Silicon Valley Bank meltdown sparks contagion fears: ‘We found our Enron’

March 10, 2023 8:49am

Fears of a broad financial contagion spread on Friday after tech lender Silicon Valley Bank set off alarm bells over liquidity concerns — sparking share losses across the banking sector worth some $52 billion on Thursday.

On Friday, the Federal Deposit Insurance Corp. said regulators have shut the bank down to protect insured deposits.

That was after the bank’s parent SVB Financial had reportedly tapped outside advisers to facilitate a potential sale. "Large financial institutions" were exploring a potential acquisition of SVB Financial, CNBC reported, citing sources familiar with the matter.

Earlier in the morning, building managers at Silicon Valley Bank’s Manhattan branch reportedly called the police after a group of tech founders showed up and attempted to pull out their cash.

SVB shares — which plunged 60% yesterday after the company’s CEO begged investors to "stay calm" and not "panic" over liquidity concerns — remained halted as of midday Friday after plunging 47% in premarket trading early Friday.

The financial sector was rattled on Thursday by the meltdown of Silicon Valley Bank.

Peter Thiel’s venture capital firm Founders Firm advised clients to withdraw their deposits from Silicon Valley Bank — despite the fact the lender has been a mainstay for tech startups for decades, according to Bloomberg News.

Bill Ackman, the billionaire hedge fund manager, called on the US government to step in and bail out Silicon Valley Bank.

Michael Burry, the eccentric investor featured in the 2015 film "The Big Short," warned: "It is possible today we found our Enron."

Shares of Silicon Valley Bank’s parent company, SVB Financial Group, nosedived by 60% on Thursday evening, wiping out more than $80 billion from its market capitalization.

The company’s stock was down another 45% in pre-market trading on Friday — dragging down the share price of several other publicly traded banking giants.

Shares of Silicon Valley Bank’s parent company, SVB Financial Group, nosedived by 60% on Thursday evening
Bloomberg via Getty Images

Greg Becker, the CEO of Silicon Valley Bank, tried to calm tech investors and startups during a Thursday Zoom call.

"My ask is to stay calm because that’s what is important," Becker told listeners on the call. "We have been long-term supporters of you — the last thing we need you to do is panic."

Shares of Signature Bank dropped by some 4% in pre-market trading while First Republic Bank, whose stock fell 17% on Thursday, was down another 3% before the opening bell on Friday.

Shares of JPMorgan Chase, which fell 5% on Thursday, dropped another 1% in pre-market trading on Friday.

Peter Thiel’s venture capital firm Founders Fund has advised its clients to withdraw deposits from Silicon Valley Bank.
Bloomberg via Getty Images

On Wednesday, Silicon Valley Bank said it would raise $2.25 billion following a $1.8 billion after-tax loss in various bets on securities.

Goldman Sachs, the Wall Street investment giant, was involved in efforts to save the bank, according to The Wall Street Journal.

Goldman bankers arranged for the company to sell shares at $95 per share on Thursday afternoon, the Journal reported. But the deal fell apart as the stock price kept dropping and more customers withdrew their deposits.

"We knew that would create a lot of noise, which it has," Becker conceded. "But what we wanted to do was reposition … a low-yield asset to a high-yield asset."

SVB, which does business as Silicon Valley Bank, launched a $1.75 billion share sale on Wednesday to shore up its balance sheet.

It said in an investor prospectus it needed the proceeds to plug a $1.8 billion hole caused by the sale of a $21 billion loss-making bond portfolio consisting mostly of US Treasuries.

The portfolio was yielding it an average 1.79% return, far below the current 10-year Treasury yield of around 3.9%.

Michael Burry, the hedge fund investor featured in the 2015 movie "The Big Short," likened Silicon Valley Bank to now-defunct energy giant Enron.

"The failure of @SVB_Financial could destroy an important long-term driver of the economy as VC-backed companies rely on SVB for loans and holding their operating cash," Ackman tweeted.

"If private capital can’t provide a solution, a highly dilutive gov’t preferred bailout should be considered."

Ackman likened the turmoil engulfing Silicon Valley Bank to the 2008 financial crisis, when the Federal Reserve bailed out JPMorgan Chase after the Wall Street giant bought investment bank Bear Stearns, whose market value was eviscerated due to its involvement in the risky subprime mortgage markets.

According to Ackman, no other private institution will step in to save Silicon Valley Bank the way JPMorgan rescued Bear Stearns.

Billionaire hedge fund investor Bill Ackman called on the federal government to bail out Silicon Valley Bank.

"After what the Feds did to @jpmorgan after it bailed out Bear Stearns, I don’t see another bank stepping in to help @SVB_Financial," according to Ackman.

"The gov’t could also guarantee deposits in exchange for a dilutive warrant issuance and other covenants and protections," Ackman tweeted.

"If @SVB_Financial is indeed solvent, this would buy time to enable SVB to restore the franchise and raise new private capital."

Ackman then clarified in a later tweet that any bailout of Silicon Valley Bank "should be designed to protect its depositors, not equity holders or management."

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"We should not reward poor risk management or protect shareholders from risks they knowingly assumed," Ackman tweeted.

He added: "The risk of failure and deposit losses here is that the next, least well-capitalized bank faces a run and fails and the dominoes continue to fall."

"That is why gov’t intervention should be considered."

Additional reporting by Lydia Moynihan