A Silicon Valley Bank short seller explains how he knew the bank was in trouble months ago 2 Less than an hour before the California financial regulator closed Silicon Valley Bank’s doors on Friday, short seller Dale Wettlaufer is walking me through their financials, and laying out some metrics he’s been closely eyeballing for months. “I’ve never seen a situation like this change so quickly,” says Wettlaufer, partner at the short-selling shop Bleecker Street Research, which opened its short position into SVB in January. Wettlaufer wasn’t talking about the events of the last two and a half days—when a bank run ushered the California financial regulator into its offices to close it down not long after SVB said it was raising more than $2 billion in capital through a share sale. No—Wettlaufer was referring to the last two years. In 2021, as the venture market soared to new heights, Silicon Valley Bank was flying high. The bank had long sat at the very heart of the private markets as a lender and banker to some half of the industry's startup companies—not to mention as a prominent lender to venture funds, private equity funds, and a wealth manager to rich entrepreneurs. The bank has a fund of funds, investing in the likes of Accel or Sequoia Capital, and it invests directly in startups itself. The bank effectively touches every part of the private markets. Riding on low-interest rates at the beginning of the COVID pandemic, startup funding soared to new heights as startups reeled in billions from venture capitalists and VCs raised enormous multi-billion funds. It was all a win for SVB, as many of those startups would park their newly-won funding at Silicon Valley Bank, then draw from it as needed. Venture funds would borrow from SVB as they waited for limited partner dollars to hit the bank. As Silicon Valley Bank required some of those funds to park money as collateral for those loans, SVB was sitting pretty. Non-interest-bearing deposits at the bank soared to $126 billion in 2021, nearly double the $67 billion the bank held in 2020. What to do with all that new cash on the balance sheet? “In 2022, the liability composition changed so much and so quickly,” Wettlaufer explains as he walks me through his own models. At the height of the venture boom, with the bank sitting on so much cash, its long-term securities portfolio grew from $17 billion to $98 billion, Wettlaufer explains. SVB invested that cash at the height of the market. Now, interest rates aren’t zero any more, and that long-term securities portoflio is underwater by about $15 billion, Wettlaufer says, meaning that, if SVB had wanted to trade bonds within that long-term portfolio to free up capital, it might have had to recognize somewhere up to $15 billion in the unrealized losses it had reported at the end of 2022. But another result of the newfound high-interest rates of 2022 was that Silicon Valley Bank’s own interest expenses would soar to absurd levels—both because of the Fed hikes, which necessitated SVB to up the interest rate it was paying to customers, but also because venture funding slowed down in 2022. That slowdown caused inflows of non-interest-bearing deposits at the bank to fall below outflows of those deposits. That's because startups and other customers were burning cash. Because of this, the composition of SVB deposits changed drastically. Noninterest-bearing deposits fell $45 billion in 2022, forcing the bank to replace those with higher-cost liabilities than what had funded it previously. As of Dec. 2021, SVB’s interest expense on its deposits was $62 million. By Dec. 2022, it was $862 million. By the end of this year, Wettlaufer was projecting it to be nearly $4 billion. When Silicon Valley Bank posted its annual report at the end of last month, non-interest-bearing deposit levels were clearly deflating. And it seemed like those figures would keep falling. Wettlaufer was projecting non-interest-bearing deposits might go down to $40 billion, from $80 billion, meaning that SVB would have had to come up with $32 billion somewhere else to fill that hole. “It's insane. I've never seen anything like this,” Wettlaufer says, noting that the bank may have had to resort to selling anything it could, laying off staffers, or other means to improve the numbers. All of that was before the panic set in. On Wednesday, the company said it had sold all of its liquid securities portfolio, recognizing a $1.8 billion loss, and that it was trying to sell shares to garner more than $2 billion in capital. The bank also revealed some updated projections: a decline of somewhere around 30% in net interest income from its 2022 outlook. On Thursday, venture capital investors were warning their portfolio companies to withdraw funds, founders were panicking, and it sparked a good old-fashioned bank run. By mid-afternoon Friday, California regulators had closed Silicon Valley Bank, and the FDIC had been appointed receiver. “I've never seen a balance sheet crumble this quickly,” Wettlaufer says. Bleecker Street Research, of course, has made out quite nicely from the demise of Silicon Valley Bank (The team won’t comment on how much they made off their short bet).
Do you know what happens to Cathie wood's performance if you take away TSLA? Yup, never made a cent-! All her flagship's performance is tied to one stock.
The run was sparked by a letter that Silicon Valley Bank Chief Executive Officer Greg Becker sent to shareholders Wednesday. The bank had suffered a $1.8 billion loss on the sale of US treasuries and mortgage-backed securities and outlined a plan to raise $2.25 billion of capital to shore up its finances.// Ok this is what I meant by there being some US Bond event that tripped this up-- Why should a bank be allowed to make these sort of bets? With depositors funds I assume...
