Stop me if you've heard this one
Pop quiz; where’s this quote from:
“Don’t look now, but there is something funny going on over there at the bank George. I’ve never really seen one, but that’s got all the earmarks of being a run.”
a.?It’s a Wonderful Life, a 1946 film about a man named George Bailey and the neighborhood Building and Loan.
b.?The New York Times on Friday.
Answer below.
Key Updates
The answer is "a," but it could well be both.
In the movie, George Bailey pulls up in front of the Building & Loan and the driver points out all the people “running” on his bank.
If someone were talking to someone else named George on Friday – it would have worked just as well as Silicon Valley Bank disintegrated in an honest-to-goodness, old-fashioned run on the bank.
SVB may not be a household name, but nearly half of all venture-backed startups bank(ed) at SVB, keeping $175 billion in deposit accounts for little things like, well, payroll, for example.
On Tuesday, SVB seemed fine.
On Wednesday, the bank announced it had sold assets at a $2 billion loss.
On Thursday, SVB’s stock lost 60% of its value, and VC funds advised their portfolio companies to withdraw their deposits, and suddenly it had “all the earmarks of being a run.”
But while George Bailey heroically stopped the run on his bank, SVB was not so fortunate. On Friday, the Federal Deposit Insurance Corporation (FDIC) took control of customer deposits and bank assets, SVB ceased to exist, and the second largest bank failure was in the books.
Wait, is this 2008 all over again?
Not really. 2008 was a systemic issue. This appears, at least so far, to be an SVB issue.
Here's what happened. Remember back when interest rates were low? Back then, startups were flush with VC cash, and SVB's deposits were through the roof.???
Then interest rates went up, VC funding went down, and the value of the low-interest bonds many banks bought to earn a low-risk spread on their deposits tumbled.
SVB was more vulnerable than most because they had invested an unusually high portion of their deposits in bonds and…
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Wait for it…
Mortgage-backed securities, which also suffered as interest rates increased.???
Sigh.?
One bank collapsing is not the end of the financial world.
But contagion could be.
If people begin to?believe?there is a problem, other banks fail as depositors withdraw funds. None of the banks have much cash in their vaults, so if all depositors panic, well, as George Bailey put it:
"You're thinking of this place all wrong…. Your money's not here; your money is in Joe's house… and the Kennedy house… and Mrs. Makelines' house..." in other words, the cash wouldn't be there.
That's why Congress created the FDIC in the first place back in 1933.
Of course, the FDIC generally only insures deposits up to $250,000, and many startups held millions in operating capital at SBV. So, the FDIC took the extraordinary step of ensuring bank customers wouldn't lose anything.
Interestingly this is not a bailout of the bank: SBV no longer exists, but its assets do, and depositors have access to their money.
Aftershocks may continue for a while; for example, Signature Bank of New York also evaporated over the weekend. This could even impact the Fed's interest rate strategy. We'll see.
But at least this does not look like a 2008 situation.
And if you did have money at SVB (or Signature), your account is still there.
Still "overly invested in mortgage-backed securities…."
That's enough to trigger financial PTSD.
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From Around The Web
Don't remember (or never saw) the scene from Its A Wonderful Life?
Here it is?complete with George Bailey's inspiring speech to his depositors. It's fun to watch... enjoy.?
Want to read more about the SBV meltdown?
I've had to gloss over a lot here; this article?from the New York Times?gives a good account of what happened. And?here?is more information from Barron's on the bond issue that SVB faced.