Hey everyone,
I briefly mentioned this in a previous newsletter, but I feel like I need to discuss Silicon Valley Bank and Credit Suisse. SVB was a California bank that primarily provided banking services for tech startups before it went bankrupt earlier this month. The bank took billions of dollars worth of its deposits and purchased treasury bonds with the money. Treasury bonds are loans that companies or people can set up directly with the government in either 20-year or 30-year agreements. The government receives money from the individuals and in exchange pays a regular interest payment, or coupon, back to the individual on an agreed-upon basis. This is usually viewed as being a safer investment than stocks or other types of bonds because the government will always pay back the individuals, but because of the lengthy agreements the bond is at risk of losing its value if inflation goes out of control. Which is what happened to SVB.
The treasury bonds that SVB purchased slowly began to lose value as inflation spiraled out of control in recent months, which caused the coupon payments to also lose value. SVB used coupon payments to keep cash on hand in case bank customers wanted to make withdrawals of their funds, but suddenly they were getting less money from each interest payment. It’s estimated that SVB had lost close to $15B in the actual value of the treasury bonds. Inflation also began to affect SVB’s banking customers, as the tech startups began to face difficulties with fundraising and began to depend on their SVB deposits to maintain payroll and operations for their companies. Suddenly, all of SVB’s customers began to withdraw their money at the same time, and SVB was unable to meet this demand. A classic bank run occurred, and the bank collapsed.
The FDIC oversaw the takeover of SVB by First Citizens Bank as a way to stabilize the banking industry, and the government went out of its way to declare several times that this wasn’t a bank bailout. First Citizens and the FDIC assured SVB’s tech startup customers that they would have access to all of their deposits, but this money was coming from First Citizens Bank as opposed to using taxpayer dollars so it technically wasn’t a bailout. However, shock waves began to ripple through the banking world and Credit Suisse was the next domino to fall.
Credit Suisse was a Swiss bank that was dealing with all sorts of scandals and mismanagement before the bank collapse, but it is one of a handful of banks that prop up the entire global industry. It is known as a “systematically important financial institution” and was thought to be too big to fail. Earlier this year, witnessing what was happening with SVB, Credit Suisse decided to pursue a loan to have an injection of cash and protect itself from a similar bank run. However, due to years of mismanagement within the organization, they were unable to receive any loans, which caused customer perception to crumble past the point of repair. Fearing that a similar bank run would destroy Credit Suisse, the Swiss government stepped in to negotiate a takeover of Credit Suisse by its largest competitor, UBS. The second largest bank in the country was now owned by the first largest bank in the country to prevent global economic collapse.
To me, the biggest takeaway from these bank collapses is that banks always have less cash on hand than they would like you to believe. Banks exist to loan out your deposits in a variety of ventures designed to make the bank money. If those ventures aren’t as profitable as they hoped they would be, or if too many people decide to get their deposits back at an unfavorable time for the bank, it can topple a bank with billions of dollars in assets. In the case of SVB’s demise, this could have single-handedly crippled the entire tech startup industry. In the case of Credit Suisse, this could have caused a global recession or depression. It behooves everyone involved with the means to do whatever it takes to save those financial institutions.
The other main takeaway from this fiasco is how fragile these money markets truly are. I used to think that having billions of dollars prevented you from any financial issues, but SVB and Credit Suisse both lost billions of dollars seemingly overnight. It makes me wonder whether they truly had billions to begin with, or if they were simply the benefactors of the right perception, narrative, or happenstance. It’s no different than a company going public with a ridiculously high valuation, only to see that fall once we learn more about the company and how they aren’t the industry disruptor that they pretend to be. The IPO class of 2020/2021 is all facing tremendous stock price hardships, and it makes me think that the stock market is one “bank run” away from being in serious trouble.
Perceived strength can make or break a company, or a bank.
Par for the course! Venire capital is just welfare for rich people.