Four failed in 2020. Four failed in 2019. None failed in 2022 or 2018. Banks fail fairly regularly, but it's the size of the bank and the types of deposits that are concerning in this case.
SVB was the biggest bank in Silicon Valley (2nd in California), and the 18th largest bank in the entire US.
I knew this whole thing was big as I personally know a lot of friends use SVB for their startups, but I failed to realize how big deal this is. How can the 16th biggest bank in the country fail so rapidly?
One thing to bear in mind is that "failing" is not binary.
The story seems to be that SV put all their deposits into 10 y bonds in 2021. I'll use that as an approximation.
A 10Y bond will usually move about 8x as much as the underlying interest rate (it's called "duration"). So if SVB did nothing but buy these bonds and sit on them, then they would have lost about 36% on these (8 x 4.5% rate movement). That's a lot but also better than losing everything. And you'd hope the bank wasn't idiotic enough to take no precautions: no hedging of IR changes, putting all assets into just that.
My finger in the air haircut would thus be maybe 15-20% loss of deposits, if this simplified model has anything to do with reality. That's a lot but also means depositors get 80-85% of their money back.
It's possibly pushing the limits of my toy model here but a 10Y bond bought in 2021 is now only an 8Y bond, because time has passed. So instead of 8x you get more like 6x and the pessimistic haircut number is thus 29%.
> That's a lot but also means depositors get 80-85% of their money back
That's not what happens. Let's say 100 clients each deposited $1 in the bank, and the bank loses $20, so only has $80 to pay out when liquidated.
Let's say half (50) depositors withdraw their funds early, they each get $1 back. So now the bank has $30 in assets and has to pay 50 people. Suppose 20 people demand withdrawals, and the bank pays $20 to them. Now the bank has $10 and has to pay 30 people.
I admit that I don't know when/whether a bank can actually refuse withdrawals in such situations, or when bankruptcy proceedings are triggered, but the earlier you withdraw the less likely you're going to lose money, and the later you withdraw the more likely you'll lose a significant part of your deposits.
Sure your calculus still works out on average, but I'm not sure that means anything and it's no consolation for the ones that reacted last.
I don't believe the bankruptcy clawback provisions you're referring to apply here, because this is an FDIC conservatorship/receivership, not a bankruptcy proceeding. I don't fully understand why this particular part of the processes differs, but I'd argue it's that it does unfortunate, as it incentivizes bank runs like this.
There is an extensive comparison of the two processes in [1]. Specifically:
> the Bankruptcy Code provides trustees the authority to avoid, that is, claw-back or reverse, certain transfers (subject to certain limitations52) made by debtors
> the FDIC as conservator or receiver may not avoid (i.e., reverse or claw-back) any property transfer pursuant to a qualified financial contract unless the transfer was performed with the "actual intent to hinder, delay, or defraud."
I do love a CRS report, but that was written before Dodd–Frank imported the bankruptcy code rules for preferential transfers into FDIC receivership.
> The Corporation as receiver for any covered financial company may avoid a transfer of an interest of the covered financial company in property [...] that enables the creditor to receive more than the creditor would receive if [...] the covered financial company had been liquidated under chapter 7 of the Bankruptcy Code... (12 U.S.C. 5390(a)(11)(b))
It also calls the 90-day clawback period out explicitly.
This is precisely why we have the FDIC -- if deposits are federally insured, there is much smaller incentive for depositors to withdraw their money out of fear of a bank run.
"As of December 31, 2022, the amount of estimated uninsured deposits in [SVB] U.S. offices that exceed the FDIC insurance limit was $151.5 billion. [from total deposits of $173,11B]." [0]
After FDIC seizes the bank your funds are available the next business day up to the insured amount. Above the insured amount you have to wait a while longer.
The startup I worked for used SVB. While I am unsure if all of their money was with SVB, it was company that had raised over 100m. I wonder if there will be issues with paychecks going out. Surely they diversified their accounts, but who knows.
Deposits ate FDIC insured up to 250k per depositor per bank. Companies with > $250k in the bank need to take the risk that they really can lose that money into account.
Per bank and per account with different ownership categories, so if a company had multiple accounts in different ownership categories those would each be insured up to $250,000
Why would a company have different ownership categories for their accounts? Wouldn't all of their accounts be wholly owned by the company and no one else?
> My finger in the air haircut would thus be maybe 15-20% loss of deposits, if this simplified model has anything to do with reality. That's a lot but also means depositors get 80-85% of their money back.
Depositors have been getting 100% of their money back. [and will still do if they are quick (or has the bankruptcy been declared already?) - edited: too late!]
The loss - that is an amount measured in dollars, not an abstract percentage - is going to be supported by a smaller number of depositors.
A bank that can't pay back 100% of deposits has failed. This isn't equity where haircuts can be expected at times; depositors absolutely expect to be able to get back all of their money when requested.
I believe the implication is: why aren't we using the fed for our banking, this kind of bank run would be impossible. The fed provides guarantees to banks but not to retail and that's a policy decision we could change, if we wanted to.
We're making some progress in that direction. The FedNow program will provide retail money transfer services [0]. This should make it much more practical to do direct stimulus efforts like we saw during COVID.
> The fed provides guarantees to banks but not to retail and that's a policy decision we could change, if we wanted to.
Who is "we?" The US is not a democracy. Nothing could stop US elites from overturning the Bretton Woods system, passing NAFTA, and bailing out the banks in the mortgage crisis, so what makes you think "we" could change this policy decision?
Karl Marx showed us how capitalism works 150 years ago. The ruling class rules and the working class works. If you don't like it, you need to move beyond capitalism.
No, failing is failing. It means the bank is insolvent. That doesn't mean the bank is worthless, but it doesn't have enough cash to meet its obligations. And yes, depositors will likely get some of their money back, but only after a long battle. Also, the bonds held by the bank are likely off the run. The market for these is not large.
