The rise and fall of Silicon Valley Bank: From $209B collapse in 48 hours

On the evening of Thursday, March 9th, 2023, a man named Greg Becker picked up his phone. He started calling his biggest clients. His message to them was Silicon Valley Bank is fine. Your money is safe and you got nothing to worry about. But by Friday morning, FDIC regulators had seized the bank, put it into receivership. $209 billion in assets, all frozen. The failure of Silicon Valley Bank would be the second largest bank failure in American history. And it moved faster than anybody had ever imagined. So it's fascinating to think about what could cause a bank this size to fail so spectacularly. And in this video, we'll dig in and explain the rise and fall of Silicon Valley Bank.

Oh, and by the way, thanks to Nord Protect for sponsoring this video. More on them later.

The lore behind Silicon Valley Bank is that it was actually started over a poker game back in 1983. Supposedly, two Bank of America executives hatched the idea while they were gambling. Whether that was true or not, the spirit of the story lived on in the bank, and we'll hear it later as we go along. But the insight the two guys had was that Silicon Valley was booming. The tech industry was becoming a huge force in the United States. The problem was there weren't any banks that really understood startups, and none of them understood tech companies that take venture capital, especially tech companies. They're different than normal borrowers. A lot of times these folks are losing money, are unprofitable, and they take big VC investment with the hopes of cashing out someday when they hit it big and win a big market. Famous companies that we all know today, like Apple, Microsoft, eBay, Amazon, they all took venture capital and they all lost money for a long time. Well, until they didn't and started making money later on. Silicon Valley Bank would go after these types of clients, and by 1983, they were just a tiny little bank. They only had $18 million in assets. Typically with a bank, assets are how much money is owed to the bank by other people. In other words, loans that they make. And by any measure, Silicon Valley Bank was tiny, but they carved out a niche in the market that would prove to be very valuable. They were the bank of Silicon Valley. Silicon Valley Bank had a brilliant model. When they would loan money to a startup, they would do something else that was pretty special. They'd force that startup to put all their deposits and cash inside of Silicon Valley Bank. This gave them two things that was pretty insightful. One, it gave them collateral, meaning any cash that the startup had was deposited with Silicon Valley Bank. The second thing it gave them was insight in what was going on with their clients. They saw all their transactions. The beautiful thing was this created a flywheel effect for Silicon Valley Bank. They became the hub for money moving around Silicon Valley. VCs would naturally put their money at the bank because, well, they were going to just transfer it from their account to the startups when they opened accounts at the bank as well. The vendors did the same thing, and suddenly a lot of Silicon Valley was just banking the easy way, all with Silicon Valley Bank. The model worked, and by 2011, when Greg Becker became CEO, over half of all venture-backed tech and bioscience and healthcare startups in the United States were banking with Silicon Valley Bank. Becker, like the CEOs before him, understood Silicon Valley Bank's game. If you had relationships with the VCs, the venture capitalists who controlled the money flows that would go into these startups, basically you had access to every startup that they funded. And up through 2019, Silicon Valley Bank acted like most of the other banks around— boring, unsexy, making money a little bit at a time on safe transactions and safe loans that, well, they felt really good they were going to get paid back. And then coming into 2020, that would all change. If you remember back in the COVID era, the government was terrified that the economy was going to shut down when people weren't able to work anymore and stuck at home trying to survive the whole situation. So they printed money like crazy. And suddenly, with people stuck at home and money flooding the system, things like venture capital started to go crazy. In 2021 alone, venture capitalists poured $329 billion into startups. That was more than double the previous highest record year. Every one of those startups needed a bank, and their venture capitalists would suggest that they banked with Silicon Valley Bank. In fact, over half of were putting their deposits and doing their banking at Silicon Valley Bank. Between 2019 and 2021, Silicon Valley Bank's deposits grew by 271%. And you say, well, that's okay. Well, the rest of the industry of banking grew just by 29% during the same time. Total assets, meaning the loans they had made out, grew from $70 billion to $211 billion in just a couple of years. And here's the deal. Banks, when they have a bunch of cash sitting on their balance sheet, that's a liability because they have to pay interest on it to the people that deposit the money at the bank. So when you're a bank in that situation, you need to put it to work. And that means making more loans. But you can only make so many loans out into the public sector. I mean, the fact of the matter is there's more money out there than there are good borrowers you can loan it to. But there is somebody else who's extremely hungry to borrow money. And that group is the United States government. We're racking up debt like crazy in this place. And so by the end of 2021, Silicon Valley Bank had done what a lot of people had done, which is put that money into government bonds and mortgage bonds as well. The problem was the average yield that we're getting was not very good. It was 1.79%, but they were government bonds. They were safe, right? The problem with doing loans like this, as with any loan, is you have to worry about not making the loan. That's the easy