If anyone has been out of contact and is wondering what was going on with our stocks today

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If anyone has been out of contact and is wondering what was going on with our stocks today, the Silicon Valley Bank went bankrupt, and were taken over by the FDIC, for the second largest bankruptcy in US history. It scared the heck out of everyone, with fear of other banks going under. It seems to have been at least partially due to the extremely rapid raising of interest rates by the Fed, which caused the value of bonds, and government bonds, that some were holding their money in, to plummet. I would imagine that this will certainly make the Fed rethink their next planned interest rate hike.

This was for information only and doesn’t need a response unless you have something really important to add.

Saul

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This is not exactly true.

Their venture capital business is restructuring … might as well call it bankruptcy, no need to sugar coat it… but I have personal, business and mortgage accounts there and it’s business as usual at the bank today. No problem withdrawing money or transferring wires out (had an unrelated need to fund a wire for another investment). So for personal investors, FDIC will save the day.

We’ll see how this shakes out for bigger, corporate clients with monies on deposit exceeding insurance requirements. I think the alarmism can go back in the box because this bank still has significant assets that another bank will likely acquire. Or the government will (gasp) bail them out. For companies like BILL, I doubt the large loss today is due to “SVB bankruptcy” so much as the Quickbooks effect. For companies like ROKU or Databricks, a small haircut on their cash positions is possible, but even these shortfalls get FDIC-issued notes that are senior to all other debt.

Whatever happens to SVB, as long it stays contained, is unlikely to be the precipitant of a new banking crisis. But we do live in strange times, and it has certainly happened rapidly so who knows what happens when we wake up Monday.

(Post was edited)

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Thanks Saul - does anyone have a scoop of what is happening with BILL.com and if it’s exposed to the bank financially?

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BILL does rely on Silicon Valley Bank. In their S1 filing for IPO, they mentioned use of JPM, Silicon Valley Bank and The Bancorp Bank. In their latest 10Q they now only use JPM and Silicon Vallley Bank.

We depend on banks, including JPMorgan Chase and Silicon Valley Bank, to process ACH transactions and checks for our customers.
We also rely on third-party providers to support other aspects of our business, including, for example, for card transaction processing, check
printing, real-time payments, virtual and physical card issuance and our cross-border funds transfer capabilities. If we are unable to effectively
manage our third-party relationships, we are unable to comply with security, compliance or operational obligations to which we are subject under
agreements with these providers, these providers are unable to meet their obligations to us, or we experience substantial disruptions in these
relationships, our operations, results of operations and financial condition could be adversely impacted. In addition, in some cases a provider
may be the sole source, or one of a limited number of sources, of the services they provide to us and we may experience increased costs and
difficulties in replacing those providers and replacement services may not be available on commercially reasonable terms, on a timely basis, or
at all.
https://s24.q4cdn.com/404137088/files/doc_financials/2023/q2/7e3c750f-ce4d-4e0b-9014-6f2c105278a3.pdf

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Thanks Jonewayne - I am not US based but I’m assuming the bankruptcy/restructuring should not affect the ACH clearing system or if it does it would be possible for Bill to switch to an alternative provider/bank? Will be good to know from people in the US, thanks.

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The main question is on uninsured deposit (over 250k). How much money really BILL has with SVB - we don’t know as of now. Check out ROKU and RBLX disclosures earlier today.

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A lot of Silicon Valley Execs who posted on Twitter that they weren’t worried have deleted those posts, as per Stephanie Ruhle.

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My opinion (only one persons view), is this is a significant event. SVB is pretty embedded into venture capital and valley culture. Startups need venture capital to survive. Also a lot of VCs did business with, or relied on, SVB. A fair amount of startups themselves bank with, or have credit lines from, or other dependencies on SVB.

I just had a call with a lawyer from a prominent large law firm in the Bay Area. Our call was previously planned, but he said their firm has spent all day meeting with clients advising them of their rights and options as a result of SVB’s restructuring. Another call that I had, was previously scheduled, was with a Tech VP R&D. He canceled the call with me saying he was caught up in the SVB mess and needed to defer our meeting as he is in major damage control mode.

All this is deeply involves some of our companies (mostly tech firms) and their customers (which include startups).

The overall market also fears financial contagion (or similarities) much like we saw in the GFC when Lehman failed. As I understand, big banks hold bond portfolios on the balance sheet that are being held to maturity and they do not mark them to market. Bonds have gotten killed as interest rates have risen, and these companies are not taking those as losses (because they plan to hold to maturity, why would they?). What killed SVB was that those were depositor funds invested in long-dated (10 year) bonds. So when depositors came calling, the bank had no cash to fund withdraws, thus a liquidity crisis. Could this happen with other banks (I don’t see why not), and what’s the next domino.

I personally was unaware (because I don’t invest in big banks) that they do not mark those funds to market (like you would any other security). So the reality is, banks capital ratios may be worse than they report, or that some of us (me anyway) think. This is bound to have a chilling effect on their willingness to extend credit and make loans even if the bank is in fine shape right now.

All of this, coupled with additional rate increases which just make everything worse for all these reasons, reduces overall liquidity which is the lifeblood for companies that are not free cash flow positive. A lot of those firms are our companies customers.

I am not Cassandra, I am sure we will get through all this. But this is pretty bad news, and quite frankly, astonishing. This bank was a powerhouse and very well regarded. Many firms did business with them. It’s not like they lost billions speculating in derivatives. They invested client funds into treasuries.

