The second biggest collapse of a bank in U.S. history by deposits Friday hardly made it a relaxing weekend for investors. I spent many hours Saturday and Sunday pouring through articles and news items on the event as well various twitter feeds. Venture capitalists and noted hedge fund managers were calling for a government bail out of the bank to ensure they weren't contagion to other parts of the financial system such as the regional banks, which nosedived in trading late in the week.
Ironically, some of these same venture capital funds were telling their portfolio companies to pull all their deposits from SVB Financial Group (SIVB) - Silicon Valley Bank - Thursday, this triggered the run on the bank that caused the collapse in this financial entity in the first place.
These startups also seem to have put most of their eggs in one basket and didn't diversify risk by having funds in multiple banks, perhaps in part to get a little more yield on their deposits.
Then there were the screeds attacking some members of management who were selling stock weeks before the implosion at the bank. Digging deeper these seem to be pre-planned sales for the most part and insiders appear to have held on to the vast majority of their stakes in the firm, so I put little onus on the theory insiders knew the bank was on the verge of collapse until last week.
In addition, insider sales can tend to be heavier in the first couple of months of a new year, notably to pay taxes, especially in high tax states like California and New York.
The true cause of failure at Silicon Valley Bank seems to be very poor implementation of basic risk management disciplines. First of all, the company's deposit base was not very diversified at all, mostly consisting of startups with a large concentration of technology and life sciences firms with high historical rates of failure.
The bigger problem was that the bank had a massive surge of deposits come in from startups in recent years, largely thanks to the IPO/SPAC boom in 2020 and 2021 I have talked about often in these pages. This boomlet was triggered by Federal Reserve's easy money response to the pandemic and its associated lock downs.
Unfortunately, Silicon Valley Bank decided to stretch for yield to increase profitability a bit by buying long duration Treasury bonds and the like. This mismatch between assets and liabilities made the bank very vulnerable to a scenario where interest rates rose steeply.
When the central bank embarked on the most aggressive monetary policy since the early 80s to quell the highest inflation levels in over four decades, SVB started to see huge unrealized losses on its long-dated bond portfolio, eventually leading to last week's debacle.
As I have been saying for several quarters now, Chairman Powell's rapid ratcheting up of the Fed Funds rate was going to expose a lot of 'naked swimmers', Silicon Valley Bank being the largest of these to date. Hopefully the FDIC's actions over the weekend mitigates any contagion into the regional banks in the week ahead.
I also believe commercial REITs remain vulnerable, especially in the office sector. My regular readers know I have been negative on Vornado Realty Trust (VNO) and SL Green Realty Corp (SLG) for a long time now due to their heavy exposure to the commercial real estate market in New York City.
I spent my weekend, once again, going through my holdings to make sure every stock I hold has a solid balance sheet. I urge other investors to do the same. I also plan to shift more of my cash to one year Treasuries this week, as I believe Silicon Valley Bank's blow up probably signals a Fed 'pivot' might now be emerging on the horizon.
And those are some of the lessons I think investors should take away from this financial debacle.