The Implosion of Silicon Valley Bank

from The New York Times I'm Michael. labaro this is the daily. [Music]. today we look at what caused the. collapse of Silicon Valley Bank and why. it required an emergency Federal rescue. plan for the entire industry. my colleague Emily flitter explains. [Music]. [Applause].

[Music]. Tuesday March 14th. [Music]. Emily it has been a truly remarkable. 72 or 96 hours depending on how you. measure it in the world of finance and I. think for those of us who lived through. the 2008 financial crisis which also. unfolded over a weekend everything about.

this. feels like deja vu like here we go again. that's right I was a banking reporter. during the financial crisis in 2008 and. the way I started out in these last 72. hours was trying to find all the ways. that this wasn't going to be like that. that's how scary that was. right well we'll get to that so let's. start at the beginning how we got into. the mess we're in where does that start.

the precipitator of this crisis starts. with a bank in Silicon Valley called. Silicon Valley Bank it's a trendy sort. of sexy name that many people may not. have heard about but it certainly was. one of those banks that you know the CEO. was on CNBC and it had a reputation for. being associated with Innovation and the. future and Tech Bros and things like.

that but the bank's Origins were much. humblr than that. tell me about that it's a Regional Bank. it was started in the early 80s and it. didn't grow very quickly originally but. it had a sort of interesting side. business which is that back when it was. legal to do this it had a venture. capital arm. that means that some of the banks own. money was going toward investing in.

little Tech startups venture capital is. the riskiest kind of investing there is. and a lot of banks are really. conservative and they wouldn't dream of. doing this but. this Bank began to grow in the Venture. Capital world and eventually Greg Becker. the head of the Venture Capital business. took over the bank and he courted The.

Venture capitalists themselves and the. bank ended up just becoming like this. central figure in the world of venture. capital investing and startups in a way. that was so dramatic that there were. little companies that had just started. out on a prayer and a little idea and. their Founders were saying things like. Silicon Valley Bank is so great it's the. only bank that will agree to bank me. [Music].

um. so what ends up happening to this. Regional Bank closely tied to Silicon. Valley and its businesses that has a. real taste for risk. so the Bank wants to grow but there's a. barrier to that or at least something. that they see is a barrier which is that. if you're a bank and you have more than. 50 billion dollars in assets you're. going to be subject to some extra.

regulation. those regulations which are called the. Dodd-Frank Financial reform package put. in place after the 2008 financial crisis. make sure that no institution can bring. down the entire Financial system through. risky Behavior through failing somehow. and causing a systemic panic and there. are different components to it there's. the component that requires the banks. with 50 billion dollars or higher in.

assets to adhere to certain Capital. requirements to submit to stress tests. by the FED where the FED goes in and. applies different kind of disaster. scenarios and tries to figure out. whether their balance sheets are going. to stand up to these different scenarios. and the banks also have to come up with. living wills ways to resolve themselves. if they do fail that are orderly and. don't cause any further damage.

so a bunch of these Bankers including. the CEO of Silicon Valley Bank they get. together and they start lobbying in. Congress to roll back this part of the. regulation they call their senators and. members of Congress and they say hey you. guys should change the Dodd-Frank. regulatory package so that these. regulations that are designed to control.

systemic risk only apply to banks that. are bigger like 250 billion dollars in. assets or bigger. and Greg Becker is among the most. strident CEOs out there trying to get. this stuff moved so that his bank can. grow without these extra regulatory. burdens and what exactly was his. argument for doing away with these. regulations these Banks were saying they. weren't a threat to the system they.

weren't big enough and they weren't as. powerful as the guys who had already. caused a crisis the biggest banks and. does he succeed at convincing them. eventually yes what we're doing today. with respect to Dodd-Frank is truly. important legislation so after Trump. gets elected and Republicans are in. control of both houses of Congress. there's a successful effort in 2018. so. I'll be signing now a very very.

important bill from the standpoint of. people and jobs and loans and getting. out there and building a business to. roll back these regulations in a way. that opens up the field for banks the. size of Silicon Valley Bank to grow and. expand and not be subject to this extra. kind of scrutiny. okay so by 2018 Silicon Valley Bank and. its CEO have helped bring about a change. that ensures that it will fly below.

