Silicon Valley Bank collapsed Friday into receivership of the Federal Deposit Insurance Corp (FDIC) after it failed to raise more than $2 billion in capital to cover losses on a massive bond sale, spooking depositors and investors who made a run on the bank, and talks failed to sell itself.
SVB stocks went over a cliff Thursday and shares of SVB Financial Group were halted Friday, according to a Nasdaq web page that tracks stock halts, after a sharp selloff that came as the bank tried to raise fresh capital. The stock fell 60 percent Thursday in the bank’s biggest one-day wipeout in history, and had fallen by 68 percent to around $34 Friday in premarket trading.
The bank failure comes two days after Silvergate, a Federal Reserve member bank and a one-time major player in crypto banking, announced that it was shutting down and liquidating, confirming fears that it was headed for bankruptcy after delaying its annual report.
Other bank stocks sank in a ripple effect. First Republic Bank (FRC) stock fell 16 percent after resuming trading following a halt; JPMorgan Chase JPM (JPM) rose 1 percent after sliding 5.4 percent on Thursday; U.S. Bancorp (USB) declined 2.9 percent after tumbling more than 7 percent on Thursday; Charles Schwab (SCHW) fell 9.2 percent after ending Thursday down 12.8 percent; and Signature Bank (SBNY) shares sank 18.4 percent.
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SVB partnered with nearly half of all venture-backed U.S. tech and healthcare companies. Selling part of its US Treasuries portfolio at a loss to cover a run on the bank led to a sharp selloff in other U.S. bank stocks and global markets sank.
“Lots of banks hold large portfolios of bonds and rising interest rates make these less valuable — the SVB situation is a reminder that many institutions are sitting on large unrealized losses on their fixed-income holdings,” said Russ Mould, investment director at UK broker AJ Bell.
Some market observers and traders have compared the Silicon Valley Bank collapse to that of Lehman Brothers, including an investor writing for Seeking Alpha who identified as CFH (CashFlow Hunter) – a cash flow-focused investor.
“I witnessed up close the failure of a number of very large financial institutions such as Bear Stearns, Lehman Brothers, Washington Mutual, Countrywide Financial, AIG, and Fannie Mae and Freddie Mac,” CFH wrote. “I have to say that none of those companies officially imploded as quickly as SIVB blew up today. Today was epic and I don’t really see a way out for the bank.”
Mithilesh Jha wrote in an article for Mumbai-Based ET Now Digital. “Many experts have compared the crisis to that of Lehman Brothers and Enron Corporation, and they are of the view that this could create a systemic risk to the entire system … the crisis has taken place at a time when interest rates are high, and the US is on the brink of a recession.”
Sources told CNBC’s David Faber that SVB Financial was in talks to sell itself after attempts by the bank to raise capital failed, and the bank hired advisors to explore a potential sale. However, the withdrawal of deposits outpaced the sale process, making it very difficult to realistically assess the bank’s value by potential buyers, the sources told Faber.
Some investors profited by Thursday’s SVB price plunge. About 5.4 percent of SVB’s available shares were sold short, according to FactSet data from February, Wall Street Journal reported. Short sellers bet that a stock’s value will go down, borrowing and selling shares of companies they believe are overvalued, then buying the shares back later at a lower price.
SVB said late Wednesday said it wanted to raise $2.25 billion in capital by selling a mix of common and preferred stock after facing a $1.8 billion after-tax loss on a giant batch of bonds it sold. The rush to raise cash spooked investors and depositors, who withdraw funds from the bank. Stock collapsed by 60 percent on Thursday and another 20 percent in the after-hours session.
Silicon Valley Bank catered to tech firms, venture-capital and private-equity companies. The bank grew fast along with those industries. Total deposits rose 86 percent in 2021 to $189 billion and peaked at $198 billion a quarter later.
The Moguldom Nation CEO Jamarlin Martin warned about this bubble bank in a 2017 opinion piece.
At the time, there was close to $1 trillion worth of subprime paper valuations in U.S. private tech stocks. “This is not going to end well,” Martin wrote. “Almost half the unicorns have fake and misleading valuations. Some companies valued at more than $1 billion have made such generous promises to their preferred shareholders that their common shares are nearly worthless.”
Martin predicted in 2017 that if there was a severe crash in private tech that fed on itself, one stock stood out “that you probably want to consider for short exposure or a hedge” — Silicon Valley Bank.
The hometown bank of private tech, it’s the “banker of choice in Silicon Valley and as frothy unicorn valuations have risen, so has its stock.”