30% of YC companies exposed through SVB can’t make payroll in the next 30 days
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Even if the extremely unlikely scenario plays out and companies are unable to make payroll, employees are very unlikely to walk out, it would make an inconvenient situation (no pay) much worse (terminated) in an already challenging economic climate. Anybody with the financial means to walk away because payroll has been missed is someone with the financial means to ride out a few weeks waiting to be paid.
We will see many startups fall in the next few weeks + months, and many will attribute it to the failure of SVB, but SVB’s failure is a symptom of the broader economic environment, not a cause, and the same factors that caused SVB to fail are already hurting startups — like the difficult fundraising environment at the moment. SVB will be an easy scapegoat, “we didn’t fail, it was SVB’s fault!”
Most any startup that attributes its failure to SVB’s collapse would have been dead in a few months anyway.
On top of that: there is no meaningful risk that these startups will not be made whole in the coming weeks. Given the absence of risk, there will be plenty of lenders competing to provide these companies with liquidity for a relatively small slice of the pie, should it even come to that.
No one, yet, has expressed doubt on the credit of the FDIC.
Sub 10% of SVB's deposits were insured. Meanwhile SVB's HTM bonds have taken a 20%+ loss which will, barring an acquisition, cause non-insured deposits to take a 19%+ haircut.
Combined with an indeterminate period of waiting. So start ups with cash in SVB should expect to lose 20% and find alternative sources to make payroll, pay payroll taxes, and pay suppliers. I expect we will see many startups close us shop when founders are unwilling to bail out their own company's balance sheet with personal money.
Then yes, I agree they probably won't be made whole by the fed or government. Nor should they, in my opinion.
Wow, two very bold claims here:
1. they will be made whole
2. in a few weeks
For 1. I think this is very unlikely to happen. Absolutely account holders will get some money back, but I would be pretty surprised if it was 100%. Regarding number 2. I would be even more shocked if anything more than the FDIC insured amount was returns within "a few weeks".
However you are claiming that there is "no meaningful" probability these will not both happen. Do you care to elaborate on this more because I have heard nobody with any experience in this space making claims like this?
It would be unthinkable that they wouldn't, up to the $250k limit. Beyond that limit, they probably won't be made whole.
Even if employees don’t walk out, they can file a wage claim and collect penalties. Any retaliation for filing a wage claim is illegal and would result in more penalties.
the ious are actually receiver's certificates, and as i understand it, borrowing against receiver's certificates is a commonplace thing to do in cases like this
Their assets were higher than their liabilities. This is a liquidity problem, not a solvency problem. Everyone got their money from Lehman Brothers, and everyone will get their money from SVB. But not everyone is going to get it right away, because it is invested.
“Receivership certificates” aren’t really IOUs (they are more “defunct entity owes you”). The DFPI takeover and FDIC receivership is, effectively, a kind of “bankruptcy” for the bank.
> these companies can borrow against the IOUs.
What amounts to an IOU from a bankrupt entity is…not very good collateral for a loan.
> It’s not like this is a minor bank failure; everyone knows about it.
Right, and everyone who isn’t already exposed wants to stay out of the blast radius, not jump into it.
(hint: three comma club, easily)
The liquidity problem gets solved by merging this bank with a bigger and more liquid bank. The insolvency problem is solved by wiping out the stockholders and bond holders will get a haircut. I get why people panic, but the issues here can be resolved cleanly and speedily.
editing to add citation: California Labor Code Section 558.1
It does not apply to claims by employees against the corporation under foreign state wage and hour laws, nor could it.
The government isn’t that simplistic that they’d accept that as a legal defense if they were going to enforce the law. Possibly if the executive could prove that they were defrauded by another exec or vendor with liability and they resigned as soon as they had information to that effect which coincidentally was on pay day, they could pull it off. Even then though as a corporate officer they have liability over how the company operates when they choose the people to do the job. As the other poster pointed out the liability for payroll pierces the corporate veil and that means they can’t just bail out and use the corporation as a legal shield.
He even managed to use the occasion to throw Ukraine under the tank treads, again.
Rather, it is illegal to not pay wages timely. It is more illegal to do it intentionally/wilfully vs. not, but it is illegal in any case.
https://www.kron4.com/news/bay-area/sfusd-still-struggling-w...
People are acting like there's some set of circumstances that makes wage theft reasonable. Situations where management forces the employees to work for free under threat of being fired are exactly why the corporate veil should be pierced in these matters.
