Silicon Valley bank failure prompts investors to seek government bailout

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

Justin Sullivan | Getty Images

Silicon Valley and financial industry bigwigs are calling on the federal government to push for another bank to take over the assets and liabilities of a Silicon Valley bank after the financial institution failed on Friday.

The Federal Deposit Insurance Corporation (FDIC) will cover up to $250,000 per depositor and may begin paying those depositors on Monday.

But the vast majority of SVB’s clients were enterprises with bank deposits. According to regulatory documents, as of December, more than 95% of bank deposits are not insured. Many of these depositors are startups, and many of them are worried that they won’t be able to pay salaries this month, which in turn could trigger a wider wave of failures and layoffs in the tech industry.

Investors worry that the setbacks could undermine confidence in the banking sector, particularly mid-sized banks with less than $250 billion in deposits. These banks are not considered “too big to fail” and are not subject to the regular stress tests or other safety valve measures that have been in place since the 2008 financial crisis.

David Sachs, a venture capitalist and former CEO of a technology company, called on the federal government to encourage another bank to buy SVB’s assets. Write on Twitter“Where’s Powell? Where’s Yellen? Stop this crisis NOW. Let all depositors know they’ll be safe. Place SVB with a Top 4 bank. Do it before Monday’s open or there will be contagion and the crisis will spread.”

VC Mark Suster tweeted: “I think they’re working. I’ll wait until Sunday for the announcements. We’ll see. Either that or Monday will be brutal.”

Investor Bill Ackman made a similar argument long tweetwrites: “The government has approximately 48 hours to correct an error that cannot be corrected immediately. By authorizing @SVB_Financial to fail without protecting all depositors, the world understood what an uninsured deposit is – an unsecured liquid claim on a failed bank. No @jpmorgan @citi or @BankofAmerica Buying SVB before Monday’s opening, which I think is unlikely, or the government won’t guarantee all SVB deposits, the giant exhaust note you’ll hear will be “removal of all uninsured deposits except systemically important ones. banks (SIBs).

Benchmark Partner Eric Vishria wrote“If SVB depositors are not fully formed, then corporate boards will be forced to require their companies to use only two or more of the BIG four banks. This will destroy the smaller banks. AND make it harder for the banks that are too big to fail.”

Since its inception 40 years ago, SVB has become a central part of finance in the tech industry, especially for startups and the VCs who invest in them. The firm has become known for extending banking services to early-stage startups that struggle to get banking services elsewhere before they can generate steady cash flow. But the firm itself has faced cash flow problems this year as startup funding dried up and private assets locked up in long-term bonds.

The company surprised investors on Wednesday with news that it had to raise $2.25 billion to shore up its balance sheet and sold all of its outstanding bonds at a loss of $1.8 billion. Confidence from bank executives was not enough to stop the run, and on Thursday, depositors had withdrawn more than $42 billion by the end of the day, making it the second largest bank failure in US history.

Many in the tech community blamed VCs for a run, as many told their portfolio companies to put their money in safe places after SVB’s announcement on Wednesday.

“It was the banks’ work that created the hysteria,” fintech investor Ryan Falvey of Restive Ventures told CNBC on Friday. “This will go down as one of the last cases of the industry cutting off its nose to avoid being seen in the face.”

Observers point to the irony, as some VCs with free-market views are now calling for a bailout. For example, reactions to Sachs’ tweet “I’m sorry, sir. Suddenly the government is responding?!?” and “We capitalists want socialism!

Some politicians opposed any aid, including U.S. Rep. Matt Gaetz, U.S. write a tweet“If there is an attempt to use taxpayer money to bail out a Silicon Valley bank, the American people can count on me to lead the fight against it.”

But financier and former Trump communications director Anthony Scaramucci argued“This is not a political decision to save SVB. Don’t make the Lehman mistake. It’s not about who benefits, rich or poor, it’s about stopping contagion and protecting the system. Make depositors whole or wait for a lot of tragic, unintended consequences.”

Hugh Son and Ari Levy contributed to this story.

The venture capital community has largely worked on SVB, says Unlimited CEO Bob Elliott

Leave a Reply

Your email address will not be published. Required fields are marked *