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Silicon Valley Bank crashed just a day ago, and many folks in the VC/startup world are freaking out. I’ve seen predictions that 50-100 different startups will go bankrupt over the next month. This could cause a contagion effect and lead to worse effects, although I’m skeptical of a major economic collapse as some doomsday prophets have discussed.
Apparently the bank was mostly into mortgage backed securities, which lost a ton of value due to the Fed’s precedented* rate hikes. I don’t know enough about finance to confidently hop on my soapbox here - @BurdensomeCount may have a better idea of what’s going on.
As this collapse mainly affects very left coded super technical folks, I don’t expect many on the right to shed tears. That being said I do think this speaks to a larger issue of growth in the economy as a whole. Tyler Cowen has famously backed the stagnation hypothesis, or the idea that overall production has been slowing down.
Tech startups have recently been the major sector looked to for economic growth, especially with all the AI/LLM hype. This collapse not only will slow the industry but shows a marked incompetence from this growth sector which may cool investment there in the future.
How can we sustain economic growth without the recent massive gains from Silicon Valley technology?
What I haven't been able to see in reports on this is what started the bank run. What or who started the ball rolling with "get your money out now, before this place crashes"? Or did nobody do it, it was just that the companies using it were drawing out money but the bank didn't have the reserves to cover it?
The bank had tons of deposits from venture investees storing their investments there, with far less demand for loans from their core clients, so they bought a ton of bonds (safe bonds bit relatively long dated bonds). As rates rose last year those bonds were dropping in value and with VC investments slowing there was drawdown of those deposits which meant SVB was selling bonds at a loss. Eventually someone saw the writing on the wall (the bank was particularly vulnerable due to needing to sell bonds to liquidate deposits and triggered the run). Most of their deposits are way over the FDIC insurance limit so I'm sure some of the deposit firm's have someone reviewing financials of their credit counterparties and would have triggered the run. I saw a VC saying they were suggesting to their portfolio firms to pull funds on Wed or Thurs but doubt they were first.
Thanks for the explanation, that makes the sequence of events much clearer to me.
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