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Silicon Valley Bank Failure. What You Need to Know About the SVB Collapse

Written by Paul Esajian

Video Transcription

All right. Welcome everyone. I thought I’d do a quick share as this is what we research. Our community has been asking a lot of questions, commenting this is what we read every day understand ourselves. So I thought I’d ask, ask and answer a few things in a very succinct manner. What’s going on with the banks the news specifically, what happened to Silicon Valley?

and really, what do I need to know as a, as an investor as a real estate investor, as someone who has personal and business accounts at banks, what do I need to know? So let’s jump right into it this year, in 2023, and possibly by the time you review and or see this, this training, this’ll be outdated.

Here we are in 2023 at the beginning of the year, frankly, and there’s three Bank closures and failures, two of which are failures. One is a closure. Silver Gate Bank kicked it off, so Silver Gate Bank came out with the news that. Hey, we can’t figure out how to meet our rules and regulations as a bank to cover our deposits and what we, what we were banking.

And we are going at a business. So Silver Gate Bank, they’re here in San Diego. They kicked it off and they said, we’re out. Now, technically they’re not considered a bank failure yet. They’re returning everybody’s money and going at a business. Okay, so we gotta going at a business sale. Why did Silver Gate Bank.
Basically go outta business because Silver Gate Bank went all in on banking. The crypto businesses and exchanges. You may have read them and seen them in your, in your research, but they had a big client, one of which being ftx. So what story on Silver Gate Bank? They bank crypto. They’re out. So they decide to close shop cuz they just couldn’t, they couldn’t manage through, have enough deposits.

People are pulling money out. Crypto companies and values are going down their cash, all these things. Second is then Silicon Valley Bank or SVB. So this is what you’re seeing in the news daily. I mean, it’s just every, every hour on hour, a new article kinda sharing, showing, talking. So Silicon Valley Bank being in the Silicon Valley is specifically a focus.

One primary industry, which is tech companies. I mean, you name a tech company and they’re likely have a bank account there from Roku. You know, just think of all these different tech, large companies, small companies, a lot of small companies, but tech, right startup, venture capitalists are bank there and they send their portfolio companies to bank there.

So Silicon Valley Bank, that’s what we’re gonna talk about. They didn’t close, they failed. They couldn’t do what was necessary to stay in business. So treasury, treasury chair Yellen steps in and backstops the deposits at that bank. We’ll get into that more in a second. Then the third bank that happened within, you know, s Silicon Valley Bank was March 10th 2023 on Friday.

They added about 42 billion of deposits that wanted to get out of the bank. You call that a run on the bank that put major stress on them again from Friday. Then over the weekend, a third bank failed. And that Signature Bank now Signature Bank, they banked. So Signature Bank went out of business that same weekend basically because of couple different factors, but they did a lot of banking of crypto and more industries. But here’s three [00:04:00] bank closures, two failures, one closure. Okay, so. Let’s talk about Silicon Valley Bank. What happened to Silicon Valley Bank?

Well, here’s the deal. They’ve been in business for four decades. Okay? So they, they’re not, you know, they didn’t just open up five years ago. So for 40 plus years they’ve been in business. It’s the fifth largest bank, okay? Fifth largest bank. Second biggest bank failure only to, you’re gonna see here in a moment, wamu.
2008 ish. And then they bank technology companies. So when they had trouble starting that Friday on March 10th, this kind of got the rattle, the, the, the Rattler and the, and the concern and other banks started to get stressed and hence the signature fell and who knows who’s next. Right. And we’ll talk a little bit about what we.
Try to answer that question with, and this rattled the financial markets, and they’re still being rattled as we speak right now. You know, we’re, we’re gonna have a, in about a week or so the Federal Reserve is gonna go in their meeting and they’re gonna have a very hard decision on what to do of raising rates or not, which is what they’ve been saying.
But now, as. People have discussed their rates are, were going to create cracks in the overall economy and financial system. This is a crack, so it’ll be interesting to see what happens. Out of that next Fed meeting, less than 200 less than 250 billion in deposits. the trump era tax legislation got rolled back where they’re for banks that have less than 250 billion in deposits.

They got some relaxed rules from that Dodd-Frank Bill, right? So, so coming out of 2008, the government and policy and politics said we gotta put all these rules on banks. And they did. And then in the Trump era Dodd-Frank Bill, they rolled back some of these. Some of these rules and tests, which, you know, at the time they called bureau bureaucratic and not efficient.