part. As my grandfather used to say, "Lending's the easy part. The hard part is making sure you get paid back." In this case, well, at first glance, you would think all these loans they were making to the government would be safe. Well, later on in the story, we'll find out that wasn't necessarily the case. In March 2022, the Federal Reserve started raising interest rates. They went from 0% to 4.5% over just about 12 months. It was the steepest rate increase almost in the history of the Fed. So the thing about bonds is they don't actually trade based on the interest rate, effective interest rate that you get. They're actually fixed price. So when something happens like interest rates go up, that means the folks who own a bond that's only paying, say, 1.79% as a yield, suddenly when there are other bonds out there that are 4.5%, suddenly the price of your bonds goes down. Nobody wants to buy them at face value anymore. This meant that Silicon Valley Bank's $80 billion loan portfolio by the end of 2022 was a ticking time bomb. They were sitting on $15 billion in unrealized losses. But it gets worse. All that money that had been deployed, well, it started to dry up. —both in the public markets when companies couldn't SPAC anymore, which was a way companies that were very speculative were going public and exiting for cash, or just regular IPOs. The whole market dried up around this time. And similarly, the private market did the same thing. Those VCs who'd gotten all that cash from investment funds and from stimulus, basically they stopped deploying it in startups. And when that happened, well, the flywheel of startups started to slow down. So with startups withdrawing all this cash, Suddenly Silicon Valley Bank had a perfect storm, the cash withdrawals and the bond portfolio that was shrinking underneath them. And the thing about banks is that they are incredibly highly regulated. We've gone through multiple cycles in this country where people were just sick of watching their deposits fail inside of banks and the FDIC have to step in and bail stuff out. The reality is that modern banks, for a variety of reasons, and one of them is this regulatory framework, they don't fail like they used to. And in this case, the regulators had actually been flagging Silicon Valley Bank's weakness and potential weakness in this whole thing. The problem was the people in charge of Silicon Valley Bank were kind of like the VCs funneling money into all these companies. They just thought the good times would never end.

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It was crazy enough at Silicon Valley Bank for much of 2022, the position of Chief Risk Officer, the person whose job was to make sure the bank didn't take too much risk, was vacant for 8 months. And the crazy part is Mr. Becker, the CEO of Silicon Valley Bank, had been testifying in front of Congress back in 2015 about relaxing the rules that would keep his bank on stabler footing. And it turns out the lobbying by him and other bankers to relax the bill called Dodd-Frank that had restricted the bank from certain requirements, those got relaxed by Congress in 2018. And ironically, if the bank had been doing these stress tests in 2019, 2020, and 2021, it would have flagged exactly what was happening to Silicon Valley Bank, that it was creating a ticking time bomb inside of the well, inside of itself. And for Silicon Valley Bank, the danger was uniquely high. Part of the reason was your typical borrower, over 94% of them for Silicon Valley Bank, was a company with more than $250,000 on deposit. If the bank went belly up, there wouldn't be any insurance from the federal government to bail them out. They'd lose their money above $250K. So there was millions of dollars parked in the bank, totally uninsured. And the funny thing was, these weren't like grandmas or individuals who were disparate, they were all part of the same network in the same locale. These are folks all in Silicon Valley, south of San Francisco, highly networked and highly connected. And like much of Silicon Valley, they were in group chats, WhatsApp, Signal chats. And heck, I remember people talking about this on Twitter, the connection between all these depositors at Silicon Valley Bank. Well, it was tight. As such, the failure of Silicon Valley Bank wouldn't potentially just bring down the money from a bunch of depositors. It would run the risk of potentially stopping one of the greatest growth engines in the United States economy, the tech engine in Silicon Valley. And ironically, during this time without a chief risk officer, Silicon Valley Bank had been actively increasing their exposure to rising interest rates. Normally, banks like that will buy insurance or hedges against the interest rates going up. And in this case, Silicon Valley Bank had been removing those hedges, increasing the risk. In other words, these guys were betting the good times would never end And the music would never stop. And on Wednesday, March 8th, 2023 Eastern Time, Silicon Valley put out a press release. They were doing a fire sale of a number of their bonds. They needed to raise $2.25 billion to shore up their balance sheet, and they needed to do it fast. They were selling $21 billion in bonds at a $1.8 billion loss. The hope was they could sell these bonds at a loss now, reinvest the money in new stuff, and stop the bleeding. But the timing was catastrophic. Rating agency Moody's, who rated public stocks like Silicon Valley Bank, downgraded them. The highly networked community in Silicon Valley centered around all the VCs started to reach out to their individual startups. Founders Fund, one of the famous VCs located in Silicon Valley, went out to all their startups and said, pull your money immediately out of Silicon Valley Bank. At this time this is happening, I was hugely involved in Twitter and I remember the wildfire news of Silicon Valley Bank spreading like crazy. And you know what I did? Having invested in a startup that had money at Silicon Valley Bank, I called the CEO, told them to get their money