SVB clients in limbo after taking refuge in money-market funds

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(Bloomberg) — Within hours of the collapse of a Silicon Valley bank, a group of startups tried to cash out. Those that couldn’t turn to a last-ditch option: parking it in a third-party money-market fund offered through a lender.

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

While U.S. regulators announced late Sunday that depositors would get all their money back, it left a key question unanswered: How can cash held in money-market funds run by SVB clients BlackRock Inc., and Western Asset will you be able to get it again? management.

US Representative Zoe Lofgren, a California Democrat, told Bloomberg there are many unanswered questions 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 will they be treated? This is an issue people want answers to. And we don’t have an answer yet.”

BlackRock declined to comment and had no immediate comment, while Western Asset Management’s parent Franklin Resources Inc did not respond to messages sent outside normal business hours. The FDIC also did not respond to multiple requests for comment.

‘always covered’

Money-market funds allowed companies that had deposits at a Silicon Valley bank to safely withdraw cash while generating some interest. The lender’s SVB Cash Sweep program automatically transferred customers’ excess cash to those partner funds. The program was marketed to customers as a way to “always have access to your invested money, so you’re always covered.”

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

At the end of December, the SVB said that $64 billion of client cash was held in sweep money-market funds and $89 billion in managed client investment funds, which also include third-party money market funds. By offering BlackRock funds in its cash sweep program, the lender is expected to earn approximately $101 million in fee sharing and related revenue for 2022.

word spread that SVB’s financial situation was deteriorating, the funds were seen as a safe haven. In one of the biggest bank runs in history, investors tried to pull out $42 billion on Thursday. When bank relationship managers didn’t answer calls and transfers stopped, some customers decided to dump cash into money market funds that the bank offered to its depositors.

Law firm Cooley said in a memo on Saturday that SVB clients should retain ownership of money-market assets, although the timing of their availability is uncertain. 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 receivership,” Wilson Sonsini Goodrich & Rosati said in a note to clients. “However, it may take some time to access these funds.”

With assistance from Billy and Katanga Johnson.

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