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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?
The order taking possession of property and business states that, as of March 10th:
It also says that the bank was "in sound financial condition prior to March 9, 2023," which seems hard to square with it being insolvent (not just illiquid) less than 48 hours later. Is the bank large enough for its panic-selling of mortgage backed securities to temporarily crash the price?
Also, long-term interest rates (the kind that effect mortgage prices) are much lower than short-term interest rates right now. If the Fed has to keep raising rates, or keep rates high longer than currently expected, long-term rates could rise substantially too, in which case the holders of the mortgage backed securities have to wait until the loans mature to get their full payout.
If the loans are sold immediately at a loss, there won't be enough money to cover all depositors (because the bank is insolvent). How bad the damage is depends on how much of a loss they are sold for, and most companies don't plan for losses on bank deposits.
"Insolvent" is used as a technically term in different contexts with different meanings. As a legal term, and the CA DFPI order you link to is a legal document, it means the same thing as "unable to pay its obligations as they come due". As an accounting term, it means "book liabilities exceed book assets". As an economic term, it means "real liabilities exceed real assets". As a practical business term, it means "all the equity is wiped out and then some".
It is rare for an entity which is economically solvent to end up legally insolvent, because you can almost always do something to raise funds (if nothing else, selling the company) within the de facto grace period on your obligations. A bank run is a rare exception to this - partly because there is no grace period on banks' obligation to pay withdrawals promptly (there are various Twitter threads pointing out that operational improvements to banking have reduced the implied grace period caused by queue at the teller window, and how this made the SVB situation play out faster than It's a Wonderful Life) and partly because of the self-fulfilling nature of bank runs.
SVB's long-dated bonds are liquid, and the FDIC knows what they are worth. If the FDIC is promising to pay uninsured depositors in full at no cost to the taxpayer (which they were as of Sunday night), then they probably have a pretty good idea that the bond losses are limited to the point where they can be covered by zeroing out the common equity ($16 billion at book value) and the holding company debt ($5 billion). The bank would be legally, but not economically, insolvent. The other possibility is that the FDIC has multiple parties who are interested in buying SVB as a near-going concern for $1, and is confident that at least one will pan out. We know that just that has already happened for the UK subsidiary (sold to HSBC on Sunday night).
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