Second, even if the company is profitable, they might rely on income from other companies screwed over today. Those companies might not be able to pay their bills. If I'm Sentry, Render, Mongo, or any other number of companies that gets most of their revenue by providing services to startups, I'd be worried right now. Even big cloud providers like AWS and GCP will likely take revenue hits. Big companies can float resources while this debacle gets sorted out, but small companies cant. I'm sure there are a bunch of startups out there that had $2 million in the bank which would give them a good 18 months of runway, and are now trying to prioritize cost cutting measures to help make that initial $250k of insured deposits last as long as possible. And that's permanent lost revenue for those companies.
Third, I'm not saying wage theft is reasonable (it's not), and I don't think anyone else is either. I'm simply trying to point out that piercing the veil isn't some magic bullet here. If a company has to close up shop that's probably the worst of all worlds. Employees lose their jobs with little notice and no severance, office owners need to find new tenants (in an already tough office real estate market), healthy companies seeing ripple effects start belt tightening as well. And in the event that the full (or majority of) deposits from SVB are eventually released to the bankrupt company, where do you think that money goes? Right back to the shareholders. Employees are still screwed.
Piercing the veil makes sense in a typical situation where a company has gone bankrupt and they need to find a way to meet their final obligations, but it's a little more complicated in this situation. There are plenty of healthy companies that will be healthy again once the FDIC is able to release deposits.
I remember the early dotcom days where a company would hold your first paycheck!
If their bank accounts get frozen for a week, they'll just lay everyone off and then hire them all back a week later with a signing bonus to cover their missed days. No one is going to permanently shut down their company because their bank is closed for a couple days.
Maybe a few lucky executives will accidentally get their vesting accelerated, and a few startups that were on the brink of collapsing anyway might be pushed over the edge, but beyond that life will go on as usual.
This may be better or worse for workers than being laid off.
Bigger companies will be able to float resources for a bit, but if it takes the FDIC more than a few months to sort it out there will be large second order effects.
I hope this hypothetical stays hypothetical, if the FDIC can announce that SVB has been acquired and all the deposits will be honored this will all be moot. But any company with a large deposit at SVB should probably be working off the assumption that they're going to have to make that $250k of insured deposits last for a while. At least until new information is released.
Why do you think it may take months for FDIC to do their job?
I think FDIC will pay the 250k on every account before Monday morning. Anything beyond 250k is not covered by 'deposit insurance'.
> acquired and all the deposits will be honored
SVB is effectively bankrupt. Buyers are going to get a good deal, and not sink their own bank.
It's everything above $250k, which is substantial, and which companies need, that will take a while to sort out. It's true that everything above $250k isn't covered by insurance, which means they may not get it, but SVB has assets, those assets will get sold, and first up to those assets is those who had bank accounts and to make them whole.
I wonder how much of YC's reputation was destroyed yesterday by this self-serving attempt.
It is unlikely that these companies won't have access to enough of their deposits to make payroll, and even if that rare case occurs there are many many alternatives available to them-- bridging from their VCs, from private lenders, etc.
Tan yesterday sounded a lot like that Zero Hedge guy back in 2009.
I don't understand how you can say this is an unlikely scenario. It is very likely, because a large number of startups are using one bank and that 250k won't cover much of their burn rate.
It also puts you in a terrible position to raise bridge rounds and other financing. Every investor and lender isn't incentivized to give good terms.
8% might seem like a stubbed toe, but these are _bonds_. You aren't suppose to lose anything. 8% inflation, 8% from bank failure and add-on the additional losses from non-bond related issues... S&P500 at 1% for the year but from mid-2021 it is down nearly 10%.
If you hold them to maturity. If you sell them early, not so much.
No, part of it disappeared when the long-term bonds were sold for a loss. That money hole is why SVB was closed today.
Why wouldn't a lender lend in this scenario? It's almost zero risk.
It wouldn't be a good negotiating position if there was no other lenders, but there would presumably be plenty of lenders interested in providing a "small" bridging loan in a situation like this. And those lenders will have to compete.
it's not
you can't predict what the unwinding of SVBs positions will produce in 6 months time (or however long it takes)
Mind you, the FT comment section is always full of people who predicted stuff like this, rather like the comments on breaches around here.
A lot of start-ups avoiding down rounds just got a great excuse to raise operating capital under the veil of liquidity.
