So what happened?
- On March 8th, SVB issued an 8-K, citing that it has sold substantially all of its Available for Sale (AFS) securities portfolio at a $1.8 billion loss.
- It contemplated offering $1.25 billion common stocks and $1 billion mandatory convertible preferred stocks to plug the hole.
- But this only created more fear and SVB subsequently faced a bank run that it couldn’t defend.
- SVB was put into receivership by the FDIC in the morning of March 10.
- The depositors should be made whole, the senior bonds should recover 40 cents on the dollar, and the subordinated debt and equity will be wiped out.
Likely, most of you were not affected directly by the failure of Silicon Valley Bank, so why am I blogging about it and why should we care? In short, this is an real example of the failure of our current banking system AND more importantly it reveals how we as individuals have given a significant amount of control of our money over to the government.
There is a lot of significance hidden in each of the five bullet points above, particularly the last three points. The potential instability of the fractional reserve banking system dramatically amplifies fear and greed in the banking system. The ability for SVB to be put in to receivership by the FDIC comes from an implementation of a relatively new law, the Dodd-Frank Act of 2010. The FDIC did in fact protect the small depositors in this case, however the actual fraction of these accounts is quite small. The majority of creditors in Silicon Valley Bank were wiped out, or left holding equity in a now essentially defunct operation.
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