So that smaller banks had, would not be, you know, regulated the same way a trillion dollar bank is being regulated. Okay, so that’s an important note. You probably heard that in the news from 2019 to 2020 at si, at Silicon Valley Bank deposits tripled to 189 billion. In 2019 to 2020 of deposits.
That’s because 2019, the tech industry and market has been very robust. Lots of what we call kind of easy money, lots of liquidity, lots of credit, and then the tech industry was just on a run. So those tech businesses, A lot of them banked at Silicon Valley Bank and so huge amount of deposits. So now the bank is sitting on deposits.
What do they do with them in 2021? They had their most profitable year as a bank in the, in the last four decades, Silicon Valley Bank. They took cash. Now that they had all this cash, and they did. This is what’s really interesting about the story. They put the cash into something that will yield a return and they put ’em into 10 year treasury bills or, or bonds.

Okay. US government, 10 year T-bills. Right. It’s basically they bought bonds that go out 10 years. At the time they were buying them, it was right. 20 20, 20 20, 20 21, at which time the yield on those bonds were pro were about an average. They were, they were averaging in their portfolio about a 1.6% return or so.
So what’s interesting about this bullet is that they didn’t, they didn’t you know, like 2008, they didn’t buy. A security baskets of, of ninja loans, right? No income. No job. They, they didn’t buy what would be deemed a risky investment. They put their money in US government tenure bills, bonds, their portfolio rose to a hundred billion in one year of these, of these investments and assets.

Here’s the thing. Starting in the middle. And the begin, starting really a little before the middle of 2022. The Federal Reserve says we need to raise the federal funds rate to slow down inflation and or pump the BR brakes on the economy. And, and take this inflation the other way. So here’s how it works.
As interest rates rise, bond prices fall. So if you bought a bond in 2021, And it’s a low interest rate environment, and your yield is correlated to that as interest rates rise. Now, the value of the bonds you bought at that low yield, if you went to sell it, you’re taking a loss. And this is the story of Silicon Valley Bank.
So they had these bonds and as interest rates started to rise, Their portfolio, if they were to sell it right now, these bonds, they had a 17 billion deficit from the value of which they bought it and a loss, right? So they bought it, they spent a dollar to buy it, and then they, if they would sell it today, they would incur a loss.
That loss 17 billion. Okay? So these, the thing about banks is you don’t have to mark to market. Which is what they, which every other business or financial industry typically has to mark to market. What is the, what is the asset worth in today’s value? It’s not that you’re taking a loss cuz you haven’t sold it yet, but in your financials you mark to market banks.

The government says it banks with, with bonds you don’t have to mark to market. So even though they’re worth less in their financials, they’re just show showing that they have X amount of dollars and 10 year treasury bills and bonds, right? Little nuance. So on top of it, the tech industry, along with the overall economy, starts to slow down and the free money and, and the, and people start needing cash to run their businesses to invest in things.

So, so now the economy’s starting to right. Slow a bit. And in 2022, their new deposits shrink by 30 billion. As you may or may not know, I’m sure you do. The F D I C ensures up to $250,000 of your money in each bank account you have at a bank. That’s great. But most of these customers at Silicon Valley Bank, like I said, are large tech companies.
They have not $250,000 in deposits. They have 250 million, so the majority of their deposits at the bank are not insured. Okay, good. Important obvious to note. So on March 8th in 2023, They put out their filing and they announced a 1.8 billion loss on bond sales to cover deposits because the reason, so remember, the bank was flushed with cash.
They had their best, best two years in their history, a ton of deposits. They go and put it in what they think is not risky investments to get a low yield, a low return. Then deposits start to not grow at the same pace, and they start to need cash to put on the balance sheet to cover for banking rules, the the loans that they do have.
So they start selling some of their bonds and they go ahead again, March 8th, 2023, and they share in a public filing that they took a 1.8 billion loss on bond sales. Then the stock. Then the investors get spooked now. Now the rate’s, you know, it’s starting to rattle through individuals, the tech community and this is what happens.
These tech owners, these startup CEOs, a lot of these private equity firms that, that have told their, what we call portfolio companies, the companies they invest in or that they start up, they’ve told them to bank. At this bank, well now these startup CEOs start calling each other and they start calling tech companies and they get, and they say, get your money out of Silicon Valley Bank.

Get your money out of S V B because it’s not, it’s looking spooky. And then what happens? This is called creating a rut on the bank. So if everybody wants to get their money all out at one time, that’s, that is never good from a banking standpoint, because if the bank just did an orderly fashion, everybody, you know, gets their money, and, and over time they would’ve been fine.

The stress, the stress that occurred here and the crack that broke the dam is that [00:13:00] people didn’t wanna sit around. And just wonder if everything was cool. They, they called up the bank and or they went online and they started pulling money out. And what happened was on Friday, March 10th, 2023, there was 42 billion that was trying to be withdrawn in one day.

