The collapse of the Silicon Valley Bank leads to investors demanding state aid

Big names in Silicon Valley and the financial sector are publicly calling on the federal government to pressure another bank to take over Silicon Valley Bank’s assets and liabilities after the financial institution failed on Friday.

The Federal Deposit Insurance Corporation (FDIC) is covering up to $250,000 per depositor and may be able to start paying out those depositors as early as Monday.

But the vast majority of SVB customers were companies that had deposited more than that with the bank. More than 95% of the bank’s deposits were uninsured as of December, according to regulatory filings. Many of these depositors are startups, and many are worried they won’t be able to make payrolls this month, which in turn could trigger a major wave of defaults and layoffs in the tech industry.

Investors fear these defaults could hurt confidence in the banking sector, particularly mid-sized banks with less than $250 billion in deposits. These banks are not considered “too big to fail” and do not have to undergo regular stress tests or other safety valve measures in the wake of the 2008 financial crisis.

Venture capitalist and former technology CEO David Sacks called on the federal government to pressure another bank to buy SVB’s assets. write on twitter“Where’s Powell? Where is Yellen? Stop this crisis NOW.

VC Mark Suster agreed, tweeting, “I suppose they’re working on that. I expect explanations by Sunday. We will see. I really hope so, otherwise Monday will be brutal.”

Similarly, investor Bill Ackman argued in a long tweetwrites: “The government has approximately 48 hours to fix a soon-to-be-irreversible bug. By allowing it @SVB_Finanzen to fail without protecting all depositors has made the world aware of what an uninsured deposit is – an unsecured, illiquid claim on a failing bank. Absent @JP Morgan @citi or @Bank of America Takeover of SVB before opening on Monday, a prospect I think unlikely, or the government not guaranteeing all of SVB’s deposits, the huge sucking noise you will hear, will the withdrawal of essentially all uninsured deposits from everyone except for the “systemically important” banks (SIBs).”

Benchmark Partner Eric Vishria wrote“If SVB depositors don’t recover, corporate boards will have to insist their companies use only two or more of the BIG Four banks. This will crush smaller banks. AND make the too-big-to-fail problem much worse.”

Since its inception nearly 40 years ago, SVB has grown into a financial hub in the technology industry, particularly for start-ups and the VCs that invest in them. The company was known for expanding banking services to early-stage startups that were struggling to get banking services elsewhere before generating stable cash flow. But the company itself has struggled with cash flow this year as seed funding dried up and its assets were tied up in long-term debt.

The company surprised investors on Wednesday with the news that it had to raise $2.25 billion to shore up its balance sheet and that it was selling all of its bonds for sale at a $1.8 billion loss had. Reassurances from bank executives weren’t enough to stem a run, and depositors withdrew more than $42 billion during the year End of day Thursdaywhich caused the second largest bank failure in US history.

Many in the tech community blamed VCs for spurring the run, as many told their portfolio companies to put their money in safer places after SVB’s announcement on Wednesday.

“This was a VC-induced, hysteria-induced bank run,” Ryan Falvey, a fintech investor at Restive Ventures, told CNBC on Friday. “This will go down in history as one of the ultimate instances of an industry cutting its nose in defiance.”

Observers call out the irony as some VCs with notoriously libertarian free-market attitudes are now calling for a bailout. For example, reactions to Sacks’ tweet included statements such as “Excuse me please. Suddenly the government is the answer?!?” And “We capitalists want socialism!“

Some politicians opposed any bailout, including Rep. Matt Gaetz, R-Fla., tweet“If there is an effort to use taxpayers’ money to bail out Silicon Valley Bank, the American people can count on me to lead the fight against it.”

But financier and former Trump communications director Anthony Scaramucci argued“It is not a political decision to save the SVB. Don’t make the Lehman mistake. It’s not about whether the poor or the rich will benefit, it’s about stopping the contagion and protecting the system from unintended consequences.”

— Hugh Son and Ari Levy contributed to this story.