Delving into the collapse of SVB Financial Group’s SIVB Silicon Valley Bank, former PayPal executive, tech investor and entrepreneur David Sacks said he sees two adverse outcomes of the crisis.
What Happened: Sacks sees the extinction of startups, as thousands of these companies and small businesses have exposure to the bank and won’t be able to meet payroll expenses. If the FDIC does not release a substantial portion of their deposits on Monday, these companies may have to furlough or lay off employees, he said on Twitter.
Since the payroll is Wednesday for most companies, they may immediately start laying off employees, otherwise their directors will be personally liable for unpaid wage claims, he noted.
Secondly, Sacks flagged a regional banking crisis. He sees runs on other banks if the Fed does not provide reassurance that deposits are safe. The moral hazard problem is solved as the stockholders and executive options of the bank are going to be wiped out, he said.
Depositors aren’t sophisticated investors, and they expect the Fed to ensure that the banks are safe, he added.
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Way Out: “The Fed needs to bearhug the situation,” Sacks tweeted, adding that it should announce that all deposits are safe. This will end the crisis, the investor said.
This would cost the Fed very little because SVB already has plenty of assets to pay off depositors, he said.
“The costs on the banking system and economy will be far greater if they under-react,” Sachs said.
“The banking system will further consolidate in the hands of a few “too big to fail” banks. None of this will help the little guy,” he added.
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