Bay Area Investors Demand Government Step Up After Silicon Valley Bank Crash

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The astonishing collapse of Silicon Valley Bank, once a leading financial institution serving the Bay Area’s tech sector, has led some of the region’s powerful investors to demand that the federal government find a solution for the bank’s shell-shocked customers before Monday.

Speaking to CNBC on Friday, Garry Tan, CEO of startup incubator Y Combinator, said Friday’s abrupt bank closure by regulators could wipe out small startups whose funds were frozen in the bank. Startup founders who settled through SVB found their accounts frozen on Friday and had to find answers to questions about how to pay salaries and pay expenses.

“These savers will not go weeks or months without some kind of plan from the government,” Tan said.

David Sacks, a partner at Craft Ventures, took to Twitter demanding the federal government arrange for the sale to a major bank by Monday, warning that the crisis could spread to other banking institutions.

On Friday afternoon, US Treasury Secretary Janet Yellen convened the heads of the Federal Reserve, the FDIC and the Office of the Comptroller of the Currency, according to a notice provided by her office.

The FDIC was named the bank’s liquidator and created a new organization called the National Deposit Insurance Bank of Santa Clara to protect insured depositors. The FDIC press release says customers will have access to insured deposits on Monday; uninsured depositors will be issued a “certificate of acceptance” within the next week that could entitle them to future dividend payments if SVB’s assets are sold.

More than 85% of SVB’s deposits, totaling approximately $151 billion, were uninsured, according to a recent statement from regulators.

Yellen “expressed full confidence that banking regulators will take appropriate action and noted that the banking system remains resilient and regulators have effective tools to respond to such events,” the US Treasury Department said.

The collapse of SVB is the biggest banking collapse since the financial crisis of 2008 and marked a staggering decline for an institution that has been making solid profits for years along with the growth of the tech sector.

The bank has served technology start-ups by positioning itself as a long-term financial partner with offerings such as valuation services in addition to traditional banking services, often acting as the lead underwriter for large transactions in mid- to late-stage private technology companies. According to S&P Global, about 40% of its deposits were in technology, life sciences and early-stage healthcare companies — companies hit hard by rising interest rates, making it more expensive to borrow money.

The bank’s financial troubles came to a head on Wednesday when it announced a plan to sell nearly all of its securities to raise capital to reinvest in higher-yielding short-term assets. The bank estimated a $1.8 billion loss on the sale and said it plans to raise about $2 billion through a private equity firm.

Shareholders were scared, which led to a massive sell-off of SVB shares. Investors including Peter Thiel reportedly advised portfolio companies to withdraw funds from the bank. Investors and depositors withdrew $42 billion on Thursday, leaving the bank with a negative cash balance of about $1 billion, according to government filings.

“Leadership is out of control,” Ashu Garg, general partner at Palo Alto-based Foundation Capital, said in an interview Friday.

Randell Leach, CEO of Oakland-based Beneficial State Bank, said the size and complexity of SVB’s business could mean regulators or potential buyers are still scrambling to assess SVB’s risk.

“It’s quite large and complex; it has always been a specialized bank […] they are unique in their venture capital funding base,” Leach said.

By Friday afternoon, some Bay Area politicians were calling for swift federal action to protect companies whose assets were frozen in the bank.

Rep. Eric Svolvell, who represents some of the Bay Area, said he is working with colleagues to find a way to enforce the deposits. Other senior lawmakers, such as former Speaker of the House Nancy Pelosi and Senator Dianne Feinstein, have kept quiet about the brewing crisis.

The government may sell SVB’s assets to a larger bank as rumors circulated on Friday that JP Morgan, which has reportedly been poaching SVB employees for years, could end the auction.

But the question is “at what cost and with what support,” Leach said.

“The market can absorb it, but it’s a market of sorts,” he said. “There’s some difficulty in that, and it’s probably limiting the number of players that can get through it.”

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