The First Ever Meme-Driven Bank Collapse

Photo Credit: The Fintech Times

With the Fed gearing up to announce a 25 bps increase next Wednesday, the markets are bracing for an economic slowdown. The FOMC voted to increase the target range for the Federal Funds Rate 25-50 bps in its meetings yesterday and today.

Why did a $212 Bn tech lender fail? Apparently there’s ‘no single answer’. Federal investigations have begun and lawsuits filed. Treasury Secretary Janet Yellen told a Senate panel that the nation’s “banking system is sound”, so I guess that’s that. Some are saying, incorrectly, that the direct cause is Trump’s rollback of Dodd-Frank. The Economic Growth, Regulatory Relief and Consumer Protection Act (S. 2155) was the most significant piece of regulatory reform legislation for community financial institutions since Dodd Frank itself. The rollback raised the asset threshold for banks subject to enhanced scrutiny, like stronger regulations and stress tests, from $50 Bn to $250 Bn. Silicon Valley Bank CEO Greg Becker had been lobbying rigorously for this change. SVB had just passed $50 Bn in assets at the time Trump helped to ease the pressure. Regardless of Biden’s uncanny ability to get physically lost while stationary in the Oval Office, I’m sure he was well aware of S. 2155’s implications. Even Footnote 563 of the CFTC Federal Register for that matter. The latter being even more impactful economically. However, the rollback was not the direct cause of this run, based on what is currently known.

This really all started with a rising interest rate and was compounded by rumor and social media. The recent rise in interest rates hurt the value of SVB’s long term treasury bonds. On the secondary market a bond’s resale value is inversely proportionate to interest rates because bond payments (coupons) are static. If you have a bond that’s worth $10 with a 10% yield, that earns coupon payments of $1. If the rate went up to, say 20% to compete with the Federal Reserve’s target rate, you would still have a coupon of $1 but the value of the bond for resale would be $5. Because $1 is 20% of $5.

Because of economic uncertainty and because 94% of SVB’s deposits exceeded $250,000, the FDIC does not insure over this amount, people withdrew in hordes. Customers pulled more than $42 Bn in a single day in what House Financial Services Committee Chairman Patrick McHenry called “the first Twitter fueled bank run.” Ben Thompson, an analyst who tracks the tech industry, wrote in a post on Monday. “It was the speed, fueled by zero distribution costs for both rumors and withdrawals, that was so destabilizing.”

SVB surprised investors on March 8 with an announcement that it took a $1.8 Bn hit on its $21 Bn portfolio of treasury securities to cover its dwindling reserves. The debt holdings, originally valued at $23.97 Bn, ended up being sold at a negotiated price of $21.45 Bn. Goldman Sachs were the ones who actually bought the SVB bonds whose $1.8 Bn loss set off the startup lender’s meltdown. SVB followed this hit by taking out a loan of $15 Bn from a home loan bank. A loan of roughly seven times the size of its initial loss.

One focus of upcoming federal inquiries could be the sales of company shares by several bank executives in the weeks before the bank’s failure. Legal experts say that the sales generated millions of dollars in proceeds, though some of the bank’s executives sold stock pursuant to insider selling plans. Setting the timing of such sales in advance, which is a way to avoid the appearance of trading on confidential information. For example, under a prearranged plan, Silicon Valley Bank’s former chief executive, Gregory Becker, exercised options in late February that permitted him to sell shares worth about $3 million for around $287 a share; the sales were disclosed in a regulatory filing on March 1. The filing also shows that the stock trading plan was set up on Jan. 26 when shares of the bank closed at $296. Investigators look into prearranged stock selling plans when the sales take place shortly before bad news tanks a company’s stock.

Aside from the government covering the $1.8 Bn in losses and with SVB filing bankruptcy, the FDIC is insuring all of the banks deposits currently as well as handling auctions for its sale. There were no takers on the 13th, as JP Morgan Chase and Bank of America both passed. Several alternative asset managers including Blackstone, Ares and Carlyle Group are potentially interested in their $74 Bn loan book.

There’s may be ‘no single answer’, to why there was a run on this bank but there’s definitely a simple one. The bank run at SVB was not only due to a rising interest rate, but social media as well. This could have even been a way for a smaller firm to gain ownership with ease. It could have also been a way for short-sellers to profit from a major loss. Similar to what has occurred in the past with meme stocks like GME but in reverse. Throw insider trading in the mix and this is either the beginning of a terrible economic chain reaction or it’s just the first ever meme-driven bank collapse.

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