The Demise of Silicon Valley Bank
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FDIC Takes over Silicon Valley Bank - https://news.ycombinator.com/item?id=35096877 - March 2023 (708 comments)
> the bank purchased a large amount (over $80 billion) in mortgage-backed securities (MBS) with these deposits for their hold-to-maturity (HTM) portfolio. Almost 97% of these MBS were 10+ years in duration, with a weighted average yield of 1.56%.
> with the rise in Fed rates, the value of SVB’s MBS plummeted. This is because investors can now purchase long-duration "risk-free" bonds from the Fed at a 2.5x higher yield. Precisely, with the rising US Fed interest rates, the value of existing bonds with lower payouts fell in value.
The second paragraph explains what the original article summarized as "The trouble is that when rates started to go up, mortgage assets got hit hard".
I imagine they ran out of their more liquid instruments.
Now you know why.
2. Fed raises interest rates. Now new mortgages are shiny (they return more money) and those old mortgages are shitty, so now they are worth $75 ea. Normally not a problem as they can wait for those mortgages to mature and get $105.
3. Tech sector experiences a crunch. All the sudden more and more companies are taking money out of their bank account.
4. In order to process withdrawals, SVB is now forced to sell the mortgages it bought for $100 for $75. If this continues SVB won't be able to find enough money to pay depositors.
It's not that new mortgages are shiny and old mortgages aren't; it's that $100 in 5 years (or whatever) is now worth less. It's easier with zero coupon bonds, because there's only the maturity, so a $100 zero coupon bond that matures on date X is worth $Y, regardless of when it was issued; and $100 mortgage that completes on date X needs to have each payment adjusted for current value. Clearly, a smaller series of payments is worth less than a larger series of payments, even though the principal amount is the same.
Because safe interest rates went up, people can get a better deal on long term debt unless they get a discount on the bonds from SVB so that in the end the SVB bonds work out to a the current interest rates, if held to maturity.
This is how bond prices move opposite to the external interest rate environment.
There is also a risk premium since t-bills are considered perfectly safe, while these mortgage backed securities are likely now carrying a risk premium so buyers want an even higher effective interest rate out of them.
It isn't really new-vs-old, it is just the interest rate environment. If there was zero new issuance of debt people would still be trading the old debt at the same interest rates and the value of the bonds held by SVB still would have been underwater. Of course if there wasn't enough debt to satisfy the appetite for buying debt then the prices would rise and get bid up, but we'd see this as a lowering of interest rates in these markets (which isn't happening).
Not quite. The article addresses this in detail. They bought mostly hold-to-maturity (HTM) bonds which could not be sold.
(Technically such bonds could be sold, but selling would trigger a portfolio revaluation of all their HTM bonds, which would have made them immediately insolvent.)
"HTM assets are not marked to market... they remain glued to balance sheets at amortised cost regardless. By contrast, AFS assets are marked-to-market... Sell even a single bond out of an HTM portfolio, however, and the entire portfolio would need to be re-marked accordingly."
There's a bit more detail here, but it doesn't get into the re-marking aspect. https://www.investopedia.com/terms/h/held-to-maturity-securi...
Essentially, when interest rates go up, current bonds temporarily fall in value as people can buy higher yielding ones. For a variety of reasons, SVB needed to sell the bonds at a loss now to cover deposit withdrawals, etc.
Going to miss payroll bad?
- All funds in SVB are frozen
- FDIC has implied that insured funds (up to $250K per account) will be released within 7 days.
- It's entirely unclear how long it will take to recoup uninsured funds (above $250K per account).
- It's also unclear how much of uninsured funds will be recouped (although most people believe the figure will be above 80%)
If given the above fact pattern, your company can't make payroll, then it will have to raise emergency cash to do so. Whether or not that's feasible isn't an answer anyone here can provide.
Where is this 80% number coming from?
The question is what haircut the FDIC will take on the $209b when they forcefully liquidate all securities. If the above data is still accurate, the FDIC can make depositors whole as long as they don't take more than a 16% haircut when liquidating.
SVB recently liquidated their AFS bond portfolio at ~90c on the dollar. And, this traunch of securities is very sensitive to interest rate changes.
Their HTM bond portfolio consists mostly of securities that could be sold today for ~80c on the dollar.
