Silicon Valley Bank is down +80% since yesterday and has since been halted. The situation is more complex than what the headlines show and is the result of poor risk management.
This post is my best attempt to give you all the details of this debacle in a concise and simplified way. It might be a bit technical due to the nature of what’s going on.
So what's going on? 🧵👇
1️⃣ Rare and far gone seem the days where a large bank can fail, especially after the regulation that came out of the GFC (i.e., Dodd Frank and TARP).
The unravelling of SIVB comes as close to a similar bank "crisis" event that I've personally witnessed (I was 14 in '08).
2️⃣ SIVB is the bank of record for the VC-backed business world. When you raise $50M from Sequoia, where do you think you put the $50M?
You deposit it at Silicon Valley Bank.
In 2021, $SIVB saw a massive flow of deposits. (~$60B in 2019 -> ~$190B in 2021)
3️⃣ Banks loan out deposits to other banks that need funding and generate a yield % on that.
The selloff is a result of $SIVB going all in on mortgaged-back securities (MBS) to generate the desired yield % they wanted to see on that capital. How much? +$80B much!
4️⃣ The issue is not the MBS themselves, but a duration mismatch as $SIVB seems to have been caught blindsided by a rising rate environment that most expected, something they should've hedged against.
As the Fed raised rates, the value of these MBS's went down.
5️⃣ ~97% of these MBS were 10+ yr duration, with an avg yield of 1.56%.
As a smaller regional bank, $SIVB gets exposed by the fact that anyone can go get a 5% return on treasuries rather than deposit money with them.
Starting to see the picture?
End of 2022 to 2023 has been a much tougher funding landscape with plenty of safer and higher-yielding alternatives for yield.
6️⃣ Yesterday, $SIVB announced that they sold $21B, almost all, of their AFS (available for sale) securities to shore up liquidity, at a LOSS. This raised a huge red flag that investors weren't expecting and leading the street and likely many depositors at the bank to believe that there's in fact a liquidity crisis.
7️⃣ It's extremely rare to see any stock, let alone a large regional bank fall +60% in a day.
Especially so when $SIVB has been a major driver of funding for the Silicon Valley economy and other VC-backed companies that rely on them for loans and hold their operating cash.
8️⃣ While its too soon to tell if there's a bank run/solvency issue, you can guarantee that it's on the mind of VC investors/other depositors, which is why they're scrambling to get their money out.
Recall, FDIC insurance guarantees your deposits up to $250K. Anything you have over that is an unsecured liability for the bank.
9️⃣ I can also guarantee (with high probability) that most startups / millionaires in Silicon Valley that hold deposits with $SIVB, have way more than $250K that they know is currently at risk.
🔟 The risk of failure for the 15th largest US bank by deposits is starting to spread contagion among the financial world and would be a fatal blow if it materializes.
1️⃣1️⃣ The last 18 months have left many investors and customers scarred, questioning the integrity of the financial world: FTX, Celsius, Voyager, BlockFi, Silvergate, to name a few.
Fiat is inherently fragile and humans are poor risk takers.
1️⃣2️⃣ Are we on the brink of another bank collapse? Should the government intervene and help $SIVB out if they fail?
I'm a bit fearful in the short-term as what does this spell for the next, least-well capitalized bank? Are there others like $SIVB?
1️⃣3️⃣ If so, it's a big NO BUENO for the global economy that's already being challenged by an unprecedented macro (specifically bond / rates) environment.
All one can do is continue to stay tuned