And by new I mean a buncha old guys from Wall Street or private equity who are going to buy a seat at some “disruptors” and then explain how things are going to work now.
I agree with the rest of your comment, but not the implication of this sentence. Riding out not getting payed is extremely risky with very low to no reward. Those that could ride it out are much better off quitting and making use of their time for interviewing - or anything but working for free.
Likely event. 30% of YC companies will not make payroll in the next 30 days. Their bank accounts literally went to zero today.
Everyone should maintain the ability to miss a few paychecks. And everyone should know to start a job search the moment a company misses payroll or even looks like it might.
Or several months, if not years. If SVB isn't bought by Monday those funds are going to be inaccessible for much longer than people realize.
I think a lot of startups are in this situation. They have SVB accounts, but likely don’t have all of their money in there.
One thing to remember, SVB is very founder friendly. Often giving companies favorable lines of credit, giving founders favorable mortgages, etc. They helped us tremendously with our PPP loan, and are also deeply integrated with products like Stripe Atlas.
Can't blame the guy for doing his job, but you can call bullshit on him.
And whatever they do get back above FDIC limits, it will not be immediate. Months at a minimum.
"The closure had no immediate effect on depositors. All deposits even those above the FDIC limit were transferred to Chase. As the FDIC stated, "No one lost any money that was deposited in Washington Mutual Bank." In addition, all existing WaMu CDs were honored by Chase to maturity."
-- https://www.depositaccounts.com/blog/2010/09/twoyear-anniver...
Looks like for IndyMac, uninsured deposits got paid back at 50 cents on the dollar.
If this is like WaMu, the bank opens on Monday and everything goes back to normal. If this is like IndyMac (or worse, Silver State Bank, 11 cents on the dollar recovered), a bunch of startups are now fucked companies.
Might be some politics going on this weekend.
And what are those founders going to do? They're going to call up YC, which funded them and has board seats, and ask for instructions. YC probably told them to use Silicon Valley Bank.[1] So now YC has some responsibility to untangle this. It's probably in YC's interest to find a bulk buyer for SVB receivership certificates. If they don't, all their startups will be losing a month or two of management distraction while dealing with this problem.
For YC to take the lead on getting a market going in that stuff makes a lot of sense. They're the largest interested party. There are probably people at YC right now working the phones, trying to find a buyer for that paper.
So, priority is to get through the next two weeks while somebody works out a longer term solution. Keep track of which founder teams deal with this well. They have potential in running a larger business.
This is what we call "hubris". Gary needs to settle down.
Tan makes it sound like it will favor the balance of power to big tech. I think big tech is irrelevant here, and it may actually shift the balance of power away from SV stereotype startups and give some oxygen to other businesses.
* honestly I think most solvent startups will find workarounds, it's more going to be a big stress than actual destruction
> 30% of YC companies exposed through SVB can’t make payroll in the next 30 days.
https://twitter.com/garrytan/status/1634286688922132481?s=20
If 70% of depositors withdrew before the bank went into receivership there is nothing left.
And the assets they held were primarily treasury securities and MBS. Why would anyone sell those “on the cheap” when the market is super liquid?
If there were assets on the books left, the gov't could purchase them at face value and just hold to maturity.
The solution is to wipe out the SVB shareholders, that's the only way to make sure other banks don't have an incentive to do these things. Then pay the startups whatever part of the funds you can recover on the market (may be close to 90% if some comes from SVB shareholders).
The VCs may have to step in at a few companies for loosing 10%, but that's likely the ones that weren't doing great anyway.
Using tax payer money to save SVB shareholders and some VCs is ridiculous. These guys have enough money, they're all professionals, it's a risk they took and unfortunately they lost this round. Better luck next time.
It is in the governments best interest for people to have faith in banks, regardless of what industry they serve. The FDIC was created because a run on one bank, once it becomes public knowledge, always turns into a run on more banks. They don't want this turning into a line of dominoes.
The biggest risk is that this leads to runs on other banks. People are already looking pretty closely at a few others like First Republic. Deposit insurance exists to reassure people that they won't lose their money, to reduce the temptation to start a bank run.
The workers who might not get their next paychecks or could lose their jobs entirely are not to blame for the problem either.
VCs will be fine no matter what happens, because they are billionaires. Trying to hurt them will fail and will result in other people getting hurt too. Moral outrage shouldn't be used as an excuse to make a bad problem worse.
Because then even more people that did not cause this would be paying for it.
