The Silicon Valley Bank Fallout Is Here

Feeling the Vibrations

The banking world is feeling vibrations in its foundations once again this week. Actually, this is more like an eight-on-the-Richter scale earthquake, and of course, the online responses are turned up to 11.

Silicon Valley Bank (SVB) was birthed in one of the highest-achieving per-square-mile locations on Earth, becoming the 16th-most powerful bank in America.

Bad Investment Game

At the heart of its failure is heavy investment in long-dated US government bonds, featuring many mortgage-backed bonds. When the Federal Reserve sought to raise interest rates to combat rampant inflation, SVB's bonds plummeted in value.

Subsequently, many of the bank's customers started withdrawing their deposits, sparking a rush to sell off bonds at a loss, which sparked a downshift in confidence.

With all signs pointing to a bank run, late last night, US financial regulators triggered emergency measures to ensure all depositors will have access to their funds on Monday morning.

Bail Out or Not?

This stems the flow for many of the startups and smaller provincial banks who are connected to SVB, but the bank itself looks far from salvageable.

Now suffering the consequences of its recent investment decisions, the bank collapsed in spectacular fashion just a few days after announcing its new investment capital raising plans.

However, the fallout is tainted with controversy.

According to a prominent entrepreneur's social media post yesterday, there is “something very ugly happening right now.”

Yelling Fire in a Theater

“They're yelling fire in the proverbial theater,” says the post's author, clearly incensed we may be seeing hysteria spread across the country and wider world.

What's most curious about SVB is nearly 90% of its deposits were not insured, which dwarfs the usual rate in most banks.

The story continues, revealing how “they didn't hedge interest rate risk,” which was foolish, considering how great their portfolio was.

Moreover, the hedge they did make was based on currying favor in fashionable or powerful circles, boosting carbon-neutral and sustainable finance industries with a $5 billion investment.

Occupy Silicon Valley Is Coming

He finalized his condemnation, saying that this should herald an “Occupy Silicon Valley of historic proportions.”

It is unclear as to whether this move pays off, though most people suspect we are heading into similar territory to 2008 and a bank run is inevitable in the absence of an official bailout:

Filling up The Cookie Jar

The author has a reasoned response:

Too Big To Fail Again

However, others are also far less enthusiastic than Mr. Ramaswamy, customers will seek refuge in the kingpin banks once again. Regional banks don't want a clientele that doesn't have confidence:

Divisive Rhetoric Is Wrong

However, it isn't that straightforward. One commenter believes it is unfair and divisive to taint all startups and VC groups as the same.

But there seems to be far more pessimism than optimism surrounding this catastrophe, based on how reassuring SVB was before this unfolded. There are echoes of the FTX scandal here.

Political Ambition?

One commenter is furious that the original poster is mischaracterizing SVB customers as “woke coastal elites.” Maybe a little reputation burnishing is what is happening here? Who knows?

Moreover, the political ambitions of the original poster are all too clear for some. 

It is hard to know what further implications await this potentially dangerous scenario. With reports of federal involvement now evident, time will tell.

This post was inspired by this thread.

This article was produced and syndicated by Wealth of Geeks.