The Collapse of Silicon Valley Bank Sparks Market Chaos and Fears of Contagion

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The Collapse of Silicon Valley Bank Sparks Market Chaos and Fears of Contagion

On Friday, March 10th, Silicon Valley Bank, a tech lender to startups and venture capitalists, was abruptly shut down by the California Department of Financial Protection and Innovation, after disclosing a $1.8 billion loss on its bondholdings. The remaining assets were placed under the Federal Deposit Insurance Corp.'s control. Uninsured deposits totaled $151 billion as of Dec. 31, 2022, according to public filings.

This collapse has sparked fears of wider contagion that some experts worry could upend the US banking sector. Billionaire Peter Thiel's Founders Fund and other tech luminaries had urged startups to pull their cash or risk losing it entirely ahead of the bank's failure, which came amid a major slowdown in the initial public offering market this year.

Although depositors are tech executives rather than mom-and-pop investors, the chaos unleashed by the bank's downfall could spread to other institutions and spell trouble for the broader economy. The nation's four largest banks lost a combined $52 billion in market capitalization, with shares of Goldman Sachs and Bank of America being hit hard. Investors are concerned about where they should put their money, and it is not good for smaller banks when customers ask these questions, says Christopher Whalen, Chairman of Whalen Global Advisors.

Silicon Valley Bank ranked as the 16th-largest bank in the US, according to the Federal Reserve. As of the end of last year, it had approximately $209 billion in total assets and roughly $175.4 billion in total deposits, according to the agency. Its downfall marked the largest bank failure since the Great Recession and the second-largest of all-time in terms of asserts, trailing only the doomed Washington Mutual. It is the first FDIC-insured institution to crumble since Almena State Bank in 2020.

Although ex-Treasury Secretary Larry Summers said SVB's implosion shouldn't pose a systemic risk to the US financial system as long as depositors are made whole, other market heavyweights such as the eccentric investor Michael Burry of "The Big Short" fame warned, "It is possible today we found our Enron." Hedge fund billionaire Bill Ackman called for a government bailout of the bank.

The crisis has left many companies scrambling to find alternate sources of funding. In an email to clients that was reviewed by The Post, Silicon Valley venture firm RRE admitted, "While we work to understand when and how normal banking operations may resume, we are concerned about our companies' short term access to capital." Notable firms listed as SVB customers include Pinterest, ZipRecruiter, and Shopify.

In New York, police were reportedly called to a local SVB branch on Friday morning after depositors swarmed the building in a bid to withdraw their money. Journalist Eric Newcomer reported that at least one person was forced to leave the facility. The chaos unleashed by Silicon Valley Bank's downfall could be the beginning of a larger financial crisis, and only time will tell what impact it will have on the economy.

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