How SVB fell in 48 hours

TLDR:

Last of Us Finale
Breaking down SVB’s Collapse
Tool: Triplewhale

Last of Us has captured America

The Last of Us season finale is tonight and I just wanted to give a quick shoutout to hands down the best show of TV the year. If you aren’t already watching I couldn’t recommend it more.

A+ storytelling that takes a popular narrative (dystopian zombie apocalypse) and brings a new angle to the genre. They take the multi-episode TV format and explore the great depths of the games story. Like the best episode of the series being about other characters (Ep 3 deserves an Emmy IYKYK ). I’m not going to ruin TV for anyone but the Marketer in me was definitely taking some notes there.

To the 932 peeps that are going to get this appreciate you sticking through all the changes and updates. Really means a lot. I jump on here every Sunday with the intention of earning your inbox. If there’s anyone this would resonate with give them a share. They don’t need to be subscribed to read it.

How does a bank collapse in 48 hours?

I’m sure you’ve heard the news by now SVB a Top 20 American bank that was listed by Forbes as one of America’s best banks has been taken over by the Federal government. Today we’re going to dive into: What happened? How we got here? The impact/steps forward.

For anyone who isn’t familiar Silicon Valley Bank’s unique selling proposition is the bank Tech startups and investors deposit their money after raising a big round of financing. One of their most unique offering is what’s called Venture Debt, where they loaned startups money based on how they’ve raised.

What the heck happened this week?

Wednesday (3/8) the company announced that it needed to sell equities for a $1.8bn loss and issue new shares to raise $2.25bn to cover its current cash shortfall to ensure it had enough cash on hand to continue running the business. This caused VCs to panic to tell their companies to withdraw their money. How does take a bank down in 48 hours?

The short answer is there was a run on the bank where all the companies who had deposits at the bank all tried to withdraw their money at the same time. The FDIC has to step in and completely halt all operations going into the weekend because the withdraw requests were greater than the amount of cash the bank could get access to. (Aka bankruptcy when you’re not a bank).

Now anyone who wasn’t able to get their money out has their assets frozen, the FDIC temporarily runs the bank, and on Monday every depositor will be able to access $250k of FDIC insured funds to run their business off of.

This is a grave problem and shares a lot of similarities to Lehman Brothers in the Great Financial crisis (of ‘08), where the buck probably doesn’t stop here. So…

How did we get here?

And how did the 16th largest American bank, who had strong Q4 ‘22 financial performance, go completely belly up in less time than it takes Facebook to approve a new ad?

Part 1: What SVB did with the deposits?

At a high level how banks work and make money: They take deposits and invest them in other assets (usually loans) and make enough money through that process to pay back to depositors and make profits.

Looking at their books they had a strong balance of $212bn in Assets (funds to pay people back) and $200bn in Liabilities (What they owed - including deposits). On paper they had $12bn of cushion just in case anything happened. (Great write up on the math from Rich Falk-Wallace)

Like a typical bank they took those deposits and invested them in a mix of assets. Some considered to be safe like Mortgage Backed securities + long-term T-bills (US gov’t Bonds) and some high risk like Venture Debt loans to startups.

Startup friendly SVB gave loans to startups which made them a magnet that kept attracting more capital in the last 5 year bull run. They had so much new money coming in they needed to find anywhere they could stuff the money to keep up with the accelerated pace of business.

Part 2: What broke the model?

An important note to remember: SVB was leveraging deposits 10:1 which means that for every $1 they received in deposits they were loaning $10 out. A completely normal bank process, but provides a fairly obvious choke point in the whole system.

$82bn / $212bn in Assets were in Mortgage Backed Securities (MBS), and another $55bn were in liquid assets (probably T-Bills + cash). T-Bills are going to operate similar to MBS. Interest rates jumping up greatly decreased their value so SVB’s “safe investments” were less valuable.

On their books SVB didn’t have to remark (account for the value) of the current price of the T-Bills and MBS, because the accounting law saws you only have to remark the present value for Equities not Debt.

SVB’s numbers looked strong because they were carrying the value of the maturation date of the bonds, not what they’d have to liquidate them today for. This strategy only works if you don’t have to sell the bonds to cover depositors withdrawing their money.

$74bn / $212bn Assets were Direct Loans (Venture Debt, Mortgages, etc). These have been profitable in the past but they can’t just call these debts in. The companies on the other side of these loans are unprofitable and survive off the cash they deposited into SVB + their venture loans. Plus this group has a high failure rate so there’s a high likelihood of defaults in this segment of the loan portfolio.

When the safe investments lost so much value someone ran the math and started asking tough questions.

Part 3: The 48 hours sprint

The problem is in 2 days Depositors withdrew $42bn of their money because they worried the bank might go under.