Regulators radar and their most strict. scrutiny for banks. and how they organize themselves and use. their money. correct Silicon Valley Bank and its. peers they get this regulatory rollback. and then it is absolute boom times. times have almost been too good in our. culture and in Silicon Valley in. particular interest rates are still low. the tech sector is booming money raining.

from on high like Mana from heaven from. the Federal Reserve has fueled a bull. run in technology stocks that's led to. hiring booms across these companies. Monopoly like businesses generating. great cash flows there's all kinds of. money sloshing around for investing in. these little startups because interest. rates are so low and investors are. trying to find any way they can to make. lots of money I want to bring in Greg. Becker he is the CEO of Silicon Valley. Bank Greg generally what is the tech M A.

environment like right now you know I. think it's still a healthy it's a. healthy environment. Silicon Valley Bank goes from having 45. billion dollars in Assets in 2016. to 200 billion by the end of 2020. wow. it's just an incredible expansion and I. believe that will continue if we do see. a dip in 2022 or 2023. um I believe it'll be temporary Silicon.

Valley Banks essentially the the. Investment Bank for the Innovation. economy so they're very well positioned. for what we think are great future. growth companies and they're just taking. on all kinds of new clients they have a. specialty business and financing. wineries so when you walk into their. headquarters in Menlo Park the lobby is. full of bottles of wine from The. Vineyards that they bank it's just like. it's that scene so pretty unabashedly.

they're courting wealthy clients oh yes. they want to be the bank that serves all. of these clients various needs whether. it's you know managing their personal. wealth or managing their business. accounts or even banking the companies. that the clients are investing in I mean. they're trying to be a One-Stop shop to. the point where they discouraged clients. from having money at any other.

institution and that all contributed to. this situation in which the overwhelming. majority of Silicon Valley Bank's. clients had. deposits far in excess of what the. Federal Deposit Insurance Corporation. insures which is 250 000 dollars. right which is this magic number that. you know if you walk into a bank that. says FDIC insured means that no matter.

what happens you're going to get that. money back. that's right. and if you have an account with more. than 250 000 in it if the bank fails you. will only get 250 000 back guaranteed. the rest of that money it's not certain. you're going to get back. but that was a risk that it sounds like. lots and lots of people using Silicon. Valley Bank were willing to take. it was and it's a massive failure in. Risk Management by the bank and by some.

of its customers for instance Roku the. company that makes Smart TVs had like. half a billion dollars just sitting in a. bank account with this Bank uninsured. hmm. so what does Silicon Valley Bank do with. all of this tens of billions of dollars. coming in during this period of. Breakneck growth and quite low. regulation well they put some of it into. what they think are pretty safe.

Investments they're longer dated U.S. government bonds that mature in 20 or 30. years and they do that because you can. earn more money on the longer dated. stuff in an environment in which. interest rates are really low got it and. of course interest rates were very low. over the past few years. yes but at the beginning of 2022 rates. started to go up and the FED made it. really clear that they were going to. have to keep raising interest rates.

again and again and again until they. achieved their goal of subduing. inflation and the more interest rates. went up the more pressure there was on. the whole startup ecosystem in Silicon. Valley things that seemed like a good. idea when interest rates were near zero. all of a sudden didn't seem like they. were gonna fly and startups started to.

collapse tech companies started to lay. off workers everybody was belt. tightening and that meant that the. companies who were Silicon Valley Banks. depositors needed to get some of their. cash out and so Silicon Valley Bank. needed to get its own cash out of those. seemingly safe law long-term treasury. bonds that it had bought and that's when. they made a really bad decision they. decided to sell their entire 21 billion.

dollar portfolio of these long dated. treasury Bonds in one 24-hour period. and they end up taking a two billion. dollar loss on this decision to sell. this portfolio and the world learns that. late on Wednesday last week and. everybody who cares at all about Silicon. Valley Bank is suddenly very spooked and. why is everyone so because a two billion.

dollar loss yes is big but you just told. us that Silicon Valley Bank has 200. billion dollars in assets so why. ultimately is a two billion dollar loss. inspiring. all this fright. don't think about the asset size versus. this two billion dollar loss think about. the portfolio size which was only 21. billion dollars so the message to the. people looking at this bank was this. bank has a portfolio of government bonds. which are very safe which are worth 21.

