RIP, SVB. America’s 16th-largest bank was just destroyed by the largest bank run in U.S. history. To talk about what happened and what happens next, we have Liz Hoffman, business and finance editor at Semafor and the author of the book Crash Landing, on the Fed’s response to the pandemic.
If you have questions, observations, or ideas for future episodes, email us at PlainEnglish@Spotify.com. You can find us on TikTok at www.tiktok.com/@plainenglish_
In the following excerpt, Liz Hoffman discusses the factors that played a role in Silicon Valley Bank’s failure and whether the federal government will step in.
Derek Thompson: How have the last 72 hours been for you?
Liz Hoffman: I’m pretty tired. No, it’s my first real bank run. I started as a financial reporter just after the 2008 crisis, and so you’d sort of hear about these things, and old-timer bankers would pull up a chair, “Let me tell you some stories,” but this is wild.
Thompson: It is the largest bank run in American history, so yeah. This is a good way to be inaugurated into that ancient tradition. In my open to the podcast, I walked through how Silicon Valley Bank actually died. That was breaking news as of Friday, early Saturday. Now, it’s Monday morning—we are talking in the 11 o’clock hour a.m. Eastern Standard Time—and the news is moving at the speed of light.
So, I want to just tick off a few things that have broken/are breaking. Two more banks have been closed, Signature and Silvergate. The news leading The Wall Street Journal right now is that First Republic Bank’s stock is crashing, down 75 percent. Are we on the verge of a bona fide banking crisis here?
Hoffman: I think not, and I’ll explain why. It’s very scary out there. People are very panicked. The Fed did a bunch of things last night that have helped and should help, though clearly not quite enough yet. So yeah, as you say, First Republic, a bunch of others, PacWest, Western Alliance, their stocks have been halted. But the real problem with these guys is not the stock price. That’s the thing you can look at and say, “Oh, this is scary.” It’s actually: Are people pulling their money out of the bank?
And what the government did last night is say, “We’re not going to end this run, but we are going to fund it.” The FDIC could have, though the legal authority is a little unclear, said, “Every deposit dollar in America is now insured 100 cents on the dollar.” They didn’t do that. They said for Signature and for Silicon Valley Bank, that is true; you will get all of your money back beyond that $250,000 cap. And they stopped talking there.
So what they did do is they said, “We are going to make a ton of money available to basically any bank that needs it. They can bring us their stuff, their Treasury bonds and their Fannie and Freddie debt and their mortgage bonds, and we will give them cash for it,” which they can turn around and give to depositors. So, they’re going to fund this panic, but they haven’t yet said, “We’re going to end it.”
Thompson: I want to ask you a question that sort of lives behind the news headlines, which is the question of blame. Whose fault is this? I first want to look at Silicon Valley Bank leadership. The 2008 financial crisis was caused by the collapse of the housing market, which involved all of these incredibly complicated securities and derivatives that basically no one understood.
Am I wrong, or did SVB basically screw itself because they bought basic Treasury bonds that got smoked by widely telegraphed rate hikes? Hindsight is always 20/20, but it’s kind of astonishing looking back and seeing just how obvious their balance sheet problems were.
Hoffman: You are not wrong. Like, if you had told me six months ago that Silicon Valley Bank would’ve failed, I would’ve said, “Well, sure, they probably did something dumb in Silicon Valley,” but nope, they did something dumb with Treasury bonds. The basic math here is that they got a lot of money in 2020. If you were a start-up and you got a check from Andreessen Horowitz, you walked it over to the Silicon Valley Bank. You said, “Hello, I am a funded start-up founder. Here is my money.”
And what Silicon Valley Bank did with that—what you have to remember is these are deposits, which means that they have to give it back to you anytime you ask for it. So what they should have done is put it in really short-dated things. They could have lent it overnight to another bank. They could have bought one-month or three-month Treasury bills. But nope, they bought long-dated bonds, which means that they cannot access that money for a while.
Now, this is where I’ll bore your listeners for a minute with an accounting diversion. But if you’re going to buy these bonds, you say, “I have no intention of ever selling them; I’m just going to hold them until they mature.” These are five-, 10-, 20-year Treasury bonds. You can put them in a sock drawer, the way your parents gave you savings bonds when you were a baby, and then you found them 20 years later and took them to the Treasury, right?
So you can keep those in a sock drawer, collect the interest, and never have to decide every day what they’re worth based on what’s happening in the market. That’s fine. The other problem is that all those deposits that Silicon Valley Bank had gotten started to dwindle because start-up fundraising dried up, companies couldn’t go public, so they started to spend down that money that they had raised.
And so you’ve heard about a balance sheet. Those are the two sides of the balance sheet, and they got out of balance, which is that deposits started to go away, and they had these assets that they had decided they were never going to sell, so they didn’t need to value them. But then they started to have to sell them. And what had happened in the meantime is that interest rates had gone up very quickly.
And again, there’s some boring bond math, but what happens is that when interest rates go up, the value of bonds that you bought at a fixed rate from a year ago are not worth as much. And so they have this huge hole, and they were functionally insolvent really fast. This was terrible risk management. What they did with the bonds is inexcusable, and they will obviously all be fired because the bank is going out of business, but just inexcusable and utterly boneheaded.
This excerpt was edited for clarity. Listen to the rest of the episode here and follow the Plain English feed on Spotify.
Host: Derek Thompson
Guest: Liz Hoffman
Producer: Devon Manze