Silicon Valley, once the underdog, is now too big to fail
washingtonpost.com
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Did SVB lose money and made bad bets? Yes. Could they have raised back money by selling shares and return to solid ground? Also probably yes.
What made this completely fatal is their client base. Client base which are supposed to be the biggest risk takers in the economy. Fled away at record speed. The burners of billions of dollars, fled away from quite moderate risk bank (moderate relative to their own risk profiles). That has been there for 40 years.
It's not people who are unfamiliar with raising money. It's not your common people who somehow started a bank run.
It's a small and connected group, that could communicate exaggerated risk to everyone and flee at record speed. Which is why I don't buy their innocent claims at all.
It's actually hilarious that people who were selling sham crypto for billions of dollars got spooked by a bank. As depositors. It's like they projected their own insecurities and grift and fled like they saw their own scam and found themselves in it.
For the record, I believe that's "definitely yes". As far as I'm aware, they were securing additional funding at the time they put out the announcement that ultimately triggered the run.
Which makes the whole panic that much more frustrating (even if it is understandable from a game theory perspective), and likely would've been avoidable if the CEO hadn't completely f*ked up the messaging.
A huge part of being a successful risk taker is knowing when to get out. Make no mistake, SVB was going to collapse eventually. Too much of their deposits were startup slush funds that will be withdrawn in the next few years as they struggle to raise money.
If they had cash injection, they could still plan for reduced client deposits. They don't need their deposit base to grow to stay alive. That's startups projections.
SVB was not in a position to capitalize on raising rates. All their money was stuck in those low rate bonds and mbs's. If they want to get in on those higher rates they would need their deposits to increase, but they have been and will continue to decrease. They tried to raise money, no one gave them any because their book was underwater.
Which would mean that whoever would enter, would get a big chunk of their stock, but he would still have a good deal. Banks don't need increasing or decreasing deposits. They need stable and predictable deposits.
They know how fast you burn cash, so they know what flows to expect from you and how much of your money they get to invest and for what duration. SVB failed to predict the Fed, but there's no way they survived this long without knowing how to plan around cash burning startups, that's their bread and butter.
What made finding a buyer impossible is that their deposit base showed their unpredictability. And they have done tremendous damage to startups and banking relations after this. Finding banks is going to be much harder as a startup after this debacle, whether you're part of this bank run or not.
"The bank run that led to SVB’s collapse was allegedly started by tech tycoon and Republican political donor Peter Thiel.
After SVB’s collapse, journalists and critics have shifted their attention to Thiel, accusing him of pressuring companies to stop funding the bank. It is believed that his actions were the first to ignite the bank run, which prompted California regulators to step in."
https://lifestyleug.com/peter-thiel-byrne-hobarts-newsletter...
All while screaming "bank run", which was a clear signal from them to the Fed that they should step in.
I mostly saw VCs, techies and tech bros here and many HNers and especially YC screaming at the government to save their pyramid scheme of funding for unprofitable startups who failed to read the FDIC insurance deposit limit of a failed bank.
Quite funny to see the techies here panicking all over Twitter and on HN around the collapse.
Ouch. That's a bit painful to read, because... it rings true, based on conversations I've had over the past few days. My understanding is that a majority of venture-backed startups in the US as well as a majority of venture capital firms all their had their cash balance deposited at SVB. In other words, the federal government just saved the entire US venture capital ecosystem from failure.
Privatize the gains, Socialize the losses.
The corollary is: socialism for the rich, unabashed cutthroat capitalism for the rest of us.
VaaS, Vandalism as a Service.
Only it turns out that "insurance" is a fraud, as it is misrepresented. The premiums are advertised as being for backstopping up to 250k in the account, but it turns out this was a fraud and actually it's whatever arbitrary amount they choose all the way up to the biggest holder in the bank. And when they're finished, they'll assess a "special assessment" which totally isn't a tax, nevermind the licensees have no choice but to pay it.
When has FDIC reimbursed more than the “up to” limit? Everything I’ve read regarding this suggests that this may be moral hazard, at least in the short term. The remaining amount should come from liquidation of the failed bank’s assets or by the acquiring bank, not the FDIC.
In what world do we live in that a government agency can demand a new mandatory fee over the course of a weekend. This whole thing is bonkers.
“The ultimate result of shielding men from the effects of folly, is to fill the world with fools.”
SVB had a short-term liquidity crisis, followed by botching a funding round to solve the crisis (along with some internal issues). They were a relatively small bank whose assets likely would have been gifted to another bank in exchange for covering the liabilities.