We live in interesting times, but I would prefer less interesting to be honest…

Thanks,
Rob

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Thanks learninginvestor. Here’s what I found out in a few minutes of googling:

Saul

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“SIVB was one of the biggest providers of “venture debt” to start ups. Often times, as a REQUIREMENT, startups had to keep their main bank account with SVB. Those companies ARE IN DEEP TROUBLE (unless they got all their $ out in the last day).” Databricks anyone? Not that they would be in trouble of going broke, but this will severely hamper their IPO plans.

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If you made it this far, switch to this new thread. BILL just had a PR that alleviates any fears.

i am not sure bankruptcy is the right word but the general feel of it is the same and its probably just semantics… SVB became insolvent and State of California & FDIC took over.

Matt Levine had a really excellent explainer (and was hilarious, as always).
Highly recommend a read: Startup Bank Had a Startup Bank Run - Bloomberg

-muji

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But it’s not like they were insolvent because SVB had invested in Junk bonds, or high-risk mortgage instruments, etc.

Irony is that the US Gov’t has to come in and take over a bank because it had to sell US backed instruments early.

Might the US Gov’t have instead underwritten the refinancing that the bank was seeking, so SVB didn’t have to sell HTM instruments at a loss to meet the run on the bank? It would be backed by…US Treasury bills after all, not junk bonds (allegedly).

If we see the “next bank up” have a similar run, this strategy might have proven much cheaper than FDIC bailouts and the economic risks we face.

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Banks do not just go insolvent overnight for no reason.
Here the triggering event has been a run to the bank and I read that Peter Thiel and other top VCs had a role in initiating this. And of course when Thiel says something millions of other people do what he says. I think SVB at some point issued a statement saying they had to go back to the equity market to raise additional capital for their ratios to stay in “solvent territory”, the reason being that their bond portfolio deteriorated as a consequence of raising rates and they had to take a pretty big writedown. But every bank has bond portfolios and probably many of them will have to go raise capital to comply with legal requirements. This, per se, is not necessarily a red flag. But when you add a run to the bank into the mix, things get scary.

This is a piece I recommend about this whole story: Why was there a run on Silicon Valley Bank? - by Noah Smith

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Signature insolvent, too, but depositors including those with amounts in excess of FDIC insured $250k limit will be made whole (at SVIB and Signature). Costs not to be borne by the taxpayer but rather a special assessment on all banks including the GSIBs.

Some thoughts as they pertain to companies relevant to the board

  1. For those that had deposits with SVB - BILL, ROKU, I’ve heard CRWD and DDOG floated around - this should assuage any short term negative pressure tomorrow.

  2. The impact going forward on risk assessment will be interesting. This outcome seemingly signals a willingness for federal entities to intervene and support institutions who have riskier lending strategies should significant missteps occur that could be dangerous to the wider economy (though one would assume this strictly refers to riskier but legal strategies and not strategies that embrace any element of fraud or malfeasance)

  3. The path is clear (edit: uncertain - GS says the opposite, no rate hike now predicted!) for further near-term rate increases and surely keeps us on track for a .50 point hike

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Good news. See link to other SVB related post on Saul’s discussion board.

In a joint statement Sunday, Treasury Secretary Janet Yellen, Federal Reserve Chair Jerome Powell and Federal Deposit Insurance Corporation Chairman Martin J. Gruenberg said the FDIC will make SVB and Signature’s customers whole. By guaranteeing all deposits – even the uninsured money that customers kept with the failed banks – the government aimed to prevent more bank runs and to help companies that deposited large sums with the banks to continue to make payroll and fund their operations.

[
BILL.com discusses impact of SVB closure
discussion.fool.com dab0d533d905a89aeaeb1b773a323f954cb80aff.png36x36
](BILL.com discusses impact of SVB closure - #9 by sjo)

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If you want to conduct more forensics on your stocks, use this SEC Edgar site’s search function. The link below pulls up all mentions of “Silicon Valley Bank” in the filings database. You can include the name of your stock or conduct other specific searches using boolean functions etc. Check the FAQ on the site for more instructions.

https://bit.ly/3JDHn25

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The Feds (by making all depositors whole) essentially did what I suggested they needed to do above. Because without that, the risk of a further run on banks would be quite likely IMO.

But what does this mean to our stocks?

I think the landscape for Venture Capital could change. If the above did NOT happen, a whole lot of money was still at risk for those VC’s who didn’t pull their (or the companies they were funding’s) money out of SVB. Not sure what the effect will be now, but it certainly didn’t pump up the sector of VC investing.

In the long term? VC money is going to be harder to come by for awhile and that means LESS threats to the already-public companies such as DDOG, SNOW etc. I think the whole thing has damaged the image of Venture Capital a bit and will make it more difficult (for awhile) for VC’s to raise money. It has been pretty dry now for a bit, but I think this extends the period of VC being “out of favor”.

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I am having a difficult time thinking that it will in any way change the landscape for venture capital. It will for sure change where investors and the startups put their money. Venture capital invests too earn a high return, albeit with a greater risk. Venture capitalists aren’t sitting around with vaults of cash. They have to keep their money somewhere. Banks are where folks keep their money. I can’t see that changing. I can however see that vulnerable companies will spread their risk, perhaps among multiple banks.

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Yes. But… a lot of investors (high net worth individuals and also private/public entities) who’ve put money into VC’s (knowing these were risky investments) have now come to understand a whole different risk.

The fact that many VC’s had their money locked up at SVB and wouldn’t get a lot of it back if the Feds didn’t change policy and come in to stem the tide, shows another whole risk that some of the above hadn’t considered. At the end of the day, what the hell were all the VC’s (and I mean pretty much ALL) doing with all their money at the same place? They might know startup businesses, but they sure as hell got lucky they didn’t lose a ton of capital starting this morning.

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