The Washington Post

Collapse of Silicon Valley Bank reflects a larger anxiety


Most Americans were probably familiar with Lehman Brothers when the storied investment house collapsed in 2008, a victim of bad bets on soured mortgagere­lated investment­s.

But relatively few would ever have heard of Silicon Valley Bank, the country’s 16th largest before it was seized Friday by the Federal Deposit Insurance Corporatio­n, a banking regulator.

Silicon Valley Bank’s demise on one level is a straightfo­rward tale of a financial screwup. A massively bad bet on interest rates caused painful paper declines in its investment­s, forcing the bank to sell securities at an actual loss. This could have happened to any bank. Once depositors learned they might lose access to their cash, they panicked and began withdrawin­g en masse. Poof: Silicon Valley Bank incinerate­d in two days. In purely technical terms, this had nothing to do with the tech industry clients it served.

Yet, at another level, the bank’s swift fall had everything to do with its clubby clientele of Silicon Valley start-ups and the venture-capital and private-equity firms that fund them. That its collapse coincided with a moment of intense anxiety in the tech industry is no accident.

Silicon Valley was, in many ways, just a normal bank. It held deposits for companies and their wealthy executives, made loans, and provided cash-management services. These are the workaday tasks banks perform for their customers.

Begun in 1983 — about a decade after the term “Silicon Valley” began to be applied to the area at the base of the mountains around San Jose — the bank developed a powerful niche catering to tech-focused start-ups. Just as venture capitalist­s ( VCS) built a new financial industry investing in companies with few physical assets that couldn’t have attracted capital elsewhere, Silicon Valley Bank followed in the VCS’ wake by offering itself as the preferred bank for newly funded entreprene­urs.

It became an article of faith among start-ups that once you secure funding, you put that money in SVB, as everyone here calls it. There was no reason that young companies couldn’t have placed their money at Jpmorgan Chase or Bank of America, though both were longtime players in Northern California. But they generally didn’t. As with so many other aspects of the tech ecosystem, start-ups did exactly what successive generation­s of their forebears did by banking with the institutio­n that understood them best.

The bank flourished for 40 years, particular­ly during the pandemic, when a flood of investment­s in tech companies associated with the success of remotework applicatio­ns caused its assets to peak at $198 billion.

The bank’s collapse, then, had nothing and everything to do with its eggs-inone-basket reliance on local tech firms. With deposits rushing in during the pandemic, the bank had to invest more and more money in bonds, typically U.S. bonds. As interest rates spiked, bond prices declined. That would have been fine but for the bank’s sudden downturn in deposits. After rising robustly in 2021, deposits fell 13 percent in the first three quarters of 2022. This meant that tech companies were pulling cash from the bank as their outlooks dimmed. Forced to sell securities to meet withdrawal demands, the bank said on Wednesday it would record a large loss and seek to raise fresh capital. This was a signal to customers that their deposits might not be safe. A classic and chaotic run on the bank ensued.

The bank might have been saved had its high-rolling customer base — faddishly accustomed to following each other for good reasons and bad — joined forces to remain calm. That wasn’t likely in an environmen­t of plunging stock prices, mass layoffs at Bay Area companies large and small, and a broadly dyspeptic mood among the typically peppy tech crowd.

“More in the VC community need to speak out publicly to quell the panic about [Silicon Valley Bank],” Mark Suster, a respected investor with Upfront Ventures, tweeted on Thursday. Suster went on to tweet he had spoken to many VCS who were not encouragin­g their portfolio companies to yank funds. That was either wishful thinking or he was speaking to the wrong VCS. No bank ever has enough funds to allow every customer to pull out its money at once. All it took to do in SVB was the legitimate concern among enough customers that they would never see their money again.

The implosion is only the latest example of a generation of executives used to operating in a low-interest-rate environmen­t getting caught in a crosswind with which they had no experience. Once the shareholde­rs of what was Silicon Valley Bank are partially or totally wiped out, the bank’s business likely will be a tasty target for an establishe­d player wanting to invest for the long haul in the technology industry. The bank’s overnight demise is a reminder that the valley is bruised and shaken — but holds too much potential to be written off.

Adam Lashinsky is the former executive editor of Fortune magazine and author of “inside Apple: How America’s Most Admired — and Secretive — company Really Works.”

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