What does Silicon Valley Bank’s collapse mean for the financial system?
economist.com
economist.com
Well check out SVBs most recent 10-Q. Everyone knows they had $90B in MBS but most people haven’t commented on the fact that they also had $70B in loans as part of their assets. Normally loans are considered pretty safe assets, but as others have commented a good part of these loans are to the same depositors (startups) that SVB owes money to. Additionally SVB lent money to founders to buy homes, cars, etc. Hopefully you can see where this is going now… The real question is going to be how much if any of those loans SVB can recover to cover their deposits. This could mean calling in all kinds of credit instruments from startups that are ill prepared to suddenly pay them back.
Unless the loans are forgiven, in addition to making the depositors whole, SVB will still take a whole bunch of startups down with it. Those companies vendors will feel the hit too. It may take some time for the full repercussions to be felt but this is going to be a big deal.
Also, for those of you who didn’t live through 2008, there were plenty of people who assured everyone that everything was OK right until the music stopped.
This is fine. Healthy even. There are risks inherent with investing whether that’s a startup or otherwise and so letting them fail leads to better, safer, and more innovative business models that don’t rely on low interest rates and excess cash.
Ultimately SVB isn’t contagion because SVB unlike many other banks was heavily reliant on investments and securities that were highly exposed to interest rate increases. Shit happens. Businesses including banks and startups fail. World keeps spinning. Any argument for bailing out investors here is an equal argument for bailing out homeowners or any other person who was affected by high interest rates for any reason.
In some cases, the issue is literally (using small numbers to make it work for individuals), you have a steady job, $200K in the bank and owe $200K in loans, partially secured by the cash and partially by your income.
Tomorrow, the bank calls, and says “we spent your future paychecks and life savings, so we really need you to continue making payments on that loan”.
Sure but it is a case of buying the wrong product (SVB) and then reaping the repercussions of that bad decision. It doesn’t really work for individuals because it’s a B2B transaction and not B2C.
A bank is just some other business. Mismanaging the risk is the industry’s problem and now they get to eat the lunch they ordered. The world is scary, some things have insurance (FDIC which is not most deposits at SVB), and some things don’t. Is what it is. Doesn’t matter if it’s “right” or wrong - that’s a naive interpretation of business.
That is whole reason for having regulations and goverment audits.
Shareholders can and should be wiped out with very little to show for it. That is the risk they run.
Demand deposit holders getting wiped out is unthinkable. Taking any non-negligible haircut on their demand deposits (yes, even over $250k) will destroy confidence in the banking industry. This is far worse than the moral hazard of a bailout.
What must be done is not a corporate bailout to protect shareholders, yet tons of people think this is "socializing losses and privatizing gains."
Plus it is not just that shareholders took risk, it is also that market incentives push companies into too rules breaking and too much riks. Because it makes shares go up temporarily.
Says who? 2/3 of amercians live paycheck-to-paycheck [1]. The only thing that a banking system has to provide them is day-to-day operations plus a small cushion (much smaller than 250k).
For that people accumulating over 250k is a privilege, one thay may as well come with the risk of getting it wiped out in very rare events such as this one.
[1] https://www.prnewswire.com/news-releases/23-of-the-us-popula...
> yet tons of people think this is "socializing losses and privatizing gains."
Think about the 2/3rds of americans above. Why shouldn't they think that?
Because:
> 2/3 of amercians live paycheck-to-paycheck [1].
Their paychecks are drawn from these demand deposit accounts.
This money above $250k is not being stored in an account like Scrooge McDuck just trying to get the highest score. This money is being held in a transitive fashion to pay employees, vendors, and lines of credit. This is what people are not understanding.
they are already going to guarantee most accounts anyway.
Hmm it definitely wouldn’t have anything to do with SVB executives wooing VCs with lavish perks and favorable terms to increase deposits though right? That’s definitely not how the industry works.
Anywho - they are still victims and they should be made whole with remaining assets after FDIC makes depositors hole (which is a tiny percentage of deposits at SVB) - no doubt about that, but beside that these businesses and VCs are sophisticated and able to take on and assess risk. They were all calling to remove assets and urging portfolio companies to do the same because they understand the game. Not a lot of regular folks at SVB were. There’s a clear difference in sophistication. Next time maybe they’ll bank across a few organizations to reduce risk. Or maybe ask questions even.
If you’re going to use taxpayer dollars to bailout these businesses in excess of remaining assets you may as well pay lifetime salaries for the employees who worked at SVB. Don’t see a big difference there. I wouldn’t support either action.
Society forced SVB to structure it's capital this way - society should be responsible to make the customers of SVB whole (SVB equity holders should be wiped out though - the risks of the business model are clear and arguably they should be aware of them as owners).
Afterwards we as a society should take a long hard thought about the success record of centrally planned economies.
There’s nothing for society to do except for the FDIC to sort it what’s left and make sure the insured get their money and then the remaining assets are split up as fairly as possible.
