Few things make me as happy as seeing banks fail. At the time of failure, Silicon Valley Bank (SVB) was the 16th largest bank in the United States. Something in plain sight took it down. The rot was in the “held-to-maturity” column of their bank balance.
Bad investments in MBS Treasury bonds
Its not complicated. In 2021 peak mania, SVB had $189 billion in deposits.
It took $91 billion, and invested it in “mortgage-backed securities (MBS)” bonds. Once again, MBS is a fancy word for collecting interest from mortgages. Its supposed to be a long-term investment. Once you invest in MBS, you can’t really shouldn’t take your money out mid-way. A big deal. Because, that’s how SVB lost access to half of its deposits.
So when a bank run happened, it ran out of money. It couldn’t wait 30 years for its people to pay off their mortgage. They had a damn line at the door.
When the bank run happened, SVB got squeezed. It was forced to sell its $91 billion worth of MBS-bonds for a loss. It only got $76 billion from the sale. That’s a $15 billion loss.
SVB just bought a debt that doesn’t have much value anymore. Because the Federal Reserve is raising interest rates, the value of a 2023 bond increases, and the value of a bond released in 2021 drops. Why would anyone want to buy a bond from 2021 with low interest income compared to a bond from 2023 with higher interest income? And what does a value of a bond even mean? Well, in this sick environment, you can buy and sell debt.
And when SVB had run out of that money, they announced a stock dilution on March 8. The next day, people withdrew $42 billion in one day from the bank. Game over. Bank run. Bankruptcy. Kaputz.
Anyway, what idiot deposits at SVB? Start-ups.
Okay, okay, I get it. SVB took deposits and made bad investments. Why would anyone deposit in SVB? Why not just go to Bank of America? That’s the big question.
As it turns out, most of the depositors at SVB are start-up tech companies. They got cheap loans from SVB. But with an asterisk. A condition for these loans was that they keep their deposits at SVB.
SVB was a hub for Silicon Valley was a hub for venture capitalists — a fancy word for private equity in the tech space. 50% of venture backed companies in USA banked at SVB. That’s why most depositors were not insured by the the government.
As a matter of fact, the the government will only protect deposits up to $250,000 at a bank. Everything in excess, that’s not protected. And 94% of SVB deposits are way over the $250,000 mark. These aren’t your average Americans, with a median deposit for $5,000. This is Silicon Valley depositors.
Bailout
“The ten largest deposit accounts at SVB held $13.3 billion.” according to the Senate Banking Report.
But Silicon Valley is just as corrupt as Wall Street. Bill Ackman, Mark Cuban, and all those scumbags on the All In podcast begged the government for a bailout. And that’s exactly what the scum at Federal Reserve did. They bailed ‘em out. Every last one of those depositors. That means your US dollars in your bank account just got a little more worthless. And then you wonder why there is inflation?
The good news. Although SVB depositors got bailed out, SVB investors did not.
To understand bonds, you have to understand every bank “borrows short and lends long”. What does that mean? That means a bank borrows short-term treasury bonds and invests in long-term bonds. So, when central bank interest rates rise, a bank bleeds money. And when interest rates fall, a bank makes money.
That’s why you hear terms like “yield curve inversion”. It means a 2 year treasury bonds* is making more interest than a 10 year treasury bond. “Yield curve inversion” is a fancy way of saying, the banks are bleeding. And boy, did SVB bleed.
In summary, SVB violated the easiest rule of riba banking. Don’t put your money in long-term assets that you can’t liquidate quickly. Welcome to Riba Regulations 101. Its not normal practice to invest half your deposits in MBS debt. The other “normal banks” hold 24% of their money in MBS, not over 50%! But hey, did you know JP Morgan recommended you to buy SVB a few months ago?
Not to mention, most of the start-ups it loaned its money to… were total garbage. But they will crash later. I bet. They got bailed out by the Federal Reserve to last another day.
*Footnote: Treasury ‘bills’ mature in 4 weeks to 1 year. Treasury ‘notes’ mature in 2 years to 10 years. Treasury ‘bonds’ mature in 20 to 30 years. I used the word bond for all of these debts for simplicity.
This is part of my series on Interest Free Zone: All of the Sahih hadith related to riba, A study of weak hadith on riba, Defining riba, A detailed breakdown on why Islamic mortgages are backdoor riba, Do credit card rewards programs have riba?, Madness on options riba
Related, I have a Riba and Ruin series: Economics is to keep you a dummy, What happened to SVB?, Ward of the State, First Republic: A tale of a fake bank & a fake auction, Hush, hush, a small bank goes poof
Related, I have a Selling Islam series: Salaried Shaykhs, Can paid Shaykhs make mistakes?
References
FDIC. (2023, March 12). FDIC acts to protect all depositors of the former Silicon Valley bank, Santa Clara, California. Federal Deposit Insurance Corporation. https://www.fdic.gov/news/press-releases/2023/pr23019.html
Kinder, T., McCrum, D., Gara, A., & Franklin, J. (2023, February 22). Silicon Valley Bank profit squeeze in tech downturn attracts short sellers. Financial Times. https://www.ft.com/content/0387e331-61b4-4848-9e50-04775b4c3fa7
Reyes, M. (2023, March 14). Signature Was Seized After Leaders Caused Crisis of Confidence. Bloomberg. https://www.bloomberg.com/news/articles/2023-03-14/signature-was-seized-after-leaders-caused-crisis-of-confidence
Ramaswamy, V. (2023, March 12). Silicon Valley Bank Doesn't Deserve a Taxpayer Bailout. Wall Street Journal. https://www.wsj.com/articles/silicon-valley-bank-doesnt-deserve-a-taxpayer-bailout-federal-reserve-fdic-risk-startups-treasury-interest-rates-ad440fe9
Seligson, P., Anand, P., & Rocha, P. A. (2023, March 15). SVB Clients at Risk of Default May Have No Choice But to Return. Bloomberg. https://www.bloomberg.com/news/articles/2023-03-15/svb-clients-at-risk-of-default-may-have-no-choice-but-to-return
Tobin, M., & Miller, H. (2023, March 10). Silicon Valley Bank: The Investor, Lender, Networker of Startups. Bloomberg. https://www.bloomberg.com/news/articles/2023-03-10/silicon-valley-bank-the-investor-lender-networker-of-startups