From Boom to Bust: The Collapse of Silicon Valley Bank

Stock Market

From Boom to Bust: The Collapse of Silicon Valley Bank

Is Tesla Overvalued?What's Happening with Meta?

Are we Heading for a Bear Market?

Chevron $75 Billion Share Buyback

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As you may know, Silicon Valley Bank (SVB) was taken over by the Federal Reserve at the end of last week But why did the bank have such a sudden collapse?

Just before when the Federal Reserve took control, SVB was the 18th largest bank in the United States with over $209 billion in deposits. SVB catered to most venture capitalists and hedge funds. These wealthy organizations had their money invested (through SVB) in a lot of high-tech start-ups, and as the tech industry boomed, so did their profits. With this rapid growth, SVB received many more deposits and consequently invested them in treasury bonds and mortgage-backed securities This was a seemingly more conservative approach than they originally had in place Once the Federal Reserve began increasing interest rates to control inflation, the value of those bonds dropped and since these bonds were SVB’s main source of income, they couldn’t make up the difference

Additionally, there was a mismatch in how SVB was doing business: they were taking deposits from investors and investing them in long-term bonds rather than short-term bonds The bond yield curve looks like the radical function This means that the marginal profit of long-term bonds was smallthe additional amount of profit they would gain from investing in long-term bonds, in comparison, was small. Additionally, they would take on a lot more risk by investing in long-term bonds as they were betting on the idea that interest rates would stop their rapid increase. If you have been keeping up with Jerome Powell and the FED, you understand that this was a risky bet. SVB was on the losing side of this bet as interest rates kept rising The continuation of these rising interest rates made SVB’s assets worth comparatively less On their balance sheet, banks can put the price they paid for a bond or treasury note rather than what it is worth now This means that the banks had a significant amount of unrealized losses- where you lose money on paper, but you haven’t taken the loss yet, as the bond is still in your

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The Impact of the Luxury Tax and Salary Cap in the NBA possession. When the depositors figured this out, they started to withdraw their money This caused a “run on the banks” where all the depositors tried to take their deposits out of the bank The bank did not have enough cash to fulfill all of these requests so they had to liquidate their long-term bonds, which forced them to take large realized losses- when you sell a bond and you lose money

Another risk factor for SVB was that most of its customers had deposits that were much higher than $250,000 which is the amount that is insured by the FDIC (Federal Deposit insurance organization).

If SVB had customers with a larger range of deposits, then more of their customers’ deposits would have been covered, and the potential deposits that were “lost” would be lower. Due to this lack of diversity in the customer base, when major economic events hit, virtually all of their customers were hit hard at the same time

This ultimately led to SVB having to sell bonds at a huge loss This spooked depositors, leading to their requests for withdrawal The fact that SVB could not handle these requests forced the Federal Reserve to step in and take over the bank

As of March 12, 2023, the Federal Reserve and the FDIC have told customers of SVB that they will have access to all their funds and will not lose anything This bailout does not apply to equity holders or bondholders of SVB The FDIC and Federal Reserve are acting out of caution so that other banks don’t face similar problems It remains to be seen if bailing out SVB was the right thing to do or a mistake As of the time of this article, the Federal Reserve shut down Signature Bank as well What strategy do you think SVB should have employed to prevent this?

Is Tesla Overvalued?

Alex Sultan, '25

Tesla is a well known car company that produces environment friendly, electric cars The company wants to make sustainable cars that will last them into the future Because of this, they have had a surge in popularity over the past few years In addition, Tesla has shown amazing growth in revenue over the past couple years These factors have caused so many people to place their trust in Tesla and in turn, made the stock price and company value sore

In early 2022 Musk announced that he was going to buy out Twitter This was a huge shock to everybody because no one thought he would ever do this. Musk needed a total of about $44 billion to buy Twitter and although his net worth was over $150 Billion, most of that money was tied up in Tesla stock. Musk had to raise money through investors and get loans in order to afford Twitter. Had Musk gotten most of his money from Tesla, he would have had to sell a lot of his shares of Tesla and the stock price of Tesla would have plummeted Despite this, Musk still had to sell some of his shares in order to fully afford Twitter

When Musk bought Twitter for so much money, it worried big investors who had a lot of money invested in Tesla Since Twitter isn’t known as a super profitable company, people were worried that if Musk lost too much money form twitter, he would have to start rapidly selling shares and this would make the stock price of Tesla tank Therefore, a lot of big investors started to rapidly sell their shares in Tesla and this caused the price of Tesla to go down tremendously. In total Tesla went down by about 65% ($205 per share).

