SVB Collapse: Race Against Time to Avert Disaster

U.S. regulators are scrambling behind the scenes on Sunday to find cash for strapped depositors of failed Silicon Valley Bank.

It is a race against time, in which the U.S. authorities are engaged in an attempt to avoid the worst. 

The worst would be if they don't announce any satisfactory decision on uninsured deposits for the thousands of startups and small business clients of Silicon Valley Bank  (SIVB) - Get Free Report, which was shut down on March 10 after a run on the bank.

They don't have much time as the markets reopen in a few hours. In the absence of clear solutions, it is to be expected that panic, according to experts and the messages of many financiers circulating on social networks, will take over. Some fear that consumers might flock to the banks to withdraw their savings.

D-Day is March 15

SVB’s failure, which is the second-largest of a bank in U.S. history, has shaken many investors. It was the result of a bank run, caused by the firm’s announcement that it planned to raise $2.25 billion by issuing new common and convertible preferred shares to shore up its finances, after it sold bonds in its portfolio of investments at a $1.8 billion loss.

About $42 billion of deposits were withdrawn by the end of March 9, according to a regulatory filing. By the close of business that day, SVB had a negative cash balance of $958 million.

The Federal Deposit Insurance Corporation took control and is now the manager of $175 billion in customer deposits, including money from several startups and from some of the biggest names in the technology world.

The regulator also created a new entity and indicated that unsecured depositors, that is, SVB customers with more than $250,000 in their accounts, will not, for the moment, have access to their money. 

This leaves much uncertainty about the ability of many startups to operate in the coming weeks, since their funds are locked up. The FDIC said it will pay uninsured depositors an "advance dividend within the next week."

The question is how much this "advanced dividend" will amount to. 

Companies with SVB accounts, lines of credit and credit facilities are wondering what this means for them, when they will be able to access their funds, whether they will be able to get all their funds out, and whether they will have access to their credit lines. 

More than 95% of the bank's deposits were uninsured as of December, according to regulatory filings.

According to Bloomberg News, the FDIC was in the process of selling the assets of SVB on Sunday, March 12. The federal agency hopes that it will have found a buyer or buyers during these auctions by Sunday evening at the latest. 

The FDIC is seeking to obtain as much cash as possible to distribute to the SVB depositors on Monday, so that they can pay their employees and suppliers and continue to operate.

The D-day for the payment of wages by many companies is March 15.

The FDIC declined to comment on the auction process.

Treasury Secretary Says No Bailout Planned

Treasury Secretary Janet Yellen said on March 12 that there were several options on the table.

"I simply want to say that we're very aware of the problems that depositors will have," Yellen said in an interview with CBS’ “Face the Nation”. "Many of them are small businesses that employ people across the country and of course this is a significant concern and working with regulators to try to address these concerns."

Asked whether regulators might be open to a "foreign bank" buying SVB, Yellen responded, "I'm sure they're considering a wide range of available options that include acquisitions."

"This is really a decision for the FDIC, as it decides on what the best course is to resolve this firm,” the Treasury Secretary said.

Yellen, however, dismissed the idea of ​​a bailout.

"Let me be clear that during the financial crisis, there were investors and owners of systemic large banks that were bailed out," Yellen told CBS’ “Face the Nation.” "And we're certainly not looking - and the reforms that have been put in place - that we’re not going to do that again. But we are concerned about depositors and we're focused on trying to meet their needs.”

The challenge for the FDIC and the Fed is that any guarantee of the borrowers’ funds might be perceived as a bailout, with taxpayer money being used to protect clients, drawing similarities to the government intervention in the 2008 financial crisis.

House Speaker Kevin McCarthy (R- Calif.) said on Fox News’ "Sunday Morning Futures" that he's "hopeful that something can be announced today to move forward."

Many politicians have already sent the message that taxpayer money should not be used to bail out SVB.

"Taxpayers should absolutely not bail out Silicon Valley Bank," Republican presidential candidate Nikki Haley said on Twitter. "Private investors can purchase the bank and its assets. It is not the responsibility of the American taxpayer to step in. The era of big government and corporate bailouts must end."

Extraordinary Measures

For powerful Republican Sen. Mitt Romney of Utah, Silicon Valley Bank’s shareholders and executives should "lose it all."

"Depositors in good faith, however, should recover and have access to their deposits in order to meet their payrolls, pay their suppliers, and to prevent contagion," the former presidential candidate said.

"What I'll say about the banking system overall is it's more resilient, and has a better foundation than before the financial crisis. That’s largely due to reforms put in place after the financial crisis. Our Treasury secretary is at the helm and working diligently with regulators," Shalanda Young, director of the White House Office of Management and Budget, said on CNN’s "State of the Union."

One of the concerns is that there is a contagion to regional banks, which also do business with venture capital firms and start-ups. Regulators are considering extraordinary measures to avoid unpleasant surprises.

The FDIC and the Federal Reserve are working on the creation of a fund that would allow regulators to backstop more deposits at banks that run into trouble, following the collapse of SVB, reports Bloomberg News.