Shulou(Shulou.com)11/24 Report--

Panic Black Thursday last Thursday, Silicon Valley's tech venture capital circle was in a panic that had never been seen before. Many people will ask by the way when chatting, have you transferred the money from your company? Some people laugh at themselves with a wry smile and say that the company's savings are all in it, and they don't even know if they will get paid next week.

A head of a database software startup told Sina Technology on Thursday night that their financial staff had safely transferred millions of dollars out of Silicon Valley Bank. After receiving an affirmative reply from the financial staff of the company, the responsible person heaved a sigh of relief and had a feeling of surviving after the disaster.

A founder who had just joined the self-driving industry was a little glad that they had just received a million-dollar fund three weeks ago, and because they were not satisfied with their previous experience with Silicon Valley banks, they decided to open an account with another bank. Unexpectedly, they dodged a bullet.

The financial director of another travel platform startup fell into anxiety. They didn't realize the seriousness of the problem until Thursday afternoon, but it was too late to check their accounts but could not transfer them. With a paycheck due next week, the treasurer spent the weekend trying to raise money temporarily and didn't know how much money he would be able to withdraw from Silicon Valley banks on Monday.

Billionaire Mark Cuban said in an interview that he has 8 million-10 million exposure to Silicon Valley banks. In addition, his generic drug sales site Costsplus.com also has an account with Silicon Valley Bank, which is about $3.1 million. Cuban said that after the collapse of the Silicon Valley bank, he was busy opening accounts with other banks these days because he had to make sure that there were enough funds to pay his employees next week.

The dark clouds of the financial crisis hung over Silicon Valley. In just two days, a bank with $200 billion in assets closed, a financial institution that took deposits from half the technology industry collapsed, and a pillar company that supported Silicon Valley's development over the past four decades collapsed. Leaving a place full of chicken feathers and panic, companies are nervously waiting for follow-up: how much money can they get back?

Half of Silicon Valley Bank is not particularly famous among American banks, Silicon Valley Bank (Silicon Valley Bank), founded in 1983. At the end of last year, Silicon Valley banks had total assets of about $209 billion, ranking 16th among American banks and 1/8 of industry giant JPMorgan Chase.

But in Silicon Valley, the bank is a mainstay. Silicon Valley Bank is the first financial institution in the United States to focus on serving start-ups, and has a very close symbiotic relationship with Silicon Valley venture capital institutions and start-ups. Half of America's venture-funded startups do business with Silicon Valley banks.

Why are Silicon Valley banks so special? Regular large commercial banks are reluctant to provide loans to startups because startups do not have sufficient asset collateral or even business models and cash flows. But Silicon Valley banks are willing to provide loans to start-ups based on their financing capabilities.

For this reason, almost all of their 65000 clients are from the technology industry, including many well-known technology companies, venture capital firms and startups. In addition, due to the VIE structure, many Chinese technology companies also establish capital exchanges with overseas investors through Silicon Valley Bank and its joint venture branches in China.

Ironically, just last Tuesday, Silicon Valley Bank was named one of the best banks in America by Forbes magazine for the fifth year in a row. But the best bank in America failed two days later. This is the largest bank failure in the United States since the Washington Mutual collapse in 2008.

A 40-year-old bank with $200 billion in assets is only a day and a half before it closes. What happened last Thursday?

On Thursday, SVB Financial, the parent company of Silicon Valley Bank, suddenly announced three things: a low price sale of $21 billion worth of realizable assets (a loss of $1.8 billion), a $15 billion convertible bond financing, and an emergency sale of new shares to raise $2.25 billion. The announcement of three major measures at the same time clearly points to the same signal: Silicon Valley banks are already in a serious cash crisis. Investors who had been spooked by the collapse of cryptocurrency financial institution Silvergate the day before seemed to immediately start selling shares in Silicon Valley Bank, which tumbled 60 per cent on the day.

However, what is more frightening than the collapse in share prices is the panic, as technology companies worried about the safety of their deposits are frantically transferring their deposits with Silicon Valley banks. Although Silicon Valley bank CEO Greg Becker held an emergency conference call on Thursday night, calling on Silicon Valley's venture capital community to remain calm and stay in the same boat with Silicon Valley's longtime financial partner. Baker stressed that Silicon Valley Bank is a financial partner of the innovative economy of the United States.

However, not many people believed what Baker said. Although venture capital firms like Renegade Partner have publicly called for calm in the venture capital circle, in private, many Silicon Valley venture capital firms, including Peter Thiel's Founders Fund and Tribe Capital, are urgently notifying their investment companies to transfer deposits with Silicon Valley banks as soon as possible.

In just one day, the wave of runs completely crushed Silicon Valley banks. Customers at Silicon Valley banks asked for as much as $42 billion in withdrawals on Thursday alone, equivalent to 1/4 of the bank's total deposits, according to regulatory documents. By Thursday night, Silicon Valley banks had a cash balance of minus $1 billion, unable to meet their payables at the Federal Reserve. This means that Silicon Valley banks are no longer operational.