> I never traded cash bonds but would struggle to imagine it would be hard to liquidate
Bonds are actually well known for having terrible liquidity. It's common for corps and munis even with good credit ratings to be no-bid, and even Treasuries, once they're off-the-run, aren't easy to move without moving markets.
These types of bonds are what caused the pound's dramatic fall a few months ago. There isn't a large market for these. If you need to sell a lot at once, you're in trouble. The treasury recently explored stepping in to provide liquidity for off-the-run bonds: https://www.reuters.com/markets/us/yellen-says-taking-steps-...
They are easy to liquidate. But not at the face value. For that you need to wait until maturity.
Principle is simple. Why would you buy from someone a piece of paper saying someone else(even government) will pay you 1,5% a year. When you could directly buy from then similar paper paying 4%.
He's making it sound like depositors are going to get 80% of their money back tomorrow. It's going to be a years-long legal battle while affected companies are going to potentially shutter due to an inability to meet obligations. Also, his number of 80-85 is based on the yield of the treasuries, but old treasuries like this are hard to move.
For customers who are startups, investors, and large tech concerns, FDIC insurance of $250k may not cover the balance. Sure don't want the $2M you have left from your last funding round to evaporate, or even be frozen.
Yeah, well, indeed, that is an issue. I'd imagine it would be possible to get a fraction of it now via some third party, but that could be quite a haircut too.
Well, treasurers looking to park their cash and use US Gov debt guarantees usually buy shorter dated treasury bills - around 3-6 months. This matches their duration - chances are they will need the money quickly. In general treasurers match the duration of liabilities (when they will need the money) with the duration of assets (bonds).
If SVB really parked most of the cash in 10-year old treasury bonds that sounds.... questionable...
SVB situation is made worse 'coz it seems about 93% of bank's $160B deposits are uninsured as they are above FDIC's $250K limit. So all the more reason for depositors to pull out their money.
I'm feeling like this is early days of a disaster in Silicon Valley. We're at the first or second domino teetering right now. I hope a Sequoia or KPB will step up and save the bank, otherwise a lot of their portfolio investments are about to start missing payrolls.
If everyone’s saying we’re in a bubble, we probably are. Just because it keeps getting bigger doesn’t mean it’s not going to pop.
We’ve had 15 years of people getting billions for phone apps made in 12 months and forgotten in 6. Random individual software startups are valued more than basically the entire hardware industry under them. Bitcoin peaked out at 1.28 trillion and it still has no use beyond being a converter from dollars, to crypto, to dollars again with the occasional hand wavey “dude it’s totally completely secure and stable and everyone will use it in the future as a currency! Look how much I made by investing at the peak!” story.
No, if no one is saying that we are in a bubble, then we might be in one. Because when everyone thinks it’s a bubble they are extra careful. When they don’t think about it, they just grow the bubble
If literally everyone's saying we're in a bubble, by definition we wouldn't be. Nobody would be buying at ever higher prices in a bubble, so who's making those trades?
Sure, you might claim those people are unhinged and don't count, but they'd say the same to you. Unless you actually start going to your broker and buy a bunch of PSQ your comments here carry as much weight as mine.
People can simultaneously believe they're in a bubble and still be buying. They may believe that they'll be able to sell before it pops. Or they may believe if it keeps growing long enough it won't matter that it's a bubble, because they'll have made enough money.
The doomsayers have shifted from "we've been in a recession for six months, they just changed the definition of a recession" to "an economy that is beginning to falter."
I'll take that as a sign that the economy remains robust.
They quite literally changed the definition of a recession. Just because it's not a historically accurate recession does not mean we are not in, nor that are not heading into, one.
ZIRP is dead, there's no indication interest rates will go down any time soon, CPI indicates food costs are not moving, energy is still expensive, layoffs are picking up steam, housing is at it's most unaffordable time in history, etc.
You look at the gestalt sitting in front of you and you say "the economy remains robust". Lord, I wish I had your naivity^W^W^W^W^W^W^W optimism. I lived through the GFC and suffered the consequences of hedonistic money policy. History may not repeat but it certainly rhymes and all of this is starting to smell very familiar to me. I'm not in possession of a crystal ball but as it stands there is still too much money in the economy. The VAST majority of stock value since the GFC has been from stock buyback programs and not bottom line increases. That alone should tell you the possible origin of the next disaster.
Falter or maybe 're-balance' --> Look at all the thousands of layoffs in tech, the price of real-estate at all sectors, interest rates, savings-account rates of the population, homeless, unemployed, under-employed etc.
There are a fuck-ton of factors that all have not-so-rosey outlooks.
Its amazing we dont have an actual game "sim America" and you get to fiddle with all the various economic levers in our tax code and see the output based on real data coming from various sources in the economic space (like farm, military, foreign subsidies, etc)
One that takes in the budget proposal from .gov and lets you fiddle with the model and such and crowdsource the best model outcomes through millions of game players - rewarded kind of like the lottery - everyone pays $1 a month to come up with the best model - its run through many simulations and the best model wins a bunch of cash. and then, wait for it, chatGPT writes an actual budget bill to be voted on.
It doesn’t work like that, these banks didn’t fail because of exposure to particular industries. They failed to manage their IR risk just the same as every other American bank. Now they will all be in for some serious pain. In 2021 it would have been considered fringe economic theory for rates to hit 5%. Most economists would have told you it was more likely to be at -1% now.
Were you around during the 2001 bust? It was surreal. I had a BBQ at my house and had ~75 attendees... all tech workers. of the ~75 people there, ~3 had jobs.
I was out of work for 18 months during that period. Luckily I had a background in Animation and Architecture to fall back on and got a job designing tech companies when the crisis lifted.
It's not like they wanted to. Loads of money was coming in from funded companies but the demand for loans was low. So they had to put the money somewhere and banks (not just SVB) began putting record amounts into treasuries. At least they got something from them so they could pay interest on things and keep the lights on.