A perfect Storm Of Events-- Silicon Valley Bank's demise began with downgrade threat (Reuters) - In the middle of last week, Moody's Investors Service Inc delivered alarming news to SVB Financial Group, the parent of Silicon Valley Bank: the ratings firm was preparing to downgrade the bank's credit.That phone call, described by two people familiar with the situation, began the process toward Friday's spectacular collapse of the startup-focused lender, the biggest bank failure since the 2008 financial crisis. Friday's collapse sent jitters through global markets and walloped banking stocks. Investors worry that the Federal Reserve's aggressive interest rate increases to fight inflation are exposing vulnerabilities in the financial system. Details of SVB's failed response to the prospect of the downgrade, reported by Reuters for the first time, show how quickly confidence in financial institutions can erode. The failure also sent shockwaves through California's startup economy, with many companies unsure how much of their deposits they can recover and worrying about how to make payroll. The Moody's call came after the value of the bonds where SVB had parked its money fell due to the higher interest rates. Here is the interest rate angle // Yes it did contribute-- This calls into question the Feds ability to go higher for longer. You would think that fact may actually be good for stocks but bad for fighting inflation. Up until now the Fed has been toeing the line insisting on returning to 2% and I understand the logic, you can't really give your hand away. Things are different now though and the timing is right to infer that we want inflation going the right direction towards 4% but that it may stay at an elevated level for quite some time... in other words 4% is the new 2% until all supply chains are fixed, we produce more goods at home and get slightly more friendly with China and the War in Ukraine ends.... then we can think about 2%.
The insidious reach of this bank is far flung. Crypto I have known all along plays an undefined roll in all of this: Who is Circle? Up until today I had no idea. Stablecoin Issuer Circle Reveals $3.3 Billion SVB Exposure Stablecoin Issuer Circle Reveals $3.3 Billion SVB Exposure (Bloomberg) -- The second-largest stablecoin in crypto fell from its intended $1 peg on Saturday, trading as low as 81.5 cents, hurt by the exposure of issuer Circle Internet Financial Ltd. to the collapsed Silicon Valley Bank. USD Coin, or USDC, is a key plank of crypto markets and is supposed to hold a constant $1 value, fully backed by reserves of cash and short-dated Treasuries. But $3.3 billion of that roughly $40 billion stockpile is with Silicon Valley Bank, which has just become one of the largest US bank failures in recent history. Regulators seized the bank on Friday and investors are awaiting more clarity on the return of deposits. In that vacuum, USDC fell below $1, trading at about 92 cents as of 9:02 a.m. in London on Saturday. Smaller stablecoins such as DAI and Pax Dollar also fell from their pegs, a sign of wider nervousness. The worries haven’t so far spread to top stablecoin Tether, which held at $1. Tether has previously faced scrutiny over its reserves. Wider crypto markets are having a painful week and were on the back foot Saturday: Bitcoin oscillated between gains and losses, while smaller tokens like Solana and Avalanche were in the red. Circle’s Chief Strategy Officer Dante Disparte described the fall of Silicon Valley Bank as a “black swan failure” in the US financial system, saying in a tweet that without a federal rescue plan there would be “broader implications for business, banking and entrepreneurs.” USDC has a circulating supply of about 41 billion tokens and a market value of roughly $37 billion, CoinGecko data shows. A net $2 billion of USDC was redeemed in the past 24 hours, according to blockchain research firm Nansen. Data compiled by Bloomberg indicated USDC traded as low as 81.5 cents. Coinbase’s Step Stablecoins like USDC are intended to hold a set value against another, highly liquid asset like the US dollar. They come in a variety of forms and some, like Circle’s, are underpinned by reserves of cash and bonds. Investors often park funds in stablecoins as they move between crypto trades. As the selloff in USDC worsened, US-based crypto exchange Coinbase Global Inc. said it would be “temporarily pausing” the conversion of USDC into US dollars during the weekend, and would resume on Monday when banks open. The fall in USDC has had a knock-on effect on decentralized finance applications which let users trade, borrow and lend coins and which tend to rely heavily on trading pairs involving the stablecoin. “Unless there’s a concrete bailout plan this weekend, I think markets will be ugly again next week,” said Teong Hng, chief executive officer at crypto investment firm Satori Research, about the failure of SVB.
Too Big To fail-? Are we back to that. Once again I ask Why Do You Put money at Silicon Bank? What is the special treatment? I see this as some form of when you take out a mailbox in a happening city although you work out of Alabama. If these start up VC's are all getting loans that normal mom and pop shops would not get from a normal bank should the Gov ride to the rescue?
These new ESG companies are all highly dependent on VC's in SV.... The one time you agree with Cramer... and you're both gonna be eating crow. Old Romanian Proverb: "You don't feed your horses oats when your children are eating grass." Not sure what that meant to the gypsies exactly, but applied to this case, I'd imagine the portfolio managers around the world are gonna be tossing out these highly leveraged hope and dream ESG plays with zero earnings and exorbitant P/S multiples, and put that money into the stocks of companies that aren't so chiqué. All those funds that have sprung up chasing this stuff ... pfff... fire in the theater. Watch out below.
Van you obviously didn't watch Cramer's show that night these are not " new ESG "companies these are standard big ugly companies that you would never know have a big ESG side--I think Cummings Engine was one Otis elevator was one I think... it's a large list- Go find it. This is not a time for ill- informed banter-- Elon Musk May Buy Failed Silicon Valley Bank