A. Get Woke, Go Broke
How does the 16th largest bank in the U.S. quickly become the second largest bank failure in U.S. history? What causes the stock price of a bank to drop over 60% in six hours and drive depositors to pull $42 billion in deposits in a matter of days, leaving the bank with a negative cash value of $958 million?
Interestingly enough, the name of the bank gives us a hint of what went wrong, and acting as the lender of choice to “woke” technology startups was not the best strategy in the world. Silicon Valley Bank (SVB) claims to have banked nearly half of all U.S. venture-backed technology and healthcare startups in recent years. According to their website, the bank has worked with more than 1,550 companies in the “climate technology and sustainable sector.”
Unfortunately, many of these companies had very weak business models. Without zero-cost money offered by the Federal Reserve Bank (Fed) and “welfare” cheques from various government programs, many of these businesses would have never been viable. According to the Wall Street Journal, SVB was known for its willingness to offer banking services to unprofitable startups. SVB was also known for its lack of attention to financial risk management and for its lack of depth in banking talent! None of this seemed to matter until the Fed started to raise interest rates in an effort to tackle the growing inflation problem. With rates increasing dramatically, unprofitable companies found it harder to raise capital to support their burn rates. They began to draw down some of their deposits and looked to move remaining deposits to short-term investments that would provide them with higher investment returns.
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