The government printed a ton of money and demand for loans crashed after the pandemic started. People even paid loans down. Many companies weren't borrowing much because of supply chain issues - why borrow if you can't use it? I'm not blaming the government - unemployment went through the roof for awhile and they had to protect people. But this is a side effect that no one really saw. That the treasuries would lose a lot of value because of super rapid interest rate increases while companies start eating away at their runway because no new investment is coming.
It all makes sense today but literally no one saw this coming a couple weeks ago.
A lot of us took out 3% mortgages and avoided working at startups offering 400k to build some vaguely defined "democratization of finance" product.
No one said SVB is going to be insolvent on 3/10, but lots of people thought SV and investors were making bad decisions in general over the past several years.
SVB is a victim of its own culture. You would never be hired as an exec at SVB is you said "Lets keep all these deposits in 1-month Tbills and cash since most of these startups are garbage and are going to need to take withdrawals within a couple years."
> It all makes sense today but literally no one saw this coming a couple weeks ag
The short interest in SVB would indicate that alot of people saw this failure moths ago.
That and SI have been two of the most crowded trades by hedge funds since December. Borrow has been 50%+ for the banks. That would indicate that alot of people saw this coming 4 months go.
No, they did not have to put the money somewhere. They could've kept the cash as cash if they wanted to. Holding cash is free for a bank, it's not like their costs increased since they weren't paying any interest on deposits. They could've bought derivatives to hedge against the likely scenario that interest rates increase. They could've bought 1 year bonds instead of 10. They really fucked up here.
> But this is a side effect that no one really saw.
Literally everyone except SVB saw that long term bonds would decrease in value post pandemic when interest rates increase. Interest rate increases lowering the value of bonds is quite literally the most basic rule of bonds.
I don't think you're right. Here is an article from 2021 describing this. [1] Everyone has been doing it. SVB is unique in that its customers relied on financing to continue and because it hasn't they have been drawing their runway down. Other banks don't face this dilemma necessarily. Or they do and are coming up next. I don't know if you noticed, but a lot of banks stocks are down massively this week.
Folks knew it was going to happen - but banks are highly regulated and don't have a lot of choice in what they can invest in, it has to be 'safe'. Which means specific types of bonds.
It's why the fed is currently bailing out the industry by being willing to take them all at par value, not market value, in exchange for cash.
Smaller banks are usually pressured into offering higher interest rates to compete with larger banks. Holding cash gives you exactly 0%, and short term maturity bonds pre-2022 basically gave you roughly 0%. So, as a small bank how do you entice your customers to keep money in your bank? If the large banks are offering say 0.5%, you're probably pressured into offering ~1%. And how do you afford to do that? By buying longer term bonds.
OK, now comes 2022, inflation is high and you think the Fed will increase rates. Now your bonds have already dropped in price due to the anticipated rate hikes. The billion dollar question now is whether you believe the Fed's "it's fine, don't worry we can get inflation under control", and keep your bonds, or whether you believe aggressive rate hikes are coming? It's easy to ridicule in hindsight, but as the saying goes hindsight is 20-20.
Bad things can happen but they’re more likely to be predicted accurately when someone puts up some data. But most of these doomsayers are just working from vibes. “It feels like”. They’re unhelpful comments.
Will missing payrolls result in layoffs/resignations? Thus, increasing unemployment rate that the FED desires. If contagion doesn’t spread outside of tech/startup, does the government have any incentive to intervene? Maybe this is not too big to fail.
A sale seems like the most likely scenario out of this liquidity problem (insolvency). It’ll be dirt cheap and has to make sense to its buyer.
edit: Even with recent downturn in tech, there is still sizable value in having tech as banking clients.
Management and shareholders would not be personally on the hook for missed payroll in the event of insolvency.
If all the cash evaporated from my company's account, we were forced to declare bankruptcy, that's pretty much game over. The employees would be among other creditors figuring out their turn to pick over the remains. The employees may end up near the top of the list, but they wouldn't get to hold the C-Suite or shareholders accountable on a personal level.
They're contractually obligated to pay their employees, but that contractual obligation rolls up to the company level, not the people who run or own it.
I don't which other states may do this, but in Cali Labor Code Section 558.1 - company managers and owners are personally liable for missed wages. It is a codified approach to piercing the corporate veil. I learned this well when we had a single digit bank account and were waiting on funding to get wired in as payroll was coming due.
Ahh I wasn't aware of this - wow. Thanks for informing me. Can't imagine the stress some of these depositors must be under with that added personal liability on top.
I think the implication is that companies won't have enough cash on hand to make payroll in future periods, so will layoff staff to cut payroll expensess.
Supposedly these jobs are the “good” jobs to still have around no matter what because, again, supposedely, they create innovation, which innovation then creates an increase in productivity (among other things), which increase in productivity has been one of the Holy Grails of mainstream economics for the last half century (with the FED being a pillar of said mainstream economics).
So, in that light, losing these jobs would be like throwing away the kid with the bathwater.
I personally don’t agree with all the premises and conclusions I’ve enumerated above, but imo that’s how a mainstream economist (like one working for the FED right now) is most likely to view things.
If you miss payroll the employees are under no legal obligation to continue laboring for you and the clock for resignations starts ticking. Many will not bother with a formal resignation because it's not clear the company still exists in any meaningful way.
I've also worked at both startups and large companies where problems with the bank or payroll software delayed payroll a day. In those situations there's typically overcommunication about the steps being done to get it resolved ASAP so employees don't walk out.
Indeed - it really began in late November, 2021. We hit a peak then and we also started to see some of the highest flyers begin to taper off and come down. The not as darling names were first. By early 2022 we started to see the entire segment draw down and it accelerated into Q2 of 2022. The flimsiest startups that weren't generating revenue yet were the canary as they were the first to start doing layoffs in May, June, and July of 2022. As the industry came to realize that the Fed was intent on raising rates, the middle and bigger players started to plan scale downs. Q3 saw revenues starting to slip and Q4 was a bloodbath for revenues. Just about everyone seemed to cut 10%-20%.
