SVB (Silicon Valley Bank) - Quick Thoughts

First off, by the time you read this things may be outdated. I am writing this Sunday morning after returning from a few days in North Carolina (where it was not snowing like here). Things are moving quickly with the bank and what happens next. Also, I am just hitting the highlights and some commentary. No thoughts on the CEO selling stock before it crashed, bonuses, and more. Just sticking high level here.

Let’s get to it. It’s only a 3 minute read. 

Background:

• SVB had been around for 40 years and their sweet spot was funding and working with tech startups.
• When interest rates were super low these tech company clients of the bank parked their cash in the bank.
• SVB then invested these funds, which is what banks do. Unfortunately, the bank invested in a lot of long-term bonds, which have dropped in price as interest rates have increased (remember, bond rates and prices are like two sides of a seesaw. When one goes up the other goes down.).
• Many of these clients accessed cash recently which meant the bank had to create more cash by selling these long-term bonds at a loss. They then started talking about needing fresh capital to cover its losses.
• When some of these tech companies heard about the need for fresh capital the chaos began. Many started to run on the bank and pulling their cash. VC’s (Venture Capitalists) are known as herd followers and this certainly followed that trend. $42 billion was withdrawn on Thursday. This was $1 million a second for ten hours straight!!!
• It caused the FDIC to step in during the day to fail the bank. This meant shutting it down.

Quick Commentary:

• As recently as two weeks ago the CEO of SVB was asked about the risk of their long-term bond positions. He basically said it was nothing to be worried about.
• This same CEO successfully lobbied the previous administration to weaken the stress testing requirements for banks of his size. I have not seen any commentary on whether that would have prevented what happened Friday, but I can’t imagine it would have been worse.
• Banks have a history of being terrible investing their own money. The investment firm I use to help me manage my clients’ money started by managing money for banks.
• It’s amazing how many tech investors are now calling for the Government to bail them out. That sure was a quick change from being a capitalist to a socialist😉

 Lessons For You:

• First off, the FDIC provides insurance for accounts up to $250,000. This is for cash and not investments themselves.
• Many of the larger banks, and now even smaller banks, have the ability to get you above this $250,000 limit by agreements with other banks.
• Be sure to talk with your bank if you have cash above $250,000 on how much of it is 100% FDIC insured.
• As a bonus, Jim Cramer was on CNBC a month ago saying this was a buy. Never let Jim Cramer say you are going to live forever😉 Seriously, it is another lesson to not take investing tips from entertainers on TV.

 What’s Next:

• Well, this is the big question. Again, cash positions of less than $250,000 in FDIC accounts will be made whole. Anything above that is the issue.
• The best chance for the bank is for it to be acquired by another bank.
• Intervention at the Federal level is a bit trickier. Changes made after 2008 limit the ability of the various tools by the Government to be focused on the “broad market” and not on one banking institution. There are also restrictions on utilization of tools reserved for “systemic” issues, which this probably does not qualify as.
• Congress could get involved, but what do you think the odds are of this? I’m thinking not.
• Again, I wouldn’t be surprised to see if another bank or a group of investors comes together to pick up what is left of SVB. This may take some time to work through the numbers to see if a deal can be struck.
• In the meantime, the Fed and other government resources will be watching to make sure there is not a ripple beyond SVB. Monday’s open will be interesting and who knows how much will change in the 23 hours between when I am writing this and the market opens.

I’m Dan Johnson, CFP®, founder of Forward Thinking Wealth Management. I run a flat-fee financial planning and investment management firm located in beautiful Akron, OH. Although I am in Akron, OH, I work with clients regardless of location. I cater to owners of equity compensation positions who are looking to organize their financial lives, keep more of what they make, and do the things they want in retirement and even now.