I also don't agree that the most prudent and responsible banks bailing out disproportionately depositors at failed banks is beneficial for them or their depositors. It also creates a moral hazard for customers to chase banks with the highest yield risk profile knowing they'll be bailed out by the other actors.
people seeing a bank fail will worry that their own bank could fail, which could lead them to withdraw en masse which will cause their own banks to fail, and so forth. this scenario is tremendously bad for everyone.
>people seeing a bank fail will worry that their own bank could fai
I feel more confident in my bank as it is compared to my bank minus a "special assessment" to backstop depositors at irresponsible banks.
https://www.federalreserve.gov/newsevents/pressreleases/mone...
It's worth noting it's still unclear if that'll be necessary (it all depends on the level of recovery they can get out of SVB's assets), but the potential is there, and it's hard to deny that, if that is necessary, those costs will ultimately be born by everyone as the banks pass those costs along.
The idea that there won't be losses here is a little laughable. If their assets were so solid then some other bank would happily have written a loan with them as collateral. SVB transparently couldn't get financing, so they had to sell a bunch of stuff last week and booked a $1.8B loss (which is the proximate cause of the bank run).
No, this will end up being a bailout. It'll be obscured enough that people will be able to claim it wasn't. But it is.
the deficit left after auctioning off SVB's assets will be raised from other banks. the FDIC/treasury/Fed are not going to just pay for it out of pocket.
HN readers should be acutely aware of this as being entrepreneur-savvy. If your costs go up (unexpected FDIC assessment) you either are immediately less profitable, or you raise prices and past the cost to your customer. Banks are the Chris Paul of passing costs on to their customers.
tl:dr new fees for banks is increased fees for customers.
The federal reserve denied inflation was real for so long, signaling to everyone that it was safe to buy US Treasuries, then suddenly and aggressively started raising rates.
And wasn't it the federal government regulators who are responsible for ensuring that banks are not taking on excessive risk? Are they not to be trusted, and must every depositor perform a deep-dive due diligence on their bank and continuously do so in order to make sure their money is safe while deposited in a bank of all places?
No, the Federal government is more like an arsonist who set fire to a building, then showed up to rescue the people inside, taking all the credit, and then shaming those who noticed the smoke and escaped on their own before they arrived.
And if you are going to encourage (and sometimes insist) that your portfolio companies work with a bank, understanding concentration risk is the minimum professional standard you should be held to.
Every other industry understands what fdic insurance is and is not. Competent CFO and corporate treasurers manage their counterparty risk as part of their job. It’s either immaturity, incompetence or entitlement that makes SV think this isn’t their problem.
Nonsense.
>The federal reserve denied inflation was real for so long, signaling to everyone that it was safe to buy US Treasuries, then suddenly and aggressively started raising rates.
The Fed was issuing forward guidance in 2020 that it planned to aggressively raise rates. By 2021, my dog could have told you that this was going to happen.
>And wasn't it the federal government regulators who are responsible for ensuring that banks are not taking on excessive risk? Are they not to be trusted, and must every depositor perform a deep-dive due diligence on their bank and continuously do so in order to make sure their money is safe while deposited in a bank of all places?
SVB spent a lot of money on lobbying to keep themselves small enough (by raising the limits) to not have to get the full brunt of regulations. (https://theintercept.com/2023/03/11/silicon-valley-bank-used...)
>No, the Federal government is more like an arsonist who set fire to a building, then showed up to rescue the people inside, taking all the credit, and then shaming those who noticed the smoke and escaped on their own before they arrived.
Makes sense that you don't know the difference between the Federal Government, the Federal Reserve, and the FDIC though.
FDIC is not part of the government and I never said it was, but it does work closely with them. I'm not sure what your point is.
As for your claim that the the "fed was issuing forward guidance in 2020", this says otherwise, from 2021 even:
Federal Reserve calls inflation "transitory" as it keeps interest rates near zero https://www.cbsnews.com/news/interest-rates-inflation-federa...
Totally SVB's fault.
They knew that there were risks in their strategy and went ahead with it, rather than hedging and forgoing profits. It’s not the feds job to make policy on the basis of how one bank is trading.
SVB was financially mismanaged by its leadership. They then handled the communications around their poor financial position very poorly. This lead to the immediate cause of the banks collapse, a textbook bank run.
So, technically yes? The depositors who pulled their money were the immediate cause of the failure if we’re being simplistic. They pulled out a quarter of the deposits in a couple of days, no bank is going to be able to withstand that.