Q1 of 2023 has stabilized a bit and began with a market rally, but it could just be a dead cat bounce on the path to lower lows as the year goes on. Seeing SVB implode suddenly is ominous not so much because of them, but what it means for the industry right now. I was hoping that we maybe hit the trough in Q4 of 2022 but it would appear this year will be bleak and I sadly suspect we'll be seeing more layoffs in the second half of this year if the first half continues to miss.
I hope I'm wrong. We are about at the point where a bear market ends (around 9 months) but that's just an average. We could very well have quite a few more months or even the entire year and into next year ahead. High flying tech has been in a bear market now for over a year, although it probably needed a correction.
If someone saves the bank, it'd have to be someone who a vested interest in making sure the bank doesn't fail. As it stands, the bank has negative value.
The same Sequoia who bet the farm on FTX? I'll sit tight and wait for the FDIC. They have ample authority to do an orderly liquidation in a worst case scenario.
Well if a startup just closed a $20MM round they'll get back $250,000 after a long unwinding from the FDIC. So that's a pretty big haircut.
I look to Sequoia because, of any VC fund, they are the most likely to be able to pull off a takeover of SVB. I am still gobsmacked that they invested hundreds of millions in a company with no board or CFO (FTX)
1) FDIC insurance only applies in situations where the bank doesn't have the assets to make depositors whole. SVB has a ton of assets; most sources I've found asserting 100% deposit coverage, just not liquid. Even if the FDIC takes over (which isn't even likely) (edit: this aged well), the insurance element is irrelevant; its about operations and finding funding to drive liquidity.
2) When startups close a round of funding, they don't just get a check for $20M and throw it in their SVB account. Funding rounds are an agreement between the VC firm and the startup for that money, which transitively represents an agreement between the VC firm and its partners, and the money is generally delivered "just in time", not all at once. When the startup needs an infusion, they go to the VC, who then goes to their own bank accounts or their partners, who then go to their own bank accounts, and wire transfers happen. SVB is only one player here; yeah, its absolutely true that many startups (maybe most) directly use SVB, but its less common the further up the chain you move as the money gets more and more boring (when you hear "partner" think "old boring local business magnate who has banked with JP Morgan for 50 years"). And more-over short of systemic bankruptcy the VCs are still on the hook for that $20M.
The risk that SVB, the financial industry, and regulators are worried about right now is short-term liquidity. Startups may have $xxx,000 in their SVB account which they use to make payroll every two weeks and pay vendors and such, which is separate from the $xxM on contract with the VC. If SVB can't meet outflow demands, the people staying and trying to make payroll are going to get caught up with the panic'ed people trying to pull all their money out, and short-term liabilities like payroll are at risk. That's part of of the reason why some VCs are pushing their startups to pull money out; its not about "oh my god we're going to lose all our money", its because they don't want to get caught in the herd and be forced to pull money from other sources which are also less liquid, like long-term investments or going to their partners. Put another way, SVB's liquidity issues could spiral to cause liquidity issues further down the chain; and no one in the industry wants that to happen.
But, its a macroeconomic prisoners dilemma. And, to be frank, and I mean this absolutely genuinely and sincerely; most VCs are just rich idiots. Lets be real, the industry is proud of the fact that if one bet in fifty pays out 100x it'll make up for 49 bad bets, yet we treat them as paragons of investing genius? Their biggest motivation is to avoid embarrassment among their drinking buddies (read: investing partners) during the next trip to Jackson.
It's very possible that we never raised enough, or the firms we did raise from operate differently, but we did raise low $xxM and we got all of it at once, and we did in fact deposit it right into out SVB account.
I've never heard of the "just in time" funding - and if that's more common than I think I'm also very surprised that we don't hear more of the "fund committed $100M, but the business went south and they declined to fund it fully" sort of stories.
That's interesting; I've heard the opposite from every VC I've talked to about it. Its possible that different firms do things differently, and the ones I've talked to are in the minority.
> the "fund committed $100M, but the business went south and they declined to fund it fully" sort of stories.
My understanding is that its contractually obligated, and there would be legal ramifications for doing such a thing (or, there are clauses in the contract which allow it, or, you know, its pretty common for VC partners to sit on the board of the businesses they fund, so there are definitely options for the VC to assert sway over the company's finances and spend short of turning off the hose and breaking a contract).
Some startups definitely deposit $X-$XX MM directly into an account at SVB. Depending on a bunch of factors, these funds can be risk for availability in the short term.
SVB's assets are not liquid enough to cover all of those funds, obviously. If depositors panic in a meaningful way (they have, and will continue to do so), then SVB will be under new management by Monday.
Startups' $XX MM will not be lost. Today's payroll might fail. Next week's will be fine.
There are a lot of things that can kill a startup, and founders need to prioritize between them. Bank failures are rare enough that I wouldn't be surprised if many otherwise-good startups had not considered them to be a risk worth focusing on.
If startups have their funds in SVB, which most do, and they can't wire those funds to ADP or whatever there's no payroll. I know this first hand because when I had a startup we wired upcoming payroll to ADP every two weeks. One week our bank (not SVB) made a mistake and payroll didn't go out. It was a mess but thankfully BofA bent over backwards to fix things.
In hindsight they shouldn't have bought those MBSs, should have foreseen the coming inflation and the following interest rate hikes, and of course shouldn't have said those words yesterday.
However, sad to see what looks to be another government caused implosion.
- First, via the massive government stimulus COVID19 SVB got enormous amount of deposits in 2020/2021. They have to put that money to work, and the traditional lending it back out was not going to work, the market was already flooded with money from the government. So they sadly locked themselves in those MBSs.
- Then the gov finally reacts to their own stimulus and zero interest rates programs and they rapidly raise interest rates in attempts to lower inflation.
- And as a result, the MBSs that SVB holds are underwater in mark to market. Investments into startups fall, so no more influx of customer deposits into SVB. And finally, due to the difficult market (and VC market), all the startups are drawing down their deposits rapidly through their current burn rate. And SVB ends belly up.