Given the above, it seems likely depositors will be made close to whole. Then again, who knows what's hidden from public eye.
The same statement also says "The FDIC will pay uninsured depositors an advance dividend within the next week." which I assume means some percentage of the uninsured funds based on a worst case scenario of the recovery.
Another issue is that this isn't just about the company not having funds, but also funds that may have been transiting through SVB today. At least one payroll provider was affected.
How much would you pay for a property that will instantly be worth 20% less than the day you purchased it?
In normal times I can see it, but we all know (or most of the smart folks, at least) that the economy is on the brink of falling over.
Note that before this news broke out, SVB shares were frozen. If this were simply a 20% loss?
It appears that text from this story may have been stolen from https://twitter.com/jamiequint/status/1633956163565002752 https://news.ycombinator.com/item?id=35099982
This probably foreshadows waves of startups failing as they run out of runway.
A bunch of companies now have no or little operating cash and all they're going to have on Monday is $250k each.
How many of you are directly paid by the Valley tech sector?
SVB had ~$200b in total assets, less than 1% of the total assets in banks across the U.S. alone.
There are definitely going to be indirect effects, but HN and other voices in early-stage tech are predisposed to overestimate the impact on the broader economy.
> As at the end of 2022, it had 37,466 deposit customers, each holding in excess of $250,000 per account -- and -- The bank does have another 106,420 customers whose accounts are fully insured but they only control $4.8 billion of deposits
So SVB had only about ~150k banking customers. And of those, less than 40k are actually affected by this debacle. But those were concentrated enough to make SVB the 20th largest bank in the US.
Puts things in perspective.
ADP could always take it at 90%, figure out the expected return and everybody wins
AWS could take it plus some equity for credits? I imagine the incremental cost of providing the compute is worth the risk
No one forces the economy to operate on dollars - and both traditionally and currently a whole lot of it doesn't.
https://www.federalreserve.gov/aboutthefed/boardmeetings/202...
It may only be a couple day disruption but what if your employees quit? What if your vendors cut your access and your customers leave?
What if you don't get made whole but get back 80% of your cash? Now your runway is 20% shorter in a climate where investors aren't around.
This could be very bad.
Even if they don’t, in California there is a statutory penalty payable to the employee of $100 to each affected employee for a first, non-willful late payment of wages (second or subsequent violations, or any willful or intentional violations, have a much greater penalty – $200 plus 25% of the wages not paid); that’s not a lot (if you didn’t happen to have a prior payroll hiccup bumping this into the “second or subsequent” category), but its still a hit.
I guess they don't have to worry so much about that what with all the tech layoffs over the last 6 months and with a lot of other statups in the SVB boat, who's going to be hiring?
That will take months at least. In the meantime they'll have this non-liquid piece of paper. I suppose they could try to pay employees with IOUs, but I don't think that many employees would be able to afford to stick around for very long.
Yes, they’ll get an “advance dividend” based on whatever surplus cash is available beyond what is necessary to cover the insured balances, plus a “receivership certificate” accounting for the rest, and, to quote the FDIC press release [0], “As the FDIC sells the assets of Silicon Valley Bank, future dividend payments may be made to uninsured depositors.” [emphasis added].
[0] https://www.fdic.gov/news/press-releases/2023/pr23016.html
Apparently lots of VCs and startups use SVB as their bank. Could someone explain why would startups not choose relatively safer big banks like BoA or Chase? What are the advantages of using SVB as the primary financial institution?
They appear out of thin air with no history and millions of dollars. They then constantly burn money in the tens to hundreds of thousands of dollars a month until they disappear or get injected with millions more dollars. Often, traditional banks don't know how to deal with these entities and it sets off tons of alarms in their fraud and risk management departments.
SVB and related departments know the business and financial models of startups a lot better and are more willing to help.
I'm assuming a similar thing was going on with SVB vs. other large banks.
Because such startups tend to, when they can’t raise funds easily (=nowadays), withdraw all their cash deposits at the same time (=what’s happening at SVB), which puts it in bankrupt. So, small market, but so much variance in deposits that it’s risky.
It's not like they blacklist you the moment your attempt to open an account raises an eyebrow. Show up to BofA or Chase with a copy of your contract with your VC, in addition to their check, and it would be odd for them to refuse you an account.
