March 30, 2023

Great Indian Mutiny

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Uninsured depositors of “Silicon Valley Bank” seek to sell assets by fire

US clients of Silicon Valley bank not covered by the government-backed insurance scheme are rushing to sell their deposits to pay salaries and other operating expenses after the lender was shut down by regulators.

SVB will reopen Monday for depositors insured under the newly formed National Deposit Insurance Bank of Santa Clara, but it’s not yet clear whether or not customers with more than $250,000 in their accounts will be able to access all of their funds.

Some try to sell at deep discounts to raise money. On Friday, uninsured SVB deposits were priced between 55 and 65 cents on the dollar, according to Cherokee Acquisition, a bankruptcy claims trading platform. Other deposits have been offered for between 70 and 75 cents on the dollar, according to a person familiar with the situation.

Startup founders have resorted to selling uninsured deposits because they need to pay employees early next week. “I have a few companies selling [for] 90 cents on the dollar to make sure they do the payroll. “All of these companies have an SVB effect,” said one venture capital investor.

Less than 24 hours after the bank collapsed, the founders received cold emails from investors offering to buy out their deposits, according to the messages seen by the Financial Times.

Fulcrum Capital, an Austin-based private parking fund, contacted the startups on Saturday offering to pay an unspecified percentage of the total deposits they hold in SVB and “take the duration/risk of payback. We can fund in a week (a good 48 hours).”

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Jefferies is one of the financial groups that has shown interest in buying some of the deposits.

“At the request of many VC clients, Jefferies is working to help their portfolio companies find innovative ways to meet critical demands such as short-term salary commitments by helping them monetize or fund their deposits as the receivership process progresses,” he said.

According to one industry source, when the bank reopens under FDIC control, standard banking services will be available including checking and transfer services.

Any sale of SVB to another bank can also unfreeze customer deposits.

Sheila Beer, who led the FDIC during the 2008 financial crisis, urged uninsured depositors not to “sell hastily.”

“The refunds can be substantial, even if they aren’t quite enough to pay off the uninsured. So I think it would be premature to sell the uninsured at a steep discount,” Blair said.

SVB had already suffered a bank run on Thursday, when deposit holders initiated withdrawals that eventually totaled $42 billion, nearly a quarter of the $173.1 billion in deposits that SVB had at the end of 2022.

The vast majority of SVB deposits are uninsured, in part because their client base is dominated by large deposit clients such as the venture capital firms and startups they support. At the end of last year, nearly 96 percent were not covered by an FDIC insurance policy that guarantees deposits of up to $250,000. At Bank of America, that number was about 38 percent.

Uninsured depositors are usually seen by regulators as “volatile” and more likely to withdraw quickly at the first sign of stress than clients with insured capital, who are seen as more “sticky”.

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The Treasury, Federal Reserve and other regulators are closely watching the fallout from the SVB and any signs of it spilling over into the broader banking sector.

In a semi-annual report published this month, the US central bank reported that large banks “still have sufficient liquidity to cope with severe deposit outflows.” President Jay Powell echoed that view in congressional testimony this week, saying “American banks are well-capitalized.”

The Fed declined to comment, while the SVB referred a request for comment to the FDIC.

On Monday, SVB clients whose accounts have been insured by the FDIC will be able to access their funds. The FDIC’s priority over the weekend was to ensure that money was available, as it promised on Friday, according to a person familiar with the matter.

FDIC officials review the bank’s records with SVB personnel, reviewing the day-to-day business of the bank in order to set priorities, prepare for any impending deadlines, and make any necessary legal filings.

For uninsured deposits, the FDIC said it would pay them an “advance profit” during the week that would be a percentage of their deposit. By comparison, uninsured customers at IndyMac Bank, the California-based bank that failed during the 2008 financial crisis, received an initial 50 percent profit on their deposits and paid more money later.

In a hastily arranged conference call Friday night for clients, attorneys at Cooley, a Silicon Valley firm, said it typically takes the FDIC six to 12 months to sort deposit refunds. However, given the complexity of SVB, lawyers cautioned that this decision could take longer. They speculated that the FDIC’s seizure of the SVB in the middle of a Friday, rather than the traditional end of the day, may have mitigated the harm to uninsured account holders.

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The company also noted that besides traditional savings and current deposits, SVB offered other types of accounts including money market funds and custody and buy-back arrangements.

One complication was the FDIC’s decision to place insured deposits with the National Deposit Insurance Bank of Santa Clara while leaving uninsured deposits in receivership. This could complicate a particular sale, especially during the 2008 period, as buyers typically seek to buy out all deposits of a failing bank.

The freeze in SVB has extended to the tech startup community as many companies scramble to ensure they can meet next week’s payroll. The groups have sought advances from venture capital backers, sought bridging loans and even borrowed with credit cards for immediate liquidity needs, according to multiple sources.