> Afterwards we as a society should take a long hard thought about the success record of centrally planned economies.
I disagree. Going down the centrally planned economy route would be a huge mistake for the US (it’s a universal mistake for all countries except perhaps in dire circumstances like a global war). We should avoid central planning mistakes like bailing out or subsidizing bad businesses. Etc.
Yes, they reduce risk. They do not eliminate risk. If you're gambling on a "sure thing" or "have a system" it doesn't mean you're always going to beat the house.
The house relies on suckers and rubes misunderstanding risk.
* Inflation is unusually high right now
* The working/middle class is increasingly discontent.
* Rising interest rates are causing major follow on effects.
* Housing prices have been blowing up. Given increasing unemployment and interest rates, it's unclear what's going to happen there.
* The pandemic created insanity. Markets have made little sense over the past 3 years. They're just now returning to normal.
* Many, large companies are doing layoff. The market as a whole is signaling they don't expect profitability through revenue increase - so they're reducing burn.
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I have a hypothesis that markets are becoming increasingly optimize - which results in quicker returns, but also more frequent and harder drops/recessions.
The working class (with housing and all that) are screwed, while the rich get richer. Eventually there's no where left to turn for profitability though - and no more debt Wall Street can issue to keep the spending up. Then what?
Time for a forceful redistribution and system change. Can’t happen soon enough.
Sadly revolutions have a really bad track record for the 99%. It may feel good in the short term but the people who end up assuming power are usually much worse.
OTOH fractional reserve banking and cronyism are really past their expiration dates. It'd be nice to stop kicking the can down the road - we have technological solutions now.
Similarly if you redistribute wealth - what's going to prevent it from becoming unequally distributed again? I'd imagine that a small subset of people would quickly game whatever system is devised and we're back at square one again.
Instead, a random representative sample of 1000 people is chosen from the population, for some congress, for a year. They rule during that time. Some rules cannot be overruled, like the 1 year limit, no way to game that. Additionally, all communication of the chosen ones must be recorded and public, without exceptions.
This basically eliminates corruption or the rise of a „ruling class“, and lobbyism has a much harder task.
I would also argue that this will result in much better overall decisions - they might lack some initial knowledge but that is more than offset by missing corruption and cronyism
A randomly assigned legislature sounds like a recipe to create an unaccountable bureaucracy of staffers and advisors 'guiding' the forced citizen through what must be done / can't be done legislatively. This is where the real power would lie - and frankly we are kind of there today. Most congresscritters spend 45% of their time campaigning, 45% of their time fundraising and 10% of their time looking damn cute. Staffers, lobbyists and think-tanks do most of the legislative work.
Sounds like the UK civil service in Yes, Minister / Yes, Prime Minister.
The people doing the drafting, suggesting, and explaining won't have term limits and will have the real power. They'll also be the ones targeted by lobbyists.
You'll end up with is a floor show with the real decisions being made behind the scenes by people who are mostly not directly accountable.
Not unlike what we have now. Different, possibly better in some ways, and possibly worse in others.
My sample is anecdotal at best, but the single instance in which I ended up in a position to witness a judgement and its rationale, the result was... laughably wrong. It was quickly overruled in appeal by the judges who actually know the law.
So... I'm not optimistic. Perhaps some AI could help, I guess? But that comes with lots of risks, too.
The redistribution shouldn't be a one-time event, but rather a persistently different approach to taxation, labor rights (unions!), welfare, etc.
We can see this working in a number of countries, especially the Nordics.
Of course, there will always be attacks on such a system, but such is life. Some battles need to be refought every two generations or so, that's just how humans work.
Norway doesn’t count because of its sovereign wealth fund.
How is it working in Sweden though? That country still has billionaires (IKEA founder, Minecraft’s notch).
I think it just doesn’t work in general. If you try to set up a new system to redistribute the wealth, the winners will be those in charge of the system.
You need incentives to work hard and it is a good idea to have strong differences in outcome, as long as you have mostly equal opportunity.
Otherwise you end up where all socialist experiments end up: in economical, social and humanitarian hell.
I mean hell, the whole BLM shindig petered out the nanosecond that it looked like the people with BLM signs in their yard might not get tackled by the first cop that see em'.
Now imagine how something with serious dollar signs attached would go(!!).
I mean hell, the whole BLM shindig petered out the nanosecond that it looked like the people with BLM signs in their yard might get to see someone walk down the street with an open container and not get tackled by the first cop that see em'.
Or you can travel with great public transport, for free. It’s not that I want more money, taken away from the rich, but the realization that everyone including me is much better off of everyone around also is taken care of. Strong public services are key.
Ontop of that, even more radical, companies should be run by the people working in it instead of shareholders siphoning out profits. Workers would never fire each other for more profits, or evade taxes that fund their neighborhood, or offshore their own jobs. Currently that might not be legal, that’s why it would need forceful redistribution.