Or was this bank just uniquely fucked?
A lot of banks have similar asset books and asset values MUST go down as interest rates rise. So, banks are really screwed unless they offer MUCH higher interest rates on deposits ASAP. Because if they don't, most people are very aware of treasurydirect and will simply deposit there.
Every crisis is different, but hedging so much money in one basket seems to be the real undoing here. I’d posit that the bank, which was much smaller in 2000 and 2007, didn’t make those sorts of moves then.
Another point seems to have been that Silicon Valley bank have a customer base which is tightly knitted, so if any bad news gets shared in the circle, it gets around quickly. Maybe they weren't as popular the last crashes, or as impacted as other sectors, so it would be easier to avoid trouble. But specifically this time, the trouble was related to them, so they got hit the hardest.
The main reason some of the other startup banks such as Ramp or BREX exist is because SVB was kind of a dinosaur when it came to cash management. Their online cash management apps were very basic and rudimentary. And they were a lot slower than these new online banks at responding to customer requests.
So now you're saying that bank (a very conservative investment bank from what I've been told) was moving too fast?
This has been the most widely predicted recession in history as far as I am aware. The Fed has openly and deliberately said they will raise interest rates until something breaks. Investing in assets that are negatively correlated with interest rates under these conditions is a terrible idea. Professional bankers should know this.
Startups are far less negligent, but still, could diversify their deposits with multiple banks (or use “real” banks) to mitigate their risk. Startups are risky enough; having sound money is important and I wouldn’t be risking it with a regional bank.
The Fed is negligent for treating financial markets like penny stocks. They had nothing else in their tool chest to fight inflation, though, so I can’t entirely blame them.
Politicians and the Fed are negligent for creating so much liquidity that it spurred such immense inflation. Anyone with a macro-101 level of economics could have foreseen this.
Voters are negligent and ignorant for their unwillingness to elect better politicians and demand change and reform in an area that continually fails them. We are failed time and time again by the banking system because it is fundamentally unable to be guaranteed solvent. We bail banks out or get by a crisis somehow and forget about it until the next time around and then shout “wow, who could have seen this coming?!” as if it is the first time a bank has failed.
So you decide...
(Unless rippling forces you for opening SVB account, i don't know, i do not use rippling)
They were holding some candies that became less valuable because you can buy better candies for the same price in the shop. They needed the money, so they had to sell those candies for cheaper. Some friends of theirs noticed they were selling those candies for cheaper and started getting suspicious and panicky and asking for their toys back.
* Candies - fixed income securities, like mortgage backed-securities and US treasuries
* Candies becoming less valuable - government raising the interest rates, which makes fixed income products, like treasuries and mortgage-backed securities less valuable, because you can get the same securities but with higher returns in the market
* Friends panicking - investors and depositors
* Friends asking for their toys back - withdrawing money from the bank, which starts the bank run
Let's say you are looking for an investment to pay 1% yield year over year, because that's the going market rate (which highly correlates to interest rates). Then this bond should be worth about $90.53 to you. You buy it at that price.
Now suddenly rates change and everyone is expecting investments to pay 3% year over year. Then an equivalent bond is now worth only $74.41.
That's OK. You don't have to sell your bond. You can hold on until it matures, and just live with the fact that you aren't getting the same yield as others.
But now imagine you need to come up with a lot of money quickly to satisfy some requirement (like customers withdrawing a lot of money). Now you have no choice but to sell your bond. And that means you have to admit you lost the money. And now you may not have enough money to cover your obligations, even though you would have if you could have waited for the bond to mature.
A lot of bonds.
1. Some mighty people/companies will bail out all depositors as this would cause a chain effect damaging the whole USA innovation.
2. Still, the consequences will be grim as many startups will lose access to venture debt and need to do layoff quickly.
Yeah, I'm sure Elon Musk can just write a check to cover this... oh, wait.
Seriously, who do you think would have the capital to swoop in here and cover something north of $170B in shortfall? Especially right now given that money is pretty tight everywhere.
The challenge is $80Bln mortgage-backed securities, which they likely have to sell at a 20-30% markdown and cover that.
It's not a bail out in the sense of free money. It's a bail out in the sense of a short term loan, just like after the GFC.