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When assets << liabilities nobody wants to buy the bank. Especially when you don't get any time to do due diligence.

This isn't just a liquidity problem, this is a solvency problem. The bonds they have aren't temporarily worth less because nobody wants to buy them, the bonds are liquid and have a fair market value based on the current interest rate environment.

Your cash isn't at the bank anymore. Your cash has been invested in bonds and those bonds are now worth less than the number you see in your bank account. That's bad.

It's not a solvency problem. The bonds are valued based on when they mature, not what they fetch on the open market.

It is a liquidity issue, which means the money is there, but they can not access the money in the amount of time they need it by.

No, it's absolutely a solvency issue.

A 2023 USD is not the same thing as a 2043 USD; those are difference currencies with an exchange rate. (That'd be nice, but we've collectively agreed a little inflation is good.)

Liquidity is a logistical issue.

Solvency is a value issue.

You cannot with a straight face say "It's just a liquidity issue......that lasts many years."

It is a solvency issue because they are legally obligated to give people their money back when they ask for it. If none of the customers would withdraw money for the next 10 years they would be fine.

But the customers are startups that have expenses like payroll and AWS. And the climate for raising money is bad, which means a lot of money is being withdrawn every month, and not much new money is getting deposited.

That is not what insolvent means though. There is a difference in not being able to pay back depositors bc you gambled it away on magic beans vs it’s tied up in safe bonds. In both situations you can’t satisfy depositors immediately, but they’re otherwise very different.

For one thing, people buy companies that are insolvent, eg svb, they don’t buy magic bean farms, eg ftx.

The money is not tied up in bonds. Because those bonds are liquid and can be sold on the market in exchange for dollars. And when depositors ask for their money the bank is forced to sell those bonds at a big loss to get dollars. That results in assets < liabilities. Which is insolvency.

All the small banks are going to face this problem.

There is that economic adage attributed to Keynes: In the long run we're all dead.

If you need money but your current assets in whatever form can't furnish that fund for you, I am afraid you're broke.

So you're saying having zero money is equivalent to having future money that can be borrowed against in the present?

Obviously the latter is not as good as just having money. But it's clearly better than the former.

Therein lies the difference between solvency and liquidity problems.

Not at all, my point is to avoid fancy words like "solvency" and "liquidity", they blind you to the basic fact that if you need cash today and you can't get it then you're broke.

Whether you have assets that *you* believe you could draw on in the future doesn't matter when your need is immediate.

You say blindingly fancy words. I say important difference.

You say basic fact. I say oversimplification.

We can argue about the semantics of the word "broke", but the difference here is between losing all your money vs. having to take out a loan now that you're pretty much guaranteed to be able to repay when your bonds mature and only losing the interest payments on that loan.

But here's the the bugger: Folk don't give you loans when you're insolvent.

That's why it's so much better to be illiquid! :)

If you're willing to close your account with payment in bonds that mature in 8 years sure, if you're looking to withdraw cash, no.

>The bonds they have aren't temporarily worth less because nobody wants to buy them, the bonds are liquid and have a fair market value based on the current interest rate environment.

Maybe I’m missing something but couldn’t you just potentially wait for the bonds to mature?

"Dear customer, we're currently having a teensy tiny problem with liquidity. Kindly do not withdraw any money for the next 10 years. No worries, though! Everything is fine. Please don't panic."

From what I understand, for this method to become profitable (or even reasonably close) the interest rates have to drop down to where they were when the bonds were purchased. Otherwise the bond yields will never be worth it and the price of the bond(s) continue to stay lower than what they were purchased for.

These bonds were most likely purchased when interest rates were near 0 and I don't think anyone is banking on those rates returning any time soon.

That being said, I'm going off of some basic reading I've done this morning: https://www.fbfs.com/learning-center/bonds-interest-rates-an...

Stupid question but why were they buying bonds when interest rated was near 0? Were they betting on negative interest rates?

Short-term rates were near 0, but Long-term rates were 1.x%, which doesn't sound like much but keep in mind they bought tens of billions of dollars of these bonds.

That 1.x% on that huge amount would be over $1 Billion per year.

It's a mismatch in terms of the duration, ie your depositors can ask for their money back at any time but the bonds don't mature for many years, but as long as the deposits are kept there the bank can get away with it.

The succinct answer is: Greed.

This is a concise follow up, nicely put.

May I ask you why do you sound so calm and confident that your money will not evaporate permanently (above the FDIC guarantee)? Banks going bust is a totally normal thing in a capitalist system, and bigger more established banks than SVB have done so only a decade ago.

There have been pretty much zero instances of people's money evaporating from U.S. bank accounts, even above the FDIC guarantee.

Not sure why this is downvoted. FDIC-insured accounts have never lost funds in the nearly 100 years since the FDIC was established. And I think there was one? maybe two? times depositors lost funds in excess of the FDIC limits over that same time frame?

Failed banks that have been resolved by the FDIC have, in fact, seen depositors lose money on non-insured deposits (i.e. deposits in excess of the insurance limits). FDIC makes payments, called "dividends", to depositors. The history of dividend payments for failed banks can be found here [0]. For reference, SVB has about $200B in assets.

The largest failure to-date was WaMu in the 2008 financial (approx $300B in assets). Depositors were paid back 100%. The largest failure prior to WaMu was IndyMac (approx $100B in assets). Depositors were paid back 50%. No additional dividends have been paid out to depositors.