By Friday's trading, Silicon Valley Bank's shares had plummeted another 60%, and shares, which were as high as $267 on Wednesday, are now less than $35. After the collapse of its $2.25 billion IPO plan, Silicon Valley banks are desperately looking for a sale in the hope that a financial giant can take over, according to CNBC. But Goldman, which is rumored to be interested, did not step in. Goldman is considering selling its "American flower" business, GreenSky, and is an underwriter of bonds issued by Silicon Valley banks.

Guarantee $250000 US regulators usually act after the market closes, but this time the Federal Deposit Insurance Corporation (FDIC) can't wait for half a day. At noon on Friday, FDIC urgently took over Silicon Valley Bank, creating a new entity, Santa Clara Deposit Insurance National Bank (DINSC), and injecting all Silicon Valley Bank deposits into the new entity.

FDIC provides insurance of up to $250000 per depositor per insured bank, which means that Silicon Valley bank depositors can at least get back deposits of no more than that amount. Deposits that exceed this insurance limit need to wait for the bank's assets to be liquidated, and it is unknown how much deposits they can get back.

Marc Lasry, owner of the NBA Bucks, revealed that their Greek star Giannis Antetokounmpo (nicknamed Brother Alphabet because of his long name) has opened deposit accounts in 50 banks, each for no more than $250000. In this way, no matter how volatile the bank is, his $10 million deposit is at ease. Perhaps Adtokumbo experienced the Greek banking crisis of 2015 and had an unusual demand for sense of security.

But Silicon Valley Bank is a bank that provides deposit and loan services to technology companies and venture capital institutions, whose deposits far exceed the $250000 guaranteed by FDIC. As a result, of the $173 billion deposits held by Silicon Valley banks at the end of last year, $155 billion were not covered by FDIC insurance, including $13.9 billion in overseas deposits.

Judging from the information exposed so far, the deposit positions of Silicon Valley companies in Silicon Valley banks vary from hundreds of millions of dollars to hundreds of thousands of dollars. American streaming platform Roku alone has deposits of $487 million, or 1/4 of their cash position, video game company Roblox has deposits of about $150 million, cryptocurrency company BlockFi has deposits of about $227 million, and biopharmaceutical company Generation Bio has $5 million.

Parker Conrad, founder of corporate financial services company Rippling, said on Friday that they had begun to transfer the employee compensation platform from Silicon Valley Bank to JPMorgan Chase on Thursday, and that Rippling would no longer pay employees through Silicon Valley Bank in the future, but the collapse of Silicon Valley Bank still caused their pay delays this week.

After the COVID-19 epidemic of radical investment suicide, the Federal Reserve adopted a policy of almost zero interest rate to stimulate economic recovery, resulting in a flood of liquidity in the US economy, a surge of hot money in the technology industry, a surge in technology stocks, and extremely active investment and financing activities. it is easy for startups to get investment funds.

These positive conditions have also brought large deposits to Silicon Valley banks. Deposits in silicon valley banks soared 86% to $189 billion in 2021 alone, and reached $198 billion in the first quarter of last year.

In the face of a frenzied influx of deposits, Silicon Valley banks must find effective means of investment. With almost zero interest rates at the Fed, it is almost unprofitable to put money in reserve accounts, so they choose to invest most of their deposits in forward Treasuries and mortgage securities (MBS).

From mid-2020 to the end of 2021, Silicon Valley Bank increased its holdings of US Treasuries by $12 billion and MBS by as much as $80 billion. In other words, Silicon Valley banks invested almost most of their new deposits in 2021 in MBS. Their cash positions, on the other hand, are shrinking, to $13 billion at the end of 2021. This means that Silicon Valley banks did not set aside enough cash for themselves to cope with a large outflow of deposits that seemed unlikely at the time.

There may be nothing wrong with such an aggressive investment strategy in the loose policy environment of 2020 and 2021, but the Fed's rate hike in 2022 changed everything. In order to curb inflation, which hit a 40-year high, the Federal Reserve raised interest rates sharply last year, directly causing the US stock market to turn around and go down. Previously, technology stocks, which led the market, became the industry with the biggest decline. The sharp fall in the stock market and the rise in interest rates have a direct impact on the venture capital industry's investment and financing activities and initial public offering (IPO) trading. The deposits deposited by technology companies in Silicon Valley banks began to decline sharply, and gradually began to deplete deposits. These factors have led to a decline in deposits at Silicon Valley banks.

On the other hand, the continued sharp increase in interest rates by the Federal Reserve has also led to a decline in Silicon Valley Bank's fixed-income investment products, resulting in huge losses for the bank. Mark Zandi, chief economist at Moody's, commented, "the Fed's rate hike has reduced the value of Treasuries and other securities assets held by Silicon Valley banks, and they do not have enough money to meet depositors' withdrawal needs."

