SVB’s cardinal sin

This is an audio transcript of the FT News Briefing podcast episode: ‘SVB’s cardinal sin’

Joanna Kao
Good morning from the Financial Times. Today is Monday, March 13th, and this is your FT News Briefing.

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Silicon Valley Bank is in the hands of regulators after the tech lender crumbled last week. It’s the second-largest bank failure in US history. Plus, disposable vapes aren’t just a growing health concern. They’re also a problem for the environment.

Oliver Barnes
Say you’re an 18-year-old going out clubbing on a Friday night. Are you gonna try and recycle your vape?

Joanna Kao
I’m Joanna Kao, in for Marc Filippino, and here’s the news you need to start your day.

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US banking regulators were looking for a buyer for Silicon Valley Bank on Sunday. Officials are trying to prevent its collapse last week from sparking panic in the broader banking sector. Yesterday, the US Treasury secretary said the US government will not offer a bailout. But Janet Yellen said on CBS News . . . 

Janet Yellen
We are concerned about depositors and are focused on trying to meet their needs.

Joanna Kao
Silicon Valley Bank may not be as well-known as other commercial banks, but it’s hard to overstate its importance.

News clip 1
It is the largest bank failure since the banking crisis back in 2008.

News clip 2
SVB was the bank of choice for many tech companies and workers.

News clip 3
The demise of the nation’s 16th-largest bank wreaking havoc including . . . 

Joanna Kao
The FT’s Tabby Kinder says SVB worked with half of all venture-backed tech and life sciences companies in the US. It financed the personal loans of entrepreneurs and even esoteric projects like vineyards. We caught up with Tabby at the tech and music festival South by Southwest in Austin, Texas.

Tabby Kinder
So it’s the only conversation in town. I mean, everyone who came to South by Southwest assuming that the biggest topics would be, you know, AI and its psychedelic innovation, etc. Now it’s Silicon Valley Bank is dominating all of the conversations. Every panel is coming back to it because it was a stunning and a very rapid collapse.

Joanna Kao
But as rapid as SVB’s collapse may have seemed, the seeds of its downfall were planted two years ago.

Tabby Kinder
The reason it was so vulnerable and its investors were so spooked is because of a series of decisions that its management made right at the peak of the pandemic. And that was to take a load of the extra deposits that were flooding into the bank because the old tech, small tech companies were raising loads more money than usual. Take that money and lock up about $100bn of it into government-backed securities, a super safe investment, but at really low interest rates. So it was searching for yields and it just took the risk that interest rates wouldn’t go up very quickly.

Joanna Kao
And in doing that, SVB committed a cardinal sin of finance.

Tabby Kinder
Its management took really big risks in order to bolster short-term profits at a time of really low interest rates. And the potential pay-off was modest, and it made a larger than average bet that interest rates would stay low and they’ve risen very rapidly that that has unravelled.

Joanna Kao
So in hindsight, this really does seem like a terrible decision. But at that time it wasn’t that unreasonable.

Tabby Kinder
Lots of banks did it. The issue for SVB and what its management should have seen is that it’s so highly concentrated to one sector. So that leaves it super vulnerable if there is, for example, as we’ve seen a run on the bank. Everyone knows each other gossiping, people ringing each other to ask if you’re taking your money out of the bank, etc. So you have this kind of very quick spiral effect, which you wouldn’t see at a bank where it has a diversified customer base. Also, it meant that when deposits by tech start-ups started dropping, I mean, that’s its entire client base. So the tech sectors had a really bad time. No one can raise any money. They’re burning through cash, so they’re pulling money from the bank. Other banks aren’t exposed to one sector. So Silicon Valley Bank’s management should have seen that this was a risk for them.

Joanna Kao
So then why did it blow up last week? SVB had become worried about falling deposits. There were lots of withdrawals. So management decided to liquidate about $20bn of its available securities.

Tabby Kinder
The plan was to reinvest them in shorter term securities that would earn a higher interest rate. It would improve its profitability while deposits were dropping. And when it sold these, it had to recognise a loss of about 1.8bn, and you know, 1.8 billion for a bank of this size, it should not have been a fatal hole in its balance sheet. But what happened is it raised attention, it focused investors on to this interest rate risk on its balance sheet. It showed how vulnerable the bank was to rising interest rates and falling deposits, and it showed that if deposits fall any quicker, then it might be forced to liquidate some of its securities that are marked held to maturity on its balance sheets. If it was forced to touch them, it would have had to have recognised an even bigger loss on its balance sheet.

Joanna Kao
Tabby says SVB executives, including chief executive Greg Becker, have remained quiet.