SVB wouldn’t have these issues if they monitored the risk better. If they put the money in short term govt bonds they would be fine. Or if they kept the rates they paid on deposits low to discourage the excess, they would also be fine.
Banks are in the business to manage risk.
The sad part is this risk management and investment process is concentrated in a very small group. Most of the bank employees are very good, had no idea what was happening, and some will lose their jobs as their equity goes to zero.
This is correct, Banks can plan for this risk by aiming to match the duration of their liabilities, which includes deposits, to their assets. For example, if a bank is getting funding via a one-year certificate of deposit, it can buy a Treasury maturing in one year to match. But if a bank’s deposits can move at any moment, it has to weigh that risk when investing. Banks also diversify with assets that are floating rate, like many kinds of corporate loans or credit card loans. Few are at risk of needing to wind down so quickly. But many may still have to take actions throttling back on loan growth or raising more capital if the Fed keeps going and deposits flee more quickly than anticipated.
"SVB wouldn’t have these issues if they monitored the risk better."
Let's see what happens. If only SVB goes belly up, then yes, only SVB was the one that couldn't read the tea leaves of the government's actions. But if SVB is just the first of more banks that will go belly up, then perhaps it is not just an error on SVB's part.
They’re still supposed to have swimsuits on, to continue the metaphor. If anything, their customers are relying on trusting them more during turbulence.
When interest rates are negative the bank could just stuff the cash in a mattress no? Why do they need to take risks? They don't HAVE to (except profit of course)
KI used to bank with a small credit union in Sunnyvale, CA - it was a tech credit union (cant recall the name of it ATM)
But they used to have a sheet they posted on the wall near the tellers - this was in 2007-2009 at the height of that particular financial fraud collapse (lehman, etc)
The sheet showed how much the bank was making on over draft fees - and every time I was in the bank I would check that number - and it was stunning to see as deeper we got into that recession, how much that number increased.
They were making about 500k per month on _overdraft_ fees alone...
That said a lot about the state of peoples finances alone.
The Fed gave plenty of warning that they would raise rates. Preventing 10% unemployment was absolutely worth the covid helicopter money. SVB is obviously incompetent just from seeing how they've handled the last couple days and should've realized that their long term bonds would get blown up in the post pandemic monetary environment.
> The Fed gave plenty of warning that they would raise rates.
In 2022. Up till the end of 2021, they kept saying inflation is "transitory". According to reports SVB bought a bunch of 10 year MBS in 2021.
SVB is obviously incompetent in believing in that Fed BS about transitory inflation -- wait but should they have believed in the rate hikes as well then?
Yeah, although SVB's failure demonstrates a major shortcoming with deposit insurance (in its role as a deterrent for bank runs). If you have more than $250k in assets, or are worried about short-term liquidity, you're still incentivized to run from the bank.
Correct me if I'm wrong, but FDIC insurance is mainly to protect individuals / small businesses from lose their entire livelihood, they're unlikely to have more than $250k in their bank account at any given time. If you do, you're most likely in/above the 1% and will survive by other means if you lose everything above $250k (or, rightly be "punished" for not having any other survival mechanism)
It's great, but it punishes the smaller banks while leaving the 'too big to fail' conglomerates in a position to be bailed out by taxpayers. We need to chop down any bank that poses a systemic risk so that it's small enough for the FDIC to handle.
TARP arguably turned a profit, so a bailout isn't necessarily bad. Might be better to let them fly high, get burned, and then let investors get wiped out while keeping customers whole. What we don't want is socialized losses, but distressed investment gains are a-ok with me.
FDIC being involved doesn't actually mean you lose everything above 250k. Assuming that the bank's problem was liquidity, and not fraud, it's very likely that no depositor will end up taking a haircut.
> It's quite possible that no depositor will end up taking a haircut.
It's possible that uninsured deposits will eventually be recovered at full value, but losing access to depository funds is itself a loss which often has a very real costs, and when the Depository Insurance National Bank taking SVBs place opens no later than Monday, uninsured depositors are going to only have a claim against the potential realized value of SVB assets beyond what is necessary to cover the insured deposits, while insured depositors will have access to actual money in actual deposit accounts in an actual (solvent) bank.
Blaming the government for poor investment decisions is just ridiculous. The playing field is level yet they are the ones to eat shit. They didn't diversify. They didn't consider macroeconomics. They didn't limit deposits despite having no game plan. It's pure greed and mismanagement.
What are the executives getting paid so much for, if not to manage complicated financial risk? I'm no banker, but as a layperson, I was certainly aware that inflation was possible. I figured it was a given (M2 growth and low productivity), but I guess they felt strongly enough otherwise to risk their entire bank?
Could they not have cut interest rates and take the dip in profit with shorter duration bonds? Was there really no sensible way to prevent this?
Businesses fail all the time from things outside their control, but I've yet to see any indication that's the case here.
> should have foreseen the coming inflation and the following interest rate hikes
That's putting it lightly. Powell has been saying over and over again "more inflation, more rate hikes." Even giving us approximately how many they are planning on doing in a given timeline. I don't understand why so many people think it's a good idea to prepare for the opposite of what the government is literally telling us it's going to do. That does not seem like a smart bet, but maybe that's just me.
You can blame the government for some stuff but at some point companies have to own the decisions they make in the face of not just evidence, but also clear statements, that run counter to how they are operating. SVB made their bed in a large way here.
“It’s the governments fault the bank mismanaged the money given to them” is certainly one perspective. If it were true why aren’t all banks facing the problem SVB has?
> of course shouldn't have said those words yesterday.
They were going to have to say something sooner-or-later. I think the biggest part is that before they could raise capital, they needed to be honest about their books or risk securities fraud charges.
The pandemic was going to shake the boat regardless. It was impossible to right-size the stimulus, and in hindsight we over did it, but given the information we had then I think we did the right move, at least with the 2020 stimulus. The 2021 stimulus is much more shady given that then we already had a vaccine deployed and were in a trajectory to recovery.
