News of Silicon Valley Bank’s rapid collapse late last week sent shock waves through the U.S. and brought back memories of the Great Recession. So far, two more banks have followed.
Something is odd about the collapse, according to Guy Williams, president of Gulf Coast Bank and Trust. He discussed it this week with WWL’s Newell Normand.
“Here’s what’s odd,” he said. “I mean, there’s several things that are odd about it. First – I don’t know how the people that managed the bank didn’t think that there was some risk in buying very long securities at very low rates.”
Williams explained that Silicon Valley Bank – a prominent bank involved in tech startups and wine industry lending, among other things – grew very fast after it was established in 1983. With the new money rolling in, its leaders made what he characterizes as an unusual choice.
“They thought that it would be a good idea to take all that new money that they got and invest it in long term securities,” said Williams. “So when rates were super low, they bought very long term mortgage backed securities. And their thought was that they were going to grow forever, sort of, you know, drinking your own Kool-Aid and believe in your own press releases. They figured they were going to grow forever.”
Things were working well for the bank. Forbes ranked it as one of the best banks in America, and as of the fourth quarter of last year, it had more than $200 billion in assets. However, things began to wobble as the Federal Reserve Bank kept raising interest rates.
“As rates started to go up, their business customers started to want more interest on their deposits. But the other thing that happened is they have a lot of tech customers. Well, tech customers talk often about burning cash,” said Williams. “Well, when the market slowed down and there weren't many new tech companies opening, these tech companies were using up their cash. And so, Silicon Valley had to come up with more liquidity as customers wrote checks on their accounts. The problem is those long-term bonds that they bought weren’t worth what they paid for.”
What happened next was like a lightning-speed version of the “It’s a Wonderful Life” bank run scene.
“The difference this time is because… all of their customers are hyperconnected,” Williams said. “So when some of them started saying you need to get your money out, it really took a matter of minutes before all of their customers were aware that they had a potential problem.”
Within a span of just 48 hours – according to CNN Business – the Silicon Valley Bank failure was the second largest in history, behind the Washington Mutual failure of 2008.
Listen to Williams and Normand break down what the Silicon Valley failure means, as well as the subsequent failures of Signature Bank and Silvergate Bank, here.
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