Have you ever felt the momentary panic of being told your credit card was declined or your check bounced? A huge portion of California winemakers felt that terror, but much, much worse this past weekend, after Silicon Valley Bank (SVB) collapsed Friday morning. The bank, which had been America’s 16th largest, is now the second largest to fail in U.S. history, and while it was primarily known for being a favored partner with the tech industry, it was also a leading player in California wine, providing loans, financial advice and industry support to more than 400 winery clients.
When the bank went under, winemakers with accounts there suddenly found their SVB credit cards no longer worked, their checks would no longer clear and the bank’s app wouldn’t even let them log on. One winemaker told me she spent Friday morning contacting her distributors, telling them not to pay her for any of the wines they had ordered—a request she never thought she’d make—because she had no idea if she’d ever be able to access that money again once it entered her account.
Most people started breathing again on Sunday night, as the federal government announced that bank customers’ deposits would be completely covered, even funds over $250,000, which is usually the limit to FDIC coverage. They were able to begin withdrawing their money Monday morning. The Feds are actively looking for a bank or banks to buy SVB’s assets and take over its operations.
But the panic is not completely over, and for the wine industry, SVB’s collapse brings both short and long-term concerns. And the news is confusing. So here are a few answers.
How exactly did this happen?
While there will be months if not years of investigations into how a bank with $200 billion in assets at the start of the year could collapse in 48 hours, the early reports suggest SVB was not the victim of crooked dealing. And it appears the bank’s wine division had no responsibility. Wine division employees told me they were completely blindsided by this. (Since most held large amounts of SVB stock, they have also lost a lot of their personal net worth.)
Back in 2021, when the stock market was healthy and the tech sector that is SVB’s bread-and-butter was booming, the bank took tech firms’ money and invested it in long-dated bonds. These looked like safe investments. Early signs suggest SVB executives made two major mistakes. First, the tech industry made up a huge portion of their business, making them particularly vulnerable to a downturn there. Second, their focus on long-dated bonds suggests they didn't spread their risk across numerous types of investments. When the Fed began raising interest rates last year, those bonds became less valuable. Then the tech industry began to slow, and firms began to withdraw money from SVB to pay their bills. SVB had to sell the bonds—at a loss—and found they were losing about $1.8 billion.
Could the bank have survived? It’s possible. But when executives explained this to their customers, it triggered a panic. Venture capitalist firms told their clients to pull their money from the bank. SVB’s stock price cratered, and soon there was a full-scale bank run—only digital and without George Bailey.
What does this have to do with wineries?
SVB founded its wine division in 1994, looking for industries with growth potential. Rob McMillan, who heads the division, explained to his bosses at the time that there was an entire industry that wasn’t getting specialized service by traditional banks. As of last week, SVB had more than 400 winery clients and more than $1.2 billion in outstanding loans to the industry. While wineries weren’t as big of clients as tech firms like Roku and Etsy, the bank was a big player in the industry and McMillan built a reputation for wine business knowledge.
Wine is not your typical business. Think about it—you want to start a winery. You might want to plant a vineyard, which will require land and vines that won’t start delivering grapes for three to five years. Or perhaps you want to buy fruit—top-quality grapes cost four figures a ton or more. Plus, you’ll either need winemaking equipment or to work with a custom-crush facility and you’ll need barrels, bottles, and a whole lot more. Once you make your product, you let it sit in a cellar for months or years. Then you need to sell it. Will you rely on the three-tier system or sell direct? Target restaurants or retailers or both? It’s a complex, long-term business that many financial advisers would tell you you’re crazy to join.
Winemakers tell me that SVB was more than a lender. Bank staff sat down with them, shared recent market research and helped them decide what was best for them, both short and long-term. Adam Lee of Clarice Wine Company told me about the early days of his first winery, Siduri, when he had been paying the bills with loans from his mom. An SVB banker sat down, tasted his wines with him, asked him about his goals and helped him develop a plan to reach them.
"We’ve come up with financial tools to help wineries specifically. This is all we do. It allows us to focus on this," McMillan told me yesterday. He's spent the past 72 hours in shock, but also fielding calls from clients and trying to keep operations running. The bank's leadership has been fired, but the staff remains at work. "We've made $4 billion in loans in three decades and we've lost $4 million in all that time. And it’s not because we’re cautious. It’s because we understand risk and we know how to help clients succeed. We know how to be patient."
McMillan grew a bit emotional mentioning how many clients, while checking on their own finances, have been asking how he's holding up. Then he returned to what he saw his job as. "Everyone can give you a line of credit. But how do you support that business? That's what we tried to do."
Will wineries lose their money? And will the panic spread?
Unfortunately, the slow recovery from the pandemic, inflation and the Federal Reserve's efforts to combat that inflation are undoubtedly going to create more financial insecurity in the months to come. The Feds stepped in so quickly to guarantee SVB account holders' money in order to stop customers at other banks from panicking. (Investors in the bank are out of luck.) Stock prices have dipped at other regional banks, but several of those have taken steps to shore up their bottom lines.
Wineries will be fine when it comes to their checking and savings accounts. What happens to SVB loans, lines of credit and other financial accounts will likely depend on if the bank finds a buyer and what parts of the company that buyer takes on. Like a lot of other businesses, wineries may find it harder to get credit and affordable loans in our current economy.
And regardless of the short-term loss, there's the loss of SVB's wine-specific knowledge. Hopefully the staff will find new homes and someone else will realize the benefits of being the preferred bank of wine country. But that will not be fixed overnight. Trust cannot be built as quickly as it can collapse.