According to Wikipedia [1], the last three >$1B failures were Guaranty in 2017, Doral in 2015, and First National in 2013. Depositors in each of these three cases received less than 100%, averaging around 80%.

[0] - https://closedbanks.fdic.gov/dividends/ [1] - https://en.wikipedia.org/wiki/List_of_bank_failures_in_the_U...

When Lehman Brothers collapsed in 2008, many people lost money over $100k. So many, that FDIC retroactively raised the insured limit to $250k and made people whole up to $250k. A lot of the money over that simply evaporated. Today, the limit is $250k, but as SVB's clients were mostly startups, and startups need to make payroll and pay operating expenses like their AWS/GCP bill, they'd easily have cash in excess of $250k at SVB.

>> When Lehman Brothers collapsed in 2008, many people lost money over $100k. So many, that FDIC retroactively raised the insured limit to $250k and made people whole up to $250k. A lot of the money over that simply evaporated.

That's not at all true.. 100% of Lehman customers received 100% of their funds. Secured creditors also received 100% of their funds.

https://www.sipc.org/news-and-media/news-releases/20220928

100% of depositor funds from WaMu (including every penny over the FDIC limit) were safe as well after the Chase buyout.

https://www.fdic.gov/resources/resolutions/bank-failures/fai....

From your link https://www.sipc.org/news-and-media/news-releases/20220928:

> Distributions to unsecured general creditors with allowed claims totaled over $9.372 billion, representing a 41.2841 percent recovery.

That sure sounds like 58.7259% didn't recover what they were owed. Mind explaining why that isn't the case?

And what about IndyMac? IndyMac depositors only got 50 cents on the dollar.

https://www.depositaccounts.com/blog/indymac-depositors-are-...

Unsecured creditors in Lehman Brothers were entities like other banks and hedge funds who either offered unsecured credit lines or bank loans -- they're inherently risky and have nothing to do with retail or consumer banking. Those entities ate the losses and none of their customers lost money. It's good and appropriate they saw haircuts after the depositors and secured creditors were repaid in full.

Indymac is an interesting case - their insured depositors were made whole at $100k and then the uninsured amounts were paid out immediately at 50% -- but then that is indeed when Dodd Frank did the retroactive FDIC raise to $250k -- so all of their depositors were fully reimbursed at $250k and presumably there were some losses of uninsured beyond that. It was a weird entity, they didn't have any debt or secured creditors so there wasn't anything else for an acquiring bank to buy once it was bankrupt. Very different than SVB but fair enough, a case where uninsured depositors lost some money in a bank run.

Unsecured creditors also includes anyone holding their stock, so if you held any shares of SIVB before today, you're sitting on a big fat goose egg.

Equity holders are a lower precedence still from the unsecured creditors but nobody wants to bail either of them out - they took a risk and it didn’t pay off. Their investment is worth zero. People and companies who had cash in checking accounts weren’t taking any imprudent risk.

To be sure, Lehman Brothers was not a depository institution. FDIC insurance protects only insured deposits up to the limits, and thus was not in play for creditors to Lehman.

The banks a decade ago got bailed out. None of their customers lost money.

A bailout is not guaranteed. How long it takes to be made whole is unknown. How long can you go without cash while regulators work out the details. How long will payroll and creditors wait for you to get your cash back.

Hope for the best, plan for the worst.

Edit (epoch time 16784666958): https://www.cnbc.com/2023/03/10/silicon-valley-bank-is-shut-... (Silicon Valley Bank is shut down by regulators, FDIC to protect insured deposits)

Nonsense. A bailout has more precedent now, and the current political situation with the Democrats in the White House virtually guarantees it. The last bailout never had a precedent or approval of the American people, but they did it anyway and they will do it again.

Capitalism doesn’t allow planning for the worst. Karl Marx showed us this 150 years ago, and the working class is regularly reminded in blood, but the ruling class just never seems to get it. I wonder why.

Dodd Frank did away with bail outs. It will be a “bail in” using customer deposits this time around.

>Capitalism doesn’t allow planning for the worst.

Governments bailing out banks is not capitalism.

Not all of the banks got bailed out. Lehman Brothers is the one that started the panic because the feds didn't bail it out.

> Felt like a lot of dumb panic.

A lesson everyone should have learned from the toilet paper scarcity crisis during the pandemic is that it doesn't matter if it's rational or smart, if you want to keep your ass clean make sure you're in the front of a line when people are panicking.

You could make a pretty compelling argument that the last decade the entire tech sector has been propped up by "dumb exuberance", but people aren't complaining about the money they made during that period.

If you can tell that people are panicking, you're not at the front of the line.

I’m reusing that.

Well this comment aged well

At least you're able to acknowledge your mistakes. For your employee's sakes, I hope you're able to make next payroll.

Thoughts now?

> Annoyingly, we're moving it because everyone else is moving it. I know it's a really dumb, self-fulling prophecy but at this point you don't want to be the last in line.

On the bright side, Ronnie James Dio wrote a song about your current predicament.

I guess you were right - In historic last-minute deal, HSBC acquires Silicon Valley Bank UK, says all depositors’ money is safe

https://techcrunch.com/2023/03/13/in-historic-last-minute-de...