Why did Silicon Valley Bank go off the rails?

Silicon Valley Bank is the 16th largest bank in the US. At the end of 2022 the bank had $151 Billion in uninsured deposits. It opened in 1983. It is the 2nd biggest bank failure in the US.

Timeline to disaster

• The Dodd-Frank act signed in 2009 put stricter regulations on banks to prevent another 2008 style financial meltdown. This included banks like SVB.
• On May 24, 2018 a portion of the Dodd-Frank act was rolled back on banks under $250 Billion in deposits when President Trump signed a bill passed by Congress.
• During the pandemic, deposits soared at SVB to $189 Billion in 2021.
• During this time, SVB put that money to work by buying government securities of over $100 Billion in face value. This was during a time of extremely low interest rates. The securities matured far in the future.
• After they did so, interest rates rose causing the value of the long dated government securities to drop dramatically.
• The value of their government securities become worth 17 Billion less than they paid for them.
• On March 8, 2023, SVB filed paperwork that stated they had sold some $21 Billion of these securities for a loss of $1.8 Billion, after tax. They were forced to do so because their cash on hand was below the minimum required.
• This triggered a run on the bank as investors panicked and rushed to avoid yet another crypto related Silvergate Bank type fiasco. They sprinted to pull their money out. In the age of the internet, this is easy to do. A couple of clicks online is all it takes.

Conclusion: The first shoe to drop was the ill conceived partial rollback of the Dodd-Frank bill that occurred in 2018. At the time, the supporters of the rollback claimed that if a bank with ‘only’ $250 Billion of deposits failed, it would be no big deal. The second shoe to drop was the flood of money that ended up in SVB during the Pandemic that the management of SVB responded to by buying large amounts of government securities at extremely low interest rates that matured far into the future. The only way one could justify this decision would be a knuckleheaded belief that extremely low interest rates would last for more than 10 years. That qualifies as one of the dumbest management decisions of all time. The third shoe to drop would be the aggressive increase in interest rates by the Federal Reserve. The same Federal Reserve that was claiming during the Pandemic that the heating up of inflation everyone was seeing was “transitory” and did not require any increase in interest rates to cool it off. All the while, inflation kept steadily climbing. Only when inflation became a hot potato politically, the Fed panicked and jacked interest rates up very fast. This caused the value of Bonds to drop, fast. The fourth shoe to drop was the very public disclosure on March 8, 2023 by SVB that a run on their deposits was underway and they were forced to respond with an emergency sale of government securities and take a big loss. It looked to most investors that this was just the tip of the iceberg.

What to do: Undo the partial rollback done in 2018 of the Dodd-Frank bill of 2009. If that rollback had never happened, SVB would have been forced to run its bank in a less risky way and the ongoing drama we see unfolding before us, would never have happened.

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