SVB executives did NOT have to load up on high-duration bonds! They were under no obligation to do that.
They CHOSE to do it because they wanted to increase interest income and earnings in the short run.
They could have easily purchased a lower-duration mix of bonds. Instead, they gambled the bank on a bet that long-term rates would stay at historic lows.
Once they made that bet, they could have easily hedged it every year, at a cost. Instead, they chose not to spend any money on hedging.
The federal government did not cause SVB's failure. SVB executives caused it.
Don't you understand the difference between deposit holders (customers) and the executives and investors in the bank?
But you're blaming the federal government for something the executives did voluntarily!
Please don't change the argument. I didn't say anything about depositors in my response.
The federal government did not cause this. SVB executives did.
Please don't make strawman arguments.
Your arguments seem to be motivated by ideology, as opposed to facts and reasoning, so this will be my last comment on this sub-thread. Goodbye.
https://www.wsj.com/livecoverage/stock-market-news-today-03-...
https://theintercept.com/2023/03/11/silicon-valley-bank-used...
https://www.businessinsider.com/anti-woke-bank-backed-peter-...
It was actually the raising of 10y long term rates (which are not controlled by the Fed) which caused the value of SVBs MBS to fall. That in turn is mostly affected by inflation expectations.
These days it's largely the mantra that if you can't find a way to pass risk and costs off, you're incompetent at your role. We've learned to optimize risk away from the reward system and made it socially and culturally acceptable. Before, it was less accepted, hence the narrative. Anymore, people don't even paint the facade.
Dataset needed.
SVB's problem wasn't just buying government bonds.
The other problem SVB had was a homogenous customer base that had highly correlated behaviours. In particular, during the COVID boom, their customers collectively raised a ton of money and created a huge pool of deposits for SVB. And then when that money dried up, that turned into net outflows.
And these behaviours were correlated, both as a group, but also critically with... you guessed it... interest rates. Which means as bond values were dropping, they were simultaneously seeing a major change in their cashflow profile, and the combination of the two is what led to a liquidity crunch.
That just isn't happening at other, more diversified banking institutions.
I am sort of a silicon valley hater myself, but I agree that SV is not the only party to blame, not should it take the lion's share of the blame. SV did what SV does - take big risks. It did not help that the federal reserve help turbo charge risky investments via extraordinarily accommodative monetary policy.
To blame SV alone is to ignore a bigger problem, which is the fed.
"The Fed" (singular) almost always, but especially in this context, means the Federal Reserve.
"The Feds" (plural) usually refers to some or another branch of federal law enforcement, especially the FBI. It occasionally refers to a non-law enforcement federal agency.
I think that's very suspect given the behavior of the VC set. Altman said he was going to write a few loans ("six figure" ones, even! That's, like, more than a car loan!), but the "whiny Calacanis types" were absolutely the rule, not the exception.
What has people so upset is exactly what the article is pointing out. The very set that claimed so loudly to be Brave Superheroes taking the risks that no one else could tolerate turned out to be outrageously risk-averse when faced with actually losing their own money.
And I think that calls into question the whole venture capital business model. It's not what we thought it was. At the top, it was a cartel-run gravy train, squeezing investment dollars from downstream investors and turning that into income for the partners at the big players.
The $10-20 billion in bailout sounds like a lot but it's not much compared to the market cap that banks are losing. Charles Schwab alone lost 30-40 billion in market cap because of SVB and bounced back up 10-15 on the bailout. The Fed action was to protect banks. A bunch of tech bros getting bailed out was a side effect of that.
That's more (this bank is) "too triggering to fail" than (this industry is) "too big to fail".
If SVB was a later failure in an ongoing crisis, it doesn't seem like the FDIC would have been prioritizing it because of some Silicon Valley connections.
Even if it was true that they had blown their whole wad, it would be lawful. The systemic risk exception would allow that.
> Another couple banks have problems like this and they’ll be telling us that we need to turn on the munny printer to save them.
No, the funding mechanism is well-defined and does not involve monetary policy. (Its even fiscally neutral, so it doesn’t even involve the monetary effects of non-neutral fiscal policy.)
I'm not saying we should be going to a commodity money, but if we were using a physical commodity as money (as in the commodity is physically in the coin, not notes representing the commodity) that were hard to mine more of, I'm not sure this kind of redistribution would be so practical.
The simple answer is you can't crank up the printing press and print money. That's not how it works.