LEVATUS Q + A | Silicon Valley Bank. Simple Questions. Simple Answers.
Everybody is talking about Silicon Valley Bank. ‘Should I worry?’
Photo by Austin Distel
News of Silicon Valley Bank (SVB) seems to be everywhere. While most of the immediate and direct risks are pointed toward the technology startup cohort that made up the majority of the bank's clients, mainstream investors and savers are still wondering, ‘Do we have anything to worry about?’. LEVATUS Chief Investment Officer, Susan Dahl, put recent events into perspective in her usual straightforward style in a recent Q + A session. Sharing highlights below.
What are the direct risks?
The direct risks are clear:
Depositors - Initially it looked like depositors might be at risk, with 85% of Silicon Valley Bank deposits uninsured, but Federal Regulators have stepped in to guarantee even deposits above the $250,000 FDIC insurance limit.
Employees - Employees of Silicon Valley Bank may face an abrupt and difficult job loss, with limited resources for benefits or severance.
Shareholders - Investors in Silicon Valley Bank face steep and permanent loss. With no buyer emerging to take over the bank, government regulators remain in charge.
How did this happen?
Silicon Valley Bank’s problems emerged from poor risk management that was not sufficiently addressed by regulators. The bank invested and leveraged a very high percentage of their short-term deposits into long term U.S. Treasuries (and other loans) and then were forced to sell holdings at a substantial loss to meet the cash withdrawal requests from their depositors. Long term Treasuries were down more than the stock market last year, so with these sales they locked in losses that made them less capable of paying the next depositor request. A downward spiral ensued, until regulators stepped in and paused activities. Separately, lending agreements that SVB had made with startup companies that they hoped would be offset with the proceeds of planned Initial Public Offerings (IPOs) continued to accrue because the IPO market dried up, meaning less liquidity than anticipated.
Will this impact the market as a whole?
There are broader economic and market implications for sure. As most of you know, LEVATUS has kept clients defensively positioned for some time. The kind of rapid shifts in monetary conditions that have unfolded in the past year, created an environment ripe for ‘black swan’ events such as this. The risk of a deeper recession certainly rises with this event. Some of the things we are watching include:
Negative impact on liquidity (money available to borrowers), which comes on the back of the liquidity tightening already created by higher interest rates and quantitative tightening by the U.S. Federal Reserve and other global Central Banks. Risk of recession rises.
There could be other financial institutions that are forced to sell long dated U.S. Treasury holdings at a loss as deposits shift away from banks to higher yielding money markets. As we have already seen, uncertainty has led to widespread pressure on many of the smaller regional banks. Financial conditions tightening - risk of contagion rises and recession risk rises.
As a major lender to technology and startups, SVB troubles mean that liquidity to that part of the market is likely to be particularly hard hit. SVB claims that 50% of startups are their customers. Biotechnology is also part of this customer base. With liquidity limited, some of these companies will likely fail or be forced to strike deals at valuations that are far lower than they had hoped. Perhaps an opportunity for larger, well capitalized companies to pick up cutting-edge technology for a decent price?
Quality will continue to be important in investment strategy, especially as liquidity tightens. If a company has cash, they are well positioned to take advantage of opportunities and accelerate future growth potential. Cash is king again.
The risk of contagion is very real, as highlighted by the New York Times on Friday. Regulators are keenly aware of this as they work toward a resolution, but rebuilding confidence takes time. Expect waves of volatility.
It is likely that the Fed will slow their tightening of monetary policy. This could become a tailwind to markets once the dust settles (if inflation remains contained). If inflation readings continue to accelerate the Fed will be between a rock and a hard place, which would likely be extremely disruptive to markets. Inflation continues to be the central risk barometer for markets.
What are the regulators doing?
The regulators have taken over the bank and continue to look for a buyer. The first auction attempt failed over the weekend, but as reported in the Wall Street Journal a second is being planned. We will see. The size of Silicon Valley Bank has quadrupled in the past five years, at a time when valuations on many startup companies got extremely overvalued. This will certainly be an area of risk review for any buyer.
This is not the first time that Silicon Valley Bank has found itself in trouble. It will be interesting to see how regulators handle this in the context of that history.
How will this affect the chances of a recession?
All things considered it is very likely that this event will further tighten liquidity conditions, making it more expensive and harder for businesses and individuals alike to get loans and finance business activity. This raises the probability of recession but may also reduce the probability of the more troubling scenario of stagflation. The silver lining is, that while recessions are hard, they tend to be clearing events for the economy and create an environment where high quality companies tend to thrive. With all the excesses of the past years some clearing may be just what the economy needs.
The information provided is for informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor's particular investment objectives, strategies, tax status or investment horizon. You should consult your tax and financial advisor.
Views and opinions are subject to change at any time based on market and other conditions. Any projections, market outlooks, or estimates in this presentation are forward looking statements and are based upon certain assumptions and should not be construed as indicative of actual events that will occur.
Levatus LLC is a registered investment advisor. Levatus provides investment advisory and related services for clients nationally. Levatus will maintain all applicable registration and licenses.
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Distilling complex topics down to their essence is a hallmark of the LEVATUS approach.
ABOUT THE AUTHOR
Susan Dahl is a seasoned executive, female leader, and dedicated client advisor with over twenty-five years of international and domestic investment experience. Susan writes on topics such as long-term investment growth and where to find it, the power of female leadership, and the intersection of investment and tax strategy. She is known for her work on investment process design for private wealth clients, as well as her development of a research-based approach to financial advisory service delivery; an innovative approach that addresses quality of life in specific and tangible ways. A deep and diverse background that extends from global investing to risk management to process development and planning, has laid the groundwork for an advisory solution that asks more of wealth. She shares some her most recent work in a talk for TEDx, Can Happy Make You Money?
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