Ironically, US President Donald Trump signed a bill in 2018 that relaxed risk assessment requirements for banks in many regions in the wake of the 2008 financial crisis and removed the mandatory requirement that banks with assets of less than $250 billion have to undergo the Fed's stress tests. reduced the cash position ratio on the balance sheets of these banks. At that time, Silicon Valley Bank CEO Baker took a clear stand in support of this "deregulation bill." Now Silicon Valley banks are dying of failure to manage interest rate risk and prepare cash.

But it was Thursday's suicide financing and the panic run that followed that ultimately crushed Silicon Valley banks. Silicon Valley Bank announced three emergency financing measures a day and sold "holding maturing" assets at low prices, directly scaring investors and start-ups. Neither the issuance of convertible bonds nor the sale of new shares can complete the financing in a day or two to make up for the run crisis caused by the panic. A withdrawal of $42 billion a day on Thursday was enough to cause the 40-year-old Silicon Valley bank to collapse. Because Silicon Valley Bank froze its accounts on Thursday night, the withdrawal requirements for that day were actually much higher.

Panic spread depositors' panic even spread to other banks in Silicon Valley. First Repubic Bank shares in San Francisco tumbled 30 per cent in two trading days. On Friday morning, after hearing the news of the collapse of Silicon Valley Bank, many depositors even lined up in front of First Repubic Bank outlets to withdraw money.

Despite the bank's claim that it has sufficient cash positions, investors are not credulous and depositors still have to be safe. The main reason for the panic caused by First Republic is that it holds more than $136 billion in mortgage securities and its assets have shrunk by nearly $20 billion. The bank's total deposits are about $176.4 billion, of which more than 2/3 are not covered by FDIC.

Will the collapse of Silicon Valley banks bring about a chain reaction and trigger a new wave of financial crisis? In addition to FDIC's routine takeover of Silicon Valley Bank, should the federal government bail out the financial institution, which accounts for half of the US technology industry?

This past weekend, Silicon Valley began appealing and lobbying. General Catalyst, Sequoia Capital and other 325 venture capital firms and more than 600 technology entrepreneurs signed a statement calling on the federal government to take regulatory measures to prevent the Silicon Valley crisis. They said, "if Silicon Valley Bank is acquired and restructured, we will strongly support and encourage our portfolio companies to restore their business relationship with Silicon Valley Bank."

Silicon valley bank's major shareholders are financial giants, with VanGuard Group holding 11.25%, BlackRock 8.05%, JPMorgan Chase 4.25% and JPMorgan Chase 5.22%.

On Friday, billionaire financier Bill Ackman publicly called on the federal government to step in to rescue Silicon Valley banks. "the collapse of Silicon Valley banks could destroy an important long-term driver of the US economy, as venture capital-backed companies rely on Silicon Valley banks to provide loans and maintain operating cash. If private capital cannot provide a solution, a federal bailout should be considered."

Ackerman points to the history of the US government providing emergency loans and arranging JPMorgan Chase to bail out Bear Stearns during the 2008 US financial crisis. If Silicon Valley banks are allowed to fail and depositors suffer losses, other banks with insufficient capital will also face a run and dominoes will continue to fall, he said.

Although Ackerman clarified that he had no interests and did not invest or deposit money in Silicon Valley banks, his call for the federal government to bail out Silicon Valley banks quickly raised a lot of questions on Twitter. Why should taxpayer money pay for the risky investment strategies of Silicon Valley financial capitalists and why take risks for technology companies?

After the federal government finally launched a thunderstorm at the Silicon Valley bank, the governor of California, members of both houses of Congress and President Biden all issued statements expressing concern and discussing possible response measures, but they did not disclose details.

Perhaps even more resentful is that just half a month before the collapse of Silicon Valley Bank, CEO Baker, a Silicon Valley bank, sold off its shares and cashed out $3.6 million. And just before FDIC took over Silicon Valley Bank, the bank, which was no longer able to withdraw cash, planned to pay its employees a year-end bonus.

Regulators find buyers for Silicon Valley banks, which is the ideal solution, but only financial giants can take on such a large amount of debt. Once again, attention has been paid to JPMorgan Chase, which took over WaMu and Bear Stearns in 2008, and JPMorgan was interested in buying Silicon Valley banks in 2014. Silicon Valley banks also have $73 billion in loan assets and more than $100 billion in fixed-asset securities (but asset values have shrunk).

Update: after the publication of this article, U.S. Treasury Secretary Yellen announced that on the recommendation of the FDIC and the Federal Reserve Board, and after consultation with President Joe Biden, he has decided to approve FDIC's solution to Silicon Valley Bank to provide full protection to all depositors. Depositors at Silicon Valley Bank will access all their deposits starting Monday local time. Yellen also stressed that the loss of the Silicon Valley banking solution will not be borne by taxpayers.

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