Even on the simplest level: if you have free access to education/healthcare/… imagine how many brilliant people can try to become entrepreneurs or researchers instead of having to suffer two service jobs to provide their family. It’s statistics, that 60%+ of the population might include the next Einsteins, but are unnoticed and their potential wasted.
I am fine with not every useless thing to exist and waste resources on that.
Anecdotally, I live in Europe and know plenty of entrepreneurs, albeit mostly either in the tech space or as incorporated side gigs.
Source: https://www.nationmaster.com/country-info/stats/Economy/Micr...
According to [1] 14.5% of all EU workers are self-employed (i.e.: they have their own business, as small as it may be) whereas only 6.6% are in the USA.
Entrepreneurs start companies that are meant to grow beyond themselves and aren't just a legal framework to provide their work.
Not to disparage anyone who's self-employed. I am too, but I wouldn't consider me an entrepreneur. I might become one, but that would mean changing my work setup.
What the EU lacks is the Ivy->Startup pipeline and insider/investor networks with access to old and old-ish money. And also the relentlessly aggressive branding and self-promotion (and tolerance of scamming and grifting) that defines US hustle culture.
If you're not in or around those networks already your chances of success in the US are pretty slim.
https://www.brookings.edu/wp-content/uploads/2016/07/02_econ...
America is a great place to be rich. In Europe they tax you. But why should a millionaire care about healthcare for the poor or homeless shelters?
I’d like people to not go bankrupt paying for medical bills. I’d like everybody to be confident they can afford their next meal.
The current system was forget in the furncace of extreme bravery and duty . A fledging nation was taking on the superpower of the time (UK). Every single founding father was taking direct personal risk to themselves and their families by declaring indeoendence.
The level of bravery needed for this is astonishing. The people doing this literally had no self-interest in doing so. What leaders can you find today with the same sense of duty that are able to negotiate this country into a better deal?
The answer is there arent any and anything new we put in place today will look like a disaster vs what we have now.
Its insane to discard a 250yr old system that has outlived 2 world wars and most competing systems, because some of its features have been gamed.
Instead, you make mods. (Term limits being one).More government.
Please explain the logic behind this. Surely the solution is smaller government, no lobbying or money in government at all?
That is, even if we could instantly magic into completion, all of the affordable housing to meet all global demand, and give it free to all who require it - as in, "hey! problems solved! enjoy your new homes, everybody!" - then the simple environmental load of doing that would put us quite significantly further on the road to ruin, in and of itself.
Climate change is here and will increase, so any human strategy involving "speed up! do more stuff! build more stuff!" is also inevitably an Own Goal in some respect. Even some things that we consider to be desperately needed for this or that societal reason.
Your point - is basically what most well off (and since you’re on HN I assume you’re better off than 80-90% of the world) are now saying about climate change, screw the poor, they need to have expensive energy, expensive food, and according to you no affordable housing. Why? Because you think the world will be ruined, because that’s what your media is telling you, and you haven’t even looked at the scientific facts on this.
You know, maybe you should give up all your possession and live on rice and beans for the next 10 years, knowing you’ve done your bit for the climate, and then see how you feel.
Edit: removed personal attack at the end. It was unnecessary.
And that's part of the perennial problem with discussion nowadays. It's near impossible to speak without being pigeonholed and caricatured : "omg! you dared to tangentially hint that prioritising building comes with some downsides! one of them! you must, therefore, also hold this, this, this, and this unfavourable worldview! how horrid you are!!".
It's all a bit silly. And ironic, because I'm actually disabled, and on a really tiny income within the scale of my country. I already make my difference by living a low impact life, practicing what I preach. I'm in my 40's and I've never owned a car, and it's not because I can't drive. I consume so much less than my countrypeople, in general in life. While my friend is earning, and consuming, $150K worth of "whatever" per year, goods, consumables, flights here and there for this and that luxury frivolity, raising his kids rich-person style, I'm living a simple life at home making a lot out of a little. There'll be no kids for me.
Screw the poor?? I am one of the poor. Regardless, I still see the basic Occam's reality that our species as it stands (and with massive inertia) is currently saturating this planet's resources in many different ways. And the mindset that we can fix everything by getting busy will always be somewhat paradoxical. Because, as you point out, everything we need is already right there, stockpiled in the hands of a greedy minority.
I can't see this not affecting inflation as cost of goods will increase.
Try one of the many online 'balance the budget" games like https://us.abalancingact.com/2022-federal-budget .
Total federal outlays in 1989 were $1,143,744M in today's dollars. That's less than is currently spent on Medicare and Medicaid, ignoring everything else in the budget.
So you'll have to make some pretty substantial alterations.
if only "essential" stuff like buying a home or a business got a loan, things would be much cheaper because overall there would be less interest to pay.
It’s always productive people that have to pay more to government. For less.
