Cutting to the chase – we’ve got $2 million parked at SVB. We’ll find out on Monday how much we’ll be able to withdraw…
That note came to me over the weekend. It was from the founder of a start-up company who just raised $5 million in what’s called a Reg CF raise. This is the mechanism by which regular investors can invest in private companies – no accreditation necessary.
SVB refers to Silicon Valley Bank. As of last week, it was the 16th largest bank in the United States.
This weekend it became the second largest bank to collapse in history. That’s after lines of people stormed the bank to pull their money out.
Over 2,500 venture capital (VC) firms banked at SVB. As did countless early stage private companies. By some estimates SVB did business with roughly half of all private technology companies in this country.
Imagine what those companies went through over the last several days…
As we know, FDIC insurance covers deposits up to $250,000 in the event of a bank collapse. For individuals, this is more than enough. Very few of us keep more than $250k in the bank.
But when it comes to enterprise clients – $250,000 is typically a drop in the bucket.
So half of the tech companies in this country just faced the prospect of losing most of their money. And if that were to happen, we would likely see a record number of businesses go bust at the exact same time… taking out some major VC firms and angel investors with them.
After a few days of panic, the U.S. government stepped in and outlined a $25 billion funding program to ensure that all SVB depositors are made whole. Uncle Sam’s not going to let the early stage tech sector go bust.
But the question is – what happens from here?
Is the banking system in trouble? Will the Fed have to stop raising rates?
The answer to that first question is no.
SVB simply got caught with what’s called a duration mismatch in the banking world. The bank had a large portion of its reserves in long-term U.S. Treasury bonds and mortgage-backed securities.
Now, the value of a bond moves inverse to interest rates. When rates go up, bond values go down.
And that’s what triggered an old-fashioned bank run at SVB. The value of its bond portfolio had declined dramatically… which raised questions about its financial health.
What’s interesting here though is that SVB planned to hold those bonds to maturity. And when a bond matures, investors get their original investment back. No matter what.
So the fact that SVB’s bond portfolio had declined in value shouldn’t have been such a big deal. It was largely just a paper loss. The bank held those bonds for the yield they provided… and that’s it. They weren’t going to sell those assets at a loss.
This begs the question then – what triggered the bank run? What prompted SVB’s depositors to rush to pull their capital out?
Most of us aren’t analyzing our bank’s financial statements every day… so it stands to reason that somebody must have triggered concerns around SVB.
I’ve heard rumors that JP Morgan CEO Jamie Dimon may be behind all this. This is unsubstantiated, but word is that he urged some top enterprise clients to pull their money out of SVB.
And to be sure, JP Morgan is going to be a beneficiary here. Many tech companies will move their deposits to the iconic bank. That includes the founder I mentioned above. The one who had $2 million parked at SVB.
So this begs another question – is there a bigger game afoot here?
We talked last week about how there’s a distinct split between the globalist power structure and the New York banking interests.
Interestingly, the Federal Reserve and the Treasury are on opposite ends of this schism. The Treasury supports the globalist initiative. Meanwhile, the Fed supports the New York banking scene.
So I can’t help but wonder… was this just another shot fired in the war between the Fed and the Treasury?
We’ll see. This certainly shines the spotlight on the Fed’s upcoming meeting later this month.
Many are pointing to SVB and saying that this will force the Fed to stop raising rates. Some think this paves the way for the Fed to “pivot” and cut rates again.
Color me skeptical.
If I’m right about the ongoing battle for monetary supremacy, we’ll likely see the Fed continue along its chosen path. That would include another 25 basis point rate hike later this month… accompanied by “hawkish” talk around future rate hikes.
And if that is in fact what happens, it will be the strongest confirmation yet that the days of low rates and easy money are over. Which means the Age of Paper Wealth has come to an end.
If that’s the case, we’re in uncharted waters here.
Nobody under age sixty has been an adult in a world where rates didn’t consistently go down over time. And how we manage our finances when rates are going down is dramatically different from how we handle our money when rates are rising.
Fortunately, there’s a simple solution. Learn more right here:
-Joe Withrow