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💥 Why Silicon Valley Bank collapsed

In today’s email:

  • It’s Budget Eve

  • Use AI to redesign your room

  • What happened at Silicon Valley Bank

  • Law admission ceremonies come to a town near you

If you take just one thing from this email…

Even if your money’s in a reputable bank that’s been around for 40 years, it might not be safe.

EDITOR'S RAMBLE 🗣

Last week, I had my admission ceremony at the Law Society in London (an old, grand building in Chancery Lane).

It was kind-of an odd experience because I became qualified in September 2022 - 6 months ago.

But I’d not got round to actually attending the ceremony until now (you have to book yourself a place).

Me thinking about how many different ways they might mispronounce “Idin”

I didn’t know what to expect from the day, but I found the ceremony, being admitted amongst some friends and my family, really meaningful - more meaningful than I thought I’d find it.

My journey to qualifying as a lawyer has been a long, windy one - I’m definitely not unique in that.

And it reminded me if the importance of ceremonies to mark important milestones in life.

One issue with the Law Society’s admission ceremonies is that they only happen in London.

Lawyers qualifying outside of London have to either pay for themselves and their families to travel for their ceremony or not attend at all.

That’s why I wanted to shine a light on the work of Emma Lilley and James Joseph who have been campaigning to bring these sorts of ceremonies to the other areas in the UK - not just in London. 👏

Have a look at what they’ve been doing (especially if you’re an aspiring lawyer outside London)!

- Idin

LAST WEEK’S POLL 📊 

In last week’s newsletter, we wrote about cheese and whether the specific names (like Gruyère) should be protected and only used for products made in the specific region or free for any cheese maker to use.

🧀 Here’s what you guys had to say about it!

🟨⬜️⬜️⬜️⬜️⬜️ ✅ YES - free the cheese for everyone (5)

🟩🟩🟩🟩🟩🟩 ❌ NO - these things should stay protected (21)

26 Votes

via @beehiiv polls

FEATURED REPORT 📰

💥 Why Silicon Valley Bank collapsed

Credit: Giphy

What’s going on here?

Silicon Valley Bank (SVB) was the 16th biggest bank in the US with around US$12bn in assets. It collapsed last Friday.

What is SVB?

It’s a bank in the US (with a UK subsidiary too) with a customer list made up almost exclusively of startups in the tech sector.

Why did it collapse?

When you put money in your bank account, it doesn’t just sit there. The bank usually invests some of it to make more money - sometimes up to 90% of what you’ve put in your account.

Banks, of course, keeps some of the money available (or ‘liquid’) so you can withdraw cash when you need.

SVB put a lot of the money it held into 10 year treasury bonds and mortgage-backed securities. These are super safe investments but meant the money was tied up for a long time (up to 10 years!).

Tying up the money for so long is fine as long as customers:

  1. keep putting money into the bank, and

  2. don’t all suddenly want to withdraw their cash at once.

The economy has worsened recently and tech companies have suffered particularly - which has been a perfect storm for SVB. Companies have put less cash into the bank as they can’t raise funds as easily. They’ve also taken more cash out to pay for things like suppliers and staff.

Customers started taking money out and once there was the slightest indication that SVB was struggling to meet the withdrawal demand, everyone else started asking for their money too.

And that’s called a ‘bank run’: when everyone tries to take their money out of a bank at once. The bank doesn’t have the cash everyone’s asking for and it collapses.

Was SVB doing anything illegal?

That’s the crazy thing about this situation - it seems that SVB was completely compliant with banking regulations.

After the 2008 banking crisis, rules were set to ensure exactly this sort of thing doesn’t happen again (e.g. banks must keep a higher proportion of cash available for their customers in case of withdrawals).

But the rules didn’t work.

Why didn’t the rules work?

There will be a lot more to unpack on this in the coming weeks and months but here are a couple of initial theories:

  1. SVB’s customers have been hit particularly hard: While the economy’s suffering generally, tech has been hit really hard (think of all the layoffs we’ve seen at Microsoft, Twitter, Meta etc). Tech companies make up almost all of SVB’s customers so the bank’s hit worse than more general banks with a mixed customer base.

