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Op-Ed: Silicon Valley Bank – Did the market get it right?

The trouble with financial numbers is that someone has to believe them.

The Silicon Valley Bank (SVB) logo is seen through a rain covered window in front of the SVB headquarters on March 10, 2023 in Santa Clara, California
The Silicon Valley Bank (SVB) logo is seen through a rain covered window in front of the SVB headquarters on March 10, 2023 in Santa Clara, California - Copyright AFP/File OLI SCARFF
The Silicon Valley Bank (SVB) logo is seen through a rain covered window in front of the SVB headquarters on March 10, 2023 in Santa Clara, California - Copyright AFP/File OLI SCARFF

The collapse of the Silicon Valley Bank is a strange-looking thing. This was effectively a niche bank, lending to Silicon Valley startups. These were apparently high-capital loans in an extremely capital-sensitive market.

… This is where things start to get very weird.

This is basically a professionals-only investment market in many ways. Investors in startups support the companies in everything, including borrowing in many cases. Investors in Silicon Valley also tend to have long pedigrees, and they’re not rich by accident.

There was a run on the bank, with depositors taking out a lot of money, running it short of cash. The bank’s stock was suspended do to extreme volatility.

These investors don’t like volatility of any kind. They’re in a picky market. Opportunities come and go very fast. Capital is tied in to success, not failing lenders. Nor do the borrowers like it; their financial plans are basically stymied. They are also well aware how many digits are involved in their borrowing, and they’re typically careful about borrowing, even at low rates.

Volatility is in nobody’s interest. Everyone has something to lose, FDIC deposit insurance notwithstanding. It’s an expensive exercise. So when both investors and borrowers get a spanner in their faces, there has to be a reason for that. That leads to a few questions:

  1. On what basis was the run on the bank? What information was going around? A lot of the publicly available market information is questionable at best.
  2. If interest rates were the issue, their effect at any level could be calculated. Reason for a move, maybe, but not necessarily panic. All that seems to be said in some quarters is that the value of the bank’s bonds was reduced by rate rises. There’s a lot more to it than that.
  3. Why did the stock get volatile to the point of being suspended? Auto-trading can cause sudden massive fluctuations, but were these trades set up to behave like that?
  4. It’s not that easy, or smart, to run a bank out of cash. Why the gleeful enthusiasm for doing that?

The quality of current information available about the bank is, to put it mildly more than questionable. Some of it is simply off-target. Silicon Valley Bank has been in business since 1983. It’s been non-news until now.  The bank’s published revenue seems solid for recent years.

There’s not really much of a prima facie problem with the bank. The main issue for the bank is said to be “solvency”. The bank planned to raise more capital by issuing a new class of stock, and that made it worse.  Meanwhile, try finding any mention of liabilities in this menagerie of search results.

Solution – A rather large mess in the background

The elusive liabilities problem eventually translates into its holding company, SVB Financial Group, which has a net debt of nearly $200 billion. You can’t blame anyone for distrusting that environment with rates rising.

Note: I found this information just while searching SVB liabilities. If this is how you guys do “financial information” in such a high-capital market, shooting is way too good for you.

The SVB Financial Group assets are about 5% higher than the debt levels. The problem with assets is that you have to realize them at those values. That may not be easy in the current market.

Even from this extremely superficial overview, this group has a few extremely large not-very-well-defined gorillas on the books. The holding company is carrying that debt, and the bank is raising capital for “solvency” reasons?  

The market may have got it right. The trouble with financial numbers is that someone has to believe them.

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Disclaimer
The opinions expressed in this Op-Ed are those of the author. They do not purport to reflect the opinions or views of the Digital Journal or its members.

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Editor-at-Large based in Sydney, Australia.

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