Silicon Valley bank arrested after depositors ran it

NEW YORK. On Friday, regulators rushed to seize the assets of one of Silicon Valley’s largest banks in what was the biggest failure of a US financial institution since the height of the financial crisis almost 15 years ago.

The Silicon Valley Bank, the country’s 16th-largest bank, went bankrupt after depositors rushed to withdraw money this week amid concerns about the bank’s health. It was the second-largest bankrupt in U.S. history, following the collapse of Washington Mutual in 2008.

The bank catered primarily to tech workers and venture capital-backed companies, including some of the industry’s best-known brands.

“This is an extinction-level event for startups,” said Harry Tan, CEO of Y Combinator, the startup incubator that launched Airbnb, DoorDash and Dropbox and referred hundreds of entrepreneurs to the bank.

“I have literally heard from hundreds of our founders asking how they can handle this. They ask, “Should I fire my employees?”

The likelihood of chaos spreading across the broader banking sector, as it had in the months leading up to the Great Recession, seemed slim. The largest banks—the ones most likely to cause economic collapse—have healthy balance sheets and large capitals.

According to the bank’s website, almost half of the US tech and healthcare companies that went public last year after receiving early funding from venture capital firms were Silicon Valley Bank clients.

The bank also boasted of its ties to top tech companies like Shopify, ZipRecruiter and top venture capital firm Andreesson Horowitz.

Tang calculated that almost a third of Y Combinator startups will not be able to get paid at some point next month if they don’t have access to their money.

Internet TV provider Roku was one of the victims of the bank collapse. A regulatory filing filed on Friday said about 26% of his cash — $487 million — was placed with Silicon Valley Bank.

Roku said its SVB deposits are largely uninsured and it doesn’t know “to what extent” it will be able to get them back.

As part of the arrest, California banking regulators and the FDIC transferred the bank’s assets to a newly formed institution, the Santa Clara Deposit Insurance Bank. The new bank will start disbursing insured deposits on Monday. The FDIC and California regulators then plan to sell off the rest of the assets to save other savers.

The banking sector has been in turmoil all week, with stocks plummeting in double digits. Then news of the Silicon Valley bank’s plight pushed shares of nearly every financial institution even lower on Friday.

Failure came with incredible speed. Some industry analysts suggested on Friday that the bank is still a good company and a smart investment. Meanwhile, Silicon Valley Bank executives were trying to raise capital and find additional investors. However, trading in the bank’s shares was suspended until the opening of the stock market due to extreme volatility.

Shortly before noon, the FDIC decided to close the bank. It is noteworthy that the agency did not wait for the closing of the working day, which is a typical approach. The FDIC was unable to immediately find a buyer for the bank’s assets, indicating how quickly depositors cashed out.

The White House said Treasury Secretary Janet Yellen is “watching the situation closely.” The administration sought to convince the public that the banking system was much healthier than during the Great Recession.

“Our banking system is in a fundamentally different position than it was a decade ago,” said Cecilia Rose, chair of the White House Council of Economic Advisers. “The reforms that were put in place then really provide the kind of sustainability that we would like to see.”

In 2007, the biggest financial crisis since the Great Depression swept the world after mortgage-backed securities tied to reckless home loans collapsed in value. The panic on Wall Street led to the collapse of Lehman Brothers, a firm founded in 1847. Because the big banks were closely linked to each other, the crisis led to a cascading collapse of the global financial system, leaving millions of people unemployed.

Silicon Valley Bank, based in Santa Clara, California, had total assets of $209 billion at the time of bankruptcy, according to the FDIC. It was unclear how many of his deposits were in excess of the $250,000 insurance limit, but previous regulatory reports have shown that many accounts are in excess of that amount.

On Thursday, the bank announced plans to raise up to $1.75 billion to bolster its capital position. This caused investors to fuss and the stock fell 60%. They fell even lower on Friday before the opening of the Nasdaq, where the bank shares are traded.

As the name suggests, Silicon Valley Bank was a major financial conduit between the tech sector, startups, and tech workers. It was considered business wise to develop a relationship with a bank if the startup founder wanted to find new investors or go public.

Created in 1983 by co-founders Bill Biggerstaff and Robert Medearis while playing poker, the bank has used its roots in Silicon Valley to become a financial cornerstone in the technology industry.

Bill Tyler, CEO of TWG Supply in Grapevine, Texas, said he first realized something was wrong when his employees wrote to him at 6:30 am on Friday to complain about not being paid.

TWG, which has just 18 employees, has already sent check money to a payroll service provider that used Silicon Valley Bank. Tyler struggled to figure out how to pay his workers.

“We are waiting for about $27,000,” he said. “This is already late payment. This is already an uncomfortable position. I don’t want to ask any employees to say, “Hey, can you wait until the middle of next week to get paid?”

Silicon Valley Bank’s ties to the tech sector have exacerbated its problems. Technology stocks have been hit hard in the past 18 months after a surge in growth during the pandemic, and layoffs have spread across the industry. Venture funding is also on the decline.

At the same time, the bank has been hit hard by the Federal Reserve’s fight against inflation and a series of aggressive interest rate hikes to cool the economy.

As the Fed raises its benchmark interest rate, the value of generally stable bonds begins to fall. This isn’t usually a problem, but when savers get worried and start withdrawing their money, banks sometimes have to sell these bonds before they mature to cover the outflow.

This is exactly what happened to a Silicon Valley bank that had to sell $21 billion in highly liquid assets to cover sudden withdrawals. The loss from this sale was $1.8 billion.

Ashley Tierner, CEO of FarmboxRx, said she spoke to several friends whose businesses are backed by venture capital. She described them as “out of their minds” over the bank’s failure. On Thursday, Tyrner’s COO attempted to withdraw her company’s funds, but was unable to do so in time.

“One friend said he couldn’t do payroll today and cried when they had to tell 200 employees about it,” Tierner said.