Why Michael Burry Thinks We Just Found the Next Enron

  • Silicon Valley Bank (SIVB) suffered a run that collapsed the stock.
  • Venture capitalists depend on the bank to protect assets that may be overvalued.
  • The government may have to step in.
Michael Burry - Why Michael Burry Thinks We Just Found the Next Enron

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Investor Michael Burry called Silicon Valley Bank (NASDAQ:SIVB) “the next Enron” after it suffered a run that wrecked its stock.

SVB is a favorite bank of venture capitalists. Shares dropped by 60% on March 9, then another 70% overnight, after a cash crunch caused a bank run, depositors rushing to pull out their money.

The bank has sought to sell common stock to raise cash. Hedge fund manager Bill Ackman suggested the government bail out the bank. 

Trouble in My Valley

SVB was a high-flyer when money was free. It gave equity a considerable advantage over debt financing. But the shoe is on the other foot now. Last year’s bonds are worth less than they were, and equity is harder to raise. The bank’s stock was worth over $10 billion on March 8. Now it’s worth less than $2 billion.

SVB said it earned $25.35 per share last year on assets of $215 billion. It was trading at $36 per share in the pre-market on March 10.

Depositors ran for cover after the collapse of Silvergate Capital (NYSE:SI), a bank focused on cryptocurrency. SVB responded by selling its loan portfolio at a $1.8 billion loss. It’s this hole in the balance sheet the equity raise is meant to fill.

Morgan Stanley analysts insist SVB’s problems are “idiosyncratic” and that the banking industry is sound. But JPMorgan Chase (NYSE:JPM) fell over 5% on March 9. Bank of America (NYSE:BAC) was down 6%.

Even if the problems are contained to SVB, they’re huge for start-ups that depend on its liquidity to fund their deals. The government guarantees demand deposits up to $250,000, but even small start-ups may have a lot more than that.

Burry’s comparison to Enron may be overblown, which is likely why he deleted his tweet. But, like all banks, SVB’s assets are loans to other businesses. It may lack the liquidity to make good on withdrawals. A better comparison might be the 2008 financial crisis, which Burry himself showed was caused by mortgage bonds being exposed as worthless, resulting in a government bailout.

Michael Burry Worries: What Happens Next?

As of 8:35 a.m. Eastern this morning, before markets even opened for the day, the Nasdaq put a trading halt on SVIB stock.

Regulators will need to step in to keep SVB’s problems from spreading. That may mean an orderly liquidation or a forced sale of the bank, which is why investors are running from it.

On the date of publication, Dana Blankenhorn held no positions in any companies mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, available at the Amazon Kindle store. Tweet him at @danablankenhorn, connect with him on Mastodon or subscribe to his Substack.

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