Combine having to 1) remark their book on short-term time horizons and 2) that $42bn left the balance sheet, and the company is actually underwater now. Instead of waiting out the 10 year period for the debt to mature and to realize the value then, they need to sell their debts now to sure up their cash balance.

When they remark their books their assets are going to fall farther than their liabilities and the losses across the board are going to mean some companies aren’t getting their deposits back. The VC panic of the bank potentially collapsing pushed the bank to actually collapse.

Tool that Needs to be on your radar

Today is going to be all about knowing your numbers. There isn’t much advice I can give on picking the right bank, but now more than ever you need to know your key metrics like the back of your hand. That’s where this week’s tool, Triplewhale comes in.

Having close to real time visibility into your ads, store, and financial performance is crucial. Decisions need to be swiftly with as much data as possible. Spend less time gathering data and more time actioning it.

Impact and Hopeful Solutions:

This is the scary part for me. As of writing this on Sunday afternoon the Fed has said they will not bail out SVB. That means the next step here is every SVB depositor will have their $250k FDIC insured deposit in their bank account on Monday. $250k makes a lot of sense for consumers, but some of these business are spending $250k/wk that isn’t going to be a real solution for them.

If their millions in deposits evaporate so do a lot of these companies. We’re talking about thousands of startups and potentially hundreds of thousands of employees that will become un-employed overnight.

But SVB wasn’t just a bank it’s also the financial plumbing for a lot of tech companies. Rippling the HR management tool used SVB to process their payroll payouts. That means if you were a Rippling customer who had your money in another bank you didn’t get paid last Friday because Rippling couldn’t transfer the money. They aren’t the only ones.

There are Payment processors, HR tools and a whole host of other providers we haven’t heard about yet that will be impacted by this. Which effect employees/real people outside of tech.

The bigger scarier part for the overall economy is faith in regional banks. SVB was the 16th US largest bank that 3 months ago everyone thought was sound. I’ve talked to a number of non-tech founders who didn’t have any ties to SVB who are moving their money out their banks and into one of the Big 4 in a flight to safety.

If you look at IAT (an ETF of regional banks) it’s already down 12% in the last week. The sleep slope down started on Wednesday and will probably continue into this week. I wouldn’t be surprised if this plummets next week on this news.

Just like Lehman in ‘08 the first bank panic drives the first domino to fall causing a run on other banks. While we’re see this tear through smaller banks first, the big banks aren’t safe from this exposure either. Plenty of the big Banks and Investment Banks got into the Venture Debt market as they wanted to wet their beaks on Tech IPOs, and are the originators of MBS.

What Happens next?

From here, I think there are 3 options that could happen:

1) While I don’t think SVB be “bailed out”. I do think the Fed should step in and guarantee the loans (Similar to TARP in the GFC), basically taking them over. They ensure people can access their money today and take the proceeds of the assets once they mature. SVB as an institution should go under.

To me this is the “safest option” to prevent the run on the next banks + the companies’ who deposited their money in a large regulated institution don’t get completely torched.

2) One of the Big 4 banks (Chase, BoA, Wells Fargo, Citibank) comes in and takes over. To me this is the most likely to happen. With the current Tech backlash, and how risky venture debt is it’s more likely one of the Big 4 can take this on their books and ride out the storm.

Chase is probably the only one big enough that wouldn’t get dragged down and has the runway to re-instill confidence. There is a lot of long term value on the books that whoever owns it has big long-term upside.

3) If neither of those things happen then the real recession starts. If the Fed opens the accounts back up tomorrow with everyone’s FDIC insured $250k and no further action is taken.

Strap in.

How quickly people communicate (Social media, 24 hours always-on news) will move swiftly and viscously through the system. In ‘08 the Lehman Brothers collapse took 1.5 mos. This will roll into other regional banks who will face similar liquidity issues there will be a real financial crisis on our hands in a week, maybe 2.

Obviously no one wants to see that and I hope that positive news breaks before you read this. If not prepare your business and self for what is going to be a tough 3-6 months.

🧠 The Takeaway

SVB collapsed because America’s banking system is still broken and now tens-hundreds of jobs are at risk and potential contagion.

1. Why the hell do we still let banks do this? Venture basically replaced Mortgages as the bubble propelling asset class.

2. The talk of panic incites panic. Digital channels accelerate conversations to tidal waves at a viscous pace.

3. When banks say they have “safe assets” they are about to go under.

👷 What can you do about this?

1. Don’t keep all your business capital in one bank. It’s only insured up to $250k.

2. Check your vendors. What are they using? What financial pipes do they use?

3. Find something that makes you feel safe and hold onto it (Figuratively and literally) the coming weeks are going to be psychologically tough).

As always. Stay confident, connect with your customers, and keep crushing it.

Jeremy Horowitz

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