One of Silicon Valley’s top banks goes bust; property to be confiscated

new York • Regulators on Friday rushed to seize the assets of one of Silicon Valley’s top banks in the largest meltdown by a US financial institution since the height of the financial crisis nearly 15 years ago.

Silicon Valley Bank, the country’s 16th largest bank, failed after depositors rushed to withdraw money this week amid concerns for the bank’s health. It was the second largest bank failure in US history after the collapse of Washington Mutual in 2008.

The bank primarily served tech workers and venture capital-backed companies, including some of the best-known brands in the industry.

“This is an extinction-level event for startups,” said Garry Tan, CEO of Y Combinator, a startup incubator that launched Airbnb, DoorDash and Dropbox and referred hundreds of entrepreneurs to the bank.

“I’ve heard from literally hundreds of our founders asking for help on how to get through this. They ask, ‘Do I have to furlough my workers?’”

There seemed little chance of chaos spreading through the broader banking sector as it did in the months leading up to the Great Recession. The largest banks — those most likely to cause an economic collapse — have healthy balance sheets and plenty of capital.

Almost half of the U.S. technology and healthcare companies that went public last year after receiving early funding from venture capital firms were clients of Silicon Valley Bank, according to the bank’s website.

The bank also boasted of its ties to leading technology companies such as Shopify, ZipRecruiter and one of the leading venture capital firms, Andreesson Horowitz.

Tan estimates that nearly a third of Y Combinator’s startups won’t be able to make their paychecks at some point in the next month if they can’t access their money.

Internet TV provider Roku was among the victims of the bank collapse. A regulatory filing on Friday said about 26% of its cash — $487 million — was on deposit with Silicon Valley Bank.

Roku said its deposits with SVB are mostly uninsured and it doesn’t know “to what extent” it would be able to recover them.

As part of the seizure, California banking regulators and the FDIC transferred the bank’s assets to a newly created entity — the Deposit Insurance Bank of Santa Clara. From Monday, the new bank will start paying out insured deposits. Then the FDIC and California regulators plan to sell the rest of the assets to heal other depositors.

The banking sector was in turmoil all week, with stocks falling in double digits. Then news of Silicon Valley Bank’s plight pushed shares of almost every financial institution even lower on Friday.

The failure came with incredible speed. Some industry analysts suggested on Friday that the bank is still a good company and a smart investment. Meanwhile, Silicon Valley Bank executives tried to raise capital and find additional investors. However, trading in the bank’s shares was halted prior to the stock market’s opening bell due to extreme volatility.

Just before noon, the FDIC set about closing the bank. Notably, the agency didn’t wait until close of business, which is the typical approach. The FDIC couldn’t immediately find a buyer for the bank’s assets, signaling how quickly depositors were being paid out.

The White House said Treasury Secretary Janet Yellen was “watching closely”. The government wanted to reassure the public that the banking system is much healthier than it was during the Great Recession.

“Our banking system is in a fundamentally different place than it was a decade ago,” said Cecilia Rouse, chair of the White House Advisory Council. “The reforms that were implemented back then really provide the kind of resilience that we want.”

In 2007, the worst financial crisis since the Great Depression swept across the world after mortgage-backed securities tied to ill-advised home loans plummeted in value. The panic on Wall Street led to the demise of Lehman Brothers, a company founded in 1847. With major banks highly exposed to each other, the crisis led to a cascading collapse of the global financial system, leaving millions of people out of work.

At the time of its collapse, Silicon Valley Bank, based in Santa Clara, California, had total assets of $209 billion, the FDIC said. It was unclear how many of his deposits were above the $250,000 insurance limit, but previous regulatory reports showed many accounts exceeded that amount.

The bank on Thursday announced plans to raise up to $1.75 billion to bolster its capital position. That sent investors scurrying, and shares plunged 60%. They fell even lower on the Friday before the Nasdaq opened, where the bank’s shares are traded.

As the name suggests, Silicon Valley Bank was a major financial conduit between the tech sector, startups, and tech workers. It was considered to make good business sense to establish a relationship with the bank if a startup founder wanted to find new investors or go public.

Founded during a poker game in 1983 by co-founders Bill Biggerstaff and Robert Medearis, the bank used its Silicon Valley roots to become a financial cornerstone in the tech industry.

Bill Tyler, the CEO of TWG Supply in Grapevine, Texas, said he first realized something was wrong when his employees texted him at 6:30 a.m. Friday to complain that they were not didn’t get their paychecks.

TWG, which has just 18 employees, had already wired the money for the checks to a payroll service provider using Silicon Valley Bank. Tyler considered how to pay his workers.

“We’re waiting for about $27,000,” he said. “It’s not a timely payment. It’s an uncomfortable position. I don’t want to ask employees to say, ‘Hey, can you wait until the middle of next week to get paid?’”

Silicon Valley Bank’s ties to the technology sector contributed to its problems. Tech stocks have been hit hard over the past 18 months after a surge in growth during the pandemic, and layoffs have spread across the industry. Venture capital funding is also declining.

At the same time, the bank was hit hard by the Federal Reserve’s fight against inflation and an aggressive series of rate hikes to cool the economy.

When the Fed raises interest rates, the value of generally stable bonds begins to fall. That’s not usually a problem, but when depositors get anxious and start withdrawing their money, banks sometimes have to sell those bonds before they mature to cover the exodus.

That’s exactly what happened to Silicon Valley Bank, which had to sell $21 billion in highly liquid assets to cover the sudden withdrawals. A loss of $1.8 billion was recorded on that sale.

FarmboxRx CEO Ashley Tyrner said she spoke to several friends whose businesses are backed by venture capital. She described her as “absurd” at the bank’s failure. Tyrner’s chief operating officer attempted to withdraw her company’s funds Thursday, but didn’t do so in a timely manner.

“A friend said he couldn’t do payroll today and cried when he had to notify 200 employees about this issue,” Tyrner said.