A contact who has a college friend who works(/ed?) at SVB as a client service rep says that they were "specifically instructed to make or accept zero communications, emails, or phone calls with SVB clients."
What due diligence can seriously be carried out by Monday/Tuesday? Especially for a messy "acquisition" like this one.
They understand timing is really important to rescue these banks, they need to get stability ASAP or tons of value gets destroyed. Potential buyers know this too.
Not making payroll is just the first problem. Vendors are the next ,
many startups provide critical services from healthcare to security to dozen other sectors if they cannot pay for their servers those services will go down too
a lot of products such as saas apps , cloud services are sold to startups extensively.
If collectively startups stop making payments, those businesses become unsound even big tech like AWS will feel pain and mean layoffs everywhere.
Not making payroll for tech and tech adjacent people also means lot of local business will be distressed in those communities think your grocers and barbers etc.
I don't know how this works in the US, but there not some kind of clause or law which basically prevents critical companies from becoming bankrupt like this?
In my country, vital infrastructure is supposed to have money on hand to keep the infra chugging along while the company gets put under administration. (or nationalized, depending on the political climate and what it provides).
Even military industrial complex which have a sharp focus on kind of independence and budgets to see it through trips up constantly and just find out some core components are coming from foreign sources that can be fragile or threat .
Just as we are discovering last couple of years whether with baby formula or chips sometimes there are risks in the system which no one knows or can’t do anything about .
Not to mention such reliability costs money no one is ready to pay for .
It's the opposite. 99% of startups do not bank with SVB and/or have less than $250K in SVB.
If this were a public ledger we could talk about exactly what the situation is. Instead we'll get lies and half truths from those jockeying to tilt things in their favor.
YC startups tend to be on average more successful than others,
So even if it's true that the average return is better, the median return is probably similar or even worse (seems YC can probably afford to take bigger bets than smaller less known funds, resulting in bigger wins as well as more failures- the latter all having a capped downside).
Anyway, maybe I'm wrong, but it's not obvious to me that if you picked 10 yc startups and 10 other vc backed startups, the yc ones would be likely to be in better financial shape, even if the portfolio returns are better
Is there actually any evidence that YC startups tend to be more successful than others, and on what metrics?
It's not altogether unlikely that other groups of startups, without an aggressive push to pull out of SVB, are in more trouble.
That is also a lot of startups in a very short window of time. Startups don't exist in isolation, and, for better or worse, often actively try to purchase each others products when possible. It is an ecosystem.
I work at an IPO'd SaaS company, but a lot of our customers are startups. If 30% of our startup customers suddenly can't pay their bills that impacts us in a big way. On top of this, like most companies, we were already concerned about how we were going to meet profitability goals.
And again, the short time frame means not a lot of time to respond and adapt.
Most startups aren't even SV companies, let alone YC ones, but if your whole world is focused on YC/SV, it can be easy to forget that.
SVB made bad bets and mismanaged risk. These firms should fail to make room for better firms. And people that work with mismanaged firms will often take a loss, often via bankruptcy.
Startups liked SVB because they would take risks big banks wouldn’t. Well risk comes at a cost.
The government’s role here isn’t to make everyone whole. It’s to prevent contagion.
edit: this is actually a long now talk, will edit later if I find exactly the talk am looking for, but should be close
[0] https://soundcloud.com/longnow/the-singularity-your-future-a...
"All insured depositors will have full access to their insured deposits no later than Monday morning, March 13, 2023. The FDIC will pay uninsured depositors an advance dividend within the next week. Uninsured depositors will receive a receivership certificate for the remaining amount of their uninsured funds. As the FDIC sells the assets of Silicon Valley Bank, future dividend payments may be made to uninsured depositors. ... As of December 31, 2022, Silicon Valley Bank had approximately $209.0 billion in total assets and about $175.4 billion in total deposits."
Those receivership certificates can be sold or borrowed against. The discount shouldn't be large, since there are solid assets, they're just long term. But figuring out how to arrange such deals is obscure, and early offers to buy will probably be at an excessive discount.
This doesn't happen often and it's not a routine type of transaction. Which means you may need expensive corporate lawyers.
If you have $1MM of uninsured deposits, you might get $100K as an advance dividend.
The importance is that this money is available quickly, while you make arrangements to do without the remainder of your funds, for a possibly-extended period of time. Until the next follow-on dividend, if any, and until you are fully whole, if ever.
