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Time bomb on SVB’s balance sheet has ‘settled in sight’, short seller says


(Bloomberg) — The problems that caused the death spiral of SVB Financial Group Inc. are hidden in the company’s income statements.

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That’s according to short seller William C. Martin, who warned his Twitter followers about balance sheet problems for nearly two months before Silicon Valley Bank’s parent company blew up. in the blink of an eye this week.

The tweets began on January 18, the day before SVB reported earnings, when Martin’s account posted a prophetic thread that began: “Investors have full confidence in $SIVB’s continuation heavily exposed to the stressful world of risk, with stocks falling heavily. Dig a little deeper, though, and you’ll find a much larger set of problems at $SIVB.”

Posts by Martin, the former manager of a now-closed hedge fund with assets peaking at around $1 billion, go on to detail how SVB has grown its stock portfolio. 700% is near a “generational peak in the bond market. “

As the bank experienced an increase in withdrawals from depositors this year, the steep loss on sale of some securities created a hole in its balance sheet, triggering a spectacular failure of the bank. it was only for two days this week, when a bank run broke out among its customers. mainly young tech companies.

Martin said he initially started analyzing SVB because he suspected he would find weakness in the loan books for Silicon Valley startups. Instead, he realized how vulnerable the company’s fixed-income investments were after a year of heavy losses in the bond market.

“They bought all of these mortgages at market-high prices and are taking a huge unrealized loss,” he said in an interview. “And it was sitting there in plain sight. There are a number of other banks and insurance companies with similar problems, but I have not seen anyone on the scale of Silicon Valley Bank.”

Asset-side losses on banks’ balance sheets are more alarming given the signs of trouble on the liabilities side: Bank deposits are at risk of disappearing amid the startup world once boiling became cold. Many of SVB’s clients are now burning cash instead of raising new capital thanks to the sheer size of the VC industry.

“When you take into account the fact that their primary depositors are venture-backed companies, so they are seeing cash outflows out of deposits, it seems from a short angle, it’s a pretty good setup.

Martin, who managed a hedge fund called Raging Capital in Princeton, New Jersey for 15 years before closing it down and setting up a family office, said he started shorting stocks in January. He said it was his biggest short position in his family’s Raging Capital Ventures, but he declined to say how much he made on the trade: “It was. It’s a great win, but I don’t want to talk about the specifics,” he said.

With a short position in place, he took to Twitter to present his case – including a post in which he described the bank’s “‘Hold-to-Maturity'” accounting trap, mentioning to an accounting trick that allows banks to avoid a loss-making market assessment on bonds it does not plan to sell.

The tweets drew a lot of attention as a top 20 US bank with more than $200 billion in assets under management by the Federal Deposit Insurance Corporation.

However, not everyone heeded Martin’s warnings in time.

“Two of my very good friends have kept substantial sums of money there despite my advice,” he told Bloomberg. “Then it’s a shame. I never thought it would happen so quickly and even to such an extent.”

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