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16TH March 2023

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SVB:”Be the first, be smarter, or cheat”.


When Movies Portend Future Events

Be the first, be smarter, or cheat”… Peter Thiel and consorts perfectly applied John Tuld’s (Jeremy Irons in the 2011 movie Margin Call) mantra as SVB went down. Echowood’s Reelay here is perfect.

Peter Thiel’s Founders Fund had no cash left in Silicon Valley Bank as it began to unravel, Bloomberg reported, closing its exposure to the failing bank after running into problems using SVB’s services. The venture capital group had been engaging in a “capital call” — where it asked investment partners to send funds to invest in a company — by transferring funds to its Silicon Valley Bank account. The funds didn’t immediately go through as expected.

Ooops. Why?

This phrase From Margin Call is popular on Wall Street and often used to describe the three possible ways to succeed in a competitive situation:

  1. Be the first: This means being the first to come up with a new idea or innovation, or the first to act on an opportunity. This requires creativity, intuition, and a willingness to take risks.
  2. Be smarter: This means being better prepared, more knowledgeable, or more skilled than your competitors. This requires hard work, dedication, and a commitment to continuous learning and improvement.
  3. Cheat: This means breaking the rules or using unethical or illegal means to gain an advantage over your competitors. This is not a recommended approach. In fact it is frowned upon.

SVB Full sequence of events;

    Fed Raises Rates

    The Federal Reserve has been raising interest rates from their record-low levels since last year in its bid to fight inflation. Investors have less appetite for risk when the money available to them becomes expensive due to the higher rates. This weighed on technology startups – the primary clients of Silicon Valley Bank – because it made their investors more risk-averse.

    SVB Clients in Cash Crunch

    As higher interest rates caused the market for initial public offerings to shut down for many startups and made private fundraising more costly, some Silicon Valley Bank clients started pulling money out to meet their liquidity needs. This culminated in Silicon Valley Bank looking for ways this week to meet its customers’ withdrawals.

    SVB Dumps Bond Portfolio

    To fund the redemptions, Silicon Valley Bank sold on Wednesday a $21 billion bond portfolio consisting mostly of U.S. Treasuries. The portfolio was yielding it an average 1.79%, far below the current 10-year Treasury yield of around 3.9%. This forced SVB to recognize a $1.8 billion loss, which it needed to fill through a capital raise

    SVB Announces Stock Sale before its Done

    SVB announced on Thursday it would sell $2.25 billion in common equity and preferred convertible stock to fill its funding hole. Its shares ended trading on the day down 60%, as investors fretted that the deposit withdrawals may push it to raise even more capital.

    Stock Sale Collapses

    Some SVB clients pulled their money from the bank on the advice of venture capital firms such as Peter Thiel’s Future Fund, Reuters reported. This spooked investors such as General Atlantic that SVB had lined up for the stock sale, and the capital raising effort collapsed late on Thursday.

    SVB Receivership

    SVB scrambled on Friday to find alternative funding, including through a sale of the company. Later in the day, however, the Federal Deposit Insurance Corporation (FDIC) then announced that SVB was shut down and placed under its receivership. The FDIC added that it would seek to sell SVB’s assets and that future dividend payments may be made to uninsured depositors.

    *Credit Bloomberg

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