Investor profits threatened by unstable silicon valley financial system: “Think of the workers! The sacred obligation of payroll!”
I didn't know there was a YC backed startup with an app that lets you directly inhale your own gas. I'm sure that one isn't at any risk of extinction.
Besides, I'm talking about the fragility of the ecosystem, not just individual startups. While everyone knows each startup is just a flash in the pan, here one day, very likely gone the next, the same was not said about a whole ecosystem. Silicon valley as a whole seemed remarkably stable until recently.
Effectively, banks lent money at X%. Then the government raised interest rates. Therefore, you owed your depositors a higher interest rate than you were collecting from your loans.
I know, not exactly the same but both related to the govt raising rates and banks not necessarily anticipating the move.
YC companies that have been exposed so badly through this are probably non-essential.
My company is also exposed and we will suffer, because we were stupid but luckily not complete morons
This is part of a healthy economic market according to market economic theory.
The obviously risky bet is that the rates would stay 0.
From most accounts it seems to be a very tight ecosystem with a lot of close relationships between VCs, service providers, and serial founders. Very easy to see how it could develop high-impact dependencies that are very close to single points of failure.
They only want to rig the game in their favor. These people weren't advocating things like tougher bank regulations that would have prevented this. They just happen to be on the losing side now and want a bailout.
With that said, the government's role in a situation like this is to prevent contagion, not make you whole. If a bunch of startups go under over this then that sucks, but that alone doesn't come close to justifying any sort of government bailout.
Things don't look good right now.
I'm curious about the calculus that makes this tradeoff non-worthwhile when it comes to squirreling away an emergency payroll fund in a backup bank. What about that is unmanageable?
Large companies and smart individuals keep cash reserves in pass-thru depository products like CDARS which do exactly what you describe. You have a virtual account at Bank A that shows your balance, but the actual money is stored across hundreds or thousands of other banks across the US - each holding less than the FDIC insurance maximum.
I guess if someone loans you money, they want to be able to keep an eye on any sudden moves you make with it.
But there's still no concrete end in sight for if and when non-FDIC insured amounts will be available.
Zach Coelius nailed it:
> I am telling all my companies that even in the worst case scenario and there is no buyer (highly unlikely), they will still get the vast majority of their money back and this just becomes a short term issue.
> I, for one, certainly plan to fund my companies through this.
And even if it had had the cash, the cash might have been at SVB.
When times are good - they are the first to criticize government reach and taxes which are spend on other people. 100% capitalism etc.
When times get bad - we need government to step in and save us !
Ridiculous.
Besides, it seems the situation is nowhere near as bad as he paints it.
SVB is kindling a bank run right now.
https://nypost.com/2023/03/10/nypd-called-to-silicon-valley-...
The situation was created by SVB irresponsibly locking most of their money into 10-year mortgage-backed securities a couple of years ago when interest rates were historically low, plus the affected startups irresponsibly locking most of their cash into a single bank that took such irresponsible actions, without that one bank being systemically too-big-to-fail from a nationwide policy perspective.
Expecting the government to keep interest rates historically low for another decade or else to bail the bank out is an unreasonable expectation on the part of SVB and the ecosystem that over-relied on it, not the fault of the government.
If someone is being reckless with fireworks right before the Enola Gay flies overhead and drops Little Boy its clear who did the killing.
Stanning for SVB when every single media outlet and signal from the Fed at the time of the purchases of those bonds was that there would be increasing rates for the forseeable future. My mom saw it coming, everyone who was thinking of buying a house saw it coming, damn near everyone on the planet saw it coming.
Other banks were not sitting with +40% of their assets in 10yr term low interest securities... try more like 25%
https://www.wired.com/2008/05/peter-thiel-makes-down-payment...
Besides founders, who is going to work for free? In this economy, I wouldn't even risk the "promise" that startups will pay up. If all or most of their assets were held in SIVB and were not able to withdraw or transfer out, then they are effectively hosed.
Good luck folks.
edit: misread. My estimate of at least 30% of VC-funded startups in SV using SVB stands. It’s recommended as the default by most investors.
I do agree with his main point: make the receivership as short as possible. I'd hope everyone can agree on that. (Meanwhile, I'm still waiting months to log back into my https://ftx.us/ account).
I disagree with this: "This is an extinction level event for startups and will set startups and innovation back by 10 years or more. " I could easily see it being the exact opposite.
Because their funds are frozen? Or they assume their funds are completely gone?
