The tech industry moved fast and broke its most prestigious bank
theverge.com
theverge.com
The bank was trying to get some financing to cover the gap, which it might have been able to do, but its customers heard the rumors and tried to pull out around 25% of the assets. Had the bank gotten the financing before the freakout, there might have been no problem.
As it is, the Fed and FDIC seem to be able to put the situation together by finding another bank that is willing to eat the shortfall to buy $200B of AUM. It's a easy resolution with the minus that now instead of two big banks there will be one even bigger bank and we've got too many banks that are too big.
1) SVB deposits were suddenly up ~4x
2) Interest rates were ~0% and few customers needed loans
3) The only way to generate a spread (i.e., keep the doors open) was to buy long-dated securities
4) SVB crosses their fingers and hopes rates don’t rise
5) Oops, rates rise quickly, assets devalue quickly
6) SVB is a little tight on liquidity and wants very badly to avoid selling their devalued assets, but can probably ride it out, provided they can raise a little cash and don’t lose more than maybe 15-20% of their deposits per year
7) People get nervous
8) SVB loses an absolute shit ton of deposits
9) “Hi, we’re from the FDIC and you’re all fired”
Be thankful for your government, it's the best that money can buy.
https://www.bloomberg.com/opinion/articles/2019-03-08/the-fe...
That's not based on any original thinking or analysis, but others have pointed out that most banks have more diverse depositors who don't have as much money individually and don't all talk to each other, making a bank run much less likely. The other banks also have an easier time putting deposits to work in a way that isn't so sensitive to interest rate increases. Allegedly, a normal well run bank should actually increase profits overall as rates rise.
There are a lot of lame attempts at anti-tech snark, but it does make sense that this bank was unusual.
Matthew Levine wrote:
"You are the Bank of Startups, and startups are a low-interest-rate phenomenon. When interest rates are low everywhere, a dollar in 20 years is about as good as a dollar today, so a startup whose business model is “we will lose money for a decade building artificial intelligence, and then rake in lots of money in the far future” sounds pretty good. When interest rates are higher, a dollar today is better than a dollar tomorrow, so investors want cash flows. When interest rates were low for a long time, and suddenly become high, all the money that was rushing to your customers is suddenly cut off. "
This does not apply to a random regional bank that, like, lends money to local people to buy houses outside of CA. Regular banks have a certain amount of assets with variable rates, like, say, my HELOC, that cushion rate increases.
Also, if you want anti-tech snark, Levine is the best:
"... I am sorry to be rude, but there is another reason that it is maybe not great to be the Bank of Startups, which is that nobody on Earth is more of a herd animal than Silicon Valley venture capitalists. What you want, as a bank, is a certain amount of diversity among your depositors. If some depositors get spooked and take their money out, and other depositors evaluate your balance sheet and decide things are fine and keep their money in, and lots more depositors keep their money in because they simply don’t pay attention to banking news, then you have a shot at muddling through your problems.
But if all of your depositors are startups with the same handful of venture capitalists on their boards, and all those venture capitalists are competing with each other to Add Value and Be Influencers and Do The Current Thing by calling all their portfolio companies to say “hey, did you hear, everyone’s taking money out of Silicon Valley Bank, you should too,” then all of your depositors will take their money out at the same time."
. . .
"Nah, man, you don’t get to be a successful venture capitalist by taking a long view or investing in relationships or being contrarian. I’m sorry, I’m sorry, this is unfair. Of course they were right — Silicon Valley Bank did collapse, and if you got your money out early that was good for you — but that is largely self-fulfilling; if all the VCs hadn’t decided all at once to pull their money, SVB probably would not have collapsed."
Just as with SVB, it only takes a few depositors to freak out in order to start a stampede, which is the point Matt Levine made about this being a self-fulfilling problem.
For example, if I was a customer of First Republic Bank I'd be seriously thinking about moving my money to JP Morgan.
I don't think so? I mean if you had everything concentrated in a literal handful of depositors perhaps, but surely no real bank is like that including SVB. The deposits were in the billions; articles say some depositors had amounts in the millions, a billion (American) is a thousand million, you know?
Levine was saying, and it sounds right to me, that when your depositors are a mix of ordinary people, they aren't all talking to each other or even paying attention, it prevents a stampede when there isn't any actual problem.
Of course, that doesn't mean SVB won't have effects on other things. I halfway expect USDC to collapse first thing Monday. When it rebounded from about 90 cents, I thought "ah, but didn't Coinbase stop withdrawals until Monday?"
But I'm making the distinction with any linkage or contagion that it's not going to be the same phenomenon, it's going to be something specific and different.
I think social media changes that.
