Silicon Valley Bank has long been considered the lifeblood for tech startups, providing traditional banking services while funding projects and companies deemed too risky for traditional lenders. Billions of dollars in venture capital flow into and out of the bank’s coffers.
But the 40-year-old firm’s intimate ties to technology leave it particularly sensitive to the industry’s boom-and-bust cycles, and on Thursday those risks became abundantly clear.
SVB, which does business as Silicon Valley Bank, launched a $1.75 billion share sale on Wednesday to shore up its balance sheet. It said in an investor prospectus it needed the proceeds to plug a $1.8 billion hole caused by the sale of a $21 billion loss-making bond portfolio consisting mostly of US Treasuries. The portfolio was yielding it an average 1.79% return, far below the current 10-year Treasury yield of around 3.9%.
Investors in SVB’s stock fretted over whether the capital raise would be sufficient given the deteriorating fortunes of many technology startups that the bank serves. The company’s stock collapsed to its lowest level since 2016, and after the market closed shares slid another 26% in extended trade.
SVB’s CEO Gregory Becker has been calling clients to assure them their money with the bank is safe, according to two people familiar with the matter.
Some startups have been advising their founders to pull out their money from SVB as a precautionary measure, the sources added. One of them is Peter Thiel’s Founders Fund, according to one of the sources.
If Silicon Valley Bank collapses, its customers would not be able to either access their funds or borrow more money, which could freeze their whole operations. That fear is driving startups and venture capital firms to consider pulling their money from Silicon Valley Bank to protect their money–and potentially spark a bank run.
On Thursday, Garry Tan, president of startup incubator Y Combinator, suggested that any startup worried about bank solvency issues should lower their exposure to just $250,000, the maximum amount protected by federal deposit insurance.
What is ‘too big to fail’?
The idea of a bank being ‘too big to fail’ gained prominence during the 2008 financial crisis. Some financial institutions were considered too important to be allowed to fail, as central bankers argued that letting them go under could topple even more banks, creating a complete collapse of the financial sector.
In 2008, the U.S. government both took over troubled financial institutions like American Insurance Group (AIG) and purchased $700 billion in toxic assets from major banks like Citigroup, Bank of America, JPMorgan and Wells Fargo.
Ackman on Thursday dismissed the idea that another bank would save SVB, citing another example from 2008: the takeover of investment bank Bear Stearns by JPMorgan. “After what the Feds did to [JPMorgan] after it bailed out Bear Stearns, I don’t see another bank stepping in to help [Silicon Valley Bank]” he tweeted.
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