And government has zero accountability. Zero motivation to use our money efficiently. 600+ foreign military bases… $200 hammers…
Justify more government wastefulness… before taking my earned money.
you benefit from having the FBI, FDA, NLRB, FAA and even the EPA while people try to rob you, give you fake drugs, force you into endless debt and low pay, put you on dangerous crowded flights and crash railroad cars around you with cheap stinking chemicals that stay on your lakes and farms for years.
these companies would rather you shuttup and buy from the only two identical stores left who raised their prices.... and shut down the government for your own problems.
not theirs.
- Universal high quality health care - Free education including high quality universities - Cheap or even free quality childcare - A social system that has everyone's back if shit hits the fan
No need to introduce socialism as some here seem to advocate. History has shown that this fails 100 out of 100 times, and it's been tried in every thinkable constellation.
Europe IMO has a better approach vs the US - still enough incentives to work hard, but aiming to afford everyone a humane existence. The main threat I see is that the balance is shifted too much to socialism over here, stifling innovation and ultimately destroying the wealth that funds all these goodies.
Eastern Germany started this way - "no one is intending to build a wall" they said, until one day, it was there.
So stop immigration, let the population contract, and the housing problem takes care of itself.
We need more workers (record low unemployment in 2023), and more consumers (to generate more profits without more profit margins), and more tax payers (to cover fixed government costs).
We should basically open the borders, and enforce that those entering work fairly against Americans to keep them from driving down wages. This wouldn't be an issue if the business acted respectably.
Here is a source that confirms my understanding : https://homework.study.com/explanation/what-is-the-relations...
Can you explain the reasoning behind your understanding or provide some source to back it up?
(Unless the parent edited their comment)
Hasn't the latest jobs reports shown that unemployment is decreasing?
https://www.cnn.com/2023/03/10/economy/february-jobs-report-...
You're right that numbers as a whole are going up.
Regulations have controlled a lot of the serious problems back then, but there is no getting away from the fundamentals. Also, during QE, the Fed bought tons of overpriced MBS assets, and they're losing money right now for the first time in a long time. This doesn't really matter since they can't become insolvent; they just print money. But that has inflationary effects itself.
This is a much more complicated (probably worse) situation than most want to admit.
In the 2nd or 3rd week of the 2008 crash starting, they put on CNN this guy who predicted the entire crash years ago and wrote a book about it. And also 3-5 finance experts. All of them were laughing in the guy's face as the guy explained what was happening, why it was happening and what exactly was going to happen very soon. They were discrediting, belittling him and assuring the public how everything was totally okay. All of them were actual prominent personas in finance, with education, experience, credentials and whatnot.
Things happened exactly as the guy wrote in his book and explained on CNN. Everything came crashing down.
What's unforgettable is how all the actual experts with credentials were reassuring the public that everthing was ok SO hard to the point of laughing in the guy's face...
FDIC will create a bank then. Just like it did for the (now) 3rd largest bank failure in history, IndyMac:
The previous CRO resigned in April 2022.
I only took exception to the idea that they “tried to unwind the position,” which is clearly untrue. There would be willing buyers at the right price.
As chief risk officer, going into a public company that goes bad not even 2 months after being hired -for strictly risk mismanagement, not fraud- tells you all you need to know about the competency of the person being hired.
EDIT: Sincerely curious about downvotes:
You are interviewing for a CTO job. As part of the process, you get unrestricted access to prod codebase. The stack/ libraries are something you are very familiar. You find out the software will be a critical component to make payments to people worldwide. Its a high profile project. You are the public face of the software that must go live very soon, no one can tell for sure, but its imminent.
Your (interview) prep finds a dumpster fire. There's no way this thing will even run. The entire thing is not salvageable.
Do you take the job ?
As for future employment. At least the current one tried to right the boat instead of jumping ship.
My point is that anyone competent would refuse to take the job. BY doing the opposite (taking the job) , the prospect hire is demonstrating that he/she (a) lacked the expertise to detect the dumpster fire, or (b) lacked the expertise to understand it was not salvageable (c) lacked the work-rate to do their due diligence (particularly for RISK management).
That doesn’t mean I’m incompetent; just that people you should hire on those terms are hard to find.
Anyway, I don’t have idea what happened here. The long time to fill the position also could have been because they were looking for a CRO that was better suited for a mushroom farm (kept in the dark + fed bullshit).
The resume of the new CRO suggests it was the former, not the latter.
If that's not correct, I'd love to be enlightened.
Not a lawyer, but various CxO’s specialize in jumping in and trying to repair failing companies. I’m sure they’ve figured out how to shield themselves from personal liability if their new employer ends up laying of 100,000 people and crashing the global economy.
I’ll probably fail spectacularly. But I will still have money in the bank.
Just not that bank.
Evaluating a balance sheet and identifying risks is one of the primary qualifications of a CRO job, no?
But seriously, I'm amused by this thread. We always belittle or downplay the complexity of systems we barely understand. Every software engineer ever exposed to any non technical management, product managers, or sales people has experienced this in spades. You go blue in the face with frustration trying to explain why "seemingly simple things" just are not as simple as people want to believe they are.