billion dollars but they need to get rid. of it so fast that they're willing to. take a whole two billion dollar loss on. it that suggests that they really have. run out of options for raising cash got. it in other words what looks like Panic. inside the bank is starting to produce. Panic outside the bank. that's right if this bank is having this. much trouble raising cash the depositors. are thinking well how am I going to get. my cash out if I wait if I have to get.

in a long line of people trying to get. cash. developments now and what is becoming a. bigger Story by the hour Silicon Valley. Bank the company facing what can only be. described as a bank run and by Thursday. there is a run on the bank many of its. clients are pulling their money out of. their accounts the bank is trying to. reassure its customers that their money. is safe 42 billion dollars in deposits. gets withdrawn shares of its holding. company svb Financial are plunging down.

34 percent the stock crashes it's just. absolute panic and as you told us. earlier Emily the vast majority of this. bank's clients have way more than the. 250 000 that the FDIC insures so I have. to imagine that the intensity of this. Panic is the intensity of a bunch of. very rich people worried that a lot of. their money will never be seen again. that's absolutely right and Friday marks. the end of a rough week for the banking. industry and by Friday morning the.

situation is so bad alarm outside. headquarters of silica Valley Bank in. Santa Clara California withdrawals are. happening so quickly that the government. steps in and takes over the bank it's. the largest bank to fail since the 2008. financial crisis right and this is the. moment when we describe Silicon Valley. Bank as failing it is now officially a. failed Bank under government control. that's right and now there's a question.

of who's next is this Panic gonna spread. and what could possibly stop it. we'll be right back. [Music]. so Emily what happens over the weekend.

after Silicon Valley Bank has failed and. the federal government has stepped in. and taken it over. so. right after Silicon Valley Bank fails. there are these two competing. camps of people. each of whom have a totally opposite. expectation for what's going to happen. next in the first camp. there are people who say okay the bank. failed they made some clear huge.

mistakes and the FDIC is gonna do what. they do best and sort it out and figure. out how much money they can give back to. the uninsured depositors and Life Will. Go On Right In other words a kind of. tough medicine approach that says this. Bank screwed up and is going to suffer. the consequences and if you have over. 250 000 in this Bank you're probably. going to get a lot of it back it might. take some time this is the tough. medicine required when people do stupid.

things exactly and banks have failed. throughout the history of the United. States and the FDIC is very practiced in. handling a resolution even if it's a big. one like Silicon Valley Bank so this was. in some ways not Uncharted Territory. on the other side though we were in. Uncharted Territory because this was the. first time in history that a bank had. failed especially of this size whose.

customers were Rich entitled and. extremely online. you already have panicked investors like. Bill Ackman begging the government to. bail out the banks that are not letting. people get their money out of the banks. right now these people had access to. social media accounts with tens or. hundreds of thousands of followers the. human impact of this I think is.

something I cannot underscore enough and. they had a level of sophistication in. their ability to talk about their. companies their ecosystem and what they. were demanding that went well beyond the. customers of a normal bank and they were. all wanting the same thing they were. demanding to get all of their money back. Mark Cuban he's been very active on. Twitter weighing in on these. developments and this Camp has really. powerful allies like Mark Cuban the.

multi-multi-millionaire investor who. owns the Dallas Mavericks he wrote The. Tragedy of SV be is that it's not the. wealthy taking the hit it's the. thousands of companies who borrowed from. svb and were required to keep their cash. in svb or former treasury secretary. Larry Summers or the hedge fund manager. Bill Ackman those entrepreneurs and. their employees and vendors are feeling. the pain and they are who the FED should.

protect and they're all saying basically. that if these Silicon Valley customers. don't get made whole everything is going. to descend into chaos. the financial system is going to stop. functioning regular people are going to. lose trust in Banks and pull their money. out other banks are going to fail I mean. they are painting a really Grim picture. okay so this is the second camp and they.

do not want this bank failure to proceed. like a traditional bank failure. basically they are predicting that if. Silicon Valley Bank depositors are not. given access to all their money even. beyond the FDIC Insurance of 250 000. that there could be runs on many banks. across the country that's right they're. saying this problem is not contained in. Silicon Valley Bank it's not just one. bank that made a series of bad decisions.