out. And I wasn't the only one. By Thursday morning, the bank run was underway. The stock that day plunged by 60%. And to go back to the incident at the beginning of our video here, CEO Greg Becker was suddenly out on the phone calling his biggest clients. Urging them to stay calm. By that day, over $40 billion had been requested by depositors. By the next day, it was expected that over $100 billion would have been requested from the bank. The problem was they didn't have it. On Friday morning, trading in Silicon Valley Bank stock was halted, and by Friday afternoon, the regulators had stepped in and seized the bank. 40 years of history gone in just over a day. You had a highly concentrated bank that had most of the money from the tech industry all in one place. And the problem was, by some estimates, 90 to 97% of the total amount of deposits was uninsured, meaning it was above the $250,000 FDC limit provided by the government. Overnight, the tech industry panicked. Companies like Roku— Roku had $487 million on deposit with Silicon Valley Bank. Other startups had hundreds of millions of dollars. Many of them would not be able to make payroll on Monday. 599 venture capitalists got together and requested that the government bail out the bank. Folks were saying that it could bring down an entire segment of the economy. The same VCs, many of whom had been urging their startups to get their money out of Silicon Valley Bank as quickly as possible, was now urging the government to come in and save the bank. In other words, a lot of the same people that had started the bank run were now asking the government to come fix it. It got so bad that D.C. had to get involved. By Sunday night, March 12th, Janet Yellen, Jerome Powell, the very toppest of the top financial kind of regulators— well, basically bureaucrats in Washington— came out and said that all the depositors from Silicon Valley Bank would be protected. Shareholders, meaning people that own stock in Silicon Valley Bank, they would be wiped out. The government would have to step forward with $20 billion. To keep the bank afloat. To be fair to Silicon Valley Bank, they weren't the only one. Two more banks would fail over the coming couple of months. First Republic and Signature Bank. It's interesting. Three of the four largest bank failures in history all happened within this period of time. And Greg Becker, well, CEO of Silicon Valley Bank, who oversaw the whole thing, he had just sold $3.6 million worth of stock a few weeks earlier. Immediately after recording a farewell message to the employees, Thank you. And my heart is with you. But I so appreciate all the things you've done for me and for SVB. Bought a $3 million vacation home in Hawaii and boarded a first-class flight out to his new house. Greg would later testify in front of Congress that what caused the whole thing was that Silicon Valley Bank was fundamentally sound, but social media— and that caused a panic which brought down the bank. When the Federal Reserve went and inspected the bank to understand What had actually happened? They saw all the stuff I talked about here. Unsound business practices, no management of risk, and basically gambling with depositor money. The bank would declare Chapter 11 bankruptcy and its assets would be sold at a discount, basically a fire sale to First Citizens Bank at a big discount off of its $72 billion asset price. At its core, the Silicon Valley Bank story is a great example of the principal-agent problem. And the principal-agent problem is an economic theory that basically says if you're the principal, if you own something, a lot of times the agent who is acting on your behalf, well, sometimes they act in their own interest and not in yours. The classic example is if you own a piece of property and you hire a real estate agent, their motivation is to get a deal done while your motivation is to get the absolute best price. So sometimes that agent will encourage you to sell it for less than you might actually get if you're a bit more patient. And in this case, Greg and his management team, they were incentivized to line their own pockets by pumping the share price and taking much more risk than they probably should have. And they wouldn't have if they'd have been actual owners of the bank. But because they were playing with house money in the casino, well, it was okay to take bigger risk because they were playing with somebody else's chips. And so that's important to remember when you hire somebody to work for you. Sometimes they don't have your best interests at heart, even though you hope they do. And in this case, Greg was a great example of that. All right, that's it for Silicon Valley Bank. If you enjoyed it, Tell me you liked it in the comments below. The nice notes encourage me to make more of these videos and go out for a nice walk on a beautiful day in San Antonio. Catch you soon. Oh, and I realized I totally forgot a very important aspect of the story. So it turns out Silicon Valley Bank was so in bed with so many of these VCs that it would do multiple kind of things that in retrospect look a little sketch. One of those was Silicon Valley Bank would actually invest in the VCs themselves, like give them money from the bank to invest. That was number one. Number 2, they would often co-invest with the VCs, so invest in deals alongside them. Number 3, they would actually turn around and then loan money to those startups that the VCs had invested in. And when they did that, they would ask for a thing called warrants often, which meant that gave them rights to own stock in the company in the future if the thing ever became a hit. In other words, like VCs were playing in the casino. And it turned out that like Silicon Valley Bank was their partner in the whole thing. Tying into this kind of theme of how the bank became so unstable, well, they just were playing too loose and fast, and eventually it caught up to them. All right, that's it for the video. Thanks, and sorry about this. I forgot about— I thought about what I got in the car. See you next time.