From SVB from Silicon Valley Bank. That’s when Friday, the regulator stepped in to seize the bank because now the government, the F D I C, they used a, a special power that they called a systemic financial potential risk. What that allows is a lot less rules for them to step in and do things.
It’s kind of kind of like. The government declares we’re in a war environment. Well then the government doesn’t need to do all the policy and procedure to, to take action and make decisions. So that’s what happened. They declared a systemic issue and potential risk, and the regulators step in on Friday, over the weekend, they tried to auction the bank.

No, no good offers that they felt were on the table. And so when the news started to come out late Sunday night . Then going into Monday after that March 10th, the the Fed said, we are backstopping all hundred and 51 billion of deposits that. We’re not insured at the Silicon Valley Bank by the F D I C, we are gonna backstop and make sure every 151 billion of deposits that those depositors will and can access their cash.

Now this is not then, then that same again, that same weekend signature bank got, got shaky ground and, and they went. basically. And really when you look at these two banks and then the one earlier that I mentioned, silver Gate Bank, ultimately there was too much concentration. One industry or one asset class.
And and in this case with S V B, this bank focuses on tech companies. But tech companies, when it’s good, it’s great when it’s not, when they’re not flush with cash, they don’t have a lot of cash. They need their cash to operate their. They’re negative cash flowing businesses, right? A lot of these tech startups, they’re not making money until they sell.

So this is what’s happening and that’s what happened with Silicon Valley Bank, where these tech customers are flighty deposits when the economy is not so great. So Treasury Secretary Yellen backstops the bank and deposit at S V B, like I said, and says, 151 billion we are gonna cover. So this is a, this is something you’ll wanna know.
This is not considered a bailout. Because the stock and bond holders of Silicon Valley Bank, they’re not protected. They stand to get none of their money back, some of their money or not. They, they, they, nobody knows what’s gonna happen to them y yet, until this all kind of flushes out. So I wanna then just take you through a view, a few visuals and cap it at that, because again, I want you to just get a succinct story.

You know, I, I consume, read, we bring, take in all this information. And then I just wanna share it so that you can only take 20 minutes outta your day and get pretty good talking pa points of what’s happened what’s going on, and kind of questions to guide yourself on what you should or should not be reading or doing going forward.
This is a great visual. I have some visuals from the Wall Street Journal here. So this is bank failures from 2001 to 2003. You can see the size of these bubbles represent certain dollar amounts. The largest bank failure in US history was Washington Mutual Bank, and that was September, 2008. That kicked off the G F C great financial crisis as it’s referred to now that had assets of 307 billion deposits of 188 billion.

The second largest bank failure in history now is on the board and it’s Silicon Valley Bank, March of 2023. Yes. Assets of 209 billion deposits of 175 billion. And then you can see down here, this is, you know, banks do go out of business. That is like any other industry, banks go outta business. Okay. But nothing, I mean, this is some sizable stuff we’re looking at.

This is some sizable stuff, so. That, that story I told you about the deposits with Silicon Valley Bank? Well, Silicon Valley Bank, okay. Had deposits. This is by quarter increase. Increase, increase. Then they got, you know, 2022. That year turned on us in the middle of the year from an economic perspective, right?

Fed the Fed raises rates. The reason the Federal Reserve raised rates right, federal, federal chair, Jerome Powell is because he, it’s his main tool to combat inflation. And nobody wants inflation. We don’t want inflation. But that puts stress on the economy and it’s specifically done to slow down the economy, and it does that.

So in 2022 by quarter, you can see now, Now companies, these tech companies at Silicon Valley Bank, they need their cash. They’re pulling it out. They’re pulling it out and. On March ninth, which is think I got my dates right, right? Which is March 9th, going into March 10th Friday, there was 42 billion of withdrawals attempted.

Okay. That Thursday, Friday, what, whatever you want to call it. But it’s basically in one day, that’s when the, the government stepped in. So that really illustrates, you know, think if you’re a bank, your, your job as a bank is to get deposits. You need to have a certain of certain ratio of deposit. Above and beyond what you lend out to make money.
Well, now they’re forced to sell bonds when people start slowing down deposits and or pulling money out. Okay, so this is a pretty good visual that illustrates that point I discussed where Silicon Valley’s Valley Banks deposits that are insured is that little gray area. So, you know, up to 250,000 by the F D I C, that that amounts insured.
But all this, this. Shaded purple is uninsured and that’s that 151 billion we mentioned of deposits that, again, fed comes in and says, we’re gonna backstop and we wanna, you know, the fed, why did they come in and backstop the deposits? Because they wanna battle inflation and they wanna slow down the economy.

