What caused the demise of Silicon Valley Bank (SVB)? Basically, they got caught not matching risk. Huh, what? Their loans were underwritten by long term bond investments which had fixed low return. As interest rates rose, they needed more assets to match risk and their customers were not depositing more cash since the VC spigot was turned off last summer again due to rising interest rates.

When they sold them at a large loss this week, it spooked their investors and the stock price dropped precipitously. They also tried to sell stock to increase their cash and it spread like wildfire through a social media addicted community. People pulled their deposits out of the bank. By Friday the FDIC took the bank over. It appears that, unlike the bank troubles of 2007, the FDIC did not have enough notice that a bank was spiraling downward to line up a buyer before they took it over.

My guess is that other banks are in a game of chicken to see who can grab it at the lowest price.

Who will lose in this sad situation? Shareholders of course will get a buzz cut. Customers with deposits over $250k will get anywhere from 10 cents to 90 cents on the dollar. Maybe I’m being too pessimistic but I’d be prepared to take a loss.

But it goes further than this. Other start up friendly banks like First Republic and Pacific Western have had small runs on their deposits. The Silicon Valley community and the startup culture is traumatized as companies struggle to get short term cash for payroll and paying their bills. The fed was trying to tamp down the frothy inflationary culture. This will make everyone think twice about risk and that in itself may be enough for the fed to slow down on raising rates. Remember, the fed only has a limited tool kit.

For ourselves, the biggest lesson is probably to match the term of borrowing with the usefulness of the spend. In other words, don’t take out a 7 year loan for a car that will only last 5 years. Or, only put on your credit card what you can pay off immediately. Don’t finance a weekend in Vegas with a 6 month credit car loan at 22%. Matching risk applies to us, too.

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