What a debacle.
Some gallows humor from twitter: "Imagine raising $100m for your AI enabled dog washing app - and your bank sets it on fire before you can".
Original: https://twitter.com/88888sAccount/status/1634028258500169731...
Some gallows humor from twitter: "Imagine raising $100m for your AI enabled dog washing app - and your bank sets it on fire before you can".
Original: https://twitter.com/88888sAccount/status/1634028258500169731...
If I had a nickel for every time I heard this from actual friends in the past couple decades, or for when I said it myself a few times... :)
The main question is whether they were forced into these investments via regulations. It's likely they could have bought shorter dated treasuries and been fine. In the end, regulations may change such that banks can only buy short dated treasuries... or limitations on the level of duration they can hold.
They're not being punished for losing money; they're being punished for not having the money put somewhere it could grow faster.
I can't escape the feeling that America has lost its grip on what banks are supposed to be for.
Duration risk is risk. Taking on 10-30y maturity is not "risk free"
Many of these banks are holding Munis and other non-treasury bonds, which are not free of credit risk and can be worth 0 in some circumstances. I don't know about SVB's balance sheet, just speaking generally
What you mean to say is there's no credit risk. Not the same thing as you can't lose money. Saying you are guaranteed X dollars 30 years from now does not mean much at all if people need money today. This is not "safe" or prudent
This has nothing to do with America, this is you not understanding duration risk.
... so SVB not only didn't have cash, it didn't have assets people were willing to buy / loan against to cover enough withdrawals to stop the run even though those assets had guaranteed ROI, which is interesting to me. Not enough lenders / potential creditors think some 10-year T-bills (and bailing out one of the biggest banks in the country on the lender's terms) is worth it?
Interesting.
Also, $5 today is not the same currency as $5 in ten years.
No, it's because they didn't properly manage their assets to serve existing depositors if those depositors wanted to withdraw. Locking up money for 10 years has obvious liquidity consequences. I knew that when I first learned what a "CD" is when I was like 10.
What I'm having a hard time wrapping my head around is what the investors saw that made them decide to all withdraw at once.
Correct, but the GP’s point was that it was not “startup creditworthiness risk”, the thing SVB was most ridiculed for taking on.
This sounds like risk taking to me.
SVB was an old stodgy banks that companies went to instead of the new kids like Mercury, specifically because of the trust. They have terrible UX and mobile app but at least they were solid and had a 40 year track record.
Some claim that these accounts are insured/protected up to $125m, but I can't find any info online to corroborate that.
We shall see.
Say you are a Small Company with $5mm in a recent fund raise that you have at SVB. You use that $5mm to make payroll, pay amazon, your office, AT&T for your fiber, buy macbook airs for your employees, etc...
Now - you are listening to the recent news, and it looks like SVB is going to be taken over by the FDIC. If that happens, you will be insured up to $250K, but the rest of your $5mm, all $4.75mm is now frozen. You will be given a certificate for the uninsured funds, and you will be in line to be paid back, but (A) Not immediately, and (B) you may lose part of your funds.
You, as a rational CEO, would probably want to put your money in, say, Wells Fargo, where it wouldn't be frozen, and you wouldn't lose any of it.
That was the basis of the liquidity event that just happened.
Liquidity is a key feature of banks and it relies on trust. Without it, they have nothing. Trust isn't some ancillary thing for a bank. It is almost everything.
Source?
SVB had an unusual amount of long-duration assets. Most banks maintain a buffer of low-yielding, highly-liquid on-the-run Treasuries.
Maybe ZFRB was just a really, really bad idea.
The only difference is that panic set in and there was a bank run, largely led by VCs telling startups to pull their money.
It’d be like a traditional bank not reselling mortgages to Fannie Mae. You can’t have $1B of demand deposit liability and $1B of 10-year treasuries because a rate hike will wipe you out immediately if you need liquidity.
By a Thiel-backed company, after he initiated the bank run?
https://dfpi.ca.gov/2023/03/10/california-financial-regulato...
(The investors don't actually know the money won't grow as fast... the Fed could decide to drop interest rates tomorrow, or something else could intervene making it sensible to drop interest rates. But "not growing as fast" was the very likely scenario).
Once everyone decided to pull, they were tanked because no bank keeps 100% liquidity.
SVB disclosed they took massive losses from high risk, high duration assets and were desperate for cash. Investors took large (up to 60% over 24h!) losses, paper or otherwise, to get out of the stock. That can't be just concern over not growing as fast, that's concern about solvency. VC's and depositors saw the same writing on the wall, but it was SVB who wrote it there.
If they were able to cover their normal operations, they wouldn't have needed the emergency equity raise.
The thing that killed SVB was the bank run. They would have been fine with the raise. Panic set in and killed them. FRB is not in a better position, but nobody is panicking, so they’ll survive.
Doesn’t feel much different than a yield farming crypto bank going under when they are forced to fire-sale thinly traded sh*tcoins and take a beating.
Every one in the past few years looks like it was acquired.
And the point is that there may be many reasons why a bank may want to acquire a smaller failed one to integrate it in its operations but "the previous owners used to have a well-capitalized business until they somehow lost it all" is not a strong reason on its own.
> At the time of closing, the amount of deposits in excess of the insurance limits was undetermined. The amount of uninsured deposits will be determined once the FDIC obtains additional information from the bank and customers.
No bank is gonna buy another bank until that is cleared up.
Who is going to buy this bank? I wouldn’t take it if you gave me 40b. That’s why they had to make a new bank.
Their problem was that their risk management didn't keep up with the changing times (rapid interest rate changes).