I never heard that before. The rich keep their money in investments.
For your explained meaning, it is in depositor's individual interest to remove their money. Get cash or t-bills. Also get a credit union account where they work for the members.
Companies will not "go extinct". Yes, they _may_ have delays making payroll, but nothing that employees cannot work through. And I doubt even that. Regulators will make some fraction of deposits available in short order and companies can function from that. It will be tight and a nuisance but it's manageable. Even if we stipulate that the next generation of tech innovation was banking at SVB, it will survive.
But yes there will be actual deposit losses. At a guess these will be no more than 30%, which will take some time to emerge. No promising startup will be unable to raise capital to fill the gap. What, investors won't kick in another 30% (if that) for an idea they like?
Gary's tweets about "small companies lacking treasury management" are disingenuous. The whole point of the VC ecosystem and institutions like YCombinator is to provide entrepreneurs with business support and advice they otherwise lack. Help with legal structure, accounting, hiring, benefits, etc is very much part of the VC value proposition. Well, cash management is exactly in that department. Wariness about cash management and banking risk is actually part of Gary's job. Apparently he didn't do it very well here. Well, we all make mistakes, seriously -- but I don't expect taxpayers to pay for mine.
This really seems like fear mongering and special pleading to avoid equity dilution at the taxpayer's expense. Really I thought better of YC.
I wonder what the sentiment of YC startups that have access to bookface [0] is right now. I don't think it is happy days there.
> Silicon Valley Bank collapsed on Friday after a run on deposits drove the Northern California institution into insolvency, marking the largest bank failure since the financial crisis.
Source: https://www.politico.com/news/2023/03/10/silicon-valley-bank...
Discussed at: https://news.ycombinator.com/item?id=35096877
>[not] a particularly well compensated
You are living in fantasy land.
I am confident in saying there were not many making more than that.
So, yeah, not “totally stuck”, but anyone with balances over $250K may be…largely stuck.
No this is complete and utter bull hockey, this is 2008 all over again in every concievable way except this time instead of mortagages and housing it is tech that is begging for a bailout. This is nonsense, for years all the SV tech bros were bragging about "changing the world through arbitaging pizza delivery misinformation ML." getting paid ridiculous salaries, and playing foosball. I don't have sympathy for them, at all.
Most of the "startup" companies had the end goal of simply being bought out they never wanted to actually do anything they were just a get quick rich scheme.
Quite frankly this correction was long overdue and obvious to everyone who thought about it for even a moment. Now that the limitless capital has stopped (because of the fed rate hikes and because of the boomer retirement) it turns out it isn't profitable to have a buinsess model where you are loosing money on every transaction.
The curtain is pulled down, the emperor has no clothes, the chickens are coming home to roost. Deal with it.
EDIT:
As a followup I don't give a damn about the jobs lost, bailouts are the worst possible thing a government can do, all it does is screw the little people over while the owners keep the wealth and use it as an excuse to cut pay and lay people off.
I'm not saying a bailout is justified either (I have no opinion on that), just pointing out who's responsible here.
I heard the same thing, but they took a gamble and lost. That is free enterprise. People who when to SVB will loose too, again free enterprise.
It was no secret interest rates were going to go up, so 2 years ago they should have sold those bonds and took a small loss.
I think everyone is being way too hysterical. This isn’t a massive bank run.
They just didn't manage the risk of a market "correction" and high interest rates. The tech sector was/is due a correction, but this isn't 2008
Many SVB startups with more than 20 - 30 employees can't make payroll on Monday.
Edit: It's also unclear today whether the assets held by SVB can cover all the missing deposits, since they will likely need to be sold under market rates to liquidate all of them in the near-term.
Are you (and the YC boss) suggesting that the government is more nimble than VC machinery at deploying capital when shit hits the fan?
Re: your edit: how is it unclear? There are no allegations of fraud or other irregularities- the thesis that they put depositors funds in long-term bonds (with positive interest) and then had a run
I can't speak for YC. VC is almost certainly faster, but it's not built to wire money over the weekend. The issue happens when the FDIC insurance isn't enough make payroll on Monday. I don't think the government can bail anyone out in that time period either, but a lack of solutions doesn't make it any less of a problem.
> How is it unclear?
On paper, they have enough in assets (as of Dec), but there's no way to know if the market takes that price as the FDIC sells it off to cover the deposits in the coming months. Typically liquidating a position impacts the price of an asset.