Was the big drop in Tesla truly inevitable? Or was it purely because of Musk’s announcement to buy twitter? I think the drop in Tesla was inevitable. Furthermore, before the drop, Tesla was overvalued as a company I think that one of the reasons why Tesla had so many people wanting to invest in it was because Musk knew how to capture the attention of young people His personality convinced people to invest in his company and it was only a matter of time before people would realize that Tesla was overvalued Moreover, even before Musk’s announcement to buy Twitter, Tesla was still on a bit of a downward trend No one knows truly whether or not Tesla was overvalued or not but Musk’s acquisition of Twitter is what ultimately caused the price of Tesla stock to tank by 65% in 2022.

Are we Heading for a Bear Market?

Victor Moche, '25

A bear market is a financial market condition characterized by a prolonged period of falling prices, typically by 20% or more, over a period of at least two months. In other words, a bear market is a sustained period of negative sentiment in the market, with investors selling their assets and lowering their expectations for future gain There are several reasons why some believe that we may be heading into a bear market Some of these reasons include: Economic Uncertainty, Inflation Concerns, Valuation Concerns, and Interest Rate Hikes

Firstly, Economic uncertainty was primarily caused by the COVID-19 pandemic, political instability, and geopolitical tensions that have led to concerns about the future health of the global economy which has led to many investors to be cautious Additionally, many investors are concerned about rising inflation levels, which can decrease the value of their investments and decrease purchasing power due to the dollar holding less value. Furthermore, some analysts believe that the current stock market valuations are overvalued, and that there is potential for a correction in prices. This can influence distrust in the entire market and warn buyers and sellers from engaging Lastly, the Federal Reserve has signaled its intention to raise interest rates in response to rising inflation Higher interest rates can lead to slower economic growth, which can have negative consequences for the stock market Overall, a bear market can be a challenging time for investors, as it can be difficult to make gains and/or preserve capital during this period However, depending on the situation, investors can take steps to protect their portfolios by diversifying their holdings, practicing risk management, and seeking the advice of financial professionals.

Chevron $75 Billion Share Buyback

Fisher Angrist, '24

Earlier in this earnings season, Chevron, the world’s third-largest oil company, announced a $75 billion stock buyback. A stock buyback is when a company buys back shares of its stock and permanently retires these shares. Companies do this when they have excess capital from earnings (they made more than they thought they would) and/or they have no better place or opportunity to invest this capital

$75 billion sounds like a lot right? This number is somewhat misleading in that this is spread over a 5-year period, which averages out to around $15 billion every year. Also, this will not be an exact $15 billion every year-- they will buy more when the stock is lower. $15 billion still seems like a lot, even in one year. To figure out how costly this will be for Chevron, you need to look at its financial statement. In the past year, Chevron made $235 billion in revenue, quantity sold x price sold, and they have a 15% net profit margin, revenue minus costs of production which includes the cost of goods sold and salaries to employees If you do the math, Chevron makes approximately $35 billion in profits every year They can easily afford to do this buyback and still have around $20 billion to invest in renewable energy, improve technology and equipment, and lots more

Chevron also used this money to boost its dividend yield The oil industry is known for small dividend yields and Chevrons is no different with a yield of 3.5%. The oil giant thinks that it is more beneficial to shareholders for the company to buy back stock than for the company to distribute dividends, an ideal that a lot of famous investors believe in such as Warren Buffett. With a small dividend yield, their profits/earnings will mostly be used to buy back stock