Silicon Valley Bank – When fleas go unchecked
In addition to the government bonds that had to be sold at a loss to cover the tech downturn, significant SVB assets were in “non-marketable securities” which is the “sweetener” that the bank clawed into its deals to extend credit to many of the smaller tech companies – if you believe the news. Some of these companies may be dogs, some dogs with fleas, some may be average operating companies, some may be extremely valuable small companies, albeit private, some appear to be OTC companies. The common thread between all these companies is, no exchange oversight. Unchecked, the flea colony becomes a parasitic city that kills the valuable host.
Who is Silicon Valley Bank?
Established in 1983, Silicon Valley Bank (SVB) carved out an impressive niche in providing banking services to tech and life science startup companies backed by venture capital firms. This niche was orders of magnitude bigger in the last 10 years than it was in 1983 leading to the once small regional bank becoming the 16th largest bank in the United States.
Why did Silicon Valley Bank bust?
During the period during and after COVID, record low interest rates led SVB, busting at the seams with cash, to buy heavily into long-term Treasury bonds. In a normal business climate, this might not be cause for concern, however, in 2022 and 2023, we are going through anything but a normal business climate. The tech sector downturn led SVB to sell a significant position in those long-term bonds at a loss due to the interest rate hikes. This scared existing SVB customers into withdrawing deposits, collapsing the business in a matter of days.
Talking heads will have you place “blame” on Donald Trump, Joe Biden, the Fed or another political figure, for a series of unfortunate events that led to this very public collapse, but the truth doesn’t have a side, politicians do (as is almost always the case).
The Truth
In addition to the government bonds that had to be sold at a loss to cover the tech downturn, at least some portion of SVB assets were in “non-marketable securities” which is the “sweetener” that the bank clawed into its deals to extend credit to many of the smaller tech companies (and VC firms) – if you believe the news. Some of these companies may be dogs, some dogs with fleas, some may be average operating companies, some may be extremely valuable small companies, albeit private, some appear to be OTC companies. The common thread between all these companies is, no exchange regulated marketplace.
Without a regulated listing market to separate the wheat from the chaff, these investments are wrongly labeled with “can’t sell = worthless” when actually “can’t sell = no liquidity.” It’s an enormous difference but not distinguishable in the world of banking, probably for good reason. (Exposing the dangers of sweeping rules that strike fear in bankers’ hearts of “mark to market” and “charge off/recovery policy” within the banking circles.)
If some, if not many, of the “non-marketable securities,” however, were deemed eligible for listing on a licensed venture exchange, the market would have the problem of determining which dogs had fleas and which were champion, pedigree dogs worth a long life of breeding. If a venture exchange market existed, wouldn’t those with fleas have had trading halted in an individual listing, perhaps the whole market? Absolutely. The national market operates under these exact crisis management rules for this very reason, to protect investors (but also to protect companies and the market) – so why not use this for the small caps?
ANSWER: Simply put, development of a venture security marketplace will absolutely resolve many of these problems. Especially for larger funds, syndicated investors (let alone bank depositors), probably now stuck with an extension of this problem, with constraints on the liquidity needed for the fund or trickling down to individual bank customer lines of credit and deposit accounts – a totally needless problem.
Perhaps, in the future, there will be selloffs during a crisis even with a venture security market – no doubt. However, having exchange self-regulation over this market will enhance and protect the market, at a micro-level differentiating both the individual security, market sectors and the market as a whole – especially if exchanges can develop custom rules to protect investors and small cap companies alike – wheat from chaff/dogs from dogs with fleas – whatever flavor of differentiation fits.
In our next webinar, titled “Maintaining a Safe Investing Market” we will be discussing how stock exchange marketplaces can help to prevent abuses when times are good and damage and destruction, especially when times are tough. Register here to attend this Thursday, March 16th.
