Why Hollywood’s Money Machine Is Unscathed by the SVB Failure – for Now
Both the tech and entertainment industries have flocked to specialist banks that understand their particular requirements. So when Silicon Valley Bank (and others) went down, Hollywood naturally shuddered.
The actual damage amounted to a weekend of worry, with regulators stepping in to make sure bills got paid, paychecks issued and cash tapped. But the bank failures set off a swirl of market uncertainty that could pose longer-term challenges for the entertainment industry — including the possibility of a global recession that would test corporate plans built on the premise of a continued bounceback from the pandemic.
From a banker’s perspective, Hollywood and Silicon Valley don’t look that different. There are risky projects that require upfront investment and may not pay off for years. There’s a rotating cast of characters with sporadic income who hop frequently from one venture to the next. And there’s a constant boom-and-bust cycle to the business.
Most of the banks that specialize in entertainment finance are smaller, regional banks whose stocks have been hammered, like First Republic, which Wall Street rushed to rescue this week after the failures of SVB, a favorite of tech startups, and Signature, a New York bank that catered to crypto firms and Broadway theaters alike.
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First Republic, a San Francisco bank which opened up an entertainment practice in Los Angeles in 2010, has seen its shares gyrate wildly: It dropped 70% since the beginning of the SVB crisis, rose 10% Thursday, then crashed 33% Friday. Other bank stocks have been similarly whipsawed by Wall Street. The Federal Deposit Insurance Corp., which took SVB and Signature into receivership, has been trying to auction them off. An early attempt failed to find buyers, with a second round of bids due Friday.
The entertainment industry has so far avoided becoming collateral damage. But bank runs like the ones that undid Signature and SVB are a “self-fulfilling prophecy,” CFRA equity research analyst Alexander Yokum told TheWrap. “The second you lose [customers’ confidence], you can go down quick.”
Making payroll
While the producers of documentary short “Stranger at the Gate” spent the past weekend waiting to see if they’d scored an Oscar, their payroll provider, Wrapbook, was worrying about making sure their customers’ collective 100,000 workers — many of them in the entertainment industry — got paid. The tech startup used Silicon Valley Bank to move payroll funds.
The bad news: the Smartypants entry lost to “The Elephant Whisperers.” The good news: Just hours before the ceremony got underway, the FDIC announced that it was backing up all of Silicon Valley Bank’s deposits and customers would have access to their money Monday.
Wrapbook CEO Ali Javid was determined that Smartypants and his other customers would get paid regardless, using his company’s own money to float their direct deposits while SVB was in limbo over the weekend. Some paper checks would have to be reissued, but Javid promised to cover any overdraft fees or other bank charges.
“We care about getting people paid and were prepared to absorb the cost to expedite direct deposits and potential overdraft fees,” he said. But as a result of the FDIC’s action, few if any requests came in.
Jessica Lessin, CEO of the Information, faced her own financial crisis: The media startup was a customer of Silicon Valley Bank. Even as her reporters were covering it, Lessin wrote an account of her frenzied efforts to make sure the company made payroll over the past week. She moved quickly to set up another bank account — with First Republic, which was soon facing its own challenges. She ended up working with three banks, she wrote in a comment on her own story.
Too special for their own good
If customers made a mistake in not seeking to diversify their banking arrangements, the troubled banks made a similar error. The failed institutions, explained Gerber Kawasaki CEO Ross Gerber, shared one element: heavy exposure to a particular client group. For Silicon Valley Bank, that was startups, who were cash-rich in 2021, causing the bank’s balances to balloon, but started burning through their deposits in 2022. Signature had tapped into the crypto boom, serving customers in the fast-growing space. That, too, turned to bust, and the failure of another crypto-friendly bank, Silvergate, weighed on others catering to the sector.
Another problem SVB had was, perversely, the loyalty of its customers. Roku kept a quarter of its cash at SVB, while BuzzFeed said Monday that it had “most” of its cash balances at the bank.
“The banks that went down were specialized,” said Yokum. “It’s unfortunate, but they were less diversified than their competitors.”
It’s also worth remembering, though, that representatives of both banks successfully lobbied Congress to change regulations in 2018, raising the asset level at which they would have to face stress tests from $50 billion to $250 billion. Stress tests, which are “quantitative evaluations” that the Federal Reserve runs on the nation’s biggest banks, are meant to assess whether institutions have enough capital to get through a significant recession.
It’s the economy
For now, the blink-and-you-missed-it crisis seems to be passing. Thanks to swift action by Wrapbook and other vendors, paychecks kept flowing in Hollywood and on Broadway. “The Fed has stepped in to protect depositors,” said Gerber.
For now, the big banks are benefiting the most. Bank of America saw an influx of $15 billion in deposits in recent days, Bloomberg reported, and its peers have seen similar inflows.
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A smaller Hollywood lender that could stand to benefit is City National Bank, the “Bank to the Stars” that famously ponied up the ransom for Frank Sinatra’s kidnapped son. It’s owned by Royal Bank of Canada, a too-big-to-fail institution. Gerber said he expected institutions like City National to see an increase in business. A spokesperson for the bank didn’t respond to a request for comment.
Rather than individual bank failures, though, the prospect of an economic downturn driven by or worsened by a banking crisis should rattle Hollywood. The contagion affecting financial markets seemed to sweep from Silicon Valley to Zurich in days, with the Swiss government stepping in to rescue a tottering Credit Suisse, and trading in Treasury bonds seeing unusual disruptions.
With the big studios carrying heavy debt loads that they’re hoping to lighten, Hollywood won’t be immune if the financial chaos gets worse. The global crisis of 2007-2009 meant a year-long delay in DreamWorks Pictures’ debt-dependent financing deal with Reliance. And a deep recession could hit the consumer spending that the entertainment industry depends on. The only upside in that scenario? Inspiration for another wave of documentaries explaining just how the markets melted down.
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