Lehman Moment 2.0: Here Is How Some Traders Are Extracting Over 2,000 Percent Profits From the Panic Around Silvergate and Silicon Valley Bank (SVB) [Updated]

Rohail Saleem • Comments
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This is not investment advice. The author has no position in any of the stocks mentioned. Wccftech.com has a disclosure and ethics policy.

The US Federal Reserve’s monetary tightening regime over the past few decades has always ended up creating some form of financial distress or a major credit event. In fact, Morgan Stanley’s Michael Wilson has bet his reputation on the emergence of such a credit event, which might finally be at hand if yesterday’s synchronized wave of selling in the US banking sector – led by names such as Silvergate and Silicon Valley Bank (SVB) – is anything to go by.

Lehman 2.0?

Yesterday was unique in the sense that multiple idiosyncratic factors affecting a number of different banks amalgamated to unleash sizable volatility across the banking sector.

First, Silvergate bank announced early in the morning that it was winding down its operations. This announcement had been largely priced in by the market given the fact that the bank had terminated Silvergate Exchange Network (SEN) just a few days back. Bear in mind that the SEN was Silvergate’s star attraction.

So, what had gone so wrong for Silvergate? Well, the bank was one of only two major banking entities that served crypto firms in the US, with the Signal bank constituting the only other major counterpart. In the aftermath of FTX’s bankruptcy, Silvergate suffered outflows of as much as $8 billion. These outflows had crippled the relatively small bank’s ability to function as a going concern.

Of course, the attitude of the regulators in the US toward the crypto sector, in general, might have also played a role in Silvergate’s decision to wind up operations. Ever since the FTX saga, the SEC has upped its oversight of this nascent sector. Moreover, the SEC and even the US Federal Reserve continue to advise banks against enhancing exposure to the crypto sector. This tacit discouragement is playing a major role in discouraging the inflow of capital, with some viewing this as a deliberate policy to financially starve crypto companies in the US.

As investors digested Silvergate’s ceasing of operations, news hit that JP Morgan has sued its former executive, Jes Staley, over ties with Jeffrey Epstein. This news predictably started hammering JP Morgan shares.

However, this budding wave of coordinated selling across the banking sector reached a crescendo later in the day when SVB made a series of major announcements:

  • The tech-focused bank would book a $1.8 billion after-tax loss on a $21 billion sale of investments
  • The bank would seek to raise $2.25 billion by selling common and preferred stock

These announcements unleashed panic across the US financial world as investors started pricing in a bank run. So, what has gone so wrong for SVB? Well, the bank’s deposits grew by 86 percent in 2021, peaking at $198 billion in early 2022. However, as the Federal Reserve embarked on its financial tightening regime by raising the benchmark interest rate in the US, SVB started suffering on two counts. First, given its outsized exposure to VC and tech-focused firms, SVB experienced a sharp reduction in deposits as its customers witnessed a dramatic reduction in liquidity. Concurrently, the Federal Reserve’s fast-paced monetary tightening regime has hammered the value of debt securities that SVB held as assets. As of the 31st of December 2022, SVB held “available for sale” debt securities carrying a fair value of $26.1 billion. Crucially, this aggregate fair value is around $2.5 billion below the $28.6 billion cost at which these securities were acquired. Since then, it can be reasonably assumed that the decline in the fair value of these securities has been rather acute.

For comparison, SVB’s net income in 2021 was just $1.5 billion.

Of course, the bank still remains liquid by any definition. However, following Silvergate’s winding down of operations, investor sensitivity to banking distress has increased markedly.

Peter Thiel’s call to dump SVB shares certainly did not help stem the panic in the market.

Michael Burry also added to the cacophony with his Enron comparison. SVB stock ended the regular trading session with a loss of around 60 percent. This was followed by another loss of 45 percent in after-hours trading following Thiel’s call.

How Are Traders Profiting From the Turmoil Around Silvergate and SVB?

Short-seller Marc Cohodes has struck literal gold with the collapse of Silvergate’s stock price. Now, the investor has turned his roving eyes toward Signal bank, the only major crypto banking player after Silvergate.

As per a tabulation by Unusual Whales, the options flow in SVB shares has been bearish since the 15th of February 2023. On the 06th of March, a few lucky traders bought put options on SVB shares carrying a strike price of $210 and expiring on the 21st of April 2023. These options were bought at an average cost of $3.67 per contract. Yesterday, the same contracts were selling for a whopping $58.30, resulting in a profit of over 2,000 percent!

Meanwhile, the panic continues.

Update: SVB is Putting Itself Up For Sale

In a major development, SVB has failed to raise the required amount of capital, as per the reporting by CNBC. The bank is now exploring a possible sale as a last resort. However, the sale has been complicated by the fact the the outflow of deposits is now reportedly outpacing the liquidation process itself. The shares of SVB were halted ahead of this announcement.

Update 2: SVB Has Been Closed Down by Regulators

Well, this was fast. Regulators have closed down SVB to protect depositors. FDIC's insurance covers deposits of up to $250,000. Uninsured depositors are expected to receive an advanced dividend from the FDIC by next week.

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