I've coded in mixed system designs for 30 years now. Experience has enabled me to see patterns I wasn't even aware to look for as a younger me. I see so much more and am available to evaluate so much more than ever before. But the most important thing that that "experience" has taught me is that this accrual of "experience" is not a convergent knowledge position. Sure, I see more than younger me's do, but I've also come to accutely embrace the notion that "the greater my sphere of knowledge, the greater my contact with the unknown." Complex systems like massive sprawling code bases are HARD. And so are highly intertwined economies.
Routine just becomes boring at some point. Once you have an established track record, it's far easier to justify (with creditability) that you decided to take on a ridiculous situation.
> Prior to SMBC, Olson held senior risk management roles at other leading global financial institutions. She also has rating agency experience, as well as experience in professional services advising large- and medium-sized financial institutions on evolving regulations, risk management and stress testing following the 2008 financial crisis. Olson began her career at the Federal Reserve Bank of New York, where over a period of 10 years she held a variety of senior policy, regulatory and examination roles in banking supervision.
I think it's much more likely she did and decided to take on the challenge to turn it around.
People in the industry knew they were in trouble. (I remember some of my banking colleagues talking about it last year). That's probably why it was so hard for them to fill the CRO job.
SVB had declined almost 66% in 2022. They were the 4th worst performer in the S&P 500. Their balance sheet concentration and mix made them an outlier in the industry and unusually exposed to rising interest rates. Its failure wasn't inevitable though. It had a strong brand and deep customer relationships with one of the primary engines of the US economy. If they could raise enough capital to fix their balance sheet, they could weather the storm.
She was a regulator that worked on stress testing banks after 2008 and could help them decide on how much capital they truly needed. It turns out it was a lot, and when they finally did announce details of the capital raise, investors got spooked and it triggered a bank run.
Your original comment makes it seem like the newly hired CRO was so incompetent that they caused the company to go bust in 2 months... (where obviously the risks were already in place and there might not be any way to advert it by the time)
> Do you take the job ?
Depends on how much they're paying me and how badly I need the money. If I expect the company to fail shortly after I joined due to the existing dumpster fire, I'd be interested in the size of the sign on bonus. And of course whether I'd have legal liabilities by association with the company. I don't think my competence matters much in this situation.
https://twitter.com/jimcramer/status/1634222320398086145?s=2...
But I've got no proof for either theory and your's is definitely the more entertaining one :D
Also I guess you have to give some kind of credit to a guy who not just spouts bullshit but invents entire bullshit concepts such as "room to grow"...
There was a moment where they could have mustered up a bridge loan to SVB, probably at very favorable terms, saved their companies and acquired some decent assets while they're at it.
Instead they DDOSed their own bank, tanked a large portion of their portfolio, and now are asking for a bailout.
It seems like the VCs should shore up their companies until SVB is wound down or take the losses. It's not like they don't have the capital.
One, they couldn’t. It’soutside their mandates; they’d have to raise new funds from LPs. Two, why? Just have your start-ups pull their capital and bank with the countless other banks providing the same services as SVB.
> SVB “didn’t have nearly as much capital as an institution that risky should have had”
https://www.bloomberg.com/news/articles/2023-03-10/svb-spect...
blaming the customers for wanting to save their money and claiming as if they were the cause of the bank's recklessness seems really strange.
Are you saying every bank in the world has assets significantly less than liabilities due to over exposure on long term low interest rate bonds?
Imagine using this excuse in any other situation: "It's not the food poisoning at my restaurant that's causing me to go out of business it's those darned customers who stopped eating here!"
I wonder if any US bank could muster up $100b in 24 hours.
(On most days with lots of withdrawals, like on common pay days, banks will see lots deposits too. They aren't one-directional and out of the blue.)
I'm not sure you have the right scale in mind. The shortfall associated with this bank may be into the tens of billions. That's a monstrous sum even for SoftBank.
I can imagine how that conversation would pan out:
"Hello, Mr PIMCO Manager. Hi, we need 80% of your committed capital in less than 2 hours in order to bail out a failing bank in which we are not a shareholder or board member. Oh yes, I don't know how much we need, but its, like, a lot. Unfortunately, we don't have any collateral on this if FDIC takes over, but I'm working on it!
Oh yea, about those mark-to-market positions, can we talk about that later please? Can we count on your capital? "
bridge loan or bailout?
Will it get liquidated and you will then eventually be paid some cents on a dollar of your brokerage accounts value?
https://www.ft.com/content/c95e7708-b903-405d-a017-963844eb3...
Not letting the bank fail is a form of bankruptcy in a way. The owners lose most or all of the value of their ownership, but the bank is sold to new owners so it can continue to run.
management needs to go. Many, many employees need to go. I'm not sure what % that is, but that's for new ownership to determine
Worth noting though that based on what I’ve read, the bank has plenty of assets to repay depositors… the issue is just that these assets aren’t super liquid. So if there was some form of bailout, it would be more of a bridge loan type deal than a true bailout assuming I understand the situation.