it's going to be everywhere unless the. government does something very drastic. right so I think Emily that that brings. us to Sunday this Moment of Truth when. we learn whether the federal government. is going to side with the first camp. that says now that we've taken over the. bank that's all we have to do and. depositors who don't have insurance for. a lot of their money are going to suffer. or whether the government is going to. decide with the second camp and. basically come up with a special rescue.

operation for these uninsured depositors. so describe what happens well so by the. time Sunday rolls around there is that. question what is the government going to. do just let the uninsured depositors. twist in the wind in this one bank or. bail them out but that's not all the. question also is how is the government. going to respond to the escalating Panic. that has been generated and stoked by.

these guys on social media and the. government basically decides to throw a. lot of the tools that they have at this. problem agreeing with these Tech Bros. that this is a big deal and it could. spread and cause a wider panic in the. financial system if they don't take. drastic action interesting and what is. that action the action they take is this. first of all and this is in a sense the.

least surprising thing if you agree that. this is a spreading Financial Panic is. that they do make silicon Valley's. depositors whole even those who didn't. have insurance on their deposits and. when you say make them whole meaning no. matter how much money you had and in a. bank account at Silicon Valley Bank. which failed you will get all of your. money back in other words they make an. exception to the normal FDIC cap of 250. 000 that's right it doesn't matter you.

could have two million you could have 20. million you could have 500 million. you're getting your money back from this. Bank however much you had in deposits. there. so that's not all the government takes. over another bank. Signature Bank is a regional lender. based in New York its name has been in. the mix of these Regional banks that are. being targeted by investors their stock. prices are sinking and there's questions.

about whether depositors trust them and. the government said in addition to. making Silicon Valley Bank customers. whole we're also going to make Signature. Bank customers whole got it so at this. point the government Now controls two. Banks and it's made exceptions to its. normal FDIC Insurance caps to both of. them that's right and finally. the government announces that Banks now. have two ways to get almost instant cash. from the FED at almost no borrowing cost.

and the message is this Banks if you. need cash if your depositors want their. money come to us we'll give you the cash. it's a very safe lending program that we. have just don't do what Silicon Valley. Bank did and sell your assets at a fire. sale and cause a panic got it and Emily. who is paying for these three rather. extraordinary actions that the.

government has just taken so. this is what I think the Biden. Administration would say is the beauty. of this program. taxpayers are not paying for any of this. making depositors whole actually. requires the banks themselves as a group. to shoulder the cost of and the way they. do that is kind of like a condo board or. a co-op board assessing all of the.

residents of a building fees you pay. into a central pot and that pot of money. goes toward fixing things if your boiler. breaks if you have to renovate a common. area the same thing applies to Deposit. Insurance Banks all pay into a central. fund and then when one of them fails. that's the money that's used to make. depositors whole and then later they're. actually going to have to recoup that. and replenish the fund through special.

assessments of banks just as if when you. have a huge project in your condo or. your Co-op you end up having to pay a. special assessment at some point in the. future to make that up got it so unlike. in 2008 when the government ended up. bailing out big Banks this is not a. taxpayer bailout of banks this is so far. a bank bailout of banks absolutely. that's what it is and so how do federal. Regulators how does the Biden. Administration end up justifying such.

unusual and aggressive actions really. across this entire industry what the. government did was they invoked the. possibility that these two Banks posed. systemic risk to the system that is the. concept whereby if one thing goes bad in. the financial system everything goes bad. and it destabilizes everything and. regular people can't do regular. Financial business so the FDIC actually.

said on Sunday night that they were. using a systemic risk exception to the. 250 000 limit on Deposit Insurance to. May take the depositors at these two. institutions whole. so this feels like a really important. question given that the government is. now saying that what happened here. amounts to systemic risk. I'm now wondering did our government. kind of get bullied.

into reaching that conclusion by that. second Camp you described by these. wealthy depositors and their allies in. Tech. who. have a lot of stake here. and seem to deliberately fan the fear of. a systemic risk that would require. the kind of rescue the government just. release in other words. the failure of Silicon Valley Bank might. not have been a systemic risk to the.

banking sector but a lot of people. involved in this turned it into a. systemic risk over the past few days. I think that is a really plausible. explanation. when you look at the industry that was. stamping its feet and trying to get this. exception and prophecying doom and gloom. if they didn't get it these are the. people whose job it is to take the. biggest risk to pick companies that are.

