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The Second-Largest Bank Failure In U.S. History
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The Second-Largest Bank Failure In U.S. History

The federal government tries to contain the fallout from Silicon Valley Bank’s collapse.

Happy Monday! According to a new report from the Recording Industry Association of America, vinyl albums outsold CDs in the United States last year for the first time since 1987.

Coincidentally, the Chicago Bears are shaping up to be worth paying attention to this season … for the first time since … about 1987.

Quick Hits: Today’s Top Stories

  • The heads of the Treasury Department, Federal Reserve, and Federal Deposit Insurance Corporation issued a joint statement on Sunday making clear that depositors at Silicon Valley Bank will have access to all of their money this morning after the FDIC assumed control of SVB on Friday amid a bank run that caused the institution to fail. “No losses associated with the resolution of Silicon Valley Bank will be borne by the taxpayer,” the statement read. 
  • The Bureau of Labor statistics reported Friday that U.S. employers added 311,000 jobs in February—down from 504,000 in January, but still exceeding economists’ expectations. The unemployment rate ticked up slightly from 3.4 percent to 3.6 percent as more people sought out work—the labor force participation rate shifted up from 62.4 percent in January to 62.5 percent. Average hourly earnings—a measure the Federal Reserve is watching closely in its fight against inflation—rose 0.2 percent month-over-month in February, and 4.6 percent year-over-year. Those figures were 0.3 and 4.4 percent in January, respectively.
  • Following secret talks mediated by China, Iran and Saudi Arabia announced Friday they are resuming diplomatic relations, and expect embassies and diplomatic staff to be re-established in the coming months. The two Middle Eastern countries have had no official relations since 2016, when Saudi Arabia broke off ties after protesters attacked and burned the Saudi embassy in Tehran.
  • By a 2,952-0 vote, the National People’s Congress on Friday officially confirmed Xi Jinping to serve a third five-year term as China’s president—only possible because he abolished the country’s two-term limit for the presidency in 2018. The presidential confirmation is largely ceremonial as Xi’s political power comes from serving as head of the Chinese Communist Party and military, positions he secured at the party congress in October
  • North Korea announced Monday that, one day earlier, it tested two submarine-launched cruise missiles capable of threatening U.S. bases in Japan and South Korea. The launch comes as the U.S. and South Korea plan to hold large-scale military field exercises today.
  • The House voted 419-0 on Friday to pass a bill requiring the Office of the Director of National Intelligence to declassify all information related to COVID-19’s origins and send an unclassified report to Congress within 90 days. The Senate had already approved the bill by unanimous consent, and the overwhelming support for the legislation signals that, if President Joe Biden vetoes the bill, he will likely be overridden. 
  • Michael Cohen, Donald Trump’s former personal lawyer and fixer, is set to testify before a Manhattan grand jury this week in a case concerning hush money Trump paid to a porn star before the 2016 election. The Manhattan District Attorney’s Office invited Trump to testify before the grand jury last week, signaling the case may be moving toward an indictment.
  • Two boats suspected of smuggling migrants capsized while approaching the San Diego coast on Sunday, killing at least 8 people. Lifeguards, the Coast Guard, and U.S. Border and Customs Protection agents were still searching for an estimated 7 additional individuals as of Sunday night.
  • The 95th annual Academy Awards were held last night, with Everything Everywhere All at Once leading the way with seven Oscar victories, including best picture, best director, best actress in a leading role, best actress in a supporting role, and best actor in a supporting role. Brendan Fraser won best actor in a leading role for his work in The Whale.

RIP to SVB

Employees walk outside of the shuttered Silicon Valley Bank (SVB) headquarters in Santa Clara, California. (Photo by Justin Sullivan/Getty Images)
Employees walk outside of the shuttered Silicon Valley Bank (SVB) headquarters in Santa Clara, California. (Photo by Justin Sullivan/Getty Images)

No one is likely feeling the Daylight Saving Time hangover this morning more than the folks at the Federal Deposit Insurance Corporation (FDIC), who—alongside Treasury Secretary Janet Yellen and Federal Reserve Chair Jerome Powell—spent the weekend scrambling to keep the second-largest bank failure in United States history from precipitating a broader economic meltdown. We’ll officially find out if their efforts were successful when the markets open in a few hours, but early signs indicate the fallout will likely remain relatively contained.

The now-defunct financial institution in question is Silicon Valley Bank, dreamed up over a poker game and founded in 1983 to cater to the blossoming tech industry in, you guessed it, Silicon Valley. Startups flush with investor cash needed a place to park it—and bankers who understood the ins and outs of the burgeoning sector. SVB provided both. 