Few of the explainers are covering both parts of this.
This was a liquidity crisis (bank run) which sparked a solvency issue, not a solvency issue.
Imagine if they put 100% of their deposits in these bonds, they would not be able to raise the interest rates they pay out above like 1.5% for the next 10 years, because they're stuck with their own long term investment. When other banks start offering a better interest rate on savings, of course people will want to withdraw.
So even if they are solvent by definition this is not the same thing as a liquidity crisis that results from an inability to sell a large amount of something in a short time, potentially something that is difficult to sell. It's not the amount or the weirdness of the asset here, it's the price they are locked into, the same way that anyone trying to sell any amount of this right now would be taking a loss if they bought in 2021. And it's not like the price is some irrational situation like GameStop, it's a natural consequence of the interest rates.
I don't see how this wasn't a predictably risky trade regardless of the VC panic factor. They put 40% of their deposits into a long term bet that interest rates wouldn't go up.
This was a liquidity crisis (bank run) which sparked a solvency issue, not a solvency issue.
No. SVB had liabilities significantly in excess of the value of their assets. They were, by definition, balance sheet insolvent.
The "hold to maturity" accounting practice made it legal for them to pretend that the value of their long term bonds hadn't changed, but that's just an accounting figleaf; the actual value of those bonds had factually dropped.
At the same time the flip side of this is that many of those startups aren't profitable and in the absence of a FDIC bailout, those startups' employees (who are typically not paid that well to begin with) may not get their next paycheck and thus it still is directly impacting individuals and families.
Yep. To me it seems like one of the monster banks will gladly pick this up. They can handle the short term liquidity then cash out massively on the long term investments.
Providing short-term liquidity will be profitable for the taxpayer.
It’s a bit unclear because some of those loans were paid back years ago, but even if it works out to be over 6 or 7 years, it’s still pretty bad.
Gov should have juiced its returns by requiring 100% equity wipeouts in exchange for gov’s ultra-high-risk loans/investments.
SVB the company is basically killed. It's true, if you're an investor/owner in the bank, your equity is probably worth ~$0. The bank is owned by the FDIC and is being managed as a new bank.
Even if company SVB is worth ~$0 in equity if the parts are sold on the market, they're still a business... so they have some intrinsic value to the future income. That means there is value in buying the company, at the right price. The hole in there books would have to be bigger than the value of their future cash flow for there to be no reason to buy it. Beyond that, there's some value for a bank to buy it because the FDIC approached them. Because there is tremendous value for everyone in the stability of the system.
2. Depositors have no other option in general. https://www.bloomberg.com/opinion/articles/2019-03-08/the-fe...
This is like arguing that if I screw up my investments and put myself in a bad position that the government should bail me out for the sake of everyone I owe money to.
Nope. Not even close.
> The FDIC receives no Congressional appropriations - it is funded by premiums that banks and savings associations pay for deposit insurance coverage. https://www.fdic.gov/about/what-we-do/index.html
If helping depositors also ends up helping the bankers, we still have to do it.
In cases like this, people need to set aside moral outrage and look at what will actually happen.
Banks pay insurance premiums to the FDIC. These premiums create the reserve the FDIC uses to pay for these exact situations.
Bail out is bad. Takeover is good.
Failure of entity is bad. Failure of equityholders is good.
All we need here is a change in management and owners. The bank should live but without any assistance (bailout) from taxpayers beyond FDIC limits
They are strangely quiet today.
Hello,
Silicon Valley Bank was taken over by the FDIC [0] today, Friday March 10th. We’re monitoring the situation closely and it saddens us to see the closure of a bank that partnered with many of you.
If you’re impacted by the SVB closure and need to open a new bank account, we are here to guide you through it.
Choosing a banking partner
- We’ve worked with startup-friendly banking partners like Mercury (mercury.com/partner/atlas) and Novo (novo.co/a/stripe-atlas) to get Stripe Atlas companies priority access to signing up.
- You can also choose to use any bank such as JP Morgan Chase, Bank of America, Wells Fargo, or PNC, and often your personal bank offers business services.
*Mercury is a financial technology company, not a bank
Of course, this doesn’t actually lower our grocery bill vs. 2020, but we’re also not paying 70% more.
I got a laugh on this one. Sure... other banks are safe from loss of client deposits and a bad bet that interest rates won't rise. I'm not so sure that with rising interest rates and a shaky economy these institutions with large loan books won't see too many loan defaults. We are seeing a lot of commercial property defaults already in the big markets. Can't pay your mortgage if you can rent out your skyscapper.
It’s almost as good as buying bonds! No one’s gone broke doing that, right?
And what if SVB is just the tip of the iceberg?
Maybe the governments should start better regulating and supervising the banksters and offer no bailouts using public money. Let the wrong doers be the only ones suffering from their mistakes.
