Things are certainly getting interesting. 

By now, you’ve likely read about (or maybe you’ve been following all along) the dramatic collapse of Silicon Valley Bank (SVB). As I write this Monday morning, there’s a lot of chatter, speculation, analysis and, well, spew out there right now. I don’t know exactly where we go from here, although my sense is that this is not the beginning of something larger. I tend to agree that this is a company specific situation, although moreso in the way the company bungled its response. 

I won’t rehash the entire scenario for you. Suffice it to say that the story entered the national media spotlight somewhere around here, and led us to where we are at the time I write this, which is somewhere around here. It appears that the federal government is moving extremely aggressively to contain the damage, which, in the short run, at least, is probably a good thing.

Our own experience with SVB

As a member of the tech industry with clients in the mortgage lending segment of the financial services industry, this story touches my business too. We had approached SVB in the past few years to consider building a relationship ourselves. SVB, as you likely know, was well known as the go-to lender and investor for start-up tech—especially when they had nowhere to go.

However, with such a reputation comes a flip side. As we explored more deeply our potential relationship, I was struck by how densely concentrated SVB’s investments were. The focus was on high-value, high-yield businesses. That’s great when everything’s going well. But with high wealth comes high risk. I don’t pretend to be a financial analyst, but something seemed off there, so we stepped back.

Enlightening thoughts from an industry giant

The highly-regarded David Stevens, former Federal Housing Commissioner and MBA CEO, has a deep and unique view when it comes to the relationship between lending, investment and government. He wrote a great piece on the matter, which you can read here. While there are plenty of simplistic, politically-motivated statements being flung about in the early days of the aftermath, Mr. Stevens observes that the word “contagion” is probably not the best descriptor for the situation. Instead, he points to management.

According to Mr. Stevens’ article (statistics cited are from Barrons), at year’s end, 2022, SVB held $117 billion of securities, which accounted for more than half of its $211 billion in assets. He also notes that a bit of aggressive bookkeeping and accounting that deprived the bank of the ability to take any potential losses over time, instead of all at once. He notes that the company also did not prudently manage its liquidity. Because SVB’s depositors were mostly VC firms and startups, which tend to demand a 1:1 match to fed actions, rising interest rates and the general uncertainty in today’s markets likely only ratcheted up the pressure. 

Parting thoughts

The Fed is not above reproach in all of this. I’ll save my thoughts on that for another Deeper Thoughts, but Mr. Stevens seems to agree, at least as I take it from this article. But I still think this comes back to  one basic observation. SVB seemed to have all of its proverbial eggs in one basket. The obvious goal was quick and exponentially large profits. That’s fine. We toss the word “capitalism” around all the time. If we truly want free markets (which are not 100% synonymous with capitalism at all times, by the way), we need to understand that some businesses will fail. Especially those taking a high-risk, high-reward approach. We’ll talk in the coming days about all the great ventures supported by SVB when no one else would help them—green energy, medical tech and the like. Kudos to them for that. But to ascribe 100% of the fault for SVB’s failure to anything other than their own actions seems to me to be a bit of selective aggrandizement.

We at LodeStar are grateful to all of our clients, friends and colleagues who take the time to view Deeper Thoughts. Please consider having a look as well at some of our other great content, including our podcast, “LodeStar’s Lending Leaders,” and “A Tale of Two Mortgages: an original webcomic for the mortgage industry, presented by LodeStar.”  As always, your feedback is welcomed and appreciated!