| The Rose Report |

A Wake-up Call for the Financial Markets

Will taxpayers foot bill for tech bank collapse?

Photo: AP Images

For weeks, international bankers, credit rating agencies, and CEOs of top high-tech firms have been hyper-focused on the financial risks posed by the Netanyahu government’s proposed judicial reforms — how they were spooking investors, how they would erode Israel’s global leadership position in high tech, destabilize regional peace efforts, and lead to massive cash outflows from Israel.

As it turns out, this misinformation campaign has turned into a massive case of misdirection.

The real financial earthquake occurred unexpectedly, some 10,000 miles from Israel, in Santa Clara, California. America’s 16th largest bank, Silicon Valley Bank (SVB), went belly-up 48 hours after announcing it had run out of money and would be forced to raise more than $2 billion in emergency funding. The next day, nervous depositors withdrew $42 billion in cash, leaving the bank without any funds to cover further withdrawals, which forced federal banking regulators to step in and shutter it before matters could get even worse.

Over the weekend, the US Treasury Department, the Federal Reserve Board, and the Federal Deposit Insurance Corporation (FDIC) worked around the clock to devise measures to protect the remaining bank depositors, most of whom were not insured. Reuters reported that an estimated 89% of the customers, with a total of $175 billion, were not insured under the FDIC’s $250,000 upper limit per account.

This is a developing story, but at press time, federal regulators assured depositors they would have access to their funds on Monday morning, although there were conflicting reports over what percentage of that money would be available for withdrawal, and over what period.

Greener Pastures

While regulators went out of their way to soothe nerves and assure investors and bankers that the SVB collapse was not a contagious event on any scale close to the 2008 financial market collapse, the second shoe dropped over the weekend, this time on the East Coast.

New York banking regulators shut down Signature Bank, which has branches in all five boroughs and Woodmere, as well as in North Carolina, Nevada, and California. Signature Bank made its mark as a lender to the cryptocurrency industry and had total deposits of $88 billion at the end of 2022.

Coming on the heels of the collapse of Sam Bankman-Fried’s crypto empire, investors and depositors will be demanding more protection from the government and better transparency from financial institutions, many of whom have the veneer of wealth but have balance sheets that need to be shored up.

For its part, SVB was a world leader for 40 years in financing and advising venture capitalists and start-ups all over the world. Shopify, Pinterest, and Etsy are just a few of the well-known companies they financed. In 2021, when the type of high-tech stocks they were backing was a vital component of any growth portfolio, SVB was trading at $750 a share, and with almost 60 million shares outstanding, the market was valuing SVB at $45 billion.

The bank had branches in London’s Finsbury Square, venture capital offices in Beijing, Shanghai, and Hong Kong, and a representative office in Tel Aviv with about 45 employees serving a roster of more than 100 clients in the Start-Up Nation.

SVB was around the world and on top of the world until its stunning collapse late last week, when the bank unraveled in 48 hours for a variety of reasons, which credit and bank analysts should have seen coming, but didn’t.

One of its clients was Verbit, a company valued privately at $2 billion, which specializes in transcription and captioning services using artificial intelligence. Verbit’s CEO Tom Livne was one of the first Israeli high-tech moguls to publicly announce six weeks ago that he was moving his company out of Israel to protest the judicial reforms, and his company had more than $100 million stashed away at SVB.

In Sunday’s online edition, Globes cited unnamed sources close to the company alleging that Livne had stubbornly refused to withdraw the company’s funds from the bank before the collapse, partly because he had confidence the bank would stay in business, but partly because it was his way of expressing solidarity with the anti-reform protests.

However, another company source noted that the money Verbit held at SVB had always been held there, or at other foreign banks, and that despite Livne’s threats, Verbit made no additional transfers from Israel to the US bank even after the protests began.

Before the US government announced it would make depositors whole, a third source had told Globes that Livne was certain he could claw back at least $87 million of the company’s money on deposit, even after the collapse, and that if it lost $13 million to $15 million, it was a sacrifice the company was prepared to make to stand up for what it believes in.

It’s too early to tell if Livne was chastened by the turn of events, or if shareholders and partners in his privately held firm will censure him, but overall the regulatory bailout of bank customers was a welcome turn of events for US citizens and for the global financial community. Financial markets worldwide have been on shaky ground for the last year with the sharp rise in interest rates, signs of economic slowdown, and inflation, which is looking increasingly hard to whip.

And whatever your opinion might be on Israel’s judicial reforms and the vanguard of mostly leftist elites who have dug in their heels, good businessmen learn their lessons, and no rational person wants to see Israel’s high-tech sector plunged into financial anarchy.

High tech employs 10% of Israel’s workforce; those workers pay about 25% of the income taxes that flow into state coffers, and high tech now accounts for more than 50% of Israeli exports.

At press time, Prime Minister Netanyahu had returned from a state visit to Italy and was scheduled to meet with Finance Minister Bezalel Smotrich and Bank of Israel Governor Amir Yaron to assemble a package of measures to keep the aftershocks of the SVB collapse to a minimum.

It will take time to sort out the damage and determine who was at fault, and what factors played a role in the SVB collapse.

Forbes and investor publications such as Seeking Alpha were pointing fingers at the warning signs, including the bank’s lax approach toward risk management and heavy losses on its investment in government bonds that dropped in value in line with rising interest rates.

Politics crept into the discussion as well, with a Forbes headline blaming bank regulations passed by the Trump administration. Other publications, including the New York Post, blamed bank executives for obsessing with “woke” corporate policies that distracted them from their real jobs. Others noted numerous examples of insider trading, with top executives unloading millions of dollars in SVB stock in the two weeks before the collapse.

More reasons are sure to surface, and the last chapter has yet to be written on SVB.

In the meantime, there is already talk that the Federal Reserve Board may call a timeout on its policy of rapid interest rate increases in the hopes that the move will restore confidence in the markets. The Bank of Israel, which has been mirroring the Fed, may follow suit, as will other central banks around the world.

Raising interest rates may be a classic economic remedy to reduce inflation, but it doesn’t seem to be having much impact in the current economic cycle other than wreaking havoc on homeowners, who’ve seen their mortgages soar, and on small businesses and high-tech start-ups that rely heavily on borrowed funds.

Politically, the SVB and Signature Bank collapse adds another dimension to the already-swirling turmoil. While President Biden is claiming credit for quick reaction time, possible Republican presidential hopeful Sen. Tim Scott (R-SC) has lashed out at Biden, calling the administration’s plan to insure deposits above the $250,000 FDIC limit as “corporate cronyism,” saying that the federal government doesn’t need to insulate sophisticated investors from the risks they know they are taking.

For Prime Minister Netanyahu, this could prove to be a political blessing in disguise. His beleaguered government can score a major victory by showing empathy with the high-tech moguls — even the ones who are protesting against him — taking steps to shore up confidence in Israel’s economy and playing up the Israeli banking system as a safe harbor, much closer to home.


(Originally featured in Mishpacha, Issue 953)

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