Silicon Valley Bank failure has investors calling for government bailout

Employees stand outside the shuttered Silicon Valley Bank (SVB) headquarters on March 10, 2023 in Santa Clara, California.

Justin Sullivan | Getty Images

Big names in Silicon Valley and the financial sector are publicly calling on the federal government to pressure another bank to take over Silicon Valley Bank’s assets and liabilities after the financial institution failed on Friday.

The Federal Deposit Insurance Corporation (FDIC) will cover up to $250,000 per depositor and may begin paying those depositors as early as Monday.

But the vast majority of SVB’s customers were companies that had more than that on deposits in the bank. As of December, more than 95% of the bank’s deposits were uninsured, according to regulatory filings. Many of these depositors are startups, and many are worried they won’t be able to take a salary this month, which could in turn trigger a broad wave of failures and layoffs in the tech industry.

Investors are concerned that these failures could reduce confidence in the banking sector, particularly mid-sized banks with less than $250 billion in deposits. These banks are not considered too big to fail and do not have to undergo regular stress tests or other safety valve measures adopted in the wake of the 2008 financial crisis.

Venture capitalist and former technology executive David Sacks asked the federal government to pressure another bank to buy SVB’s assets, writes on Twitter“Where is Powell? Where is Yellen? Stop this crisis NOW. Announce that all depositors will be safe. Place SVB with a Top 4 bank. Do this before Monday opens or there will be contagion and the crisis will spread.”

VC Mark Suster agreed, tweeting: “I suspect this is what they are working on. I expect statements by Sunday. We’ll see. I hope it or Monday will be brutal.”

Investor Bill Ackman made a similar argument in a long tweetwrites: “The government has about 48 hours to fix a soon-to-be-irreparable mistake. By allowing @SVB_Financial to fail without protecting all depositors, the world has woken up to what an uninsured deposit is – an unsecured illiquid claim on a failed bank. Absent @jpmorgan @citi or @BankofAmerica if you acquire SVB before the opening on Monday, a prospect I think is unlikely, or that the authorities guarantee all of SVB’s deposits, the giant suction sound you will hear will be the withdrawal of virtually all uninsured deposits from all but the ‘systemically important banks’ (SIBs). “

Benchmark Partner Eric Vishria wrote“If SVB depositors are not made whole, then corporate boards will have to insist that their companies exclusively use two or more of the four BIG banks. Which will crush smaller banks. AND make the too-big-to-fail problem much worse.”

Since its establishment almost 40 years ago, SVB has become a central part of finance in the technology industry, especially for startups and the VCs that invest in them. The firm was known for extending banking services to early-stage startups that would have struggled to get banking services elsewhere until they generated stable cash flow. But the firm itself faced cash flow problems this year as start-up funding dried up and its own assets were locked up in long-term bonds.

The company surprised investors on Wednesday with news that it needed to raise $2.25 billion to shore up its balance sheet and that it had sold all bonds available for sale at a loss of $1.8 billion. Reassurance from the bank’s executives wasn’t enough to stop a run, and depositors pulled out more than $42 billion by the end of the day Thursday, setting up the second-largest bank failure in U.S. history.

Many in the tech community blamed VCs for spurring the run, as many told their portfolio companies to put their money in safer places after SVB’s announcement on Wednesday.

“This was a hysteria-induced bank run caused by VCs,” Ryan Falvey, a fintech investor at Restive Ventures, told CNBC on Friday. “This is going to go down as one of the ultimate cases of an industry cutting off its nose to spite its face.”

Observers cry out the irony when some VCs with notoriously libertarian free-market attitudes are now calling for a bailout. For example, reactions to Sacks’ tweet included statements such as “Excuse me sir. Suddenly the government is the answer?!?“and”We capitalists want socialism!

Some politicians opposed any bailout, with Rep. Matt Gaetz, R-Fla., tweeting“If there is an attempt to use taxpayer money to bail out Silicon Valley Bank, the American people can count on me to be there and lead the fight against it.”

But financier and former Trump communications director Anthony Scaramucci argued“It’s not a political decision to save SVB. Don’t make the Lehman mistake. It’s not about rich or poor who benefits, it’s about stopping contagion and protecting the system. Make depositors whole or expect a lot of tragic unforeseen consequences.”

Hugh Son and Ari Levy contributed to this story.

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