This is wrong. DETR, the Nevada Unemployment Office, gave out 1.4B too much [0]. I am absolutely sure this is not an isolated case. The absolute level of corruption disguised at absolute incompetence is too high to let the government off that easily. 2020-2021 was the biggest wealth transfer from the poor to the ultra rich in the history of the world. The stimulus didn't even have a clawback attached to it.
There's ample reason to believe that the Fed delayed starting its current rate hike process due to political reasons; Chair Powell wanted to be re-appointed and felt that no chair who championed rate hikes back in 2021, which is when it should have started, stood a chance.
Powell was kept on by both Trump and Biden. For all of the hoopla about "politicalization of the Fed", Powell has kept his chair.
Its not perfectly insulated. Both Trump and Biden can whisper to Powell and encourage certain behaviors. Ex: Trump pushed for lower rates, and Biden pushed for higher rates respectively.
They also caused the entire economy not collapsing into a burning pile of garbage in 2020. They are the reason you're not living in a bunker, trading bottle caps for ammunition and fighting for supplies with gangs riding questionably modded dune buggies through the desert.
The Fed has two mandates. Maintain low unemployment and low inflation. There is no way they could have achieved both in the last three years, but inflation is way preferable to economic collapse.
It seems like we've had just as many financial crises before the advent of the Federal Reserve in 1913 than after, so it remains unclear to me the benefits of having it around, particularly as its nominal independence from the political process is eroding.
Sure, keep the lender of last resort; but maybe let the market determine interest rates through money markets, with incentive-control through judicious laws, instead of by fiat.
The obvious example is the panic of 1907, and if your argument is that today’s fed looks anything like 1929’s fed, that’s gonna be a tough road to hoe.
Exactly, and just to drive it home, I’m going to feel zero pain as a result of SVB imploding, Thanks to the fed.
I felt no pain in ‘08, in ‘20, also thanks to the fed. It was just news to me, abstract and happening to other people. That would not have been true without the fed.
I do wish we could get beyond the idea of "I don't like this system, get rid of it."
It's not realistic in a society this size to just chuck something like the Federal Reserve.
You'd think technologists of all people would understand that to get rid of a legacy system you need to make something so much better it becomes obsolete (or, at the very least, the embrace-extend-extinguish approach).
The fed will take over all of these assets and shutdown the bank and make a profit doing so.
The fed has a huge advantage in that they can just print money, buy assets that deliver 1% returns and when those assets mature delete the printed money. The fed is basically leveraged to infinity.
I don't understand the incentive for a bank to buy them at this point, because any potential buyer might as well wait until the FDIC steps in to resolve the bank. Any banking wizards at HN who can explain the dynamics?
edit: At the very least, FDIC should issue a statement guaranteeing beyond the $250K/depositor limit sooner rather than later in order to stem some of the outflow.
There was interest when SVB was solvent. Right now, SVB has negative value. E.g. you'd need to buy SVB for X and then pay an additional Y to balance the books. Y is likely to be a certain percentage of deposits and could be quite large. The only groups that will be interested in SVB are likely VC funds that are worried about an SVB collapse disrupting operations at the VC's startups.
> I don't understand the incentive for a bank to buy them at this point
If the natural incentive of the bank's assets isn't enough, its literally the job of the FDIC to add that incentive. That's what the FDIC does. "We'll pay you $100M to continue operations of this bank" this happened dozens upon dozens of times during 2008. The insurance component of their mandate is an absolute last ditch "holy shit actually they had nothing it was all smoke and mirrors" tool.
It won't come to that because, well first of all, regulations don't allow banks to get to that point anymore, but also: SVB is actually a solid bank, who made a couple fuck-ups, caused a panic, and their customers are generally more agile and cutthroat than industry average. There are so many tools they, the industry, and regulators have to stabilize things that if you walked into the meetings that are happening about this right now and said "we should raise our insurance guarantees above $250k" you'd be laughed out of the room.
The FDIC doesn't give a shit about stemming outflows from SVB. The FDIC cares about the system, not SVB's bottom line or stock price. Customers should be able to withdraw their money. If they're even involved at this point (and that's a huge if), their primary concern would be to make sure customers still can get money out, not changing the incentive structure or adding limitations toward getting that money out.
This is a liquidity problem (so far). This isn’t because loans went bad or anything, just that they needed cash quick and had to fire sale things (the things they took losses on were US Treasuries. Mostly.)
They still have a big loan book that is probably worth more than their liabilities.
A large player with liquidity could get those loan assets on the cheap if they agree to provide the short term capital liquidity (a reassuring name also probably stems any bank run risk).
Also the FDIC is pay in pay out insurance. The commercial accounts at SVB are in the hundreds of millions and no payments were made for those accounts. The FDIC probably won’t help.
We’re calling it a liquidity problem only because they don’t have to mark to market. In reality it’s a solvency problem, they lost a shit ton of money by buying bonds at 0-2% that are worth 50-70% value because equivalent bonds pay 5-6%.
In theory they could hold that shit to maturity but in practice they can’t because some folks want money now and all depositors will want higher interest on deposits eventually to match market rates.
I'm spitballing here but it could be an opportunity for another bank to expand into a new market and acquire new customers. SVB has a unique position in the market, as they specialize in catering to the financial needs of industries such as technology, life science, healthcare, private equity, and venture capital.
Spot on, a ton of Directors / MDs are rushing to push this in front of their leadership (whoever 'leads' the acquisition will no doubt burnish their personal brand / career path /s).
That said, if I'm an SVB customer...do I want to stick with the bank that's had this issue? Even so, would I want to bank with the acquirer?
Seems like much of the SVB customer base doesn't have a/much choice with who will provide banking for them at the early stage.
