97% of deposits in SVB exceeded the FDIC threshold. The question is, by how much on average?
The amount of risk here is significant. I think this is a desperate play by a company in a struggling industry.
The amount of risk here is significant. I think this is a desperate play by a company in a struggling industry.
SVB's carcass still has significant assets, so Brex can set that % number based on what they know about SVB's state, to make the loans almost risk-free.
I'm not a banker and have no idea if this is actually what Brex is offering. That public page doesn't discuss terms at all, which makes sense given the chaos. But there's certainly ways to structure these loans without much risk.
Those deposits are backed by the assets on the balance sheet at SVB. They went under because they ran out of liquidity, not because they're massively upside down or their assets are crap. Those assets are largely medium-duration treasuries (10Y IIRC). They will pay out face value as they mature (they are the definition of risk free), and the losses on their balance sheet being reported are marked to market. Assuming they have to sell them immediately - which they did have to in order to meet withdrawals.
Now that the bank is in the FDICs hands, those medium-term treasuries need not be sold, and other liquidity options exist to make un-insured depositors mostly or entirely whole. One such option is just selling all accounts to a big guy like JPM, the way WaMu was handled in 2008. Or the FDIC can swap the treasuries for cash and since they have no time pressure, just wait until they mature.
If they bought them near the peak value what they can actually sell the income streams for is going to be a lot less than what they paid.
In the meantime, impacted account holders can get their IOUs and borrow money to make payroll.
1) When yields go up, treasury prices fall. 2) When yields go down, treasury prices rise. 3) The only way you get the basis cost for a treasury back is if you hold to maturity.
When a bank run happens, you (if you are bank) need cash. Lots of it. If you own assets, you have to sell those assets to come up with that cash. SVB had to sell ALL of their notes for less than they bought them for. See #3.
The losses by SVB were realized well before today. This has been going on for a while now. Outside of $250,000 per account type per person, the only additional money folks will get back is whatever a bank sale comes up with, which won't be as much as most folks think, since the core assets were already sold off. If I had to make an educated guess, most startups/investors will lose more than 50% of what they started with. Remember, high interest rates. SVB will NOT be sold at a good price. This is not a market for sellers, it is a market for buyers. Again, sky high interest rates and many of the very investors that could make that sale possible had money at this bank. That means a lower sale price.
If I lend you 25% of your SVB deposit secured against your SVB deposit, I should still be fine (as long as my claim comes early enough in any ensuing bankruptcy).
Long term treasuries have declined 40% in value since they peaked in 2020.
https://www.google.com/finance/quote/TLT:NASDAQ
Banks hold a lot of treasuries as part of their capital requirements. So long as they intend to hold them to maturity, they don't have to mark them to market.
Banks collectively hold about $620 billion in loses in held-to-maturity securities right now since they have declined rapidly in value during the Fed's interest rate hikes.
https://www.aol.com/finance/why-silicon-valley-banks-crisis-...
If you can hold them to maturity, you're fine. If you need to sell them to raise cash (to cover other losses or during a bank run) those losses become real.
And if your startup had $10m in cash in SVB, but now you find out you're only getting back, say, $7m, that's very bad news for your business.
> Long term treasuries have declined 40% in value since they peaked in 2020.
This is inaccurate. What you linked to (TLT) aren't bonds, these are bond funds. The way a bond ETF works is that they have a stack of bonds that track the benchmark interest rate. They periodically sell off their old bonds and buy new ones, they don't just sit on them and wait for them to mature. That means TLT's NAV goes down when interest rates go up because they're selling lower interest rate bonds, and buying higher interest rate bonds.
Treasuries cannot lose value just like cash. They are as good as cash in almost every context. You can always sit on them until they mature and you'll get the full amount plus interest. You cannot lose money this way.
Where you can lose money though is if you have to liquidate them sooner. Why would someone buy a 3% 30y treasury for $X from you when they can get a 4% 30y treasury from the source for the same price? You have to sweeten the deal by paying out the difference in rates. This is where you can lose money.
SVBs issue was a mismatch in durations. They had too many demands for money out now, and too little available now. They have plenty of money coming in the future, but that's too late.
Reply to two basically correct statements, make a claim that's completely false, and then — and here's the genius — say a bunch of true statements that come around to support the view you're disagreeing with!
Be careful with absolute statements like that. While it hasn't happened so far with USA treasuries, its equivalents in many countries have lost value in the past.
No free lunch. Treasuries yield more than bills because they’re less liquid.
T-Notes - 2y-10y
T-Bonds - 20y-30y
Only if your definition of risk is limited to default risk.
