The Next Chapter, page-4238

As always, a little bit of knowledge is a dangerous thing sneef. People shorted Silicon Valley Bank (SVB) because they believed it would fail, and it did. That is what shorters do. You can argue they brought on its failure, but there were structaral faults and it could never have survived without changing its business model, which would have been impossible. Shorting makes a valuable contribution to markets and although it has occasionally been rightly temporarily banned, it exposes faults and shareholders can look to the research from shorters to save their own skins in many cases, if they are smart enough.

Splitit has never been shorted, and there is a host of reasons why.

Why did it collapse?

The collapse happened for multiple reasons, including a lack of diversification and a classic bank run, where many customers withdrew their deposits simultaneously due to fears of the bank's solvency. Many of SVB's depositors were startup companies. They deposited large amounts of cash from investors because tech was in high demand during the pandemic, said Jay Jung, founder and managing partner of Embarc Advisors.

Lack of diversification

Silicon Valley Bank invested a large amount of bank deposits in long-term U.S. treasuries and agency mortgage-backed securities. However, bonds and treasury values fall when interest rates increase.

When the Federal Reserve hiked interest rates in 2022 to combat inflation, SVB's bond portfolio started to drop. SVB would have recovered its capital if they held those bonds until their maturity date.

Silicon Valley Bank used to lend out money in short durations. However, in 2021, they shifted to long-term securities such as treasuries for more yield, and they did not protect their liabilities with short-term investments for quick liquidations. They were insolvent for months because they could not liquidate their assets without a large loss.

When economic factors hit the tech sector, many bank customers withdrew money as venture capital started drying up. SVB didn't have the cash on hand to liquidate these deposits because they were tied up in long-term investments. They started selling their bonds at a significant loss, which caused distress to customers and investors.

Within 48 hours after disclosing the sale of assets, the bank collapsed.

Bank run

When SVB announced their $1.75 billion capital raising on March 8, people became alarmed the bank was short on capital. Word spread quickly on social media accounts such as Twitter and WhatsApp inducing panic that the bank didn’t have enough funds. Customers started to withdraw money in waves. SVB's stock plummeted by 60% on March 9 after its capital raising announcement. Some people are saying the bank run was Twitter-fueled.

California regulators shut the bank down on March 10 and placed SVB under the FDIC.

Unlike personal banking, SVB's clients had much larger accounts. It didn't take long for money to diminish during the bank run, with the escalating pace of withdrawals causing a snowball effect. Most customers had deposits more than the $250,000 FDIC limit.

Many startups left money in their SVB primary account instead of using other accounts -- such as a money market -- to pay expenditures. This means most of their working capital was mainly in their SVB account, and they needed access to their deposits for payroll and bills.