Too Big To Fail
In case you missed the recent news, the stock market experienced a sell-off last week. The Dow Jones Industrial Average, the S&P 500 Index and the NASDAQ all experienced declines of over 4%. The declines can be directly attributed to the collapse of Silicon Valley Bank.
What is Silicon Valley Bank?
Silicon Valley Bank was the 16th largest bank in the United States until this past Friday afternoon when it collapsed. Silicon Valley Bank primarily catered to start-up companies, venture capitalists, and technology firms. SVB had $209 billion in total assets at the end of 2022 according to the FDIC.
What happened?
SVB reported an “elevated cash burn from its clients” as the slowdown in the economy caused its clients, mostly technology companies, to withdraw cash to fund their operations or meet other financial obligations. When there is a run on a bank, the bank is unable to meet all the withdrawal requests of its clients and that is what occurred last week. SVB had invested a large amount of its capital reserves in U.S. Treasuries. Unfortunately, as interest rates rose, the price (value) of its bonds declined resulting in losses to SVB. As with any investment (stock, bond, real estate, etc.), it is always best to sell when you want to sell and not when you have to sell.
Which companies were impacted by the SVB collapse?
Roku held 26% of their company’s cash, approximately $487 million, at SVB. AcuityAds Holding had over $55 million of their company deposits at SVB. Circle, a large player in the cryptocurrency industry, had about $3.3 billion at the bank. There are numerous large companies who had large deposits at SVB and these will most likely be revealed in the coming days.
Did the bank know that they were in an untenable situation in advance?
Fortune reported that SVB Chief Executive Officer Greg Becker sold $3.6 million of company stock less than two weeks before the firm disclosed extensive losses that led to its failure. The stock sale was part of a prearranged plan to sell stock, but the optics of the trade are less than flattering for Greg Becker. There may be talk in the future about the government attempting to claw back his gains from the sale of these shares.
Should we be concerned?
Whenever one bank fails, it causes individuals to worry about the condition of their own bank. Thankfully the Federal Reserve, often referred to as the lender of last resort, stepped in today and announced the creation of a Bank Term Funding Program designed to protect institutions impacted by the SVB failure. The Treasury Department designated SVB as a systemic risk which provides authority to “fully protect all depositors.” The following joint statement was released earlier today by the Federal Reserve, Treasury Department and FDIC:
"Today we are taking decisive actions to protect the U.S. economy by strengthening public confidence in our banking system. This step will ensure that the U.S. banking system continues to perform its vital roles of protecting deposits and providing access to credit to households and businesses in a manner that promotes strong and sustainable economic growth."
Had the government not taken swift action, we would have been much more concerned about both the short and long-term impact of the SVB collapse on the stock market and the economy.
What are doing in light of these recent developments?
We will continue to monitor developments related to SVB and the financial markets over the coming days and weeks. We would not be surprised if volatility increased in the short-term as individuals and institutions may sell some of their stock and bond holdings to meet any short-term cash flow needs.
Some view the collapse of SVB as a “black swan event.” A black swan event is a high-impact event which is difficult to predict under normal circumstances but appears to be inevitable in retrospect. Whenever “normal conditions” change, the likelihood of a black swan event increases. The combination of a rapid rise in interest rates and a slowdown in the technology sector combined to lead to the collapse of SVB and may be referred to as a black swan event.
We do not believe that anyone individual can accurately forecast future black swan events and that is why we continue to utilize market linked notes within your portfolio. While these investments will not protect from all losses, they will provide your portfolio with a degree of protection during uncertain times and future black swan events. These investments have been an integral part of our clients’ portfolios since 2008 and will continue to serve as a hedge now and in the future.
If you have any questions related to this memo or your portfolio, please do not hesitate to call or email us.