In light of the failure of Silicon Valley Bank (“SIVB”) on Friday and fear of another banking crisis, we wanted to put out a quick piece with our thoughts.

-This is not 2008. The problems being caused are not credit-related (ie, mortgages to people who can’t afford them then sold as AAA MBS). There is much more capital in the system to absorb losses.

-The failure of SIVB is an example of a unique business model run poorly. The systemic issue at hand that all banks must manage is dramatically higher interest rates and, in particular, a very inverted yield curve.

-SIVB has the highest amount of securities as a percentage of assets than any other bank, so they were particularly exposed.

-SIVB invested these securities in longer duration MBS and CMBS throughout last year and in effect locked in a yield of 1.9%.

-That’s a huge problem because nearly all of their liabilities are deposits and worse there is a growing mix of interest-bearing deposits. These have payouts of 4-5%.

-So SIVB has been wrestling with huge compression in their net interest margin and therefore profitability. The deal they proposed last Wednesday was an attempt to fix this problem.

-Their announcement triggered losses in their Available for Sale securities portfolio that they intended to backfill with fresh equity capital…that deal failed as those losses shined a spotlight on the nearly $20bn of losses in their Held-For-Maturity securities, which is greater than their capital base.

-Toss in fresh credit fears over their largely VC-backed startup commercial portfolio and a run-on-the-bank was created on Thursday. On Thursday, SIVB lost roughly a third of their deposits.

-The seizure by the FDIC on Friday hit the pause button on the run but there was up to $140bn of uninsured deposits still at the bank but unaccessible. This caused worries over the weekend that the small business depositors wouldn’t be able to make payroll or pay bills today/this week. And how would they fund their operations going forward?

-Very importantly, the FDIC took these worries off the table. Depositors will have full access today to all of the deposits at SIVB.

-The Fed simultaneously announced a new funding facility for banks that will eliminate this issue of funding losses. Another very important step that should prevent a larger more systemic problem.

-Signature Bank is a totally different issue. 20% of their deposits were in crypto. They were already having difficulties. Last week’s stress was just the coup de grace.

I have invested through many bank crises as I have been a bank investor for nearly 30 years. This is my expertise. The issues facing the industry are mark-to-market issues relating to the surge in interest rates last year. This a bigger issue for some than others so you can’t paint all banks with the same brush. The facility the Fed put in is a really big deal. A backstop. Could there be other bad actors out there that need to fail? Yes. However, those will be one-offs.

We have no direct exposure in the portfolios to banks and specifically SIVB. We called a bunch of our portfolio companies on Friday to check this. It’s probably too soon to buy banks, but this is likely a huge buying opportunity. There is a crisis of confidence right now and A LOT of capitulation. I think the smart money will begin coming in soon.

In the meantime, interest rates (particularly at the short end) are collapsing. This is great for the fixed income part of the portfolios. Remember, we are taking very little credit risk. Lower interest rates should also help our incremental tech bet. The interesting part of this move is what this means for the Fed’s decision in 10 days. Recall, a week ago the market was pricing in a decent chance that the Fed would go 50bps. Goldman Sachs this morning is saying they don’t expect any more rate hikes. If this is true, then we could bond volatility and equity volatility decline significantly, which is good for both bond and stock markets. There is a lot of economic data to come out over the next 10 days and we are waiting patiently to see what that portends.

The important point is that our conservative market positioning is still the right posture. That said, panic selling like we are seeing in some parts of the markets often present extraordinary buying opportunities. It is important to put fear and anxiety aside and remain calm. We are hard at work protecting your capital and at some point the markets will turn for the better.