Yesterday, financial markets were rocked by the second-largest bank collapse in U.S. history.
In the week before the collapse, Moody's Investor SErvice informed SVB Financial, the bank's holding company, that it was facing a potential downgrade of its credit rating because of its unrealized losses. Apparently, the bank's asset portfolio was over-invested in interest rate sensitive products. Despite steps taken by the bank to improve its position, Moody's downgraded SVB on March 8.
In response to this news, shares of SVB Financial plunged the next day. In addition, investors at several venture capital firms, including Peter Thiel's Founders Fund, urged startups to withdraw their deposits from the bank. By close of business on March 9, customers had withdrawn $42 billion, leaving the bank with a negative cash balance of about $958 million. Interestingly, Thiel’s Founders Fund had no money with Silicon Valley Bank as of Thursday morning (March 9) before the bank began to descend into chaos. It is not clear whether Thiel was able to move so quickly due to his access to information that was not available to the general public. Founders Fund refuses to confirm whether the firm’s cash withdrawals happened on Thursday (as the startup world was panicking about SVB’s financial position) or earlier.
Founders Fund took even further action, and issued a capital call to its own investors. As Thiel's limited partners initiated transactions to satisfy the capital call, they encountered issues using SVB services as they tried to transfer the funds-- they weren’t immediately going through as expected. There are accusations that this additional activity exacerbated the collapse of SVB.
On the morning of March 10, agents from the Federal Reserve and the FDIC arrived at the offices of SVB to assess the company's finances. Several hours later, the California Department of Financial Protection and Innovation (DFPI) issued an order taking possession of SVB, citing inadequate liquidity and insolvency, and appointed the FDIC as receiver.
There are reports that the CEO of SVB sold $3.57M of the bank's stock two weeks before it collapsed - and that the CFO Daniel Beck cashed in $575,000 the same day, dumping 2,000 shares at $287.59. CEO Greg Becker sold 12,451 shares at an average price of $287.42 each on February 27. When the bank collapsed, the bank's stock price was at $39.49.
Because Silicon Valley Bank served start-ups and wealthy individuals,
the majority of its deposits were above the $250,000 that is federally
insured, raising the prospect that billions of dollars worth of money
might not be recovered. One entrepreneur based in San Francisco said he withdrew $250,000
after investors urged him to remove at least some money Thursday, but
attempts to wire out the rest of the money failed. The company now has
$2 million in funds frozen. With about 90 percent of his company’s reserves frozen, it is at risk
of bankruptcy within weeks. But he knew other start-ups with all of
their cash and credit lines now frozen who could fail much sooner. Digital Media company Roku had $487M in accounts at SVB; Digital asset lender BlockFi (which is in bankruptcy) held $227M at SVB. Gaming platform Roblox had $150 million on deposit at SVB, while aerospace's Rocket Lab held $38M there.
Many start-up CEOs are at a loss for how they will pay their employees and run their businesses. Alex Meshkin, the CEO of Flow Health said that if payroll funds don’t make it to workers early next week, the company will need to figure out a way to manually pay their more than 1,000 employees in the United States and Canada, something they don’t currently have infrastructure for. “We have a lot of angry employees,” he added.
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