The Fed needs to recapitalize Silicon Valley Bank

To watch Zain Jaffer’s Fox News interview on the Silicon Valley Bank closure, click here.

by Zain Jaffer

The Silicon Valley Bank (SVB) collapse is the second largest bank failure in US history after Washington Mutual (WaMu) in 2008. This is the 2008 moment for many in the Valley, and in the entire startup ecosystem. 

It was a surprise, and it caught everyone off guard. First there was Silvergate the day before, now SVB. Talk about bad timing.

When you tell the public not to panic, yet they see these consecutive bank closures, what do you think they will do? They’re not going to wait. They’re going to do a run on the bank and that’s what we’ve seen unfold. I’m shocked at the scale and the speed at which these events are unfolding. 

Although our banking and financial leaders are saying the banking system is strong, one cannot help but feel the uncertainty moving forward.

As for the startup community, SVB was a pillar of support for many thousands of startups not just in the Valley but in different global innovation ecosystems where they had a presence. They have a forty year legacy (since 1983) of supporting tech startups. Many of Silicon Valley’s leading tech companies were helped by them in one way or another in the past, some even up to the day they closed.

I founded a startup many years ago. My previous startup was only down to a few months of cash when SVB saved us by giving a $500K bridge loan in 2012. That bridge loan kept us afloat and allowed us to raise another $25M in VC money. SVB had my back. Eventually the Company grew and sold for $780M. 

That type of help, that type of loan, isn’t really feasible if someone like SVB isn’t around to help startups. It’s next to impossible to get traditional banks to give loans to startups when all you have are your illiquid pre-IPO (pre-listing) shares of stock. That’s where SVB came in. They were a friend to many tech startups over the years.

They’d take care of their startup clients, treat them to concerts of artists like Lady Gaga. They had a nice box at the San Francisco Golden State Warriors stadium. They understood startup mentality. I feel bad for those new founders who won’t be getting that support moving forward, and also for those who have money in the bank that they can’t withdraw at the moment. 

The run started when bank clients withdrew around $42B leaving a negative cash balance of $958M. To raise liquidity, SVB had to sell their long term treasuries and mortgage backed securities before full maturity, which meant they needed to declare that as a mark-to-market $1.8B loss on their books. Their share price dropped 70% before trading was halted.

Their treasury and risk management practices could have been better. Because of rapid growth and expansion in the past, they put a lot of that cash into long term treasuries and mortgage backed securities. Unfortunately the recent Fed interest rate hikes resulted in a yield curve inversion, that saw short term bonds yield higher than long term ones. Plus with the Fed no longer buying bonds with their tightening, there were very few buyers for these long term treasuries and mortgage securities. They could only get cents on the dollar.

If there are no private bank buyers like JP Morgan to acquire them, the Fed has to step in to recapitalize them. Their job is to restore trust and financial stability. Otherwise we will be seeing a series of bank runs with smaller regional banks like First Republic. It might become a contagion. 

Unfortunately most SVB clients have deposits above the $250K guaranteed by FDIC insurance. Personally some of my portfolio companies are in this predicament. Founders don’t know how to make payroll. Some M&As are in pause mode. Term sheets are being withdrawn right now. If this isn’t fixed, the US could lose its innovation lead with the loss of this vital cog. Mass tech layoffs, the likes of which we haven’t seen yet, could follow.

This is truly a tragic day for the startup ecosystem. Who is now going to lend money to new founders and VCs now? I really believe this could have been avoided with better timing and communication and smarter risk management. 

The Fed has to step in to help fix this.