> Who cares about the financial system?
Genuinely confused. We care about the financial system because “what if svb is just the tip of the iceberg”
"Larry Summers, a former treasury secretary, has said that so long as the state steps in, there is no reason to worry that svb will harm other parts of the financial system. Lots of people will be hoping that it does, and that he is right. fS"
Nevermind that no one outside of the "tech" company crowd cares what Larry Summers thinks, the sentence is cringingly ambiguous. What does "it" refer to: (a) the state stepping in or (b) SVB harming other parts of the financial system. Did ChatGPT produce this article.
Not only is there no need to worry about SVB harming other parts of the financial system, there is no need to read "articles" like this one. The amount of useful information is negligible.
More money will be created to bail out the banks which will cause more inflation and more inflation will mean higher rates to fight it, which could freeze credit more and draw down savings and so on, all of which leads to more job losses and liquidity problems. It's numerous things in a feedback loop and if the bank runs and failures continue to spread then it's going to put serious strain on a system that never fully recovered from 2008.
The reverse repo rates are kind of fascinating when you look at what happened around 2007 and where it is today.
Maybe SVB is an outlier and can be contained but another hidden issue is how much Fintech has worked its way into normal finance. There are many online only banks and companies like Chime and Cash app which could broaden a crash.
I really believe we are about to experience a financial crisis worse than anyone alive has experienced. It will be unique as well in that so many of these factors have never happened before or all simultaneously.
This also doesn't consider global reserve currency changes and ways for the world to conduct trade without the U.S. financial system being involved. All of this provided liquidity in the past, the safe haven effect and so on.
Or maybe a few banks will get bailed out and it will be no worse than the savings and loan crisis. The next few months should get interesting.
Oh and if that's not enough, there is the potential for Ukraine to do poorly in the summer and a potential conflict with China on the horizon. The U.S. could be in a two front war with near peer competitors at a debt to GDP ratio higher than at its highest point during WW2.
Quantitative easing kicked the bucket down the road but it seems to have been a band aid only making the disease worse in the long run.
Lessons were learned following the 2008 financial crisis to sure up major banking risk exposure. Dodd Frank act was reversed a little but there are regulations and stress test simulations to improve banking system resilience if there is a cash or credit shortage. Who knows how valid some of the assumptions changes in these marginally higher interest rate times but we cannot be in pre-2008 credit swap nonsense.
SVB represents $200B assets and the customers are in large part revenue negative or growing startups. That doesn’t make it Ok but it cannot be representative of the greater economy. I’m sure fintech in personal banking, credit, and mortgages is far more popular than it was in the 2000’s but it by and large does not represent a majority or even large minority of retail banking.
My hope is there isn’t some sneaky financial engineering marvel in large corporate debt that this fringe instability snowballs and we find out we’re back in a state where the market is propped up by sketchy extrapolations of value estimates.
But I don’t think a bank run by a bunch of VCs or startups is a picture of the greater economic engine.
I suspect your comment will age poorly. The solution to 2008 was to bail out failing institutions instead of letting them fail and be replaced with competent ones. If anything, since then, the institutions that created the 2008 crisis have consolidated market share, and gotten more and more regulations rolled back.
True, BOC, JPM, Wells Fargo etc.
> and gotten more and more regulations rolled back
False, besides scaling back Dodd Frank please name 2 regulations removed from consumer investment banking or credit or mortgages.
Investment banking isn't what it was in the recent wild west days. Goldman Sachs fell from grace and stuff isn't fast and loose. Its not even cool anymore, investments are risk profile managed algorithmic ETFs. Its a well regulated industry, albeit better regulated in 2010 than now, but better than 2005. I'm sure there all kinds of shady things in IPOs and SPACs and private equity debt but that does not represent the greater consumer exposure public market.
Also, letting all large banks fold in 2008 would have been bonkers. There would not be a viable replacement in time to stop an all out dark ages. Those banks paid back loans plus interest in full. It was a systemic failure and Ben Bernanke stopped a depression and the system was improved instead of failing. Was is fair that wallstreet gets money from the Fed to stay afloat while people lost their homes? Not whatsoever, completely unfair. More could have been done to help out common people like we had in covid relief. But it was still the correct thing to do to keep the lights on. And the recovery period with QE was the longest stretch of growth thanks to the sugar rush of 0-interest debt that will play out to not be the best idea.
Anyway, I wasn't taking a shot at SVB leadership inferring they are naive startups. I'm saying that much of the SP500 are revenue generating profitable companies that do use debt but don't need recurring 20M funding rounds to make payroll. Startups are by and large not a good representation of the greater economy because they are supposed to represent new ideas. The banks customers are totally a risk and cash intensive with no physical capital. That is not representative of the economy.
That's all I'm trying to get at. The parent comment to mine is pretty doom & gloom and making ill founded parallels to 2008 and saying this will be even worse. I don't see how that follows. It does not make sense. We're entering a recession but that doesn't mean complete implosion.
