Imagine driving down the interstate, 4+ hours in the car, children in tow, late in the afternoon. Suddenly, brakes. Your map app did not prepare you for this…tail lights as far as the eye can see. No exit. 

A slew of questions come to mind as you finally approach the eerie charred metal that used to be an RV: How did this happen? Who was involved and what happened to them? How long will it take to clean up the wreckage? How many people were impacted by this?

From one smoldering weekend experience to the next, let’s look from a slightly different angle at a story you’ve become familiar with.

What happened to Silicon Valley Bank?

If you’ve ever wondered about the power of the crowd, look no further than SVB. In a sentence – it was taken over by the FDIC after a classic run on the bank by a large number of customers that lost confidence.

How did this happen?

Moody’s notified SVB of an imminent credit rating downgrade in response to mark-to-market losses in the value of the bank’s bond portfolio. SVB reacted by scrambling to raise equity capital and solidify their financial position. Depositors reacted to news of a rushed capital raise by rushing to withdraw their money.

With a very large portion of the concerned clients being startups urged to pull funds by their financial backers – Silicon Valley venture capital firms – the likelihood of raising equity capital also quickly “downgraded” to not-gonna-happen.

An important part of the bank’s plan to deal with the credit downgrade and raise liquidity was by selling assets on its balance sheet, namely $20B of bonds. Since these bonds were purchased in a lower-rate environment, they held a lower market value and had to be sold at a $1.8B loss. These were not non-performing assets nor an impairment to credit. Nevertheless, it hurts to sell underwater assets.

So…how did this happen?

Asked another way, “How in the world does a bank fail without a credit impairment, such as an asset that failed to perform? No assets go bad, and the bank goes under?” (ref. this article by David Bahnsen).

This takes us back to the extreme concentration in a single market segment – venture. David G. on “Venture in the South” spoke to this in this episode. When so many of your liabilities are short-dated deposits (e.g. venture backed firms with big burn rates), and so many of your assets are long-dated mortgage-backed securities…you better have some kind of hedge against interest rate risk. No hedge? You’re looking at a recipe for things to go south quickly.  

Who saw this coming?

Not Jim Cramer, who is getting creamed after touting SVB less than a month ago.

Could something like this come as a surprise? Surely the head of risk management would have been reading the tea leaves, right? Well… with no official Chief Risk Officer for eight months during a volatile time in the Venture Capital market (a major market segment and area of concentration risk at SVB), one might wonder.

It would appear though that someone was reading those leaves, since  it was reported that the bank CEO, CFO, and CMO sold over $4.4M in stock over the last couple of weeks. I suppose not enough of a timeline to change anything, but I guess a nice personal salve prior to the chaos they contributed to. Thanks team.

Fed made me do it

What about regulators? Where do our political officials sit on the matter? Janet Yellen assures us that “our banking system remains sound.” I guess that settles that. Others accuse regulators of being asleep at the wheel, which is an understandable charge.

Certainly the Fed’s interest rate hikes over the last 9 months contributed heavily to the market value of their bonds where they took huge losses when pushed to sell. Bahnsen doesn’t let them off the hook there though, and looks back much further to “better” days. The lengthy zero-interest-rate world that preceded all this created an environment for aggressive VC spending for years. 

Easy come, easy go. 

The interest rate environment (both down and up) was the lighter fluid that dowsed the mountain of deposits built amidst the VC startup boom. The warpspeed withdrawal frenzy? The match thrown on top.

What’s next?

Silicon Valley Bank represented a pretty unique risk profile that (thankfully) would be hard to duplicate. However, that is not deterring market skittishness and pressure/problems for other not-so-small banks. Predicting the political ramifications and decisions would be a fool’s errand, but this certainly presented a potential “extinction level event” for many Silicon Valley startups. Many companies that did nothing wrong suffered for having their money in a particular bank’s accounts.

How did this impact Reg CF?

Regarding the broader Reg CF investing space, Jim Dowd of North Capital noted there was possibly some impact on check sizes written (comparing just before the collapse to just after), though investor sentiment was uncorrelated as more checks were written. When compared year-over-year, there was more money invested and more investors, so at least in the immediate aftermath the space has been resilient.

Conclusions on Community

Just like the Northbound onlookers carefully reviewing the Southbound accident, we can take note from a distance and look to learn the lessons. We can look to do better.

Vicinity is a place to harness the power of the community to build amazing things. Large-scale impact created by hundreds of individual investment decisions. We seek to open local opportunities in a new asset class that anyone can invest in. Communities that invest internally build strength and resilience. When done well, they build trust. 

As one economist put it, “In a storm, not every house collapses. The shaky ones do…”. We believe local investing is a way to stay grounded and build on solid footing.