Silicon Valley Bank implodes: startup extinction event, contagion risk, culpability, and more

The recording starts with banter: one host shows off a bulldog named Moose as his "mascot", and the others joke that it makes him more likable. The host who leads the show jokes about going solo with a podcast of his own and plugs his other show, This Week in Startups, while the others interrupt him.

The tone shifts once the host says this is an emergency episode: Silicon Valley Bank has been taken over by the FDIC. He calls it a black swan for Silicon Valley, the likes of which has not been seen since 2008, and says the group has been talking about little else for 36 hours.

Asked whether any earlier moment in their careers felt this acute, the hosts name 2008 and COVID. One host says this may be worse from a Silicon Valley perspective, because thousands of companies are in distress at once and nobody knows what happens over the weekend.

One host, apparently Sacks, calls it a "Lehman-sized event" for the Valley. His reasoning is that the authorities let Lehman fail in 2008 and the cascade nearly took down the financial system. He sees two problems: thousands of startups that may be unable to make payroll because their money is frozen at a bank now in receivership, and a possible regional banking crisis. Gary Tan's phrase "extinction level event" is cited approvingly.

He stresses that Big Tech is not at risk, because Google and Amazon have plenty of cash. The exposed companies are small ones with 10 to 100 employees that, in his words, did nothing wrong. He also argues that SVB, as far as anyone knew, was regulatory compliant, and that deposits above $250,000 are not FDIC insured. In his telling, investors in their group chats now ask why anyone would keep money anywhere but JPMorgan or a top-four bank, and he warns of a 2008-style run unless the Fed steps in. These are his own claims and predictions.

The host who is steering the discussion says SVB serves about 50% of venture-backed startups and, he says, most venture firms also bank there. He relays that a fund he is an LP in told him it could not access millions of dollars meant for startups. Beyond deposits, SVB also offers mortgages to venture capitalists and founders and loans to general partners, so the damage could reach VC firms themselves.

Another host frames the problem as a key piece of Silicon Valley's financial plumbing switched off within 36 hours, with billions of dollars in deposits frozen. He lists the consequences he fears: unpaid bills, possible credit-line defaults and missed payroll. He then hands the explanation to Friedberg.

A host then gives the timeline as he understands it. On Wednesday evening the bank's CEO told shareholders it was rebalancing by selling tens of billions of dollars of securities, and said it would raise money by selling shares. The stock fell 60% on Thursday and again on Friday. In his account, most venture capitalists told founders to pull their money out, and a small minority who urged support gave what he calls really bad advice. Trading was halted on Friday morning and the FDIC closed the bank at noon. These are the host's figures and are not checked here.

Friedberg says the irony is that SVB was solvent before the run. Using slides, partly the hosts' own and partly from the bank's presentations, he reads the end-of-2022 balance sheet: about $195 billion of liabilities, made up of $173 billion in customer deposits and $22 billion in other debt.

Against that he puts about $208 billion of assets, a difference of roughly $13 billion that he calls book value. The assets include loans, $91 billion of hold-to-maturity securities that are not marked to market each quarter, and $26 billion of available-for-sale securities, which he says is what set off the panic. The loan figure is garbled in the transcript.

Friedberg says deposits arrived so fast over the past couple of years that the bank bought a large amount of long-duration securities. He first describes them as Treasuries, and another host interjects that they were really mortgage-backed securities with a ten-year duration. The disagreement is left unresolved. A host also notes that some of the assets were held in cash.

Friedberg offers a rough illustration. With about $14 billion of cash and perhaps $40 billion of sellable Treasuries against $173 billion of deposits, the bank could cover withdrawals of around 25% of deposits. Above that, it has a problem, and the fear that others will withdraw first is what drives a classic run. He adds that bank runs were routine in the 1920s, and a host jokes about It's a Wonderful Life.

A host then names the first of two problems: a deposit decline. In his account, VCs were investing less while startups kept burning cash faster than the bank had modeled, because it had assumed they would cut spending.

Friedberg continues with the second problem: the bonds on the balance sheet lost value. His simple illustration is a $100 bond paying 2% over ten years, which returns about $122. If rates rise to 5%, a new bond returns about $163, so the older bond is worth roughly 25% less. A 3-point rate move, he says, is what hit the available-for-sale part of the portfolio just as deposits were falling.

Facing that, the bank sold assets and announced a capital raise, and that announcement alerted everyone. Friedberg adds that an analysis on Seeking Alpha had already flagged the risk, pointing to falling deposits, long-duration bonds bought before the rate jump and the resulting paper losses. His point is that the signs were publicly visible.

Friedberg turns to the loan book. He says about 10% of the bank's more than $70 billion of loans is venture debt, which he calls questionable in this market. In his account, such loans are repaid on the assumption that VCs keep funding the borrowers, so if funding stops, defaults follow.