The pandemic-era tech boom was very good to SVB. As interest rates plummeted and tech valuations skyrocketed, startups raised a lot of money—and they put it in their local bank. Customer deposits swelled from $102 billion to $189 billion in 2021, and the company said it banked 44 percent of the venture-backed tech and healthcare IPOs in 2022—down slightly from 55 percent in 2021. But the bank held assets of companies beyond tech, too, and as recently as a few months ago, SVB was the 16th largest bank in the country. (Disclaimer: The Dispatch was a Silicon Valley Bank customer.)

“Much of the recent deposit growth was driven by our clients across all segments obtaining liquidity through liquidity events,” the bank wrote in a recent filing with the Securities and Exchange Commission, “such as IPOs, secondary offerings, SPAC fundraising, venture capital investments, acquisitions and other fundraising activities—which during 2021 and early 2022 were at notably high levels.”

Like any bank, SVB did a variety of things with that money—fund and asset management, investing in tech companies, underwriting IPOs, even financing California vineyards and wineries. But it also placed an unusually large amount of its funds—56 percent, compared to 25 percent at Fifth Third Bank and 28 percent at Bank of America—in long-maturity U.S. Treasury bonds and mortgage-backed securities. In a low interest rate environment, those bonds locked in a steady—and relatively safe—return. But we’re no longer in a low interest rate environment.

As the Federal Reserve jacked up interest rates over the past year in its fight against inflation, those returns looked less attractive and the market value of those bonds sank—so much so that, by the end of last year, SVB was sitting on unrealized losses of about $15 billion. Some investors saw warning signs and shorted SVB, but as recently as January the bank had enough going for it that Wells Fargo analysts labeled its sunken stock price the “deal of the century.” SVB wasn’t panicking—it hoped to hang tight and make it through by raising some money and holding the bonds until maturity.

Only it didn’t hold all those bonds. Elevated interest rates also put pressure on the tech bubble, and as investor money dried up, SVB’s relationship with most of its customers reversed. Startups were no longer depositing money into the bank, they were drawing down what they’d stashed there to make payroll and other obligations. SVB needed to raise some cash to meet those withdrawals, so it sold a $21 billion portfolio of mostly U.S. Treasuries—at a $1.8 billion loss. To shore up the resulting hole in its balance sheet, SVB announced a capital raise of $2.25 billion. It made these moves just days after Silvergate—a smaller, crypto-focused bank—said it’d be shutting down in the wake of the crypto meltdown.

The decision plunged SVB straight into the bank-run scene of It’s a Wonderful Life—except it had no George Bailey honeymoon funds to tide itself over. “When you think about bank runs, it’s a combination of fundamentals and panic,” said Itay Goldstein, an economics professor at the University of Pennsylvania who studies financial crises. “If everyone shows up at the same time and wants to take their money out, the bank will just not have enough.”

Already jittery over the Silvergate failure, the close-knit world of venture capital and startups began passing the word in email chains, slack threads, and tweets: Get out while you can. Certain VC firms—including Peter Thiel’s Founders Fund—reportedly took all their cash out of SVB in the days leading up to its collapse, and encouraged their portfolio companies to do the same. On Thursday, customers withdrew $42 billion, leaving SVB with a negative cash balance of about $958 million. Instead of clamoring in a bank lobby, customers swarmed SVB’s online platforms, sending screenshots of error messages as they overloaded the system. SVB’s stock price cratered until trading was frozen, and other banks’ shares took a hit, too.

SVB President Greg Becker—who reportedly sold $3.6 million of his SVB stock two weeks ago, urged investors to “stay calm” amid mounting speculation about the bank’s troubles. His words had the opposite of their intended effect.

Regulators usually wait until close of business Friday to roll up a failing bank, hoping to get things sorted by the time the market reopens on Monday. But in a sign of just how quickly SVB’s catastrophe unfolded, California and the Feds stepped in Friday morning to shut it down, citing illiquidity and insolvency. The FDIC placed SVB in receivership and stood up a dummy financial institution instead, promising SVB customers would have “full access” to their insured deposits by Monday morning.

But here’s another area where SVB’s unique market niche comes back to bite: The FDIC insures only up to $250,000 per account, and unlike at a typical bank, most of SVB’s tech company and venture capital clients have way, way, way more than that on the books. Roku, the streaming hardware company, on Friday reported having about $487 million deposited with the bank. The average customer balance at SVB was $4.2 million in late 2022, and nearly 96 percent deposits were not covered by FDIC insurance—compared to just 38 percent for Bank of America.

