Jeff Chiu/AP Photo
The Federal Deposit Insurance Corporation is seizing the assets of Silicon Valley Bank, marking the largest bank failure since Washington Mutual during the height of the 2008 financial crisis.
On Thursday, officials at Silicon Valley Bank, the nation’s 16th-largest, were urging clients to “stay calm” after a run of depositor withdrawals amid loud calls from venture capital firms (including Peter Thiel’s Founders Fund) for companies to move their money. On Friday, the bank collapsed, taken into receivership by the Federal Deposit Insurance Corporation.
It was the first FDIC-led bank failure in the U.S. since late 2020, but a significant one, with approximately $175 billion in customer deposits, making it the second-largest bank collapse in U.S. history, rivaled only by Washington Mutual in 2008. The vast majority of them are business accounts, mostly from tech and bioscience startups, as well as personal accounts for founders and executives of those companies. While the typical bank has something between 40 and 60 percent of assets above the $250,000 limit for FDIC insurance, at SVB it was an incredible 93 percent, meaning that over $150 billion is not government-guaranteed.
SVB was mostly invested in long-term government bonds, which are normally pretty safe. (They also had a large batch of those mortgage-backed securities, which you might remember from 2008.) The bank really succumbed to the wild swings in the tech industry, which soared in the immediate aftermath of the pandemic but has plummeted recently, as rising Federal Reserve interest rates put cheap money out of reach. SVB grew massively in 2020 and 2021, but with tech startups suffering, its customers pulled their money, and because of the interest rate spike, those government bonds were worth less. When SVB conducted a fire sale of some of those assets to cover the depositor losses, it came up $2 billion short.
In total, the bank was underwater by around $15 billion, according to the Financial Times. The bank run from the startup world forced the realization of some of those losses.
There are a couple of important lessons here. First and foremost, the Fed’s rapid pivot on interest rates couldn’t help but spill over into the broader economy. As Dennis Kelleher of Better Markets, who sees this as just the beginning, explained, banks had no time to adjust to the rate changes, which caused mismatches between the expected and real value of their assets. Indeed, stock in First Republic Bank, a regional lender in California and elsewhere, plunged 50 percent in Friday trading.
“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,” Kelleher said. “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.”
Second, because the depositors holding the bag at SVB are Very Important People, there’s going to be intense pressure for a bailout. Hedge fund titan Bill Ackman is already calling for one. Larry Summers told Bloomberg that the financial system should be fine, as long as depositors get every penny of their money back, which would be a $150 billion bailout. The character of the depositors as “job creators” will be used to push this narrative, as Atrios points out.
We just had a crisis where government stepped in to protect regular people; the job market roared back to life. The employment-population ratio for prime-age workers passed the pre-pandemic peak in today’s jobs report in just three years. In the 2008 crisis, predicated on bailing out banks and the rich, it took 12 years to hit that milestone. Let that be a warning as we brace for the fallout.
