Silicon Valley Bank Collapse

Introduction. We’re on the brink of a major black swan event in the banking sector which lost $90 billion of market cap last Thursday and Friday.

Silvergate Bank failed on Thursday and announced a voluntary liquidation, and Silicon Valley Bank (SVB), the US’s 15th largest bank by deposits, collapsed because of risky investment practices and poor management decisions.

While all the regulators were focusing on crypto’s risk to the banking sector, they forgot to notice the amount of long-term debt suffering in the fed’s rising interest rate environment.

What happened? This is the second largest bank failure since 2008 when Washington Mutual went down. Silicon Valley Bank had $ 211 Billion in assets, but they invested in long-duration treasuries and mortgage-backed securities, and when interest rates went up, the value of these fell and the bank became insolvent. Once rumors started spreading, people started taking their money out, causing a major bank run.

Silicon Valley Bank just published the fact they took a $1.8b loss on available-for-sale securities. For comparison, their net income on an annual basis was 1.5b last year, 1.77 the year before, so this sale represented a loss of over one year’s worth of income. Their unrealized losses are in excess of $15 b, which shows if they hold to maturity, they are worth $91 billion, but if they had to sell them now, they’re worth 76b.

Who is impacted? Approximately 44% of Silicon Valley startups used Silicon Valley Bank bank. The bank gave easy loans to tech startups, but put a rule into the agreement that the company had to use Silicon Valley Bank exclusively for all of its banking needs.

JP Morgan. JP Morgan gave SVB a price target of $375 back in November, but it’s now worth $36. The basis of the recommendation acknowledged the unrealized losses but opined there would be a massive inflow of funds for deposits.

JP Morgan itself has some major unrealized losses on its balance sheet, to the tune of $47.9 billion. It shows they lent $185 b to institutions, so what happens if the institutions have to start defaulting on that? Remember, securities borrowed are recorded as assets. If they have a bank run, they will be in real trouble.

Insider Trading.

1. SVB’s CEO sold 11% of his shares, $3.57 million dollars 12 days ago. He hadn’t sold any of his stock for years prior. The CEO was one of the directors at the San Francisco Federal Reserve but has promptly been fired.

2. CFO sold $375,000 of shares also 12 days ago.

3. CMO sold around the same time.

USDC. Circle was holding $3.3 billion of the cash backing USDC at Silicon Valley and it has since become depegged, and is trading around $.91 at the time of this recording. A lot of people are trying to arbitrage this opportunity against tether, which was selling for 1.07 yesterday on certain defi sites. USDC also had funds with Silvergate but we haven’t seen how much.

Stablecoins have lost a lot of trust. Only 3 stables in the top 8 are holding the peg.

USDC is “sticky,” though, and it is not like it will all be redeemed.

● $8.1M of USDC is in blacklisted wallets – so it can’t move to any custodial exchanges to be cashed out.

● $10s of millions are thought to be lost forever due to misplaced keys.

● There’s over $300m locked up in the FTX, Voyager and BlockFi bankruptcy estates

● There are hundreds of millions locked up in various funds, for example, $242m locked in the India Covid Relief Fund, which hasn’t moved anything in over a year

Funny everyone is selling the trusted USDC for the wild west Tether right now. I would only trust #bitcoin right now. USDC will probably get its peg back on Monday, though.

Contagion Risks. CEO of Y Combinator said we could see a 10-year setback for start-ups. We don’t know all the implications yet, but a lot of these companies provide APIs for all the different goods and services that we use. Now, these startups will have to lay off their staff. Even if they get access back to their cash, a lot of them had a big line of credits that were important to their day-to-day operations, and those are now closed.

The Companies we know of so far include

1. Circle: $3.3 billion

2. Roku: $487 million

3. BlockFi: $227 million

4. Roblox: $150 million

5. Ginkgo Bio: $74 million

6. iRhythm: $55 million

7. Rocket Lab: $38 million

8. Sangamo Therapeutics: $34 million

9. Lending Club: $21 million

10. Payoneer: $20 million

SVB has nearly $200 billion in deposits, with 97% of those deposits above the $250,000 FDIC limit.

BlockFi. BlockFi has $227m in an uninsured money market fund with Silicon Valley Bank. The bankruptcy Trustee warned them to move it last Monday.

Whatever BlockFi employee decided to sell everyone’s Bitcoin for $16k on Nov 10 and then put it in an uninsured money market fund at Silicon Valley bank should be ashamed.

Bill Ackman. He tweeted, From a source I trust: ,@SVB_Financial depositors will get ~50% on Mon/Tues and the balance based on realized value over the next 3-6 months. If this proves true, I expect bank runs beginning Monday am at a large number of non-SIB banks. No company will take even a tiny chance of losing a dollar of deposits as there is no reward for this risk. Absent a systemwide ,@FDICgov deposit guarantee. More bank runs begin Monday am.”

If accurate, there better be a statement from the government tomorrow saying they will guarantee deposits. Bankruns across the country would be awful.

FDIC Receivership. Almost all the Silicon Valley Bank deposits are over $250K, so the FDIC insurance is worthless. The idea is that on Monday, when the bank goes into the receivership, hopefully, FDIC will bail out the other banks. If it can happen to Silicon Valley Bank, it can happen to any regional bank. And it has to sell around $80b of mortgage-backed securities to hit the market. The last thing we want to hear on Monday is that other banks are hit. I would not have any money with a smaller bank, Tier 1 or bitcoin.

The way the FDIC put SVB into receivership in the morning was strange, too, like a total panic. Usually, this action is done at the end of a business day.

Buyers – They are undoubtedly soliciting buyers for the $80b mortgage-backed securities. JP Morgan has already declined, but we will hopefully see someone come in with some bids on Monday. Elon Musk talked about having Twitter buy it, and the crypto community has joked that CZ may come in and save the day. If the FDIC lets this go, there will undoubtedly be more bank runs and more people left with their pants down.

Bitcoin self-custody is probably the safest place in the world right now.

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