A lot of startups and Silicon Valley-based companies went into a tailspin over the weekend, unsure when—or if—they’d be able to get their hands on enough cash to meet operating costs. Etsy, the craft e-commerce platform, began informing sellers on its platform they likely won’t receive payment for their products on the timeline they’re used to. Camp—an online toy store—deployed a creative solution to generate a quick influx of cash: emailing customers about a 40 percent off sale. Promo code? BANKRUN.

(But if you just raced over to www.camp.com in the hopes of securing a PAW Patrol Kitty Catastrophe Figure Set for just $11.99, you were likely sorely disappointed. The promotion is no longer active, probably because the most acute part of the crisis has passed.)

In an appearance on CBS’ Face the Nation Sunday morning, Yellen previewed the announcement that would come later in the day. “Let me be clear that during the financial crisis, there were investors and owners of systemic large banks that were bailed out… and the reforms that have been put in place means we are not going to do that again,” she said. “But we are concerned about depositors, and we’re focused on trying to meet their needs.”

After days of will-they-won’t-they speculation, Yellen, Powell, and FDIC Chairman Martin Gruenberg issued a joint statement Sunday evening making clear the federal government will step in to ensure SVB depositors have access to all of their money—not just the FDIC-mandated $250,000—starting today. The bank’s shareholders and debtholders probably won’t enjoy the same fate—and SVB’s senior management has obviously been removed—but startups and others who treated SVB as a checking or savings account will be made whole. A similar promise was made for depositors to the smaller, New York-based Signature Bank, which was shuttered Sunday as well. “No losses associated with the resolution of Silicon Valley Bank [or Signature Bank] will be borne by the taxpayer,” the trio promised.

How is that possible? 

Well, we’ll see if it is. But the officials’ theory of the case is that they’ll tap into the FDIC’s insurance fund—which is made up of premiums paid by banks, not taxpayer dollars—and replenish the reserve with a “special assessment” on banks. The Wall Street Journal also reported Sunday regulators were seeking to auction off SVB’s assets to a bigger, healthier bank—either in chunks or in their entirety—and a Jefferies analysis estimates those liquidated assets would be able to cover about 95 percent of uninsured deposits. “I’m sure [the FDIC is] considering a wide range of available options that would include acquisitions,” Yellen told CBS News yesterday when asked if she would be open to another bank “coming in as a white knight” to stabilize SVB’s situation. “We are concerned about depositors and are focused on trying to meet their needs.”

Overnight, HSBC struck a deal to purchase the United Kingdom subsidiary of SVB for a whopping £1 ($1.21).

The most immediate concern for regulators as we head into a new week is whether the plight of SVB and Signature spreads to other financial institutions as customers—spooked by this weekend’s news—withdraw from otherwise healthy mid-sized banks and flee to the relative safety of JPMorgan Chase, Bank of America, Citigroup, Wells Fargo, etc. It’s certainly possible—though far less likely given the federal government’s intervention. “Regional & local banks are critical to starting & supporting small businesses of all kinds,” GOP Sen. Mitt Romney of Utah tweeted. “If depositors that account for most or much of these banks’ capital are afraid that they can lose their deposits, depositors will move their capital to a handful of NYC money center banks.”

In an effort to ensure that doesn’t happen, the Federal Reserve also announced yesterday a new Bank Term Funding Program, offering financial institutions loans of “up to one year” and using the institution’s U.S. Treasuries, agency debt, and/or mortgage-backed securities—valued at par—as collateral. “The BTFP will be an additional source of liquidity against high-quality securities,” the Fed said, “eliminating an institution’s need to quickly sell those securities in times of stress.” Even if a smaller bank’s customers do get a little flighty this week, the thinking goes, the damage should be contained.

Before the joint statement from Treasury, the Fed, and the FDIC on Sunday evening, the debate over the SVB had entered the political discussion, with officials in both political parties expressing skepticism of anything resembling a taxpayer-financed bailout. “Taxpayers should absolutely not bail out Silicon Valley Bank,” said former South Carolina Gov. Nikki Haley in a statement. “Private investors can purchase the bank and its assets. It is not the responsibility of the American taxpayer to step in. The era of big government and corporate bailouts must end.” Florida Gov. Ron DeSantis blamed SVB’s troubles on wokeness, saying the bank was overly concerned with diversity, equity, and inclusion—“DEI and politics and all kinds of stuff.” Sen. Mitt Romney, who had urged the federal government to protect SVB’s depositors earlier in the day, tweeted “right decision” when the announcement came. 