It looks like a lot of their holdings were in MBS and a lot of the treasuries were recently sold at losses (which necessitated raising capital, which appears to have set this whole thing off), but there is no reason this couldn't have happened if they only held treasuries anyway.
Then the government starts selling those bonds a lot cheaper. To buy the same bonds you have today would only cost $900k.
Even though the 2030 value of those bonds is the same, the 2023 value just plummeted. (And they will gain more per day to eventually make up the difference.)
When your customers demand their money, you have to give them 2023 dollars.
A bond that you can redeem early has the safety of cash here. A bond that you can't redeem early does not.
Back of the napkin, take the 10yr and 30 yr spot prices today for issues from 1-2 years ago, and that's your max haircut. I believe some are trading at 70 cents , so we are talking about 30%. And that's worst case (not all assets would have sold at that price, but better).
Remember this is highly liquid assets. Not some exotic stuff. Its a big loss, but not 50%
Brex's offer is collaterized up to 25 cents per dollar. SO, unless SVB lost huge money elsewhere, there's no way SVB lost > 75% mostly off their MBS portfolio (or other assets, for that matter).
Do you know this? That's a number I (and some other posters) pulled out of a hat as a reasonable thing to do, but I don't think any of us had any sources for it?
Depends upon how much was liquidated and already went to paying out fleeing customers at 100% of deposits. The average haircut could be 30%, but late to move depositors could have it worse (this is why you participate in a run on the bank).
Until the FDIC pores over their books, nobody can say anything sensible about what they own, what they sold, what they sent out and what is secured as collateral.
> As of December 31, 2022, Silicon Valley Bank had approximately $209.0 billion in total assets and about $175.4 billion in total deposits.
And I'm not trying to claim that the balance sheet necessarily entirely reflects reality
December 31st, or even March 1st, are virtually irrelevant to a bank collapse today. Assets were sold at a deep discount, presumably some were pledged, and deposits fled.
Balance to take 2-3 months. Will require an actual application and paperwork.
Depends on the price they got for those assets.
Not actually clear who is taking the downside
> This credit line is funded by 3rd-party capital (and not Brex directly)
> This credit line is funded by 3rd-party capital (and not Brex directly), who are working with Brex to minimize the impact of this event to the startup ecosystem.
It sounds like a bunch of VCs are gambling on the return, while also knowing it helps stabilize the system that built (and likely holds, in some way or another) their wealth.
In a regime of rising interest rates this gives them pricing power on the loans where they were just passive depositors previously. Since SVB loans were essentially only to companies who were already customers of these VCs, you could view this move fairly cynically.
losing 20% of your cash-on-hand, where that's above $250k. For most startups, that's going to be a haircut their investors take, where the founders can say "yeah, literally none of this was our fault".
For mature, profitable businesses with recurring income, this is going to bite, but they haven't lost 20% of their customers or 20% of the amount of money they expect to get paid next month.
For startups, where the money was investment, unlikely their investors are going to blame them for this loss. It might shorten runway by up to 20% for some pre-revenue startups, by less for startups with actual revenue.
That's just a math problem. If you assume all deposits are at least 250K, you can get a floor for that number. If 97% of deposits exceeded threshold, then the average deposit is at least $8.3 million.
> This credit line is funded by 3rd-party capital (and not Brex directly), who are working with Brex to minimize the impact of this event to the startup ecosystem.
California has declared it insolvent. It literally by definition is now.
from the article op linked, in "Findings of Fact", by the Commissioner of Financial Protection and Innovation:
> the bank is now insolvent
This is nonsense and contradictory
The bank was insolvent. FDIC took over (due to insolvency) and has no obligation to make the bank solvent again (other than the 250k insurance limit)
If SVB literally had a way to hack the time-space continuum and wait out for asset prices they own , to stabilize ("maturity") , or to pay them back in full ( a loan)...SVB would STILL likely lack enough funds to pay back their deposits.
The issue wasn’t the selling of assets, it was the panic that their actions took to prop up a balance sheet hole. It’s not like Enron or Lehman.
I contend there is no private entity credit that would go near SVB because precisely they realized more losses than they had more depositors, and such credit would have never been secured at the top of the pile with the FDIC lurking nearby.
No credit facility would save a doomed bank after the realized losses. It was a matter of time.
The panic was not the cause. The panic was always going to happen. A public company would have never been able to do a firesale/equity raise without inducing a panic in the first place.
At market price, not face value.
If you need $80B before your 10Y bonds mature and borrow it today, you're paying minimum 4% interest. By the time your $80B in bonds mature you owe $118B
If you're saying it doesn't matter to FDIC because they can get "free" credit, that's equivalent to a bail out