Please go on and tell us more HN tropey things like "oh they shouldn't have sold customer data!" or more things that could be an autogenerated robot comment by ELIZA.
Their risk management might have overeindexed on the post recession era but the bank itself lasted through some pretty wild rate shocks.
Mostly, though, all this talk about them like they're a neobank is because everyone appears to think they are one.
https://www.cnbc.com/2023/03/09/svb-financial-falls-more-tha...
That seems an odd position to allow to build given the current macro. Post-Fed changing their mind on inflation, the course was charted.
I'm guessing they held to avoid taking losses, and at some point it became untenable?
Do you think that long maturity bonds are more conservative than short maturity bonds?
No. Nobody does. That’s why they typically yield more.
Why do you say that he doesn't?
Within the set of long-maturity bonds, Treasuries are conservative. That doesn’t make them conservative per se.
What exactly makes you think that the "(i.e. super conservative)" remark is not about "long maturity bonds" - which is the think that he just referenced?
He didn't mention Treasuries at all. I find quite difficult to interpret the "super conservative" as being about some kind of long-maturity bonds relative to another kind of long-maturity bonds.
Gonna be quite a show, this.
What I meant by VCs have a tiny fraction of their fund as cash is that cash is held by LPs and is called upon only when the VC funds a startup. When a VC raises a $1B fund they don’t get the money, they get commitment that the money will be available. So this means that this failure shouldn’t affect VCs ability to invest in the future as most LPs didn’t hold their money in SVB.
[1] https://s201.q4cdn.com/589201576/files/doc_downloads/2023/03...
The majority of VCs use this product simply to help smooth working capital needs and to be able to make new investments without needing to call capital sooner than LPs would prefer (also to juice IRRs), but there's almost certainly some minority that have basically taken an advance on their entire fund size, or at least a large portion of it. And now any of that cash still held at SVB is obviously at risk.
> most LPs didn’t hold their money in SVB.
At the very step of funding, do LPs wire the money to a single bank (SVB) and then the VC dispurses it to the startup in one lump sum? Or do the LBs wire the money to the startup's bank account (at SVB)?
I've heard that UHNW individuals also individually banked with SVB. Wouldn't they have their money at SVB?
Also, wouldn't the VC's long-term relationship w/ SVB give them (the VCs and the startup they're funding) much more leeway with what the bank considers acceptable behavior (ie not money laundering and worth filing an SAR over)? Now that those relationships are gone and the VC has to go through the front door and deal with, say, BankOfAmerica or Chase like the rest of us chumps; doesn't the loss of that relationship materially hurt the broader environment?
Not as extreme maybe, and less fraud got us here, but $assets < $deposits
Two things got SVB down. First, a rapid change in interest rate got their assets repriced down. It did not need to be fatal, this happens to all banks when interest rates rise quickly.
Second, its customers did a ran and went to pull their money. If all depositors of the BoA or Chase pull money out, those banks will collapse, too. This is highly unlikely for the BoA -- if folks start saying that BoA will collapse most depositors would shrug it off; the diversity of its base will make a run highly unlikely.
But as SVB was a much smaller bank and had a lot of similar customers (startups advised by similar VCs) the ran was seen as plausible at which point it was over -- customers pulled enough money to kill the bank. This is the price we pay for the flexibility of the current banking system that allows people to get loans and free checking accounts. My 2c.
The only job for these execs was to know which way the wind is blowing and they showed themselves to be not much better than every other rabid fool that bought GME etc. thinking things would never change and bull runs and low rates would last forever.
>> As of December 31, 2022, Silicon Valley Bank had approximately $209.0 billion in total assets and about $175.4 billion in total deposits.
whereas an exchange shouldn't have a position at all
and a hedge fund normally doesn't allow withdrawals at all (without vast notice)
Money there to to be spent over the next six months is now not available.
Payroll in Silicon Valley is going to be a mess this week.
Companies that lend to startups short term are going to have a busy time.
Update: yes, seems like the insurance part is pretty quick
https://twitter.com/MMikeMMa/status/1634245929481175040/phot...
Except the last couple years have been bonkers with little revenue / spending alignment during fundraising. Early stage burns are above that level, which makes the situation worse for current crop of co's. Ouch and good luck :(
I've seen several versions of this sentiment here. What are people basing it on? I don't know much at all about the situation.
But if you're curious, and want a layman no-jargon version the press release from the FDIC is pretty good.
I mean this in no uncertain terms. HN users know nothing about this and are regurgitating pure rubbish over and over again in this thread. If you're concerned, don't even trust me, but go read the press release. CA put out one too.
first HN said there was no problem
then HN said everyone will get their money back
what next?
HN is full of dreamers, the kind who wander into traffic
We really don't need a bunch of fake money flying around. It's time to have every dollar in the wild be a real dollar.
Certainly we can argue about the precise percentage of the fractional reserve, but keep in mind that "100%" is not a panacea.
If I wanted to put money to productive purposes (at risk, with reward) I would do so myself. I'd buy bonds, stocks, options, lend money out, whatever. I already do this.
Whatever I keep in cash, without investing, is intentionally kept as cash, and I want that part to be zero risk, I don't need the bank to help me invest it at nonzero risk.
CASH is cash. Keep it in a vault. The cost of holding it is not nothing.
The same traits are present with every industry. How many BS oil fields are funded but turn out to be over hyper. What about real estate scams?
Right wing media has done a great job of changing the conversation from big oil to big tech and many people here are helping, maybe with geniue intention, but foxnews or whatever is attacking tech because it's mostly liberals not because they are concerned with the industry's practices