Seems like the reason for acquiring this risking market would be to transition your the clients who succeed into the parent bank for their future banking needs. Sure you will get a bunch of small/medium sized clients for a mega bank, but they are just fishing for a couple giant paydays and want the next Apple or Amazon to start banking with them.
these specialist banks are not worth much, there is no retail banking advantage to having tech companies as clients. the individual people who run the companies are most likely already wealth management clients of the same banks that might acquire SVB.
They went beyond it for several banks: To my knowledge, nobody lost money in the dozens of banks that the FDIC closed in the 2008 meltdown, despite several depositors being beyond the FDIC limits.
Did they even have that power in 2008? I remember they issued a statement about how they could have avoided losses for creditors, had they properly liquidated Lehman Brothers [1].
Again, it would be better to have a comment from someone who banks for a living, but back in 2008 when the FDIC limit was $100K, ISTR Sheila Bair making a statement to that effect (IndyMac?). One large issue was that companies would regularly be above the limit in order to run their payrolls, and so got caught in a bad position. That started companies with other banks worrying about where they were parking money, contributing to a systemic issue.
Its obviously risky. A year ago it had a market cap of $35B, if you can buy for next to nothing it could be worth it. Depends a lot if there is a big hole in the accounts and if the old customers come back.
This reminds me a lot of the american express crisis that led berkshire hathaway to buy in 1998.
SVB has positive brand value and (much more importantly) positive book value. At $16bn market cap EOD two days ago, they are also a relative minnow in the banking world.
This slip-up is tarnishing to their management, but the main side-effect is that it makes them a prime acquisition target.
Edits on my original comment are locked, but worth noting: Apparently the banks also thought there was no incentive to buy before the FDIC stepped in as well.
> At the very least, FDIC should issue a statement guaranteeing beyond the $250K/depositor limit sooner rather than later in order to stem some of the outflow.
The FDIC chose instead to shut the bank in the middle of the business day. They apparently don't see this as inciting a systemic event, where other uninsured deposits at other banks will now begin flowing out.
That imho is not playing it safe, given some of the price drops in the other banks today.
FDIC is probably involved with this sale already. But even if not, they likely will be soon, might as well start dilligence and figure out what your price would be.
I don't doubt it. The classic time for FDIC to invade a corp headquarters is Friday afternoon (the cliché is that they show up with lots of pizza) so they have max time to resolve it before opening of biz on Monday.
I think odds are good that we see that this weekend.
> why should the taxpayers be put on the hook for that?
One reason that it was done in the past was because it saves the taxpayers money by bailing out a single meltdown rather than something systemic.
But you should recognize: The taxpayers back up the FDIC, but singleton meltdowns are paid out of the insurance fund, which is paid into by the banks themselves. As long as that fund does not get exhausted (ie a systemic meltdown) it doesn't cost the taxpayers directly.
Why? When the FDIC steps in, the bank doesn't get to go on operating like nothing happened. They're shut down, the owners of the bank lose their money, and management is fired. It's the depositors who are bailed out.
The entire financial system is built on trust and stability. When a bank is rescued its shareholders suffer (by selling at a loss, nationalization, whatever). It’s not a positive outcome for them, but rescuing a bank has big implications for systematic stability.
Any buyer would do their own diligence and assign their own estimated value to the assets. I believe there will be a healthy competition for SVB despite their current problems. Many other banks have long wished to establish a presence in the tech world, where SVB has for a very long time been a leader.
What made SVB so attractive to startup founders? All the news reports I'm reading is saying that's their target customer.
What advantages did SVB provide that other brand named bank didn't? Wouldn't it have been safer to put your startup's money in Bank of America, or JP Morgan, etc? I've never heard of SVB until the crash.
They had good relationships with VC funds to top up portfolio companies with extra cash (debt).
SVB would be lenient to the entire portfolio in exchange for access to the best performing companies.
i.e. Company A is a Series A start-up that needs non-dilutive financing to bridge itself to the next round. SVB would be willing to lend when no one else would. In exchange, VC’s would introduce SVB to much healthier growth stage or pre-IPO companies that need a banking partner.
It was a lot of little things, but the main thing was that the understood startups so they would take into account your funding as well as your LOIs when making loan decisions, whereas most banks would not because they didn't understand them. That made it easier to get free cash when all of your startup's assets were basically owed money.
Or maybe the conservative old guard banks do understand, that startups without reliable cash flow, or on a growth-at-all-costs trajectory, are poor lending prospects. Seems whatever you claim that SVB "understood" led to its demise.
What appears to have led to the demise was when they branched out beyond startups into more traditional banking activities like mortgage backed securities.
Their primary business was making large loans to startups so they didn't have to sell shares to raise capital. Then it sounds like they leveraged that business to sell other financial products, e.g. mortgages etc
Interesting. Looking at their website, I don’t get how SVB was supposed to work. Retail and commercial banks (as opposed to investment banks) make almost all their money from lending, especially against fairly safe assets like real-estate, but SVB doesn’t seem to have a lot of those kind of lending products advertised. Successful banks have deposits just because they need the transfers coming in to keep up liquidity in the payment system, and because they’re involved in the mechanics of lending (actually created as part of lending, not actually “lent out” themselves). But they generally don’t actually make any serious money from having deposits themselves (because there’s no good way to do that in a way that is risk-free enough)…
The lending keeps money coming in (repayments), makes money (interest), etc. - so how was SVB supposed to make money and maintain liquidity without much of that?
They did bridge loans back in the day: you are running out of cash but it's fairly certain you are getting the next capital round, and that loan was secured by a special class of shares that they could either sell at the next round or keep
Startups with good VC and investor relationships will most likely make payroll and pay bills through short term loans from the investors until they can access their funds.
But it is a good lesson in money management…something about eggs and just one basket?
Here’s somethingI don’t understand. Say you raise $100m funding round. Investors just give you the entire amount, in cash? And companies just put that entire cash amount in a bank?
It seems like it would be better for VCs to keep the money, invest it (in, I don’t know, the S&P500), and then pay out to the companies on a monthly basis or some other terms.
