SVB: When Silly Valley Sneezes, DevOps Catches a Cold

Welcome to The Long View—where we peruse the news of the week and strip it to the essentials. Let’s work out what really matters.

This week: Silicon Valley Bank and what it means for DevOps. After the débâcle of Wednesday’s fire sale, Thursday’s bank run and Friday’s FDIC seizure, came Saturday’s impotent panic, Sunday’s “not a bailout” federal guarantee and Monday’s tentative restart of “bridge” bank operation.

Analysis: Your salary is safe, but who’s to blame?

Mistakes were made at SVB—this seems clear. But who sparked the sudden panic? Thiel? Andreesen? Calacanis? Or perhaps we just need more SVBs, so the risk doesn’t get concentrated in one bank.

What’s the story? John Thornhill reports—“There are few libertarians in a financial foxhole”:

“Spotlight on the hypocrisy”
As the 16th largest bank in the US, Silicon Valley Bank was not big enough to rank as a systemically important financial institution. But … US and UK financial authorities have had to engineer an emergency rescue … to shelter tens of thousands of SVB’s mostly blameless depositors, many of whom would have seen their businesses go bust without a financial backstop.
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Cue massive sighs of relief among panicking tech entrepreneurs, who had spent their weekends frantically working out how to pay their employees. … The near-death experience of thousands of start-ups exposed to SVB is certain to have a salutary impact across the tech sector.
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The SVB fiasco also shines an unforgiving spotlight on the hypocrisy of some of the biggest venture capital players … who privately urged their portfolio companies to pull their money from the bank and then later publicly called for government support. … The bank also managed the personal finances of many tech entrepreneurs and investors and invested in several venture funds as a limited partner.

Who is to blame? Lizette Chapman IDs the VC some love to hate—“Thiel’s Founders Fund Withdrew Millions”:

“Other banks instead”
Peter Thiel’s Founders Fund had no money with Silicon Valley Bank as of Thursday morning as the bank descended into chaos, according to a person familiar with the matter. … Founders Fund went further than many other venture firms, which kept some money with Silicon Valley Bank in order to maintain a relationship with the institution.
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On Thursday, as the bank was beginning to unravel, the firm started what’s known as a capital call … a run-of-the-mill activity in the venture capital world, in which a VC firm asks its investors … to send it money. … Founders Fund asked its investors to transfer the money to other banks instead.

Who else? Matt Egan points a couple of fingers—“Employees are angry with CEO”:

“Bank had more than a year to prepare”
The blame game is on … and the tech sector is pointing the finger at SVB CEO Greg Becker. … One Silicon Valley Bank employee … who works on the asset management side [and] is a Wall Street veteran … was dumbfounded by how Becker publicly acknowledged the extent of the bank’s financial troubles before privately lining up the necessary financial support to ride out the storm. This set the stage for the panic that ensued as customers scrambled to pull their money.
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“People are just shocked at how stupid the CEO is,” the … insider said. “You’re in business for 40 years and you are telling me you can’t raise $2 billion privately? Get on a jet and fly to Kuwait like everyone else.”
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Jerome Powell, Biden’s pick to lead the Federal Reserve, and his colleagues deserve at least some of the blame: … The Fed’s war on inflation depressed both the value of the bonds Silicon Valley Bank was relying on for capital and the value of the tech startups the bank catered to. Of course, Silicon Valley Bank had more than a year to prepare for both of those issues.

Egan’s source implies the CEO was merely incompetent. But larryjoe is one of many raising the possibility of wrongdoing:

The really big blame is on the SVB CEO who seems to have been very lucky or traded on inside information when he sold $3.6 million of SVB stock at $287.42. He also actively lobbied Congress to exempt SVB from the regulations that could have prevented this mess. And SVB donated/paid money to legislators to secure their votes.

SRSLY? dragontamer goes even further:

SVB didn’t have a Chief Risk Officer from April 2022 through January 2023. They were flying blind. While the Fed raised interest rates, the bank seemingly moved forward without any risk assessments.

A new Chief Risk Officer was named in January 2023. The top insiders then sold tons of shares in February, suggesting that they all realized something was wrong. In the next public report on March 8th at 4pm, they announce a capital raise to offset their now booked losses. This sets off a bank run on March 9th. And the rest is history.

O RLY? Petula D. Moronix is incensed:

If so, their proceeds should be clawed back and the culprits wiped out. And off to the soup kitchen.

OK, OK, but ELI5 please? u/margincall-ed explains like we’re five:

“Liabilities exceed assets”
The main issue was the run on the bank. With enough time this issue would’ve sorted itself out: …

1. Tech firms deposit money with SVB, SVB makes money by issuing loans but can’t find enough firms to loan money to, given how flush with cash VC backed tech firms are.
2. SVB needs to make money so they buy long dated securities with a decent return.
3. The Fed raises rates which both hurts the appetite for VC firms to fund tech firms and reduces the value of SVB’s long dated securities.
4. A combination of people knowing SVB’s market value of assets have declined significantly and firms needing to draw down on their own savings causes a run on the bank. SVB starts selling their assets to fund withdrawals but due to the second part of 3, they crystalize losses and eventually run out of money (liabilities exceed assets). Note that the assets themselves are extremely safe, they just experienced mark to mark losses due to rates movements.

Startup workers are worried about their salaries. ScienceBard blames the startups:

Thousands of startups exist in an environment that is extremely unhealthy, facilitated by institutions like SVB, so that venture capitalists can get richer by convincing tech workers to live in a casino atmosphere. Virtually all of these companies would be able to make payroll if they had staffed one accountant charged with splitting their money up among a few different institutions and having alternate lines of credit set up in case of emergency. They didn’t, because the Silicon Valley culture is “fast and lean”.

And richardlblair agrees:

If I was a founder … right now, I’d be opening at least one other bank account today and getting at least half my funds into that account. I would also never operate without at least two.
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Operating a business and having employees is a huge responsibility. If people are depending on you to manage the risk of your business so they can buy groceries it’s important to take that as seriously as you can.

Meanwhile, what of those who sparked the Thursday run? @SkylarkDip won’t tar them all with the same brush:

Is it bad to yell fire in a theatre when there is actually a fire?

The Moral of the Story:
Good friends, good books and a sleepy conscience: This is the ideal life

—Mark Twain

You have been reading The Long View by Richi Jennings. You can contact him at @RiCHi or tlv@richi.uk.

Image: Elie Khoury (via Unsplash; leveled and cropped)