Tabby Kinder
So SVB’s executive team have not come out and said anything yet. It’s likely that they will be helping regulators on the next steps for the bank and everyone’s sort of working around the clock to work out if this can be salvaged in some way, if there is a wholesale buyer or buyers for some of the assets that it will.

Joanna Kao
That’s the FT’s West Coast financial editor, Tabby Kinder.

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SVB wasn’t just critical to the US tech scene. Hundreds of companies in the UK had money in SVB’s British arm. The UK government is now considering taking the unit over and it’s also announced a cash lifeline for start-ups, who still need to pay wages and other expenses. Chinese tech start-ups also banked with SVB. Our correspondent in Beijing, Ryan McMorrow, said the speed of the collapse and the time difference left tech entrepreneurs there blindsided.

Ryan McMorrow
Basically everyone here was asleep and by the time we woke up it was over. Like no one really had any time to react to try to join in and get their money out.

Joanna Kao
Ryan spoke to one entrepreneur in Beijing who had about $10mn in SVB.

Ryan McMorrow
I think he’s nervous, but also optimistic that a large American bank will come in and buy them out or they’ll have enough assets on their balance sheet to make all the depositors whole.

Joanna Kao
That’s the FT’s China technology reporter, Ryan McMorrow.

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In the last decade, the use of e-cigarettes or vaping has grown dramatically. But vaping devices that use replaceable pods made famous by companies like Juul have given way to disposable e-cigarettes. They’re especially popular amongst young people, and they’re not just adding to health concerns. There’s an environmental impact as well. The FT’s Oliver Barnes joins me to talk about this. Hi, Oliver.

Oliver Barnes
Hey, thanks for having me.

Joanna Kao
So before we get into the environmental fallout, can you remind us why sales of these single-use vaping devices took off?

Oliver Barnes
So I think many of our listeners will remember the Juul craze that took place in the US a few years ago. Those are what you call pod-based vapes. Because of regulation that’s come in from the FDA and President Trump, those have fallen massively in popularity and they’ve been replaced by this new wave of single-use disposable vapes where you have basically 500 puffs and you’re done. And they come in all manner of different flavours and have lots of wildly named brands. And they’ve exploded in popularity over the past few years to the extent that from some calculations that we did with a number of research organisations, there were 610mn sold last year globally.

Joanna Kao
Oliver, who’s behind these disposable vaping devices?

Oliver Barnes
So the emergent trend has really been seized upon by Chinese vaping manufacturers. The big success stories in this space are the Elf Bar and Lost Mary brand, which is run by a company called Heaven Gifts, which is based in Shenzhen. And those two products alone made $1.8bn for that company last year. Surprisingly, it’s not the big tobacco companies like British American Tobacco and Philip Morris who are making the money out of this.

Joanna Kao
So let’s get back to your key finding, the environmental concerns with these disposable vapes. What’s the issue?

Oliver Barnes
With this new generation, part of that convenience is also part of what makes them so destructive, right? Each one has roughly 0.15g of lithium. And what that lithium enables is like an atomiser that vaporises the actual e-liquid and makes the experience better, the companies would argue for the vaper and makes the vape run smoother. And it’s a more powerful battery. The unfortunate like collateral damage of that is that that 0.15g when you take that over the 610mn disposables that were sold globally last year really adds up. And lithium is a critical raw material as defined by the US and the EU. And there’s concerns amongst policy officials that within the next couple years it will be in short supply. So when we’re thinking about upping electric car manufacturing, that whole chunk of 610mn vapes worth of lithium, which adds up to more than 10,000 EVs each year, going to waste is not a good thing at all.

Joanna Kao
Can these vapes be recycled?

Oliver Barnes
That’s the most ridiculous thing about the whole thing, which is that these batteries, if they had a charging capacity, they could be recharged 600 times. (laughter) There’s no charging capacity. There are some schemes across the UK and EU wherein distributors and importers and retailers have various obligations to fund the recycling of these products. Some of the big players are signed up to it, but the vast majority of 150 companies in the UK we surveyed, upwards of 90 per cent are not signed up to it. So people aren’t trying to push the recycling of these things. But then also they’re so fiddly to break apart that a number of recycling organisations in the UK said at the moment the cost of actually recycling product outstrips the money that they can make from the recycling of it.

Joanna Kao
That’s the FT’s leisure industries correspondent, Oliver Barnes. Thanks, Oliver.

Oliver Barnes
Thanks.

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Joanna Kao
You can read more on all of these stories at FT.com. This has been your daily FT News briefing. Make sure you check back tomorrow for the latest business news.

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