  2. Tech nowadays is different than in 2008: The rules to govern banks were set at a time when tech wasn’t as fast as it is today. Smart phones and social media make a bank run way quicker - all it takes is a tweet from a popular account to trigger loads of people panicking and withdrawing their cash. Also, withdrawals can be done online now which makes a bank run easier and more intense.

What happened to SVB’s customers?

SVB has a subsidiary bank in the UK, called Silicon Valley Bank UK Limited (SVB UK) with around 3,000 customers. Its clients were also stuck in the same position as the bank’s US customers - they had no access to their money.

Some acted before the collapse and managed to get their money out.

But the less fortunate ones hadn’t been able to access their bank accounts for days, which could have been a major problem when staff payday rolled around.

When it comes to payday for its staff, companies could have found themselves unable to access the funds they need to pay their staff - an awful situation for everyone!

Why should law firms care?

In short, because their clients care.

Commercial law firms advise startups on loads of things like fundraises, employment issues, IP, tech matters…

Tech companies and startups that used SVB as their bank make up a big proportion of commercial law firm clients and if something happens which threatens their existence (maybe something like not having access to any of their money) that’s no good for the lawyers.

To deal with the lack of cash, companies have been desperately trying to:

  • renegotiate any payments they’ve got to make to suppliers, and

  • raise more cash from investors or lenders.

Their law firms would be advising them on these arrangements.

Have SVB’s customers been saved now?

UK

Yesterday HSBC swooped in to buy SVB UK for £1 in a share sale.

It means that the bank’s UK customers who had been unable to withdraw their money will now be able to access it as normal and will still remain customers of SVB UK.

The Bank of England (the UK’s central bank) has said that no other banks in the UK have been affected, indicating that it considers this to be an isolated incident (phew).

USA

In the US, the government made a commitment to save SVB’s customers on Sunday. They said all SVB customers will have “full access to their deposits today” (check out the banner on SVB’s site right now).

The FDIC (the US government corporation which insures money kept in American banks) has created the Deposit Insurance National Bank of Santa Clara to protect insured depositors of the US-based Silicon Valley Bank.

In the coming days, we’ll probably see SVB sold to the highest bidder - likely to be an established bank like JPMorgan, Citigroup, or Bank of America.

A BIT OF FUN 😄

😴 Goodnight

IN OTHER NEWS 🗞

  • 👩‍💻 Tech companies near UK universities will get access to more funding: In some good news for tech companies, the UK government is set to announce a scheme that will put £80m into each of 12 investment zones across the UK. The zones could also benefit from things like a cut in business rates and national insurance contributions for employers (basically making it cheaper to run a business there).

  • 💼 Tomorrow’s a big day for the UK economy: Tomorrow’s budget day, which means the government will share its plans for the UK economy over the coming 12 months. It’ll include important stuff like the government's plans for raising and lowering taxes and how it intends to spend public money. Here are a few predictions on what will be included (hint: energy is a major topic).

  • ✂️ Meta (Facebook’s parent company) is planning more job cuts: It feels a bit like déjà vu but tech is still suffering right now. Following its 13% job cuts last year, Meta’s planning job cuts on a similar scale this year too.

AROUND THE WEB 🌐

  • 🏗️ Renovate: If you’re looking around your bedroom and think the design’s a bit stale, try this AI room decorator. It’ll give you an AI-generated image of what your room could like.

  • 🚀 Level up your thinking: The Knowledge is a weekly newsletter full of insights to help you think deeper, work smarter, and make better decisions.

  • 🤣 Useless: Got exactly 9 minutes before class? Well, you can blow 18 bubbles with bubble gum. This site tells you what you can do in any specific amount of time (I honestly have no idea why you’d click this!)

  • 💪 Strong: If you want to gym more effectively, pick the muscles you want to target and get a workout made for you (with videos).

STUFF THAT MIGHT HELP YOU 👌

  • 👥 Community for aspiring lawyers: If you're struggling with motivation for law firm applications, check out FlowHuddle - a supportive online community, hosting remote co-working sessions, expert office hours and in-person meet-ups.

  • 📕Commercial awareness journal: Check out this journal that we've created alongside the team from The Lawyer Spot. It gives your a simple three-step structure to improve your commercial awareness in a high-quality physical notebook.

  • 📣 Advertise with us: If you're looking to reach an engaged audience of over 6,000 aspiring lawyers, drop us an email.

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