As the $80 billion wipeout in wealth caused by the Silicon Valley Bank crisis shook Wall Street overnight, market veterans weighed in on the ongoing rout in banking stocks. Uday Kotak, CEO, Kotak Mahindra Bank, tweeted about the crisis at Silicon, referring to it as an inevitable “accident” that was waiting to happen. Alternatively, Pershing Square founder Bill Ackman said that the US government should consider a “highly dilutive” bailout of Silicon Valley Bank if a private capital can’t provide a solution.
Uday Kotak on Silicon Valley Bank
“Overnight developments in US banking: markets, analysts, investors underestimate the importance of financial stability for the balance sheet of a bank. When interest rates move up 500 bps from zero in a year, an accident was waiting to happen somewhere”, tweeted Uday Kotak. The industrialist also warned his followers of further interest rate hikes as sticky inflation showed no signs of slowing in a previous tweet.
Bill Ackman on Silicon Valley Bank
The CEO of hedge fund Pershing Square Capital Management, Bill Ackman tweeted, “The failure of Silicon Valley Bank could destroy an important long-term driver of the economy as VC-backed companies rely on SVB for loans and holding their operating cash. If private capital can’t provide a solution, a highly dilutive gov’t preferred bailout should be considered.”
However, he stated it’s unlikely that another private lender would step up to bail out SVB, “after what the Feds did to JPMorgan after it bailed out Bear Stearns.” He added that the government could also “guarantee deposits in exchange for a dilutive warrant issuance and other covenants and protections. If Silicon Valley Bank is indeed solvent, this would buy time to enable SVB to restore the franchise and raise new private capital.”
In his opinion, this bailout should be designed only to protect the lender’s depositors, not the management or stockholders, as poor risk management or assumption of risk should not be rewarded. If the government doesn’t intervene, the “risk of failure and deposit losses here is that the next, least well-capitalized bank faces a run and fails and the dominoes continue to fall”.
Silicon Valley Bank crisis
The shares of US-based Silicon Valley Bank – a lender of choice to startups and tech firms – sank 60% on Thursday, as it launched a $1.75 billion capital raise to make up for $1.8 billion loss from a forced sale of its securities portfolio. Silicon Valley Bank sought to reassure investors and venture capital clients regarding the safety of their funds. The bank is attempting to strengthen its balance sheet and sail through amid declining deposits from startups that are struggling for capital amid a funding winter, said CEO Greg Becker.