So, I did some quick reading on this for a few minutes. Let me know if this sounds right.
Venture capitalists sometimes prefer venture debt to raising another round of VC for various reasons, including not wanting to dilute their equity stake in the startup by adding additional owners, especially when interest rates are favorable, and spending less time/resources focusing on raising VC and more time on the product. However, startups lack the revenue streams to use as collateral for traditional loans from banks.
SVB was an early innovator in venture debt, using future equity (warrants) as non-traditional collateral. They used to be able to charge a hefty risk premium, but there are more lenders now and the risk is more understood, so maybe not so much anymore.
These were more in the form of short-term loans to sustain liquidity and pay the bills. SVB discouraged their borrowers to give them exclusive relationships, so when something like high interest rates caused highly correlated problems for all of their clients, those businesses all withdrew money at the same time to cover shortfalls, causing a run on the bank.
I’m no finance bro, but does this sound close enough for someone who doesn’t want to spend much time thinking about this?
The Levine doesn’t mention venture debt. It was just that they took all these deposits and bought longer term bonds or mortgage backed securities to capture some yield. The value of those cratered when rates went up. They would still be fine if they were held to maturity but are forced to sell for a loss when people started pulling all their money out
When the value of a share of an MMMF dips below $1, it’s called “Breaking the Buck.” Since the MMMF is touted as being functionally as safe and liquid as cash, no reputable fund company is going to Break the Buck unless the company is in a free-fall and/or there has been a serious misuse of funds.
I’m assuming if a temporary situation causes a respected fund house to be at risk for Breaking the Buck, the company is going to do everything possible, including kicking in it’s own cash, to prevent this from happening.
On the other hand, if Fidelity literally goes belly-up, the world will be headed for a wild, nauseating ride.
Yeah that’s why smart people invest in gold, which is also held by a company like Fidelity that will certainly let you come and get your physical gold when the world is in chaos. o_O
Elizabeth Warren asked legitimate questions about Silvergate, which Warren described as the “bank of choice” for crypto. The collapse of Silvergate somehow led to a domino effect taking out SVC because there is strong overlap in people dealing with either. And maybe Warren’s comments destroyed consumer confidence and led to a run on the bank. And maybe Haralalol wants to blame everything bad economically on Warren being anti-crypto wherever he can make even the most tenuous connection because he doesn’t want Warren’s POV to win out.
