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The Downfall of Silicone Valley Bank
Banks are failing. Over the last couple decades, Silicon Valley Bank has become the tried and true bank for startup founders. Whenever a new founder secured funding for a new seed or series A, they would head on over to SVB and deposit those funds.
In recent years, especially so during the pandemic, Silicon Valley Bank has seen immense growth as interest rates were low, venture capitalist firms were flush with cash and startups were being built almost every day. Prior to the pandemic in 2019, SVB managed roughly $60 billion which grew to over $189 billion in 2022.
Growing that quickly, Silicon Valley Bank had to figure out what to do with all that newly deposited cash. They ended up deciding to buy $80 billion dollars in mortgage backed securities which returned roughly 1.7%. Keep in mind this was during the years of interest rates being close to zero and cash being super cheap to borrow. Investing quite a large portion of their assets into mortgage backed securities was was a solid, reliable strategy when money was cheap but quite the opposite when rates started increasing with no sign of tapering. This meant that the price of those mortgage backed securities fell off a cliff as interest rates increased.
The reason being that mortgage-backed securities (MBS) are a type of bond that is created by pooling together a large number…
