.

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The company surprised investors on Wednesday with news that it needed to raise $2.25 billion to prop up its balance sheet, and that it sold all of its available-for-sale bonds at a loss of $1.8 billion. Reassurances from bank executives weren’t enough to stop the race, and depositors withdrew more than $42 billion before. end of Thursdaycreating the second largest bank failure in US history.

Many in the tech community blamed venture investors for spurring flight, and many told their investment firms to put their money in safer places after Wednesday’s SVB announcement.

“This was a wave of hysteria caused by the investing banks,” Ryan Valve, a fintech investor at Restive Ventures, told CNBC on Friday. “This will go down as one of the definitive cases of an industry having its nose cut off to spite its face.”

Observers are ironic that some venture capitalists with a reputation for liberal market tendencies are now calling for a bailout. For example, reactions to Sacks’ tweet included phrases like, “Excuse me, sir. Suddenly government is the answer?!?” And “We capitalists want socialism!

Some politicians have opposed any bailout, with Rep. Matt Gaetz, R-Fla., Twitter“If there is an effort to use taxpayers’ money to save the Silicon Valley bank, the American people can count on the fact that I will be out there leading the fight against it.”

But financier and former Trump communications director Anthony Scaramucci argue“It’s not a political decision to bail out SVB. Don’t make Lehman’s mistake. It’s not about the rich or the poor who benefit, it’s about stopping the infection and protecting the system. Make depositors whole or expect a lot of tragic unintended consequences.”

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Huo Soon and Ari Levy contributed to this story.