I can’t fathom how there are hundreds of companies, each with 10s of millions of dollars, just sitting in a zero interest bank account?
They don't have to be sitting there. A startup with a good person running finances will also have short term investments (should not be S&P though). Not sure about all startups in general but in my experience so far, this is what happens.
Let's assume most companies don't generally have drooling morons for CFOs because, well, they don't. The majority of unneeded funds are invested somewhere, most likely a managed fund. So the amount of cash sitting at SVB earning zero percent interest is relatively small. But when you have 30 people making $120/yr, and payroll is due this week ($300k), and your $1m/month AWS/GCP bill is also due this week (skip the rent of the office since everyone's working remote); the SVB account will have $1.3 million in it to pay upcoming obligations.
Laddered CD’s, money markets, treasuries and other semi-liquid fixed income investments are probably better than the S&P500. Most boards (and shareholders) would frown on investing funds in the market. The value is supposed to be in the company, not the stock market.
It’s a good idea to collateralize (leverage) the funds following a raise for a line of credit with one or even two banks to have short-term cash options. The longer you build a trust relationship with a bank VP and use a line of credit responsibly, the better position you’ll be in when it’s crunch time or there is a big opportunity to go after with big short term cash requirements that can’t come from selling equity.
I’ve seen too many product-oriented startups try to raise bridge rounds because they are cash poor when they should have secured a banking relationship when they had funds available.
Some startups just moved excess funds into a money market account at SVB (managed by e.g. BlackRock)..
I'm not sure who is ultimately custodial of that money, and whether it's at risk today. My instinct is that it's at BlackRock, any idea if that's true?
I think that this should turn out OK for depositors, hopefully soon. It seems that while the bank essentially has no equity if you mark to market, assets and liabilities are about equal. That means that they have enough money to pay depositors, but no reserve.
Given this, it's pretty attractive for a buyer. The buyer just needs to provide some capital to bring the reserves back into compliance.
Very curious to understand how this works. For all intents and purposes, if the bank was unable to raise capital, it is at least nominally bankrupt. What value would another entity find in a bank that has failed?
To be fair, the government may find value in shoring this bank up. That's a different story. The bank will be essentially nationalized at that point.
It’s very common for a larger bank to buy out a smaller bank, even if it is nominally bankrupt. Sometimes the government steps in and helps out by providing various guarantees or short term funding. This is nominally a bailout, but may actually save taxpayers money by not having to involve the FDIC. See: WaMu being bought out by JPMorgan Chase for $1.9 Billion in the 2008 crisis.
There's a difference between being bankrupt and being worthless. Bankrupt means you can't pay the bills you owe today. You can have enough assets to meet the obligations but be unable to turn them into cash fast enough. Another company with cash can buy the company, use their cash on hand to pay the bills, and then sell the assets in less of a panic. If the return on those assets is worth more than the cost to buy the company and cash outlay then buying company makes money.
Do you mean they've taken money from the fed to capitalize the bank already? I understood they were essentially giving money to the fed through their portfolio of purchases t-bonds.
They have assets they could sell for a loss or they could sell to someone with liquidity that doesn't have to sell those assets. The buyer also gets the SVB business which is really unique and great - a true asset in itself. This is a better outcome for SVB share holders as they get some value.
And there. They’re Wachovia’d/Bear’d. Big stuff, they were bigger than IndyMac and almost as big as WaMu. I doubt banks will actually start going bankrupt but it’s certainly concerning, the European IBs are important to watch
Someone realized the emperor has no clothes. Its only a matter of time that rest of the crowd realizes that emperors court doesn't have clothes either.
Are SVB's books plainly fraudulent, or are they just in a very tight spot because they borrowed too long? That is: is SVB actually a worthwhile asset if you have plenty of liquidity to weather the storm that SVB could not on its own?
I was trying to understand why all the doomsaying. To me it seems like this is a bank with perfectly sane books but making moronic operating choices.
So unless there’s some clear as day fraud I wasn’t aware of, someone with plenty of liquidity could buy them for a steal and benefit once all those long investments matured.
Banks and exchanges are practically licenses to print money. It really doesn't take much to run their profitably. All you have to do is not get too greedy and you can have an almost neverending trickle of profits.
My prediction. Startups with lines of credit / venture debt won’t be able to move all money out under terms of those deals and will be the bag holders when bank run takes SVB to zero by Tuesday next week.
It's alright if things fail or lose value. That's a natural part of markets. Taxpayers money going to bail out banks, otoh, is pretty much what started Bitcoin.
"Chancellor on the Brink of Second Bailout for Banks" - still encoded in the genesis BTC block.
I know you're being silly, but there's an interesting observation there.
Silvergate's failure doesn't affect BTC on paper, yet Bitcoin did go down.
SVB's failure doesn't affect the USD on paper, yet the dollar is down today[1].
All currencies, fiat or otherwise, are affected by catastrophic events in their ecosystem. The folks having a good day today are the precious metals.
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[1] Although to be fair, there are a myriad of factors at play in FX, whereas Bitcoin probably has few. However, "bank failure" and the US Treasury announcing they are monitoring some small and regional banks, doesn't fill one with confidence.
I think that very soon they will halt withdraws. Everyone I know already did it or is doing today. Many only had a SVB account, and need some time to open another account to transfer it. (International Startups)
You literally cannot just transfer the money anywhere if it's money meant for a business. In many countries, just transferring that money to your personal account would be illegal. And many banks won't allow you to open a business account and directly after transfer millions of funds to it, without a long process of due diligence (AML/KYC). There is also a bunch of anti-terrorism (funding) laws that might prevent things from being done in just hours, especially during the weekend as many (most?) banks are outright closed during the weekend.
They’re having one. This sale is almost certainly partially brokered by the FDIC, like Silvergate was, some big bank that can handle the outflows will probably acquire them
FDIC Takes over Silicon Valley Bank - https://news.ycombinator.com/item?id=35096877 - March 2023 (737 comments)