Yesterday, all my friends could talk about was the rapid, unforeseen, and dramatic collapse of Santa Clara, California-based Silicon Valley Bank (SVB), a 40-year-old state-chartered commercial bank serving Silicon Valley's mostly tech firms and high net-worth individuals.

With $209 billion of assets under management at the time of its failure, it’s the second-largest bank failure in U.S. history after Seattle, Washington-based Washington Mutual in 2008, with $307 billion in assets at time of failure.

A new bank emerges for the protection of “insured depositors”…

FDIC Creates a Deposit Insurance National Bank of Santa Clara to Protect Insured Depositors of Silicon Valley Bank, Santa Clara, California

Silicon Valley Bank, Santa Clara, California, was closed today by the California Department of Financial Protection and Innovation, which appointed the Federal Deposit Insurance Corporation (FDIC) as receiver. To protect insured depositors, the FDIC created the Deposit Insurance National Bank of Santa Clara (DINB). At the time of closing, the FDIC as receiver immediately transferred to the DINB all insured deposits of Silicon Valley Bank.

All insured depositors will have full access to their insured deposits no later than Monday morning, March 13, 2023. The FDIC will pay uninsured depositors an advance dividend within the next week. Uninsured depositors will receive a receivership certificate for the remaining amount of their uninsured funds. As the FDIC sells the assets of Silicon Valley Bank, future dividend payments may be made to uninsured depositors.

Silicon Valley Bank had 17 branches in California and Massachusetts. The main office and all branches of Silicon Valley Bank will reopen on Monday, March 13, 2023. The DINB will maintain Silicon Valley Bank’s normal business hours. Banking activities will resume no later than Monday, March 13, including online banking and other services. Silicon Valley Bank’s official checks will continue to clear. Under the Federal Deposit Insurance Act, the FDIC may create a DINB to ensure that customers have continued access to their insured funds.

As of December 31, 2022, Silicon Valley Bank had approximately $209.0 billion in total assets and about $175.4 billion in total deposits. At the time of closing, the amount of deposits in excess of the insurance limits was undetermined. The amount of uninsured deposits will be determined once the FDIC obtains additional information from the bank and customers.

Customers with accounts in excess of $250,000 should contact the FDIC toll–free at 1-866-799-0959.

The FDIC as receiver will retain all the assets from Silicon Valley Bank for later disposition. Loan customers should continue to make their payments as usual.

Silicon Valley Bank is the first FDIC–insured institution to fail this year. The last FDIC–insured institution to close was Almena State Bank, Almena, Kansas, on October 23, 2020.

<Source: FDIC: PR-16-2023>

Death by publicity release…

What typically precipitates a “bank run” is a loss of confidence by the investors and the depositors. Like the bank run on Pasadena, California-based IndyMac Bank in 2008 with $32 Billion in assets,, it started with a news release of adverse circumstances.

In the case of SVB…

SVB Financial Group Announces Proposed Offerings of Common Stock and Mandatory Convertible Preferred Stock

SANTA CLARA, Calif., March 8, 2023 /PRNewswire/ -- SVB Financial Group (“SVB”) (NASDAQ: SIVB), announced today that it intends to offer $1.25 billion of its common stock and $500 million of depositary shares, consisting of 10 million depositary shares each representing a 1/20th interest in a share of its Series F Mandatory Convertible Preferred Stock (“Preferred Stock”), liquidation preference $1,000 per share (equivalent to a liquidation preference of $50 per depositary share), in separate underwritten registered public offerings. In addition, prior to commencing the offerings, SVB entered into a subscription agreement with General Atlantic, a leading global growth equity investor, to purchase $500 million of common stock at the public offering price in the offering of common stock in a separate private transaction. The subscription agreement with General Atlantic is contingent on the closing of the offering of common stock and is expected to close shortly thereafter. SVB also intends to grant (i) the underwriters in the common stock offering an option to purchase up to an additional $187.5 million of common stock and (ii) the underwriters in the Preferred Stock offering an over-allotment option to purchase up to an additional $75 million, or 1.5 million depositary shares in the Preferred Stock offering. SVB intends to use the net proceeds from the offerings for general corporate purposes. The consummation of each offering is not contingent upon the consummation of the other offering.

Additionally, earlier today, SVB completed the sale of substantially of its available for sale securities portfolio. SVB sold approximately $21 billion of securities, which will result in an after tax loss of approximately $1.8 billion in the first quarter of 2023. <Source>

[OCS: Some announcement. We sold of $21 billion in securities and lost $1.8 billion in the process. We need more money, please. 

Following this bid for more capital, several influential venture capital firms quietly advised their portfolio companies to pull their money from the bank. In this age of near-instant communications, wire transfers represented a sudden loss of liquidity – which compounded the developing situation. Of course, the bank continued to explain that it was well-capitalized, in compliance with customary regulatory ratios, and to remain calm.] 

The impact…

For those who note that smaller depositors are unlikely to be hurt as they are made whole by the FDIC insurance account, consider the thousands of employees who work for firms whose working capital and contingency reserves were well over $250,000 and remained in the bank at the time of failure.

Consider also that FDIC insurance rates affecting all FDIC insured banks are likely to rise, with the costs being passed along to all depositors in the form of lower yields and higher fees.

The red flag was flying…

For those who could read the bank’s parent company, SVB Financial Group, November 7, 2022 SEC 10Q (Quarterly) filing, it appeared that the company had already sustained unrealized losses among its Held-to-Maturity portfolio large enough to wipe out its entire $15.8 billion in shareholder equity. Should these losses have been realized, the company would be technically insolvent. That did not stop management from claiming they were well-governed, adequately capitalized, and just experiencing a temporary condition.

Bottom line…

What can we learn?

(1)  Even though it might impair your relationship with a particular bank, it pays to diversify your liquid funds among several financial institutions and regional banks without a concentrated loan portfolio in risky sectors dependent on interest rates or large interest rate-sensitive bond portfolios..

(2)  Contingency funds should be kept in separate accounts slightly under the $250,000 FDIC limit in an FDIC-insured bank. Check with the FDIC to see if the FDIC demands separate accounts or will consider all accounts in the aggregate.

(3)  Money is fungible – bank where you get the best deal. Bankers come and go – and that friendly, smiling face turns into an unrelenting ogre if things go wrong. Banks promote customer loyalty, but it is a one-sided relationship.

(4)  Be vigilant, read the financial news, and watch the interest rates.

(5)  Observe how the FDIC handles SVB's affairs.

We are so screwed when the Administration, the Treasury, and the Federal Reserve screw up.

-- Steve

“Nullius in verba.”-- take nobody's word for it!

“Beware of false knowledge; it is more dangerous than ignorance.”-- George Bernard Shaw

“Progressive, liberal, Socialist, Marxist, Democratic Socialist -- they are all COMMUNISTS.”

“The key to fighting the craziness of the progressives is to hold them responsible for their actions, not their intentions.” – OCS

"The object in life is not to be on the side of the majority, but to escape finding oneself in the ranks of the insane." -- Marcus Aurelius

“A people that elect corrupt politicians, imposters, thieves, and traitors are not victims... but accomplices” -- George Orwell

“Fere libenter homines id quod volunt credunt." (The people gladly believe what they wish to.) ~Julius Caesar

“Describing the problem is quite different from knowing the solution. Except in politics." ~ OCS