Maybe with 'mark to maturity' accounting which banks can use in some circumstances. But T-bonds aren't cash in hand. There is a loss to be realized when selling before maturity. This leads to using 'mark to market' accounting which helps to ensure more prudent reserves.
Bailing out startups is dead last on that list. That is absolutely not something the government should spend tax money on.
OTOH, the problem is that for it to work, you’d [EDIT: probably; maybe there is a means to do this under executive authority] need immediate legislative action, involving both the Republican-majority House and the Democratic-majority Senate, and that seems improbable.
not ironically, it is overpriced mortgages an interest rate increase that are at the heart of this catastrophe again.
at any rate, at least in that thread he's not even talking about a bailout, but asking to speed up the usual FDIC process so that people can get at least a small part of their money back to make the ends meet:
> make the receivership as short as possible
doesn't seem like a great reason to gloat?
https://twitter.com/CAgovernor/status/1634634828204367872?s=...
i wonder where garry is getting this 30% number or if he just made it up
Yeah, $250K isn't going to go very far.
Also -- it's 30% of those who responded to the survey. So lots of startups could be banking with SVB and have not bothered to fill it out. Maybe those less likely to make payroll would be more likely to fill out the survey
Ultimately I am sick and tired of my hard earned money going to the government for them to redistribute it, whether it be bailouts, stimulus payments, student loan forgiveness.
If the government can make all of the depositors whole, take the associated amount of capital off their balance sheet and hold onto it until it matures, thus costing the taxpayers $0, that seems mostly okay to me? There's the opportunity cost of money blah blah but total increase to the deficit would be $0 and all of these companies would be able to continue operating.
What's the point of a Federal gov / lender of last resort if they can't keep depositors in solvent banks whole?
The only people doing anything risky were the executives at SVB, and they’re going to be wiped out completely. Its a terrible idea to punish depositors for the crime of leaving their funds in a checking account at one of the top 20 largest banks in the country.
I suspect we’ll see a “Fannie Mae” for checking accounts in the future and that seems like a good idea.
https://twitter.com/zerohedge/status/1634025141540732934
http://www.brooock.com/a/svb-collapse-exposes-cracks-in-econ...
Most people are willing to follow the rules for what is essentially 'free money'.
If the reason things don't work out for them is beyond their control that still does not mean they should be bailed out by the 99% of people who would never have used their product in the first place.
what about people losing their housing, financial security and destroyed their lives during the great recession? they also played by the rules. Why did they not receive a bailout, but SVB somehow does?
It was a known unknown you could hedge. You know your account is not insured above $250k so you make sure you prevent the loss in the unlikely event that...
Why should they get bailed out, when every 401k retirement account that lost money in the stock market today isn't getting bailed out?
FDIC takeover is a government intervention and bailout. One systematically programmed and under rules laid out in advance, but an intervention and bailout nonetheless.
The rules are FDIC insurance up to $250k. That's the world where the game is played. This is real life and life isn't fair.
Amazing how quickly capitalists turn to socialists
That is a very different statement.
>>>/g/
The system that does that is named after another name for the “investor class”.
But it’s fun to watch them fail to circle the wagons when it’s Theranos or FTX or Y Combinator.
It sucks for customers that SVB chose greed over risk management, had they invested in short duration treasuries they would be fine. It’s time to let risk actually have consequences instead of big daddy Fed/Gov coming to the VCs rescue.
So I am not sure there even are losses to socialize. There is the uncertainty with marking to market instead of marking cost of purchase but even then I am not sure the assets will shrink to the point where anyone is losing money.
Furthermore, from everything I have read about it the assets of the safest type. They are either US treasuries or Fannie and Freddy issued mortgage backed securities. Even if marking to market would make these be worth less than they were initially purchased for, there is little doubt that they will be paid back in full if held to full term, and thus eventually make more money than they were purchased for. The problem is that it will take a while for that money to be paid back, while all the depositors want to withdraw their money now.
So I understand that people are still feeling anger from the 2008 bailout. But this is not the case here (as far as I know). There has been no excessive risk taking, there are no hidden losses. It is just the well known case that even the best and best run bank will fail if all their depositors decide to demand their money at the same time.
The FDIC should take over the assets and pay the depositors as soon as possible. If necessary, the FDIC should take a loan from the FED against the assets. And no, it does not seem that there will be any cost to the taxpayer.
