by The government takeover and subsequent takeover of Washington Mutual in 2008 could serve as a possible blueprint for Silicon Valley Bank’s future.
The economic forces behind the two largest U.S. bank failures were different, but at this point, the best outcome for Silicon Valley Bank could be the same: a buyout by another bank and the protection of depositors.
“I think it’s always best to have an absolute buyer for a failed bank to restore trust between customers and the system at large,” said Kirsten Grind, author of The lost bank, a book about Washington Mutual. “But it’s not clear what will happen in this case.”
SVB’s collapse this week, which has huge implications for the technology industry, is second only to the failure of Seattle-based Washington Mutual in 2008 during the global financial crisis.
Both companies were placed under administration by the Federal Deposit Insurance Corporation. The regulator sold most of Washington Mutual’s banking assets to JPMorgan Chase for $1.9 billion, protecting Washington Mutual’s depositors.
The same scenario could play out this weekend as the FDIC tries to find a buyer for SVB — and help thousands of tech companies access cash to pay their bills and their workers. JPMorgan is also considered one of the leading candidates for a possible takeover of Silicon Valley Bank.
“Finding a single buyer would make the sale happen quickly, which would reduce the potential for panic and contagion, so I’m sure that’s what the FDIC is trying to do now,” wrote financial expert Noah Smith.
Washington Mutual, the Seattle-based savings and loan association, closed amid the 2008 subprime mortgage crisis.
“I think everyone who lived through the failure of Washington Mutual was reliving it today after the FDIC took over Silicon Valley Bank,” said Grind, a former reporter for the Puget Sound Business Journal in Seattle who is now at the Wall Street Journal.
Washington Mutual’s collapse was followed by a “system-wide failure” as more than 500 federally insured banks collapsed over the next seven years, The New York Times reported Friday.
Whether SVB is the start of a similar transmission remains to be seen.
Some analysts describe the pressures facing SVB as “extremely idiosyncratic”. The bank had a unique focus on technology companies and venture capital firms.
Against a backdrop of rising interest rates and scarce investment capital, shares of Silicon Valley Bank tumbled after the company said it would post a $1.8 billion loss related to the sale of securities. That, in turn, sparked a run on the bank.
“With WaMu, of course it was all about bad mortgages and the housing downturn — none of those are factors here,” Grind said.
William Canestaro, managing director of the Washington Research Foundation/WRF Capital, said “a crisis of confidence is not necessarily a crisis of fundamentals.”
“Every indication is that SVB’s assets exceed its liabilities,” he said. “Right now, my concern is more about when money will be available as opposed to whether the deposits at SVB are lost.”
Former Treasury Secretary Lawrence Summers told Bloomberg that as long as depositors are paid in full, there is no systemic risk.
But Robert Burgess, executive editor of Bloomberg Opinion, wrote that SVB’s failure could be “the first sign that a recession has arrived.”
“In that sense, it’s no wonder this bank has scared everyone,” Burgess wrote.
Grind pointed to another difference between SVB and Washington Mutual: the speed of the collapse. There were two months between the first bank at Washington Mutual and its acquisition by JPMorgan Chase.
SVB’s banking operation started just this week. Its customers tried to withdraw $42 billion on Thursday alone, leaving it with a negative balance of $958 million, according to a Friday filing with California financial regulators. It is this shortfall that prompted these regulators to step in, placing Silicon Valley Bank in the hands of the FDIC.
The FDIC announced Friday that insured depositors will have full access to their deposits no later than March 13, and SVB branches will reopen Monday. It will pay uninsured depositors an advance dividend within the next week. The FDIC insures accounts up to $250,000, but most of SVB’s deposits is above this limit.
Tech startups and investors should know more about their cash soon. The stakes are extremely high.
The failure of Silicon Valley Bank “could wipe out an entire generation of startups,” said Garry Tan, CEO of famed startup accelerator Y Combinator. he said on Twitter. “If there isn’t more action, this will become a contagion that will spread to other startups and other banks. Depositors must be completed.”
