This is a developing story. Updates might be posted as news flows in.
Banks in US invest the money that customers put in there. How much can they invest? If you give them $10, they could invest $9 of it. This is called Fractional Reserve Banking. This system is not a problem if the investment is sound, but if the investment is not sound AND a bunch of customers try to cash out at the same time, then the bank has no money to give back. When the bank has no money to give back, it's a liquidity crisis.
Silicon Valley Bank (SVB), which is the goto bank for most startups and venture capital, invested a huge proportion with the belief that interest rates would come down. When the Feds didn't do that, they were stuck holding a lot of bad bets. All the money was tied up in these bad bets.
I’m hearing that many VCs are advising founders to keep no more than $250,000 of funds in SVB. Here’s what USV told founders in an email:
Keep “only keep minimal funds in cash accounts at SVB,” that is, funds of up to $250,000. “SVB is in a severe cash crisis”
— Kate Clark (@KateClarkTweets) March 9, 2023
Concern among founders and VCs investors was palpable last week after Silicon Valley Bank surprised the market by announcing Wednesday it needed to raise $2.25 billion in stock. On Thursday, Peter Thiel asked many of his portfolio companies to withdraw their money out of the bank, and the shares were down another 62% in premarket trading Friday before they were halted. Regulators then shut down the bank and said the FDIC would protect insured deposits. But these insured deposits are unto 250K, so what happens to companies that have millions of fundraised dollars stuck in it? Some experts seem to think the Feds caused this problem but not sticking to the "transitory inflation" case.
In summary: Fed lied, banks died.
They said rates would stay low.
The government sold bonds on that premise.
Then they suddenly hiked rates.
Crushing existing bondholders.
This is how the Fed caused the unrealized losses that led to SVB's insolvency. And maybe that of other… https://t.co/BlmZxrD2xV pic.twitter.com/LZtWpPVnOO
— Balaji (@balajis) March 12, 2023
Others believe the SVB made really bad bets and taxpayers should not bail them out.
The venture capital community basically created a run on SVB, says Unlimited CEO Bob Elliott www.youtube.com
Come Monday, we will find out if there are other suitors that are able to buyout SVB.
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