There are a billion things I don't understand about the greater economy and globalization but I want to call out poorly formulated assertions because the narrative above is based in facts. Especially on this site where people give credence to web3 nonsense and trying to pose solutions financial problems that don't exist.
Its a not good situation and concerning. But I think there needs to be compartmentalization to understand what else is at stake.
There are ~1900 publicly traded companies with a market cap over $1B. (NAMER) There are over 1000 privately owned companies with valuations over $1B. (NAMER?)
Writing off startups as not contributing to the economy (jobs, spending with vendors, etc.) is a harder to argue in 2023 than it would have been in the past.
This very well could be the beginning of a stall in the greater economic engine. Except this time it isn't necessarily fueled by failure of the underlying assets. Instead the underlying assets may fail because of the banks. Which could cascade into additional failures across the system.
Also, 1B valuation in an asset bubble doesn’t really mean much with rosy assumptions on price to earnings ratios that is unproven. Unless that 1B company translates to public through an IPO that 1B valuation can be 10000B it really doesn’t yield any concrete value. Pre-market due diligence is a dark art and venture capital is operating on perverse incentives to value things. If you take out a large loan on your holdings in a 1B private asset light intellectual property light cash burning business then that person issuing the loan is irresponsible. Same thing with housing inflation, pointing to comps and estimated growth since that sale leads to inflated valuations. Except there aren’t many comps in a startup space and banks and credit unions are smarter at not giving out more money than they can collect back through a sale in the range of 300k-1M.
Sounds like there was too much deposits and the demand for returns made the bank choose a time risky purchase if interest rates rise. Then they did over a year. Then cash hungry customers made a run after rumors.
What does that mean for JPM and Wells Fargo and Blue Cross and Humana and GMC and Maersk? Not much because (I really hope) they’re not hedging their accounting in shares of a high risk VC regional bank.
Businesses need to adapt to higher interest rates and that alone is going to take the wind out of the sales of some speculative business models. The bank was underperforming on returns from their accounts so they chose an irresponsible bet.
In the US we need to collectively get of the cheap debt sugar rush and check the assumptions in what is viable growth and valuation. But that doesn’t mean the sky is falling because an AI healthcare startup cannot raise their next funding round.
The major banks should be good because they’re stress testing. The cheap money and every new company getting the cash to scale as has been the case for 10-15 years is likely behind us.
Valuation is not remotely related to GDP until there is an IPO.
Startup valuation on pre-profit businesses is dominated by the greater credit and bonds performance. Hopefully the impact radius of the inflated valuation coming back down to realistic levels is contained to private capital and not the whole country’s 401Ks.
It's like talking to someone as a person with a gambling problem and dismissing them telling you the roulette ain't gonna help, and you replying Well, then bet on the roulette and make money.
I.e. you totally miss the God blessed point.
I think right now it looks more like the latter (S&L crisis of the late 80s/ early 90s) than it does the Great Recession '08. Wasn't a huge impact in the economy at large from the S&L debacle. It will have an impact on tech so that this might look kind of like the tech wreck of the early aughts - again, while that impacted those of us who were in tech at the time it had little effect outside of tech. If it were to start spreading outside of tech to other sectors then I'll reconsider.
Ugh, this is like evangelicals constantly predicting the return of Jesus.
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"Christopher Whaler, Chairman of Whalen Global Advisors in New York, said: ‘I think the Fed badly miscalculated the impact of rising interest rates and so these are self-inflicted wounds and if we see more banks fail then the Fed is faced with a very tough situation which may force them to drop interest rates.’"
https://en.wikipedia.org/wiki/Collateralized_debt_obligation
The standardized, so-called "agency" MBS on the SVB books really isn't anything like that CDO plague. In 2008, people were losing faith in the ability to even assign valuations to CDOs; SVB's problem with their MBS portfolio is that the current market valuation is obviously not what they needed it to be just now.
The issue in 2008 was that the banks were doing a domino effect on each other. We don't see any such signs of that with Silicon Valley bank, and SIVB is smaller than Bear Sterns (and other banks) from 2007 crisis.
The issue in 2008 is rather that institutional investors (mostly money market funds) ceased to lend to banks, or only overnight. I am not saying that the banking system is as fragile as in 2008, it is clearly not. But it only takes a panic to cause another post-Lehman contagion across the financial system.
In this case, a number of banks are holding a lot of long-term debt as "hold til maturity", so they're not recognizing on their books that it has lost value due to rising interest rates.
Yet. They were pretty important to the startup ecosystem, and the rise in fear could imperil some of the banks that were sick already
SVB is a relatively meaningless bank that can go under with very few knock on effects to the banking system.
Lehman was atop 4 or 5 player in the financial space when it went under and. A major pillar that propped up the system.
The two are so completely different in their importance.
Asset size does very little to show this though so I understand why at a first order look one might get the idea that they are comparable.
SVB’s debts is likely to be impaired. That isn’t enough, however.