SVB Clients in Limbo After Seeking Refuge in Money-Market Funds

(Bloomberg) — In the hours leading up to Silicon Valley Bank’s collapse, a slew of startups tried to withdraw their cash. Those that couldn’t turned to a last-ditch option: parking it in third-party money-market funds offered through the lender.

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Throughout the weekend, lobbyists and lawyers fielded frantic questions from venture capital firms as they awaited guidance from the Federal Deposit Insurance Corp. on the fate of the billions of dollars in those funds, according to people familiar with those conversations.

While US regulators announced late Sunday that depositors would get all of their money back, it left a key question unanswered: When would SVB clients be able to retrieve the cash held in money-market funds run by BlackRock Inc., Morgan Stanley and Western Asset Management.

US Representative Zoe Lofgren, a California Democrat, told Bloomberg that many unanswered questions remain about the so-called sweep accounts and whether customers will be able to access them.

“There’s a lot of interest,” she said. “They are not depositors, but the bank is the financial institution of record. And how are those going to be treated? That is an issue that people want an answer to. And we don’t have an answer yet.”

BlackRock declined to comment and Morgan Stanley had no immediate comment, while Franklin Resources Inc., the parent of Western Asset Management, didn’t reply to messages sent outside of normal business hours. The FDIC also didn’t respond to multiple requests for comment.

‘Always covered’

The money-market funds allowed companies that had deposits with Silicon Valley Bank to sock away cash safely while generating some interest. The lender’s SVB Cash Sweep program automatically moved clients’ excess cash into those partner funds. The program was marketed to clients as a way for them to “always have access to your invested funds, so you’re always covered.”

Silicon Valley Bank parent SVB Financial Group said in its most recent annual report that clients were moving more money off-balance sheet to products such as external money market funds in the second half of last year.

At the end of December, SVB said $64 billion of client cash was parked in sweep money-market funds and $89 billion in managed client investment funds, including third-party money market funds. By offering BlackRock funds in its cash sweep program, the lender earned about $101 million in fee sharing and related revenue for 2022.

The funds were seen as safe havens when word spread that SVB’s finances were worsening. Investors tried to withdraw $42 billion on Thursday, in one of the biggest bank runs in history. When bank relationship managers didn’t answer calls and transfers froze, some customers made the snap decision to dump cash into money market funds that the bank offered to its depositors.

SVB clients should retain ownership of the money-market assets, though the timing of their availability is uncertain, law firm Cooley said in a memo Saturday. Another law firm echoed that advice, with a caveat.

“If these money-market mutual funds are held at a third-party financial institution, such as BlackRock or Morgan Stanley, they should not be subject to the receivership,” Wilson Sonsini Goodrich & Rosati said in a note to clients. “However, it may take some time before these funds can be accessed.”

–With assistance from Billy House and Katanga Johnson.