The crumbling of the massive Silicon Valley Bank on Friday – the second largest bank failure in American history – sent shockwaves throughout the financial sector and beyond.
But why specifically did SVB implode this week, in just 48 hours? What led to its expeditious collapse? For crying out loud, less than one year ago its stock was trading at almost $600 a share!
So how did it all go down (sorry)? In short, it was due to a "hysteria-induced" investor run on accounts that began when the company found itself significantly short on funds to cover increasingly rapid customer withdrawals.
"This was a hysteria-induced bank run caused by VCs," Ryan Falvey, a fintech investor at Restive Ventures, told CNBC. "This is going to go down as one of the ultimate cases of an industry cutting its nose off to spite its face."
High interest rates from the Federal Reserve had led to "chilly" market conditions in which "startup clients withdrew deposits to keep their companies afloat," leading SVB significantly short on capital.
Its stocks began declining, leaving investors spooked. Spooked customers then increasingly withdrew their funds, and the vortex intensified. Rinse and repeat.
SVB customers said CEO Greg Becker didn't instill confidence when he urged them to "stay calm" during a call that began Thursday afternoon. The stock's collapse continued unabated, reaching 60% by the end of regular trading.
Becker sure as heck didn't instill confidence: Customers withdrew a staggering $42 billion of deposits by the end of Thursday, according to a California regulatory filing.
Once a bank run starts, it doesn't tend to stop. People show up and want their money, right away.
By the close of business Thursday, SVB had a negative cash balance of nearly $1 billion. In a last-ditch effort, executives tried to find collateral from other sources, then finally even tried to find someone to buy the bank and bail it out.
As you know, neither of those options worked. As the "precipitous deposit withdrawal" continued, the bank became incapable of paying its obligations as they came due, it became insolvent, regulators seized its remaining assets, and Silicon Valley Bank is now no more.
Will this catastrophe spread like wildfire across the financial sector? Only time will tell. Let's hope cool heads prevail in the days ahead. But just in case ... hold on to your butts.
