Silicon Valley Bank bankruptcy prompts investors to seek government help

Big names in Silicon Valley and the financial industry are publicly calling on the federal government to push another bank to take on the assets and liabilities of Silicon Valley Bank after the financial institution went bankrupt on Friday.

The Federal Deposit Insurance Corporation (FDIC) will cover up to $250,000 per depositor and may begin paying those depositors as early as Monday.

But the vast majority of SVB’s customers were companies that had more than that on deposit in the bank. As of December, more than 95% of the bank’s deposits were uninsured, according to regulatory filings. Many of those depositors are startups, and many fear they won’t be able to pay this month, which could trigger a large wave of failures and layoffs across the tech industry.

Investors fear these failures will reduce confidence in the banking sector, especially mid-sized banks with less than $250 billion in deposits. These banks are not considered “too big to fail” and do not have to submit to regular stress tests or other safety valve measures adopted in the wake of the 2008 financial crisis.

Venture capitalist and former tech CEO David Sacks has called on the feds to push another bank to buy SVB’s assets, write on twitter“Where’s Powell? Where’s Yellen? Stop this crisis NOW. Announce that all depositors will be safe. Place SVB in a Top 4 bank. Do it before the opening on Monday or there will be contagion and the crisis will will propagate.”

VC Mark Suster agreed, tweeting, “I suspect that’s what they’re working on. Expecting statements by Sunday. We’ll see. Hope so or Monday will be brutal.”

Investor Bill Ackman made a similar point in a long tweetwriting: “The government has around 48 hours to correct a soon-to-be-irreversible error. By authorizing @SVB_Financial fail without protecting all depositors, the world has come to realize what an uninsured deposit is – an unsecured illiquid claim on a failing bank. Absent @JP Morgan @citi Or @Bank of America the acquisition of SVB before Monday’s opening, a prospect that I believe is unlikely, or the government guaranteeing all of SVB’s deposits, the giant sucking noise you will hear will be the withdrawal of almost all of the uninsured deposits from all except ‘Systems Important Banks’ (SIBs).”

Reference partner Eric Vishria writing“If SVB depositors are not cured, boards will have to insist that their companies exclusively use two or more of the big four banks. This will crush the smaller banks. AND further exacerbate the too-big-to-fail problem. “

Since its inception nearly 40 years ago, SVB has become a centerpiece of finance in the tech industry, especially for startups and VCs investing in it. The company was known for extending banking services to early-stage startups that would have struggled to obtain banking services elsewhere before generating stable cash flow. But the company itself has faced cash flow problems this year as seed funding has dried up and its own assets have been tied up in long-term bonds.

The company surprised investors on Wednesday by announcing that it needed to raise $2.25 billion to shore up its balance sheet and that it had sold all of its available-for-sale bonds at a loss of $1.8 billion. Assurances from bank executives weren’t enough to stop a run, and depositors withdrew more than $42 billion by the end of Thursday, sparking the second-largest bank failure in U.S. history.

Many in the tech community have blamed VCs for fueling the run, as many told their holding companies to put their money in safer places after SVB’s announcement on Wednesday.

“This was a bank run driven by VC hysteria,” Ryan Falvey, a fintech investor at Restive Ventures, told CNBC on Friday. “This is going to go down as one of the ultimate cases of an industry cutting off its nose despite its face.”

Observers decry the irony as some VCs with notoriously libertarian free market attitudes are now calling for a bailout. For example, reactions to Sacks’ tweet included statements such as “Excuse me sir. Suddenly the government is the answer?!?” And “We capitalists want socialism!

Some politicians have opposed any bailout, with Rep. Matt Gaetz, R-Fla., Tweeter“If there is an effort to use taxpayers’ money to bail out Silicon Valley Bank, the American people can count on me to be there to lead the fight against it.”

But the financier and former Trump communications director, Anthony Scaramucci argued“It’s not a political decision to bail out SVB. Don’t make the Lehman mistake. It’s not about rich or poor who benefits, it’s about stopping the contagion and protecting the system. Return depositors whole or expect many tragic unintended consequences.”

— Hugh Son and Ari Levy contributed to this story.

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