Silicon Valley, the land of innovation and startups that created Meta Platform’s Facebook, Amazon and many other tech giants, just saw one of its own implode in the largest bank failure since Washington Mutual in 2008 and the second largest in U.S. history.
After 40 years, Silicon Valley Bank, the nation’s 17th largest, was shut down by the FDIC Friday as regulators moved to protect customers as it faced a liquidity crunch after losing $2 billion.
That was followed by a failed attempt to raise as much in a stock offering.
|SIVB||SVB FINANCIAL GROUP||106.04||-161.79||-60.41%|
On Wednesday, prior to the collapse, CEO Greg Becker explained the need to raise capital with over 50% of its assets in bonds, according to reports.
TECH CEO WITH MILLIONS IN SILICON VALLEY BANK: ‘INNOVATION IN THE STARTUP WORLD IS BLEEDING TODAY’
“We are taking these actions because we expect continued higher interest rates, pressured public and private markets and elevated cash burn levels from our clients as they invest in their businesses …”
“We are taking these actions because we expect continued higher interest rates, pressured public and private markets and elevated cash burn levels from our clients as they invest in their businesses” he wrote. In the days that followed, the stock tumbled over 60% and remained halted for trading on Friday.
What happened is fairly simple. The bank and its clients got squeezed by higher interest rates and a slowing economy.
“People are used to having zero interest rates and easy money, and it’s gone. And there are people who will manage that well and people who will not,” former Congressional Budget Office Director Doug Holtz-Eakin said during an interview on “Cavuto Coast-to-Coast” Friday.
‘SHARK TANK’S’ KEVIN O’LEARY BLAMES SILICON VALLEY BANK COLLAPSE ON ‘POOR MANAGEMENT’
Eakin, who also served on the Financial Crisis Inquiry Commission that studied the 2008 global economic crisis, puts responsibility on the bank’s executives.
“This looks like a business model failure. The Silicon Valley Bank had poor management of its Tier 1 capital, heavily concentrated in one asset. And it had a very narrow client base. It’s all tech companies. It’s literally just Silicon Valley. So, I think of this as a real management failure. I don’t think it’s a financial system failure.”
Silicon Valley Bank
The Tier 1 capital ratio measures a bank’s financial strength and determines a minimum level of financial reserves.
Investors remained skittish over fears of contagian. S&P 500 financial stocks fell 8.5% this week, their worst week since June 12, 2020, when they fell 9.3%, according to Dow Jones Market Group.
S&P 500 Financials
The KBW Bank Index, which contains mid-sized and regional banks, fell 15.7% this week, its worst week since March 2020, when it plunged 18.8%.
The Federal Reserve, which has raised interest rates eight times since 2022 with another hike expected at the March 22 meeting in its fight to tame inflation, is creating an environment where banks can’t shift fast enough, according to one market watcher.
“That’s why SVB is just the beginning. Contagion, likely more bank failures and various bailouts are almost certainly coming” Dennis M. Kelleher, co-founder, president and CEO of Better Markets wrote in a commentary. “While the immediate financial stability threats will materialize or be addressed, the underlying fundamental problems caused in large part by the Fed will remain and likely get worse.
“The Fed’s actions to fight increasing inflation will need to be materially adjusted, which it should be anyway because inflation is driven by many factors that are beyond the Fed’s control. Causing financial instability and a recession (of any depth and length) while missing the mark on inflation should cause a fundamental rethinking of the Fed’s powers, authorities and role.”
Silicon Valley Bank customers with insured accounts will have access to their money on Monday, according to the FDIC. As of December, the bank had $209 billion in total assets and $175.5 billion in deposits, but the FDIC was unable to determine the value of assets above the insured threshold as of Friday.
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FOX Business’ inquiries to Silicon Valley Bank were not returned.