Silicon Valley Bank and the power of social media

“If it's on the Internet, then it must be true.” And “Freedom of speech stops when you yell 'Fire' in a crowded theater.” And lastly, “Perception is reality.” What do all these mean when we talk about what happened last week? After years and years of low to almost no interest rates, the Federal Reserve raised the rates in the most aggressive manner ever seen in the history of the Federal Reserve System.

Silicon Valley, like many banks, had been flush with cash after all the PPP loans. Paydowns on loans, and other things. That bank, like so many, invested its cash in the past two years in low-yielding government bonds, and mortgage-backed securities. These have always been deemed safe investments. With the Federal Reserve raising rates rapidly, the sale value of these bonds decreased.

Silicon Valley did sell some at a loss and informed the Wall Street analysts that they were going to do a capital raise to shore up any future losses, and the news was met with overall approval. Everyone knew, the bond traders the investment house, and the government regulators.

And then social media kicked in, and the news spread, and people started withdrawing all their deposits from the bank. In two days the bank was declared insolvent and now everyone is watching the Federal Reserve and FDIC and complaining about bailouts. Here are the facts:

In 2008 the government “bailout” did protect the large banks and insurance companies from failure and their shareholder's benefits. The FDIC will use insurance money, whose premiums are paid for by banks nationwide, to secure the depositors' funds. The shareholders lose everything. The rumor mill of social media which caused this run, walks away from this fiasco, penalty-free, after causing one of the great runs on bank deposits ever seen.

Who else got hurt? Venture capitalists have been funding all the innovations in technology and medicine. They are shaken and have no bank to help them fund the technology growth.

Who pays? We do! Everyone, loss of innovation, higher FDIC insurance fees which of course will be absorbed by all the remaining banks, and you know those fees will be passed on to all the banking customers nationwide.

Moral of the story? Be careful what you post online as words do have unintended consequences.