almost certain to fail that's what the. startup world is it's investing in. things that you know you could lose all. of your money in this same group of. people turned around and said if we. aren't made whole the entire Financial. system could collapse and the economy. could be thrown into a recession the. problem is that the inherent. understanding of how the banking system. works is now going to include the. anticipation that if any Bank fails even.

if they're kind of small or just not. enormous that all of the depositors are. going to get bailed out and that's going. to change a lot of decisions that people. who are Bank customer Mars make about. the risk that they want to take right. among other things it would seem to. increase everyone's appetite for risk. because the risks that were taken by. Silicon Valley Bank were never punished. here that's right and even if it doesn't. increase the risk appetite of a person.

who says I want to go out and do all. kinds of outrageous things with my money. it just might make more people care less. so we're talking to you on Monday. afternoon this plan has been out in the. world for about half a day the market. here in New York has been open for. around six or seven hours where do. things now stand with this plan has it. done its stated goal of calming.

everything down and stopping these runs. on banks that everybody was so afraid of. I can't say yet for sure that it stopped. the Run by depositors or that there even. was a run on another bank to the extent. that there was on Silicon Valley Bank. what I can say is that even though the. stocks of the regional banks have. continued to lose value they're not. hurtling down towards zero the way they. were on Friday Friday was so bad in the.

stock market that several of these Banks. actually had trading in their shares. halted and we haven't seen that today so. I think we're in a place where the. regulators and investors and depositors. are gonna watch and see what happens and. see if maybe we've gotten to the crest. of this Emily I'm struck by the fact. that just five years ago as you. recounted earlier in this conversation. Silicon Valley Bank and its CEO LED this. charge to roll back regulations that.

might have required much greater. government scrutiny of its finances and. its risk taking. and perhaps that would have prevented. the bank from taking the kind of risk. that it did and that led us to this. place are officials now looking back at. that 2018 decision with any regret I. think that there is definitely a growing. understanding that's being publicly. voiced out there that the 2018.

regulatory rollback may have created a. problem that is beyond One Bank it may. have given rise to an entire class of. banks that are too big to ignore and yet. are functioning outside of an oversight. system that was designed after the 2008. financial crisis to prevent another. industry-wide panic from bringing down. the economy and the financial system.

it's an interesting phrase you use too. big to ignore because the whole idea was. that there were banks that were too big. to fail and they were regulated one way. and there were banks that were too small. to worry about and they were regulated. differently and from what you're saying. and what sounds like these officials are. now saying there might be this new class. of banks right that are right that are. big enough that we have to worry about. them. [Music]. after the financial crisis there was. this idea that some banks were too big.

to fail like JP Morgan City but those. were the exception and the rest of the. banks actually still had room to fail. but what these last couple of days have. shown us is that maybe there is less of. a difference between the biggest banks. and some of these less big Banks we're. now in a world where whether it's caused. by irrational fear or something else the.

failure of just one of these smaller. Banks. can threaten the entire system and. that's shocking and potentially very. scary. [Music]. thank you very much we appreciate it. thank you. [Music]. today thanks to the quick action of my. Administration over the past few days. Americans can have confidence that the. banking system is safe your deposits.

will be there when you need them. on Monday President Biden sought to. assure Americans that the banking sector. remained healthy but investors seemed. unconvinced the stock price of many. Regional Banks plunge with several. losing about half their value including. Western Alliance Bank in Arizona and. First Republic Bank in New York. we'll be right back. [Music].

here's what else you need to know day on. Monday President Biden announced a. landmark agreement with the leaders of. Britain and Australia to develop fleets. of nuclear-powered attack submarines. that the three nations would ultimately. use to counter the growing military. might of China. the deal is designed to prepare for a.

potential armed crisis over Taiwan the. Democratic island with de facto. Independence that Chinese leaders claim. as their own. as part of the deal the United States is. sharing the nuclear technology behind. its submarines for the first time in 65. years. [Music]. today's episode was produced by Claire. tennisketter Carlos Prieto and Austin.

chaturvedi it was edited by Mark George. and Lisa Chao contains original music by. Marion Lozano Alicia but YouTube and Dan. Powell and was engineered by Chris Wood. our theme music is by Jim runberg and. Ben lansberg of Wonderland. [Music]. thank you. [Music]. that's it for the daily I'm Michael.

Barbara see you tomorrow. [Music].