US staring at Lehman redux? Silicon Valley Bank fainting could be a sign of recession

The Santa Clara, California-based bank isn’t exactly a household name, and it certainly wasn’t enough to spark a national banking crisis. With assets of about $212 billion, it is less than one-tenth the size of JPMorgan. In fact, it has a very niche business, which is mainly funding technology related startups.

Therein lies the problem. The Silicon Valley bank parent surprised the market late Wednesday by saying it had sold about $21 billion of securities from its portfolio, which would result in an after-tax loss of $1.8 billion for the first quarter. SVB also sold $1.25 billion of common stock and $500 million of securities representing convertible preferred shares. In addition, General Atlantic committed to buy back $500 million of common stock, bringing the total amount raised to approximately $2.25 billion. But the reason SVB gave for needing to raise capital seemed to surprise everyone: Startups that have bank deposits are pulling out cash. that makes sense. Venture capital funding has dried up as the Federal Reserve’s aggressive interest rate hikes have made investors more circumspect, especially amid concerns that the economy will inevitably be pushed into recession. According to venture capital firm Partech Partners, such funding declined by 35% last year.

According to Bloomberg News, SVB does business with nearly half of all US venture capital-backed startups, and 44% of US venture-backed technology and health-care companies that went public last year. Those sectors have been devastated as rates have been raised to combat inflation tanking valuations and forcing companies to seek cash, Bloomberg News notes. “We are taking these steps because we expect continued high interest rates, pressure on the public and private markets, and increased demand for cash from our customers,” SVB Chief Executive Officer Greg Baker said in a letter to shareholders on Wednesday. Burn level will increase. ,

It’s hard to understate how important the technology and startup industries are to the economy. Prior to the recent turmoil in markets, startups globally were worth roughly the same as the GDP of the Group of 7 economies, and startup funding could amount to $600 billion worldwide in 2021, according to a World Economic Forum report. was more than Last year.

The NYSE FANG+ Index, which includes Meta Platforms Inc., Apple Inc., Amazon.com Inc., Netflix Inc. and Google parent Alphabet Inc. That tracks the performance of the best tech companies, soared more than 700% between the end of 2016 and 2021. , dwarfing the 150% gain in the S&P 500 index. Since then, the NYSE FANG+ index is down nearly 32%. Job cuts are on the rise in the industry. Challenger, Gray & Christmas said Thursday it announced a total of 20,442 job cuts in the tech sector in February, more than the second-ranked sector; 8,544 retails at Rs.

Despite benchmark interest rates falling from near zero last March to 4.75% today, the economy has been able to avoid slipping into recession, as everyone expected. Perhaps Silicon Valley Bank’s troubles are the first sign of a recession. In that sense, it’s no surprise that this bank has scared everyone off. More from Bloomberg Opinion:

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Robert Burgess is executive editor of Bloomberg Opinion. Previously, he was global executive editor in charge of financial markets for Bloomberg News.

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