Silicon Valley Bank had a debt-to-asset ratio of 185:1 marked in February in the tech experts newsletter
Silicon Valley Bank’s collapse may have been triggered by a newsletter written by a tech expert in Texas in the last week of February.
In the aftermath of the bank’s collapse, a technology writer, Evan Armstrong, pointed to an email written by fellow writer Bryne Hobart, dated February 23.
“This entire debacle was potentially caused by (Hobart’s) bulletin,” Armstrong wrote, who later shared his own post detailing how Hobart may have knocked over the first domino.
“Almost every venture capitalist I know reads this newsletter,” Armstrong said, suggesting that as VC executives grew wary of Silicon Valley Bank, their fears spread like contagion.
Bryne Hobart writes a popular daily newsletter, The Diff, which explores the latest developments in finance and technology. It was suggested that his February 23 post might have spooked Silicon Valley Bank investors.
Silicon Valley Bank’s collapse may have been triggered by a newsletter written by a tech expert in Texas in the last week of February, noting that it had a debt-to-asset ratio of 185:1.
In Hobart’s February post, he noted that Silicon Valley Bank had a debt-to-asset ratio of 185:1 and was “technically insolvent” in the final quarter of last year.
“The tech world is more risk averse than it used to be,” he wrote, before describing SVB as “a bank that is still 185:1 leveraged on an asset base that includes, among other things, loans backed by “premium wine” in an amount almost equal to the equity marked to market in the last quarter.’
The bank is known for its loans to the wine industry and even had a Napa-based Premium Wine Division.
It reported in last year’s fourth-quarter filings that 1.6 percent, or $1.16 billion, of its $74.3 billion loan portfolio went to clients with premium wineries and vineyards.
‘After all, the signs of SVB’s potential implosion were there last year. However, all it took was a few venture capitalists to act before it all got out of hand,” Armstrong wrote on his blog.
Hobart is the author of The Diff, a newsletter that claims to have around 50,000 paying subscribers.
Diff’s website includes testimonials from hedge fund managers and technology analysts praising the quality of Hobart’s insights.
“Byrne’s work is truly the result of someone thinking, and thinking differently and deeply,” wrote one. “He reads like an industrial vacuum cleaner and synthesizes like a minimoog,” said another.
In Hobart’s February post, he noted that Silicon Valley Bank had a debt-to-asset ratio of 185:1 and was “technically insolvent” in the last quarter of last year.
Hobart also predicted that even if the bank were to collapse, measures would be put in place to ensure that people with deposits are not prevented from withdrawing their money.
However, on his blog, Hobart suggested that a collapse was unlikely despite the bank’s huge liabilities.
“It would take an absolutely titanic run on the bank to affect the liquidity of the company, so a run is unlikely,” he wrote.
Hobart went so far as to predict that even if the bank were to collapse, measures would be put in place to ensure that people with deposits in the bank would not be affected.
“And even if the company were to run into trouble, there are good political reasons to think depositors wouldn’t be hurt,” he added.
After news of the fight broke, Silicon Valley Bank customers began lining up outside one of the franchises more than four hours before the bank opened to make sure they could withdraw their money.
Federal regulators had announced that they are taking emergency measures to ensure clients have access to their funds.
In a speech Monday morning, President Joe Biden said none of the losses will fall on taxpayers, but will be paid for by fees banks pay to the federal government.
“The bottom line is: Americans can be sure that our banking system is safe, their deposits are safe,” the president said.
However, he suggested that investors in the bank would not be protected. “This is how capitalism works,” she said.
EXCEPT FOR FEBRUARY 23rd HOBART NEWSLETTER
In a newsletter sent out on February 23, Hobart wrote:
‘This is quite an astonishing fact: On a market basis, they were bankrupt last quarter, although still liquid. And that liquidity matters; One of the reasons banks are not required to mark assets at market prices is that they can hold them indefinitely as long as they have deposits. On the other hand, Silicon Valley Bank’s deposits are less rigid than those of other companies, since they are provided mainly by companies that burn money. The lack of mark-to-market accounting is a reflection of the general banking reality, that banks do not explicitly receive margin calls from customers. Sometimes they experience races. It would take an absolutely titanic run on the bank to really affect the liquidity of the company, so a run is unlikely. And even if the company were to run into trouble, there are good political reasons to think depositors wouldn’t be hurt: People who donate the legal maximum to political campaigns are disproportionately likely to bank in Silicon Valley or work for companies that do so. do.
“On the other hand, the tech world is more risk-averse than it used to be, and depositing money in a bank that still has 185:1 leverage on an asset base that includes, among other things, backed loans for “premium wine.” in an amount nearly equal to last quarter’s adjusted market value.(1) No one wants to appear paranoid about being first out of their money, but no one wants to deal with the consequences of being last. And if the money flows, they eventually have to start selling assets, which turns an “unrealized loss” footnote into a leading loss number.
Silicon Valley Bank was founded in the 1980s and quickly built a reputation as a tech-savvy lender to young, early-stage computer companies.
Over the course of the next four decades, it grew to become the 16th largest bank in the US, serving technology companies around the world.
As the industry boomed in the pandemic years, the bank’s services were in high demand and its deposits grew as businesses used it to store cash for rising payrolls, among other things.
However, his demise began after he made significant investments in low-interest, mortgage-backed, US government bonds.
When the Fed started raising interest rates last year, the value of those bonds fell and the bank’s debt-to-asset ratio became increasingly precarious.
As Silicon Valley companies fell on hard times last year and tried to withdraw money from the bank, they struggled to meet the withdrawals and were forced to sell assets prematurely, incurring losses that spooked investors.
Last week SVB filed for insolvency and on Friday was taken over by the government after a run on its deposits and a collapse in its share price.
It became the largest bank to fail since the 2008 financial crisis.