🏦 Silicon Valley spillover

Tuesday, March 14, 2023 by Snacks
Silicon Valley blues (Justin Sullivan/Getty Images)

Silicon Valley blues (Justin Sullivan/Getty Images)

Silicon Valley blues (Justin Sullivan/Getty Images)

Silicon Valley blues (Justin Sullivan/Getty Images)

Yesterday’s Market Moves
Dow Jones
31,819 (-0.28%)
S&P 500
3,856 (-0.15%)
Nasdaq
11,189 (+0.45%)
Bitcoin
$24,285 (+9.62%)

Hey Snackers,

Yesterday was a rough one for bank stocks, despite regulators swooping in to rescue depositors at two failed banks. Shares of US regional banks had their biggest plunge in three years, led by names like First Republic (down 62%) and Western Alliance (down 47%). “Systemically important” banks (aka: “too big to fail”) like JPMorgan Chase and Bank of America fared better, but were also down.

Some investors now expect that recent bank failures will pressure the Fed to cool (or even pause) rate hikes. Traders are predicting a 25 bps hike at this month’s meeting, down from expectations of 50 bps on Thursday. The February inflation report, which comes out today, will also influence the Fed’s next rate decision.

Resort

1. US regulators rush to limit banking contagion after Silicon Valley Bank’s collapse

From ski resort to last resort… Earlier this month Silicon Valley Bank hosted a “snow summit” for tech CFOs at the Deer Valley ski resort in Utah. Last week, SVB tried to borrow from the Fed — a lender of last resort — to avoid collapsing (spoiler: it still collapsed). Here’s a high-level recap of the second-largest bank failure in US history:

  • Who: Silicon Valley Bank was the go-to for tech startups, servicing about half of America’s venture-backed tech companies.
  • Rise: SVB was flooded with deposits in 2021 as startups easily raised venture cash in an extra-low-interest-rate environment, parking their funds at SVB.
  • Problem: Banks largely make $$ by making loans, but SVB’s clients were already flush with cash. Plus, interest rates on loans (especially short term) were super low.
  • “Solution”: To earn a slightly higher interest rate on its loans, SVB invested most of its deposits into US Treasury bonds with long durations (think: 10+ years).
  • Risk: If interest rates soared, the value of SVB’s bond portfolio would plunge (because its old bonds would be paying out at lower interest rates).
  • Result: Interest rates did in fact soar. The market value of SVB’s bonds plummeted by $15B (and its savvy customers paid attention).
  • Re-tweet: SVB’s close-knit clients chatted and pulled their cash out at the same time (on Thursday alone, they tried to withdraw $42B — a quarter of SVB’s total deposits).
  • Reckoning: SVB ultimately couldn’t meet withdrawal requests, the FDIC took control and declared it insolvent, and panic ensued (Signature Bank also failed).

Pulling out all the (back)stops… To avoid more bank runs, regulators announced an emergency backstop to ensure that all depositors at both failed banks would have access to all their funds (as of yesterday). The Fed is also creating a “Bank Term Funding Program” to offer loans to financial institutions who present high-quality securities (think: Treasurys) as collateral — instead of having to fire-sell securities during times of stress.

  • The FDIC guarantees customer deposits of up to $250K at every insured bank, but most of SVB’s and Signature Bank’s deposits were uninsured (think: tech companies with way more than $250K). Still, the FDIC said it would make all depositors at these two banks whole, regardless of account size.
THE TAKEAWAY

Panic can be a self-fulfilling prophecy… which is why the government is taking extraordinary measures to contain the damage. The three banks that failed this month (including Silvergate) had an unusually high concentration of deposits from tech and crypto companies. Regular folks weren’t likely to have accounts there, and regular folks are also less likely to have uninsured deposits (aka: $250K+ in one account). Still, if companies are at risk of losing millions in deposits, then people are at risk of losing paychecks — and damage control could continue to be key to containing further contagion.

CHAIN

2. SVB's implosion depegged the second-largest stablecoin, highlighting crypto's dependence on traditional banking

Cutting it close… Crypto had a weekend it'd rather forget. Circle, the biz behind USDC (the second-largest stablecoin), said on Friday that $3.3B of the stablecoin's US-dollar reserves were in the failed Silicon Valley Bank — which regulators had taken over earlier that day. With the future of SVB's deposits in doubt, crypto investors worried that USDC might no longer be fully reserved (aka: backed one to one with US dollars).

  • The drop: USDC, which was designed to always = $1, depegged over the weekend. The stablecoin fell to as low as 87 cents.
  • The climb: Circle said it'd "cover any shortfall," and on Sunday the gov’t said all SVB depositors would be made whole. Yesterday USDC regained its $1 peg.

Have crypto, will travel… While SVB's collapse sent shockwaves through crypto, it wasn't the first crypto-friendly bank to run into trouble. Last week crypto mega bank Silvergate said it'd shut down after a surge in post-FTX withdrawals. And on Sunday regulators moved to close New York's Signature Bank (over a fourth of its deposits were from crypto companies like Coinbase and Paxos). Now, with three big crypto banking players off the board, the industry’s scrambling to find alts.

THE TAKEAWAY

Crypto can't shake TradFi's grip… Circle's rough weekend is a reminder that crypto's fortunes remain tied to traditional finance (aka: TradFi). It wasn't just the stablecoin heavyweight that was forced to face this reality: bankrupt crypto lender BlockFi and Ripple Labs — the biz associated with the $19B XRP token — both had exposure to SVB. Still, some crypto fans see the recent bank failures as an argument for digital assets. Think: self-custodied crypto vs. bank-custodied dollars.

What else we’re Snackin’

  • Prop22: Uber and Lyft scored a huge win yesterday after a California court ruled the ride-hailers could keep classifying drivers as independent contractors (vs. employees, which would’ve upended their gig-biz model).
  • Treat: Pfizer agreed to buy cancer-drug maker Seagen for $43B. Seagen expects to make $2B this year from its line of cancer drugs, which Pfizer says it can deliver on a scale that’s “never been seen before.”
  • Saucy: Chick-fil-A plans to spend $1B to expand its fried-chicken empire beyond the US. For decades rivals like McDonald’s and KFC have been adding locations in Europe and Asia, and the fast-food frenzy shows no sign of cooling.
  • Oscars: "Everything Everywhere All at Once" became the most-awarded Best Picture winner since “Slumdog Millionaire.” It was the highest-grossing US release for indie production company A24.
  • Sign: Mortgage rates fell to 6.5%, down from 7.5% just a week ago, after SVB’s collapse. The drop saves buyers $128/month in payments, and could lure prospective homeowners back to the market.

Snack Fact of the Day

As home prices soar, 3M US households making $150K+/year are still renting

Tuesday

  • Consumer Price Index
  • Earnings expected from Lennar

Authors of this Snacks own shares: of Yum Brands and Uber

ID: 2790203

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