by Michael Snyder, The Economic Collapse Blog:
The wait for the next “Lehman Brothers moment” is over. On Friday, we witnessed the second biggest bank failure in U.S. history. The stunning collapse of Silicon Valley Bank is shaking the financial world to the core. As of the end of last year, the bank had 175 billion dollars in deposits, and approximately 151 billion dollars of those deposits were uninsured. In other words, a lot of wealthy individuals and large companies are in danger of being wiped out. In particular, this is being described as an “extinction level event” for tech startups, because thousands of them did their banking with SVB. I cannot even begin to describe how cataclysmic this is going to be for the tech industry as a whole.
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There is so much to cover, and so let me try to take this one step at a time.
Rumors of trouble at SVB had sparked a massive bank run in recent days, and regulators moved quickly on Friday to permanently shut the bank down…
Financial regulators have closed Silicon Valley Bank and taken control of its deposits, the Federal Deposit Insurance Corp. announced Friday, in what is the largest U.S. bank failure since the global financial crisis more than a decade ago.
The collapse of SVB, a key player in the tech and venture capital community, leaves companies and wealthy individuals largely unsure of what will happen to their money.
We haven’t seen anything like this in a very long time.
In fact, it is being reported that this is the second biggest bank failure in all of U.S. history…
The closure marks the biggest bank failure since the 2008 financial crisis and the second-largest in U.S. history after Washington Mutual collapsed during that industry-wide meltdown, according to FDIC data.
As of the end of December, the Santa Clara, California-based bank — the 16th largest bank in the country — had $209 billion in assets with more than $175 billion in deposits. As with other FDIC-member banks, SVB deposits are insured up to $250,000 per depositor.
The good news is that anyone that had less than $250,000 in the bank will be covered by FDIC insurance…
The FDIC’s standard insurance covers up to $250,000 per depositor, per bank, for each account ownership category. The FDIC said uninsured depositors will get receivership certificates for their balances. The regulator said it will pay uninsured depositors an advanced dividend within the next week, with potential additional dividend payments as the regulator sells SVB’s assets.
Whether depositors with more than $250,000 ultimately get all their money back will be determined by the amount of money the regulator gets as it sells Silicon Valley assets or if another bank takes ownership of the remaining assets. There were concerns in the tech community that until that process unfolds, some companies may have issues making payroll.
Unfortunately, as I noted above, the vast majority of the deposits with SVB exceeded the $250,000 threshold and were thus uninsured…
As we noted before, while the FDIC noted that SVIB had $175BN in deposits as of Dec 31, note that some $151.5BN of these are uninsured, which means they get exactly zero although a sizable number of them likely pulled their deposits in the past few days.
As SVB assets are liquidated, hopefully those that had uninsured deposits at SVB will eventually see some of their money.
But for now, many of them are facing a complete and total nightmare.
For example, one tech CEO named Ashley Turner is freaking out because she had “at least $10m deposited with SVB”…
Ashley Tyrner, CEO of Boston wellness firm FarmboxRx, said she had at least $10m deposited with SVB and has been frantically calling her banker. She said it had been ‘the worst 18 hours of my life.’
Can you imagine how she must be feeling at this moment?
Sadly, she is far from alone.
The CEO of YCombinator, Garry Tan, says that what we are looking at is an “extinction level event” for tech startups…
There are thousands of US startups that banked at SVB, often as their *sole bank*. $250K per account is not going to last long.
The #1 pressing issue for these startups is *payroll* – you can’t have people work if you can’t pay them.
This means mass furlough.
It might mean thousands of startups die before the FDIC gets through its receivership process and releases the funds.
From what I hear, there are venture debt options coming from providers like Brex, but we’re going to need *a lot* of options in order to avoid a mass shutdown of all American startups in the next few weeks.
This is an *extinction level event* for startups and will set startups and innovation back by 10 years or more.
I wish that I could tell you that he is wrong.
But I cannot.
When news of what was being done to SVB hit Wall Street, bank stocks started falling precipitously.
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