But Vivek Ramaswamy, the biopharmaceutical entrepreneur turned Republican presidential candidate, argued in a Wall Street Journal op-ed depositors should also have to live with the consequences of their decisions. “Startup executives must do better in managing financial risks and diversifying across counterparties,” he wrote. “Many tech founders were also financially rewarded for banking with SVB: The bank uniquely specialized in providing non-dilutive venture debt to risky early-stage companies. This allowed startup founders to preserve greater equity ownership in their companies. Taxpayers were never going to participate in that equity upside, so they shouldn’t be asked to foot the bill when downside risks materialize.”

Worth Your Time: The Case For and Against Government Help for Silicon Valley Bank Depositors

  • Writing for the Financial Times, Michael Moritz, a partner at Sequoia Capital, explains the vital role SVB played in the tech ecosystem, working with startups otherwise ignored by big banks. “Before SVB sprang to life, it was difficult, if not impossible, for a start-up to secure a relationship with a large, established bank,” Moritz writes. “I’m sure many will look upon its demise and the ungodly amount of fear-mongering on social media and chuckle gleefully about how the technology industry just got a spanking. So be it. We are not seeking special treatment or handouts. If a bank fails—even if it is our bank—that’s the price we pay for living in an economy where success is rewarded, and mis-steps are punished. But if adequate steps aren’t taken to ensure that tens of thousands of entrepreneurs can meet their payrolls and other obligations, the U.S. hold on any number of groundbreaking technologies will be substantially weakened.”
  • In National Review, Philip Klein argues bailing out SVB’s depositors creates enormous moral hazard. “Sunday’s decision by regulators to bail out uninsured depositors of the failed Silicon Valley Bank would dramatically lower the threshold for federal intervention in financial markets,” Klein writes. “Defenders of this decision will try to make it seem as if it’s an extraordinary, one-off decision by regulators, but in practice, it has created a huge moral hazard by signaling that the $250,000 FDIC limit on deposit insurance does not exist in practice. The clear signal it sends is that when financial institutions make poor decisions, the government will swoop in to clean up the mess.” SVB’s failure would not threaten the entire economy, he argues. “There would be disruption to a number of companies in the tech sector and their employees, as well as potential problems for similarly situated financial institutions. But the vast majority of banks are well capitalized right now, and there is no credible risk of this causing a complete financial meltdown.”

Presented Without Comment 

Also Presented Without Comment 

Also Also Presented Without Comment 

Toeing the Company Line

  • In the newsletters: Chris argues (🔒) presidential candidates need to know when to quit, Nick calls out (🔒) the Manhattan DA’s odd legal case against Trump, and Jonah reflects on on the incoherence of the romantic nationalism behind Trump.
  • On the podcasts: Jonah ruminates on wreckage of Republican intellectualism.
  • On the site over the weekend: Alec reviews The History of the World, Part II, Peter Meilaender examines the paintings of M.K. Čiurlionis, Oliver Rhodes explores the new deal the U.K. has struck on resolving Brexit issues concerning the Northern Ireland border, and David Kagan looks at how a recent spate of rule changes are affecting Major League Baseball.
  • On the site today: Chris writes on the sinister legacy of Howell Cobb, Jimmy Soni makes a case for standardized testing, and Thomas Lenard proposes a commission to study the government’s COVID response.

Let Us Know

Was the federal government correct to bail out SVB’s depositors?

Declan Garvey is the executive editor at the Dispatch and is based in Washington, D.C. Prior to joining the company in 2019, he worked in public affairs at Hamilton Place Strategies and market research at Echelon Insights. When Declan is not assigning and editing pieces, he is probably watching a Cubs game, listening to podcasts on 3x speed, or trying a new recipe with his wife.

Esther Eaton is a former deputy editor of The Morning Dispatch.

Mary Trimble is the editor of The Morning Dispatch and is based in Washington, D.C. Prior to joining the company in 2023, she interned at The Dispatch, in the political archives at the Paris Institute of Political Studies (Sciences Po), and at Voice of America, where she produced content for their French-language service to Africa. When not helping write The Morning Dispatch, she is probably watching classic movies, going on weekend road trips, or enjoying live music with friends.

Grayson Logue is the deputy editor of The Morning Dispatch and is based in Philadelphia, Pennsylvania. Prior to joining the company in 2023, he worked in political risk consulting, helping advise Fortune 50 companies. He was also an assistant editor at Providence Magazine and is a graduate student at the University of Edinburgh, pursuing a Master’s degree in history. When Grayson is not helping write The Morning Dispatch, he is probably working hard to reduce the number of balls he loses on the golf course.