WTF Is Going On With SVB?

It seems like everyone and their mother is talking about Banks nowadays.

I’m sure Silicon Valley Bank SIVB rings a bell?

The whole situation has caused panic and fear within the banking industry:

“Should I withdraw my money?”

“Is there going to be another financial crisis?”

Well in this newsletter, I hope I can clear up some concerns and give you some tips moving forward.

What happened?

Silicon Valley Bank (SVB) was the 16th largest bank in the US that suffered a bank run it couldn’t keep up with.

What’s a bank run?

It’s when tons of customers try to withdraw money from a bank.

You see, SVB isn’t your regular bank.

Their customers aren’t people like you and me. Instead, their customers are companies like Roku, Etsy, Shopify, and Pinterest.

And for the past 3 years, companies like the ones above didn’t need loans to finance business activities.

Amidst low-interest rates and companies not seeking financing…SVB needed to find a way to make money.

So SVB started buying government bonds.

They purchased over $100 billion in government bonds & locked them away for 3-4 years at sub-2 % interest rates.

This strategy worked in the years preceding 2022…

But when the fed started raising interest rates something happened…

The bonds SVB invested in started to become worthless.

When interest rates rise, bond prices fall. And since SVB bought these bonds before the interest rate hikes…their bond prices fell causing them to lose significant value.

But that’s not all…

Companies that banked with SVB started withdrawing money to cover short-term obligations. Amidst layoffs and slower growth, they needed to keep the lights on. So SVB sold bonds to fund these withdrawals leading to a $1.7 billion loss.

On March 8, SVB sold over 30% more shares to raise capital to cover their losses.

Not only did SVB fail to raise enough capital, but their actions spooked customers.

A bank run ensued.

This all but ensured SVB would become insolvent.

Then what happened? 

The federal government seized SVB and said they would insure deposits.

The only problem?

The federal government only insures up to $250,000 for each depositor. And over 97% of accounts at SVB have more than $250,000…

But on March 12, the federal government announced all depositors would be made whole.

Meaning the $250,000 insurance cap was lifted.

There’s a heated debate on whether this counts as a bailout, and whether it should have been done in the first place…reply to this email with what you think!

So what does this mean for you?

Well, unless you have over $250,000 in your bank account… Not much.

Your deposits are insured up to $250,000 if your bank goes belly up.

But if you have more than that keep reading…

If you have more than $250,000 in your bank account and are afraid of it not being insured by the federal government…

You might want to consider holding multiple bank accounts.

Diversification preserves wealth.

This is especially true if you fear your money is at risk.