Silicon Valley Bank- What really happened?

One of the biggest bank failures in our nations history- Silicon Valley Bank. Its been in the news for the past few days and setting off a chain of events that we have not seen in quite some time in this country.

Could there be some stuff going on behind the scenes that we dont know about? Absolutely. For example, C-Suite executives selling $4 Million Dollars worth of stock over the past week before the bank was seized. Of course they know what’s going on before the general public. That is another issue in its entirety. But we will go over what happened and why the bank was seized.

When banks take your cash, that is a liability to them in the form of a deposit. They need to quickly convert that to an asset, so they loan it out or they buy bonds, treasuries, etc. These are government securities that are backed by the full faith and credit of the United States which is deemed to be risk free- for reference. Silicon Valley bank was holding cash for a lot of start-up companies and venture capital funds. So companies were using that bank to hold their funds in order to make payroll to pay their employees and other operating expenses. Of course the bank has this all figured out onto their bottom line-the balance sheet.

Silicon Valley Bank would buy long dated government securities in the form of a 10 year bond- which was yielding (generating) around 1.5% return. This is good considering that in most bank accounts we generate .0001% or something miniscule. (We cant forget that the banks are a business too, the bank needs to make money) However, the FED keeps raising rates and yields now for government securities are in the 4-5% range. What this means is that the bonds that Silicon Valley Bank had on their balance sheet, dropped in price. Why is that? Because bonds and interest rates have negative correlation. As one goes up, the other goes down. Theoretically, SVB had tons of unrealized losses in these bonds, but didn’t actually have to realize these losses because there was no immediate need for cash from the depositors. If you and I could move something from .001% to something that is now going to give us 4.5% then we are going to do that… ALL DAY! As people began to withdraw their money the bank now had to sell these bonds and take the loss and they could not cover all of the cash positions that were being requested… This is what led to the demise of Silicon Valley Bank.

So what do you guys think? Was the right thing for the government to do was get involved, or should they have let the bank go under. We are curious as to what you all think! We love and appreciate all feedback!

Thank you!