Wealth

Fear Sets In – The Irrelevant Investor

This post is for people outside of the financial services industry who might be wondering how one bank (Silvergate) lost 42% today while another one (Silicon Valley Bank) fell 60%.

Silvergate banked virtually the entire crypto industry, including FTX. The largest banks had no interest in dealing with crypto companies, so Silvergate stepped in and experienced enormous growth over the last few years. From the beginning of 2020 through its peak in 2021, the stock gained 1,300%. Since the peak, it has lost 99% of its value and has been forced to wind down its operations.

It wasn’t just a matter of its depositors imploding, although that certainly didn’t help. The company severely mismanaged its assets versus its liabilities. If you want to learn more, Matt Levine has the scoop in Crypto Bank Had a Boring Collapse.

The bigger story is Silicon Valley Bank, the leading lender to startups of all shapes and sizes. They bank nearly half of U.S. venture-backed technology and life science companies. 44% of U.S. venture-backed technology and healthcare IPOs in 2022 banked with SVB. They are not some fly-by-night company.

SVB was a huge beneficiary of the boom in private markets over the last few years, with their deposits going from $61.7 billion at the end of 2019 to $189.2 billion at the end of 2021.

What they did with that money is coming back to haunt them. They bought $80 billion of mortgage-backed securities (h/t Jamie Quint), most of which had a 10-year duration when the bonds were yielding just ~1.5%. We’ll come back to this in a second.

The private market is not being funded to the same extent it was in the last few years, to put it lightly, and so cash burn at the company level is becoming a major issue. These companies are bleeding out, and SVB is hemorrhaging money.

So they needed to sell some of their most liquid securities (treasury and mortgage bonds) to shore up deposits and took a $1.8 billion after-tax loss to do so. They are also doing a $1.25 billion raise of common stock, with a $500 million private placement on top of it. This is not good. They claim to still have another $180 billion of available liquidity, with a loan-to-deposit ratio among the lowest of all their peers.

But these numbers can change in a hurry if there is fear of a run on the bank. And that fear is very real.

This fear spread to the rest of the financial sector, as companies in the XLF lost $167 billion today. It was the greatest loss in market cap since June 2020.

I don’t know very much about Silicon Valley Bank, but I would assume that this will become a very attractive asset if it isn’t already. It’s too big to fail for the entire startup ecosystem.

It’s too early to know if this is just a startup issue, or if there are more asset/liability mismatches out there.

The headlines over the next few days might get very scary. In times like these, it’s important to remind yourself why you’re investing in the first place. Your future self is counting on you not to make rash decisions based on headlines you probably don’t understand.

If there is a light to shine on an otherwise dark situation, it’s that the cracks we’re starting to see in different corners of the market might be enough for the fed to take a pause. We’ll find out in a few weeks.



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