It may help to call your congressman, to urge the FDIC to move fast and make people's money available quickly. It may also help to try to nudge your congressman to urge the FED to stop this interest raising cycle which is obviously affecting the health of the banking system.
The rest of the world weathered the pandemic; it’s time for tech bubble to burst.
... What?
If you think this is an economic catastrophe, just wait until you see what happens if we get rid of fractional reserve banking. It'd be a nuclear bomb in a china shop.
The 'cure' is way worse than the disease.
Every. Single. Time.
I don’t see how it can make things worse in the long run
Like, sure, I'm willing to entertain the idea that its possible to come up with some kind of planned steady-state economy that does not require speculative allocation of capital to drive production. But you're going to have to present a much more compelling vision of that future than 'Just get rid of lending.'
(Also, housing prices would collapse overnight[2], boomers and other retirees will lynch anyone responsible for something like that.)
For another argument, note that the health of the economy is a function of how quickly money moves through it. Fractional reserve banking is the engine that moves that money. Stop the movement of money, and you'll stop the economy.
All in all, I think we're better off with having the occasional bank go bust, and its customer funds getting frozen for a few weeks while the FDIC unfucks the bank's balance sheets, pays dollar-for-dollar cash for its illiquid, currently underwater long-term bonds, holds them until maturity for a profit, and then destroys the money they made in that profit. It's an infrequent failure case, it doesn't result in money getting lost, and the bank gets punished enough that most of its compatriots think twice before YOLOing the farm on long-term treasuries.
[1] This is called deflation, and if you think inflation is bad, imagine living in a world where nobody spends or invests money on anything, because you can become richer by doing nothing, and just sitting like a dragon on a hoard of gold.
[2] Heaven knows, I rail against housing price inflation all the time, but you are going to have a bad political time if you just pull the rug out from under homeowners.
Just get rid of fractional reserve banking.
Have banks offer either interest via full reserve banking where your deposit is locked or storage for a fee.
Therefore if you are a startup and just need to store money a risky bank going under won’t affect your existence.
> Have banks offer either interest via full reserve banking where your deposit is locked or storage for a fee.
Why would you need a bank to do that, you can go buy treasuries on any brokerage that have that property right now.
The problem wouldn't be on the deposit side, it would be on the lending side.
No bank would offer a prime + 3% mortgage without fractional reserve lending. Housing prices would immediately collapse.
No bank would offer anyone a low-APR loan - you'd only get utterly usurious terms. How well do you think the economy would react to the cost of borrowing money going up by 5, or 10%?
In other words could an economy started from scratch function with a fully backed reserve system?
For half of those things, yes, the issue is that it would be a dramatic change that leaves a lot of people holding the bag. But, you are correct, it doesn't have to be this way.
> In other words could an economy started from scratch function with a fully backed reserve system?
Unfortunately, you'll still have problems with the other half of those issues.
Low velocity of money depresses the economy. This wasn't a concern back when most people were subsistence peasants, and were just toiling to physically grow and put food on the table. All very inelastic demand sort of stuff.
This is a pretty big concern when the way most people put food on the table is a 'job', most of which are heavily affected by elastic demand for various goods and services. A peasant doesn't care much about the health of the 'economy', a worker does.
For another problem, high cost of borrowing significantly advantages the wealthy, and incumbents. Higher spreads between prime and actual interest rates will siphon more money into the pockets of lenders. This significantly amplifies the rich-get-richer winners-win-more problem.
Like, sure, you could build a society like that. Historically, a lot of societies looked like this. They were not very productive, prosperous, and all of their wealth was consolidated in the hands of a few oligarchs.
not in a world where other economies exist
you'd be out-competed and completely bought up by economies operating under fractional reserve
All growth stops and you get deflation. Which isn't healthy either.
Aren’t most businesses nowadays funded by stock sales and investments instead loans either way?
Must people don't want it can't have their money tied up the full length of the loanWhich then shrinks who actually lends.
This creates wealth inequality by only allowing allowing the biggest guys too lend and access capital.
Small businesses can't get off the ground because they need a loan to buy a machine that helps automation is a classic example.
And what's coming isn't just an indictment of all of that. We're about to find out what happens when you go Full Monty off of commodity-based currency such as the US with the Nixon Shock in 1971. It's a multi-generational event, so most of us alive don't know. But we all will soon.
There's so many problems with this analogy you should just state what you're trying to go for.
the world economy would collapse, along with all supply chains including that for food production
This one is talking about removing lending in general.