Big names in Silicon Valley and the financial industry are publicly calling for the federal government to push another bank to take over Silicon Valley Bank’s assets and liabilities after the financial institution failed Friday.
The Federal Deposit Insurance Corporation (FDIC) covers up to $250,000 per depositor and may be able to start paying those depositors as early as Monday.
But the vast majority of the SVB’s customers were companies that had more money in the bank. In December, more than 95% of the bank’s deposits were uninsured, according to regulatory records. Many of these depositors are start-ups and many are concerned that they won’t be able to pay a salary this month, which in turn could lead to a wide wave of failures and layoffs in the tech industry.
Investors are concerned that these failures could erode confidence in the banking sector, especially medium-sized banks with less than $250 billion in deposits. These banks are not considered “too big to fail” and are not subject to regular stress tests or other safety valve measures adopted in the aftermath of the 2008 financial crisis.
Venture capitalist and former tech CEO David Sacks called on the federal government to push another bank to buy SVB’s assets. write on Twitter“Where’s Powell? Where is Yellen? Stop this crisis NOW. Announce that all savers are safe. Place SVB with a Top 4 bank. Open this before Monday or there will be contamination and the crisis will spread.’
VC Mark Suster concurred, tweeting: “I guess they are working on this. I expect statements by Sunday. We’ll see. I really hope so or Monday is going to be brutal.”
Investor Bill Ackman made a similar argument in a long tweetwriting: “The government has about 48 hours to rectify a soon to be irreversible mistake. By allowing @SVB_Financial to fail without protecting all depositors, the world has become aware of what an uninsured deposit is: an unsecured illiquid claim against a bankrupt bank. Absent @jpmorgan @citi or @Bank of America acquiring SVB before opening on Monday a prospect that I think is unlikely or the government isn’t guaranteeing all of the SVB’s deposits the giant sucking sound you’re going to hear is the withdrawal of virtually all uninsured deposits from all but the ‘systemically important’ banks (SIBs).”
Benchmark partner Eric Vishria wrote“If SVB depositors are not made healthy, the boards of directors will have to insist that their companies use only two or more of the BIG four banks. That will crush smaller banks. AND the too-big-to-fail problem to make it worse.”
Since its inception nearly 40 years ago, SVB had grown to become an important part of the tech industry’s financial sector, especially for startups and the VCs that invest in them. The company was known for extending banking services to early-stage startups that would have struggled to get banking services elsewhere before generating steady cash flow. But the company itself faced cash flow problems this year as seed funding dried up and its own assets were tied up in long-term bonds.
The company surprised investors Wednesday with news that it needed to raise $2.25 billion to strengthen its balance sheet and that it had sold all of its available-for-sale bonds at a loss of $1.8 billion. Bank executives’ reassurances weren’t enough to stop a run, and depositors withdrew more than $42 billion against the end of day Thursdaycreating the second-largest bank failure in U.S. history.
Many in the tech community blamed VCs for boosting the run, as many told their portfolio companies to put their money in safer places following SVB’s announcement on Wednesday.
“This was a hysteria-driven bank run caused by VCs,” Ryan Falvey, a fintech investor at Restive Ventures, told CNBC on Friday. “This will go down in the books as one of the ultimate cases where an industry cuts its nose off to resist its face.”
Observers are calling for the irony as some VCs with notoriously libertarian free-market attitudes are now calling for a bailout. For example, responses to Sacks’ tweet included statements like “Excuse me sir. Suddenly the government is the answer?!?” And “We capitalists want socialism!“
Some politicians opposed any bailout, with Rep. Matt Gaetz, R-Fla., tweet“If there is an attempt to use taxpayers’ money to save Silicon Valley Bank, the American people can count on me to be there to lead the fight against it.”
But financier and former Trump communications director Anthony Scaramucci argued“It’s not a political decision to save SVB. Don’t make the Lehman mistake. It’s not about rich or poor who benefits, it’s about stopping contagion and protecting the system. Make savers whole or expect many tragic unintended implications.”
— Hugh Son and Ari Levy contributed to this story.
