The Exit Strategy Podcast

Episode 30 - Silicon Valley Bank (SVB) Collapse

Listen Later

Episode 30, The SVB Collapse is sending shockwaves throughout the market but let's review what really happened.

Act 1 – We developed ANOTHER Technology Bubble,

  • Interest rates cut to zero.
  • The developed world received thousands of dollars in stimulus checks sent to people, and tech stocks rose significantly.
  • In 2020-2021 you had a tremendous amount of cash being dumped into these tech start-ups.
  • This caused SVB deposits to multiply from $62 billion > $198 billion USD in Deposits

    • Act 2 – A tremendous amount of cash was deposited into the SVB balance sheet, and the bank had discretion to re-invest that money.

    • The problem was the SVB was trying to provide loans to their clients in the technology scene, but they all had too much cash already. So, what SVB did was that they took a lot of long-term bonds, which is extremely interest rate sensitive.
    • Now with interest rates rising, you have less demand to invest in start-ups, many of which were unprofitable and many with unrealistic business models. Deposits by this point dropped to $165 billion.

      • Act 3 – March 8th, Moody’s calls SVB and notifies them that they will be downgrading the bank and on March 10ththey downgraded them to a C-rating following the collapse.

      • WHY? Because of all the exposure to all these long-term bonds and notes, and with rising interest rates they were forced to increase the saving rate payout to keep the customers from moving their money to a competitor bank. 
      • The Moody’s call pushed SVB to sell all their $21-billion USD in long-term assets at a $1.8-billion USD loss, and

        • Act 4 – Once the SVB tried to sell $2.25 billion of its stock to investors to make up for the $1.8-billion USD loss and instead of helping it triggered panic, which further dropped deposits by another $42 billion USD to around $ 120 billion USD in deposits. 85% of all deposits were uninsured; so, it means that many of their customers didn’t diversify their banking, and every company should diversify their banking relationships.

        Act 5 – SVB UK Acquired by HSBC, shares in HSBC fell 3.5%, while Commerzbank slid around 12% and Credit Suisse was down 9.4%.

        • Elsewhere Sunday, U.S. regulators shut down New York-based Signature Bank, a big lender in the crypto industry, in a bid to prevent the spreading banking crisis.
        • First Republic Shares Fall 60% Despite Liquidity Reassurance
        • 2-year on:
          1. March 08, 2023 -  5.05%
          2. March 13th, 2023 at 4:30 PM - 4.095%
          3. 0.97% drop, which is the largest drop in such a short period of time
          4. This means that the market expects the Fed to stop raising rates.
            5. ...more
            View all episodesView all episodes
            Download on the App Store
            The Exit Strategy PodcastBy Marcus Magarian