The collapse of the Silicon Valley bank may have been sparked by a newsletter penned by a Texas tech expert in the last week of February.
After the bank’s collapse, a tech writer, Evan Armstrong, pointed to a February 23 mailing written by his colleague Bryne Hobart.
“This whole debacle may have been caused by [Hobart]’s Newsletter,’ wrote Armstrong, who then shared his own post detailing how Hobart may have knocked over the first domino.
“Pretty much every VC [Venture Capitalist] I know this newsletter is being read,” Armstrong said, noting that venture capitalists’ fears spread like contagion as they grew suspicious of Silicon Valley Bank.
Bryne Hobart writes a popular daily newsletter, The Diff, examining the latest developments in finance and technology. It has been suggested that his February 23 posting may have spooked Silicon Valley Bank investors
The collapse of the Silicon Valley bank may have been sparked by a newsletter written in the last week of February by a tech expert in Texas that suggested it had a debt-to-asset ratio of 185:1
In Hobart’s February post, he noted that Silicon Valley Bank had a debt-to-asset ratio of 185:1 and that it was “technically insolvent” in the final quarter of last year.
“The tech world is more risk-averse than it used to be,” he wrote, before describing SVB as “a bank that still stands 185:1 on an asset base that includes loans backed by Premium Wine, among other things, at a height.” , which is nearly equal to last quarter’s mark-to-market equity.’
The bank is known for its lending to the wine industry and even had a Premium Wine Division headquartered in Napa.
It reported in filings last year’s fourth quarter that 1.6 percent, or $1.16 billion, of its $74.3 billion loan portfolio went to clients with prime wineries and vineyards.
“Finally, in the past year, the signs of a possible implosion of the SVB were there. However, it only took a few VCs to respond before things spiraled out of control,” Armstrong wrote on his blog.
Hobart is the author of The Diff, a newsletter that says it has around 50,000 paying subscribers.
Diff’s website features testimonials from hedge fund managers and technology analysts praising the quality of Hobart’s insights.
“Byrne’s work is truly the result of someone thinking differently and deeper,” wrote one. “He reads like an industrial vacuum and synthesizes like a Minimoog,” said another.
In Hobart’s February post, he noted that Silicon Valley Bank had a debt-to-asset ratio of 185:1 and that it was “technically insolvent” in the final quarter of last year
Hobart also predicted that even if the bank collapsed, steps would be taken to ensure people with deposits would not be prevented from withdrawing their money
The sudden collapse of the SVB on Friday – the second largest ever by a US bank – came as investors frantically began withdrawing funds, fearing they would be unable to keep pace with the Fed’s rate hikes.
Although Hobart addressed the bank’s enormous liabilities on his blog, he did not predict that a collapse was likely.
“It would take an absolutely gargantuan bank run to actually affect the company’s liquidity, so a run is unlikely,” he wrote.
However, Hobart predicted that even if the bank did collapse, steps would be taken to ensure people with deposits at the bank would not be adversely affected.
“And even if the company were to run into trouble, there are good political reasons to believe that depositors would not be harmed,” he added.
After the crisis became known, SVB customers who wanted to withdraw their money from the bank queued in front of the branches more than four hours before they opened.
To address their concerns, federal regulators announced they would take immediate action to ensure customers have access to all of their funds.
In a speech Monday morning, President Joe Biden said none of the losses will be borne by taxpayers. Instead, debt would be paid with fees that banks pay to the federal government.
“The bottom line is: Americans can rest assured that our banking system is safe, your deposits are safe,” the president said.
However, he hinted that the bank’s investors would not be protected. “That’s how capitalism works,” he said.
EXCERPT FROM THE HOBART NEWSLETTER OF 23 FEBRUARY
In a February 23 newsletter, Hobart wrote:
“This is a pretty glaring incident: on a mark-to-market basis, they were broke last quarter, albeit still liquid. And that liquidity is important; One reason banks are not required to mark assets at market is that they can hold them indefinitely as long as they have deposits. On the other hand, Silicon Valley Bank’s deposits are less sticky than those of other companies because they are provided by mostly money-burning corporations. The lack of mark-to-market accounting reflects the general banking reality that banks do not explicitly receive margin calls from customers. You sometimes experience runs. It would take an absolutely gigantic bank run to actually affect the liquidity of the company, so a run is unlikely. And even if the company were to run into trouble, there are good political reasons to believe savers would not be harmed: the people who donate the legal maximum to political campaigns are disproportionately likely to bank or work for Silicon Valley companies that do this.
“On the other hand, the tech world is more risk-averse than it used to be, putting money into a bank that’s still leveraged 185:1 on an asset base that includes Premium Wine-backed loans at a level that almost equal to last quarter’s mark-to-market equity.[1] No one wants to look paranoid by being the first to withdraw their money, but no one wants to deal with the consequences of being the last. And eventually, when money flows out, they have to start selling assets, turning an “unrealized losses” footnote into a headline loss figure.’
Founded in the 1980s, Silicon Valley Bank quickly gained a reputation for being a tech-savvy lender to fledgling computer startups in their early stages.
Over the next four decades, it grew to be the 16th largest bank in the US, serving technology companies around the world.
As the industry boomed during the pandemic years, the bank’s services became in high demand and its deposits grew as companies used it to store cash for growing payrolls, among other things.
However, its decline began after large investments were made in US Treasury bonds backed by mortgages and low interest rates.
When the Fed began raising interest rates last year, those bonds fell in value and the bank’s debt-to-asset ratio became increasingly precarious.
When Silicon Valley companies were going through tough times last year trying to withdraw money from the bank, it struggled with withdrawals and was forced to sell assets early, resulting in losses that scared investors.
SVB went bankrupt last week and was taken over by the government on Friday after a run on its deposits and a slump in share prices.
It became the largest bank to fail since the 2008 financial crisis.