Silicon Valley Bank’s uninsured depositors seek to sell their assets on fire

Silicon Valley Bank’s U.S. customers who aren’t covered by a government-backed insurance plan rushed to sell their deposits to pay salaries and other operating expenses after regulators shut down the lender.

SVB will reopen Monday for depositors insured under Santa Clara’s new National Bank of Deposit Insurance, but it’s not yet clear if or when customers with more than $250,000 in their accounts will be able to access everything. their money.

Some try to sell at deep discounts to raise funds. As of 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 were offered between 70 and 75 cents on the dollar, according to a person familiar with the matter.

Startup founders have resorted to selling uninsured deposits as they have to pay staff as early as next week. “I’ve had a few companies selling (for) 90 cents on the dollar to make sure they’re making the payroll. All of these companies have the SVB effect,” said one venture capitalist.

Less than 24 hours after the bank’s collapse, the founders were receiving cold emails from investors offering to redeem their deposits, according to messages seen by the Financial Times.

Fulcrum Capital, an Austin-based special situations fund, reached out to start-ups on Saturday offering to pay an undetermined percentage of the total deposits they held with SVB and “take on the duration/recovery risk.” We can finance in a week (48 hours good)”, he writes.

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

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

According to an industry source, when the bank reopens under FDIC supervision, standard banking services will be available, including verification and wire transfer services.

Any sale of SVB to another bank could also unlock customer deposits.

Sheila Bair, who led the FDIC during the 2008 financial crisis, urged uninsured depositors not to “sell in a rush.”

“Recoveries could be significant, although not quite sufficient to reimburse the uninsured. So I think it would be premature for an uninsured to sell at a deep 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 SVB had at the end of 2022. .

The vast majority of SVB’s deposits are uninsured, in part because its customer base is dominated by large deposit customers such as venture capitalists and the start-ups they back. At the end of last year, almost 96% were not covered by the FDIC insurance policy that guarantees deposits up to $250,000. At Bank of America, that figure was around 38%.

Regulators generally view uninsured depositors as “fickle” and more likely to withdraw quickly at the first sign of stress compared to clients with insured capital, who are considered more “sticky”.

The Treasury Department, Federal Reserve and other regulators are closely watching the fallout from SVB and any signs of spillovers to the broader banking industry.

In a semi-annual report released this month, the US central bank said major banks “continue to have sufficient liquidity to meet large deposit outflows.” Chairman Jay Powell reiterated that view in congressional testimony this week, saying “American banks are heavily capitalized.”

The Federal Reserve declined to comment, while SVB returned a request for comment to the FDIC.

On Monday, SVB customers whose accounts were FDIC insured will have access to their funds. The FDIC’s priority over the weekend has been to ensure those funds will be available, as promised on Friday, according to a person familiar with the matter.

FDIC officials went through the bank’s records with SVB employees, reviewed the day-to-day operations of the bank to set priorities and prepare for impending deadlines, and make necessary legal filings.

For uninsured deposits, the FDIC announced that it will pay them an “advance dividend” within the week, which will represent a percentage of their deposits. By comparison, uninsured customers of IndyMac Bank, the California-based bank that failed during the 2008 financial crisis, received an initial dividend of 50% of their deposits and paid out more funds later.

In a hastily arranged Friday evening conference call for clients, attorneys for Cooley, a Silicon Valley firm, said triaging deposit collections typically takes six to 12 months at the FDIC. However, given the complexity of SVB, this resolution could take longer, the lawyers warned. They speculated that the FDIC seizing SVB in the middle of Friday, rather than the traditional end of the day, could have mitigated damages for uninsured account holders.

The company also noted that in addition to traditional savings and checking deposits, SVB provides other types of accounts, including money market funds, custodial agreements and repurchase agreements.

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 escrow. This could complicate a sale given that buyers, particularly in the 2008 period, would typically be looking to buy all of a failing bank’s deposits.

The SVB freeze has spilled over into the tech start-up community, with several companies scrambling to ensure they can meet the payroll next week. According to multiple sources, the groups sought advances from venture capital backers, took out bridge loans and even borrowed on credit cards to meet their immediate cash needs.

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