March 30, 2023

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The United States seized the bank of Silicon Valley after a historic failure

New York (AP) — US regulators scrambled to seize the assets of a Silicon Valley bank on Friday after a run on the bank, in the biggest failure for a financial institution since Washington Mutual. It collapsed at the height of the financial crisis more than a decade ago.

Silicon Valley, the country’s 16th largest bank, failed after depositors – mostly tech workers and venture capital-backed firms – scrambled to withdraw money this week as concern spread about the bank’s health. It is the second largest bank failure in US history.

The bank has had deep relationships with Silicon Valley industries and startups. Y Combinator, a startup incubator that launched companies like Airbnb, DoorDash, and Dropbox, has referred hundreds of entrepreneurs to the bank.

“This is an extinction-level event for startups,” said Gary Tan, CEO of Y Combinator. “I’ve heard literally hundreds of our founders asking for help on how to get through this. They’re asking, ‘Should I furlough my workers?'”

Tan estimated that roughly a third of Y Combinator startups won’t be able to file a payroll sometime in the next month if they don’t have access to their funds. He said he is asking regulators and lawmakers whether startups qualify for financial aid.

Silicon Valley has been heavily exposed to the technology industry But there is little chance of chaos spreading to the broader banking sector as it did in the months leading up to the Great Recession more than a decade ago. The largest banks – the ones most likely to cause a large-scale economic collapse – have healthy balance sheets and large capital.

In 2007, the largest financial crisis since the Great Depression They spread around the world after the implosion of value-wise, unwise mortgage-backed securities linked to housing loans. The panic on Wall Street led to the demise of Lehman Brothers, a company founded in 1847. Because the major banks were so intensely exposed to each other, it led to a cascading collapse in the global financial system, putting millions out of work.

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There was concern in the banking sector all week, and news of the Silicon Valley bank crisis sent shares of almost all financial institutions lower on Friday, stocks that have already fallen by double digits since Monday.

The Silicon Valley bank failure arrived incredibly quickly, with some industry analysts noting on Friday that it was a good company and still potentially a wise investment. Silicon Valley bank executives were trying to raise capital early Friday and find additional investors. However, trading in the bank’s shares was halted before trading began on the stock exchange due to the extreme fluctuations.

Shortly before noon Eastern, the Federal Deposit Insurance Corporation moved to close the bank. Notably, the FDIC didn’t wait until the business closed to take over the bank, as is typical in an orderly decline for a financial institution. The FDIC was not immediately able to find a buyer for the bank’s assets, which indicates how quickly depositors cashed out.

The White House said Treasury Secretary Janet Yellen is “watching closely.” The White House has sought to reassure the public that the banking system is much better than it was during the Great Recession.

“Our banking system is in a fundamentally different place than it was, you know, a decade ago,” said Cecilia Ross, chair of the White House Council of Economic Advisers. “The reforms that were put in place at that time really provide the kind of resilience that we’d like to see.”

The Federal Deposit Insurance Corporation said the Silicon Valley bank had total assets of $209 billion at the time of the failure. It was not clear how much of his deposits exceeded the $250,000 insurance limit, but previous regulatory reports showed that many Silicon Valley bank deposits exceeded this limit. The FDIC says deposits of less than $250,000 will be available Monday morning.

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The bank still looks stable this year, but on Thursday it announced plans to raise up to $1.75 billion in order to boost its capital position. That sent investors into a rush, and shares plunged 60%. They jumped lower again on Friday before the opening of the Nasdaq Stock Exchange, where it is traded.

As its name suggests, Silicon Valley Bank has been a major financial conduit between the technology sector, its founders, and startups as well as the people working in it. Developing a relationship with the bank was seen as good business sense if the founder wanted to find new investors or go public.

Created in 1983 by co-founders Bill Biggerstaff and Robert Medeiris during a poker game, the bank has leveraged its Silicon Valley roots to become a financial cornerstone in the tech industry.

Nearly half of the US tech and healthcare companies that went public last year after getting their early funding from venture capital firms were Silicon Valley clients, according to the bank. website. The bank is also proud of its client relationships with many well-known technology companies such as Shopify, ZipRecruiter and a leading venture capital firm, Andreesson Horowitz, founded by web browser pioneer Marc Andreessen.

Bill Tyler, CEO of TWG Supply in Grapevine, Texas, said he first realized something was wrong when his employees were texting him at 6:30 a.m. Friday that they hadn’t been paid. TWG, which has just 18 employees, had already sent the money for its payroll to a payroll services provider, Rippling PEO, which used a Silicon Valley bank. He was scrambling to figure out how to pay his workers.

“We’re waiting for about $27,000,” he said. “It’s really not a timely payment. It’s a really uncomfortable situation. I don’t want to ask any employee to say, ‘Hey, can you wait until the middle of next week to get paid?'”

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Parker Conrad, CEO of Rippling, chirp that the company will process payroll through JPMorgan Chase. But he added that today’s payments from Silicon Valley Bank “had not been processed” and that the FDIC’s involvement made him question the assurances he was getting from the bank.

Silicon Valley’s ties to the technology sector added to its problems. Technology stocks have been hit hard in the past 18 months After an increase in growth during the pandemic and layoffs spread throughout the industry. Venture capital funding is also declining.

At the same time, the bank was hit hard by the Fed’s war against inflation and a series of sharp increases in interest rates to cool the economy.

As the Federal Reserve raises its benchmark interest rate, the value of bonds, usually a fixed asset, begins to fall. This isn’t usually a problem, but when depositors get anxious and start withdrawing their money, banks are sometimes forced to sell those bonds before they mature to cover that exodus.

This is exactly what happened to the Silicon Valley bank, which had to sell $21 billion in highly liquid assets to cover the exodus of deposits. It incurred a $1.8 billion loss on this sale.

Ashley Turner, CEO of FarmboxRx, said she has spoken to many friends whose businesses are backed by venture capital. She described these friends as being “beside themselves” because of the bank’s failure. Tyrner’s chief operating officer attempted to withdraw her company’s funds on Thursday, but failed to do so in time.

“A friend said they couldn’t provide payroll today and cried when they had to report 200 employees because of this problem,” said Turner.


Associated Press writers Michael Liedtke, Cora Lewis, Matt O’Brien, and Barbara Ortotay contributed to this story.