But if people get spooked and feel that The financial system is literally breaking that there’s no confidence in banks. Then we have a major crisis. So that’s why they stepped in. Okay. And what they basically did is they told, now they told banks that, Hey, banks, those of you that have treasury bills and bonds, On your balance sheet, we are gonna treat that like cash.

If you come to us, we’ll give you an actual line of credit on those, on those bonds so you don’t have to sell ’em for a loss. But we’ll extend the cash to you at a very, very, very low interest rate. But now you don’t have to sell bonds to take a loss and then create this run on the bank and report losses.

So they, they stepped in with the systemic systemic probability financial You know, they label this a systemic potential problem in the financial system. By doing that, they, they’re able to kind of make decisions without all the red tape, and that’s why the Fed stepped in to ensure, in this example, 151 billion.

And now they’ve said to all banks that you can, you can basically post your bonds as collateral for a line of credit, so you don’t have to sell ’em at a loss. This is a really, really interesting number I wanna share with you. And it’s growing every day, but the The current number that is estimated, the F D I C has said, and this is at the end of December, 2022, the F D I C has said that across all banks there’s about 620 billion in unrealized losses.

There’s 620 billion of when these banks sell their bonds, if they sold them, had to sell ’em today at the. Rate of these bonds that have, you know, the yields have gone up, so their value’s gone down. There’s 620 billion of a, of a negative loss. So I do wanna point out that we’re at the start of a lot more news, right?

And then ultimately this is a, this is the last visual I’m gonna share you, I’m gonna wrap it up here. To keep this right under 20 minutes, the bonds at Silicon Valley Bank, they had a hundred billion bond portfolio. Okay? The book value and what they bought ’em for. And then the market value is a different number.

If they sold ’em today, the market value, they’re not worth more, they’re worth less. And that arbitrage between book value and market value is that when they had to sell some bonds to create cash to cover the deposits that were coming out of their bank, now they’re writing down losses well, in their total portfolio.

Silicon Valley Bank has a, has a total discrepancy, or I should say a total loss on, on book value. Meaning if they had to sell ’em all today of, of about 17 billion, that’s a lot of money. Now they’re not, and they’re, and banks are only forced to sell bonds. If people start pulling money out of the bank and then start doing it in large quantities, then they, then the rules say you have to have cash at the bank to cover your other loan balance amounts.

And that’s what happened. It was a spiral effect at Silicon Valley Bank. So what’s the wrap up everybody? What should you think? What should you know? There’s gonna be a lot more news possibly as we get done with this. This will all be kind of a little outdated itself, but, You know, we, we bank at multiple banks with our businesses.

We have multiple accounts for each company at, at different banks. And you, I would encourage you to do that too. Number one. If you’ve heard me train before, I always talk about that the large banks, you can’t create a relationship. But I have accounts there. So, you know, having accounts at B of A and Wells Fargo, that’s great.

And we have that. You should have that. Having accounts at community banks is not a bad thing either. We have that too. One. For example, one of our community banks, I like to call ’em, they, they don’t, they don’t have all of their banking relationships in one industry, right? They have lawyers, they have healthcare, they have real estate, they have pharmaceutical companies, right?

So the bank doesn’t have one customer, like essentially Silicon Valley Bank. They, they had one type of in. Primarily at their bank and that industry. When it’s good, it’s great. When it’s bad, it’s B, it’s a blood bath as you saw. So diversity of industries that your bank banks at, that’s the question you should ask your bank.

Hey, are you, how much concentration do you have in one industry? Right? Silver Gate Bank. The reason they went out of business is cuz they were literally, and they said as much and they thought it was. A positive until it was a negative for the last couple years. SIL Silver Gate Bank that went out of business, the first one that decided to close, they said, we’re only gonna bank the crypto industry.

And for a while, that made ’em a lot of money until it didn’t. Right. So concentration of industry and then, and then you have to ask questions to your bank. What type of investments are you in? Do you put your cash into. What’s your cash ratio at the bank over, over deposits and loans, but really what you really want to hear and ask here, it’s not so much all the detail, but you want to ask the bank, you know, and in si, Silicon Valley Bank’s case, they had almost all of their investment in 10 year treasury bonds.
Now, if they, if they didn’t sell ’em and could wait 10 years, they would never lose any money. But in this case, they had to sell ’em to cover cash from withdrawals and the deposits, cuz the economy’s changing on ’em and their clients need their money tech companies. And because of that concentration of investment in 10 year treasury bonds and having a hundred billion portfolio.

They said to start selling some, they have to post and share the losses publicly, which spooks the investors, the community, and it’s a spiral effect from there. I hope this quick share was helpful. We’ll keep doing this on financial events and real estate events as we feel it’s appropriate for you to educate, learn and understand.