Then, on March 9, the opposite happened. Following the bank’s attempt to raise the additional $2.25 billion, Founders Fund, Coatue and other firms advised clients to put their funds somewhere else. As Bloomberg News reported on March 9, “Panic spread across the startup world Thursday after a warning from Silicon Valley Bank, a major lender to fledgling companies, prompted Peter Thiel’s Founders Fund and other prominent venture capitalists to advise portfolio businesses to withdraw their money.”

Read that again: “after a warning from Silicon Valley Bank,” that is when “[p]anic spread across the startup world…” which “prompted Peter Thiel’s Founders Fund and other prominent venture capitalists to advise portfolio businesses to withdraw their money.”

That’s what spooked investors and sparked the bank run when as much as $42 billion was removed from the bank. As a result of the bank’s attempt to raise capital, the stock tanked to $106.04 before trading was halted. Smart investors knew that because deposits at the bank were well in excess of the $250,000 statutory FDIC limit for insurance, with the bank stating it was undercapitalized, that it could not possibly withstand a bank run.

Here's the dirty little secret. No private bank, no matter how well capitalized, can possibly withstand a bank run, a quick look at capital ratios of major financial institutions shows. For example, JP Morgan had a capital ratio of just under 12.2 percent as of the second quarter of 2022. Bank of America was at 10.5 percent. Wells Fargo at 10.4 percent. And so forth.

The implication is that if more than 13 percent of bank customers were to go to withdraw their funds at any of these banks, they would fail. This is a well-known structural flaw of fractional reserve banking. Almost a century after 1929, and practically nothing has changed. Sure, the laws and regulations are different. The gold standard is long gone. The FDIC now insures deposits.

But the core issue—banks lend out far more than they keep on deposit and via capital—has never, ever been resolved to anyone’s satisfaction, as evidenced by financial crisis after financial crisis, whether the savings and loan crisis of the 1980s or the financial crisis of 2007-2009.

Of course, everyone will try to assure you otherwise. U.S. Treasury Secretary Janet Yellen on March 16 just went out there to proclaim to Congress that “Our banking system is sound…” Sure, it is.

And yet, according to a Federal Reserve history, which Yellen once headed under former President Barack Obama, the savings and loan crisis mirrors today’s current problems and was prompted by a bid to rein in the hyperinflation of the 1970s and 1980s with higher interest rates.

Per the Fed: “Inflation rates and interest rates both rose dramatically in the late 1970s and early 1980s. This produced two problems for S&Ls. First, the interest rates that they could pay on deposits were set by the federal government and were substantially below what could be earned elsewhere, leading savers to withdraw their funds. Second, S&Ls primarily made long-term fixed-rate mortgages. When interest rates rose, these mortgages lost a considerable amount of value, which essentially wiped out the S&L industry’s net worth.”

Why, that’s exactly the same problem as today. In fact, Silicon Valley Bank’s exposure to U.S. treasuries and mortgages—whose interest rates have risen as inflation has swept over the U.S. the past two years as the economy overheated—is not unique. Every large bank buys treasuries and mortgage securities. Currently, banks are said to be sitting on more than $620 billion of unrealized losses.

The implication is that any attempt to normalize interest rates after former Federal Reserve Chairman Ben Bernanke set them near-zero percent in Dec. 2008 will be met with financial contagion—even and especially if the higher rates are the only mechanism available to rein in high inflation by soaking up excess dollars that were chasing too few goods.