Plus this is front-page stuff for every major news organization, which is not what would happen if a small regional bank that doesn't matter fails (which happens multiple times per year). Plus it comes at a time when people are already nervous about the economy for a number of reasons, including Fed rate increases which are directly related to the devaluation of SVB's investments.
Now no depositors should care to scrutinize anything because the Fed put is back in action. Chase the highest yield because the Fed is backstopping bank losses again.
Problem? I don't see the problem. People scrutinizing banks is probably the best thing that could possibly result from this dumpster fire. Banks should be scrutinized down to the smallest detail. No exceptions. If you don't like what you see, you should absolutely pull your money out. If that breaks the bank they only have themselves to blame. Should've kept reserves.
that doesn't sound like anti-tech snark, it sounds like anti-vc snark, which you'll hear a lot of anywhere techy
It's funny, I wrote the exact same thing in another thread hours ago and had people coming to me saying I'm ridiculous and detached from reality. Now I come here and see this top comment.
Is that something we'd expect to happen in a free market?
In a free market personal relationships matter just as much as they do in any other kind of market. It's not like everyone in business flips a coin when they decide who to use as a bank or as a vendor.
So the bank was drawing in startup clients with these nontraditional loans while requiring that they deposit the venture money with then for surety.
It wasn’t just coincidence that they were so disproportionately in one sector and had such a share of uninsured deposits. It was their strategy. It just backfired when that venture money tightened up, and finally blew up when the money spooked.
People are focusing the TBill thing thing because that side of the story broke first (and was amplified by VC PR) and glosses over the part that implicates how the startup sector was using them.
If you just got a funding round you are already running your business on borrowed money. Imagine that a bank told you, deposit the cash from that funding round with us and we will give you even more funding!
That's pretty attractive when interest rates are super low.
When the free money spigot got turned off, mainly by the Fed raising rates, some of the account holders started spending their cash rather than running on more loans. The same increase in interest rates that caused that change in depositor behavior also caused SVB's long-term bond investments to lose value.
SVB effectively doubled down on the low-interest rate era by both depending on depositors living on loans (rather than withdrawing deposits) and investing in low-interest long-term investments at the same time.
Why only one?
Different banks target different personas. There were a couple other regional B2B Banks as well but they all mostly died out in 2008 and SVB was the last one left.
Also, historically, San Francisco and Santa Clara Valley (what is now known as Silicon Valley) weren't that closely integrated until the 90s and early 2000s (less of a NJ-NY type relationship and more of a DC-Baltimore type relationship historically)
Wells Fargo also used to be a SMB B2B oriented bank in the area but basically dropped that practice by the 2000s to concentrate on a mix of IB and Housing that caused it to get acquired by a MN based bank when WF collapsed in 2008.
BoA on the other hand was always much more large business oriented in NorCal.
Also, one last caveat, until the 2000s, Northern California (Bay Area+Sacramento) was always overshadowed by Los Angeles+OC+San Diego. Even today, 2/3 of CA's population lives in SoCal and historically the entire Californian banking industry was largely based there, at least until the Aerospace and Defense Bust after the collapse of the Berlin Wall. VC was always a parochial industry based in R&D heavy but economically backwater regions like Boston and the Bay, while High Finance was concentrated in Los Angeles and NYC.
What's the concern/issue your brain is picking at with this? Based on what I'm getting from your comment you are asking why large groups of people clump together and end up following what's popular/well known. To me, that me says more about psychology and less about the idea of the free market balancing things out. (Not disagreeing with you and not aiming to be confrontational - sincerely curious.)
Why did Silicon Valley Bank have so many customers in tech? Well, name is one thing, but they've had a great reputation for nearly 40 years. They were also quite friendly in loan terms to early or completely new startups, many other banks quite literally being unfriendly to startups to say the least, if not laughed out of the door, or required exorbitant equity pledges that would allow the arbiter ownership of all assets.
This is still a free market, and in free markets businesses fail and rise all the time. Some businesses do not adjust their position against the always changing risk and fail, like thousands of businesses every year. Some businesses park a significant chunk of their income at one bank, end up getting screwed from a bank run, and may end up losing quite a bit of money. Others do not.
There will still be startups. There will still be many of the same corps that exist today in 5, 10, 15, maybe forever years. Others will not.
If your belief in the US banking system has been decimated, I don't know what to tell you, but if we survived the housing market failure which is much larger than tech, even today, I'm sure we will survive this one.
We just may not have startups selling superpowered 10x compute chrome browsers in 2024.
These loans amplified and smoothed the funding of the startups, but required parking all your deposits with SVB as collateral. (Whoops)
I would say that people forgot that money is attached to the concept of value and we saw in the previous 5 years lots of speculative markets and businesses exploding in value.
What we are seeing now is, unfortunately to us, an adjustment.
Looks like mismanagement to me. Whoops, we failed is not an option if you're running one of these.