SVB depositors, investors tried to pull $42B Thursday
bloomberg.com
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Out of 563 previous bank failures going back to October 2000, only 31 did not have an acquiring institution lined up (https://www.fdic.gov/resources/resolutions/bank-failures/fai...)
Usually the FDIC will sell the assets and liabilities of the failed bank to a healthy bank, sometimes at a negative value (paying the acquiring bank to receive the assets) and then also making the acquiring bank whole on losses of the assets
SIVB is upside down on various interest bearing assets like MBS and US Treasuries. In a normal case, it'd be cheaper for the FDIC to just make up those losses than directly make depositors whole, so they do that
In this case, given how little of SIVB's deposits are actually insured, the scale of the run before they got the doors closed, and the amount of losses they are going to take in the assets, the FDIC obviously wasn't willing to backstop the losses and no one was willing to take the risk
Depositors are definitely taking a haircut on this one
That's not clear at all and many people disagree with you.
But, if they were going to find a buyer they probably would've found one already. They certainly will either have to have one before the open on Monday or it's not happening. The assets of the bank become more and more toxic as time goes on (this happened with Lehman Brothers) and if someone swoops in today, on Saturday, then it's not too bad. But if it sits a week and no one wants to buy it, if someone buys it next Saturday now that bank looks like a fool and people are going to question the deal
If they don't have a buyer, depositors are taking a haircut. Maybe they will get 100% of their money back in actual dollars, but they will lose via time--the FDIC will either liquidate the assets or let them mature. If they liquidate, they will take an immediate loss. If they wait for them to mature, then sure in 10 years everyone gets their money but Time value of Money is a thing and being made whole 10 years from now is not being made whole
Either you sell everything now at the discounted value, leading to loss in deposits. Or you wait 10 years and pay everyone back their deposit then. Given current inflation a dollar now is only worth 50 cent in 10 years.
It's because there's a lot more bad assets there than people know or acknowledge, and most of the deposits (and therefore customers) are gone. And as time ticks on, that continues to get worse, even if it's just a perception of it getting worse that perception becomes reality
And I sincerely doubt there is appetite in Congress for a bank bailout for Big Tech.
The people being "bailed out" are the owners and employees of small businesses and startups that, just by nature of having a deposit as SVB, unconsciously acted as a creditor to an institution that had an 'A' credit rating by Moody's, a 'Buy' rating by JPM, and had passed whatever monitoring and risk tolerance requirements put in place by the Fed.
Unless a government agency swoops in to bail out the difference between their short term liabilities and the net present value of their long term assets, somebody is going to be taking a haircut.
The equity of the bank itself isn’t enough to cover the losses so it’s going to be depositors.
If there was a way out of this without a loss the bank wouldn’t be insolvent (bankrupt).
"As announced on March 15, 2020, the Board reduced reserve requirement ratios to zero percent effective March 26, 2020. This action eliminated reserve requirements for all depository institutions."
Wat?
What you want to keep banks afloat are capital buffers, not reserves.
Expressed differently: reserves are like cash in a vault (or electronic equivalents). What you want instead is a big buffer of equity in the capital structure, so that shareholders can absorb huge losses long before creditors do.
In regulatory terms something like this is called 'minimum capital adequacy ratio'. But it's generally better to set up the rules of the game so that banks naturally want to have more of an equity cushion, instead of giving them strict rules on capital buffers but leave lots of incentives to work around those rules.
As an example of incentives: many tax codes around the world let you pay interest with pre-tax money but dividends have to be paid with post-tax money. (That's simplified, since there's lots of different taxes.)
Suppose your assets are 50 dollar reserves and 50 dollar investments.
The liability side of your balance sheet is 20 dollars of equity and 80 dollars deposits. For a leverage ratio of 1:4.
If the investments drop 10 dollars in value (to 40 dollars), your leverage ratio goes to 1:8.
If the investments drop 20 dollars in value (to 30 dollars) your leverage ratio goes 1:infinity.
If your investments drop below 30 dollars (say to zero), you are insolvent.
Yes, reserves are a tool that banks can use. But that doesn't mean that legal minimum reserve requirements are a good idea.
Just to be clear: the problem is that SVB didn't have enough loss absorbing equity. If they had more, they wouldn't be insolvent.
The bank also had very few chocolate coins (probably none), but that doesn't mean requiring them to hold more of those in their vault would have improved matters.
The problem is that the bank is insolvent; not so much that the bank is out of liquidity.
If they were solvent, someone would lend them the liquidity they need.
Granted if SVB had all these bonds that would pay out “guaranteed” that feels pretty strong
And, absence a run, they were somewhat safe. They effectively concentrated all of their risk in this category. And then got hit there
I am being glib, though I am very wary of the safety of things that aren’t just like… cash. “We haven’t had to take over a bank for 2 years!” Isn’t as much of a vote of confidence in a system as I’d like.
They had assets on their balance sheet that lost in value. They lost enough value to wipe out all the equity, and become insolvent.
Very similar to how your brokerage account can go to zero, if you trade on margin.
The brokerage liquidating your account is pretty similar to the FDIC taking over SVB.
(Yes, in a technical sense SVB went to infinite leverage for a brief moment. Just your brokerage account can go to zero if the market moves faster than your broker pre-emptively liquidates your stuff.)
That sounds like a Ponzi scheme. Wiki:
>A Ponzi scheme (/ˈpɒnzi/, Italian: [ˈpontsi]) is a form of fraud that lures investors and pays profits to earlier investors with funds from more recent investors.
Like eg a money market fund that sticks to short term government debt. Or a 'narrow' bank.
Modern requirements are based on core capital ratio, which is basically the ratio of a pile of cash that is set aside to deal with losses of assets as a fraction of the assets (weighted by risk, so, e.g., you don't need to set aside any money to protect against a literal pile of cash but you need lots of money to protect against a shitton of shitcoins).
> A literal pile of cash would not count a single cent towards that requirement.
Are you sure about that? Do you have a source?
As far as I am aware, vault cash is fine, just way less convenient than an account at the Fed.
But I admit that I don't know the exact rules, and would be happy to be proven wrong.
> Modern requirements are based on core capital ratio [...]
I think you can strike the word 'modern' from that sentence. Capital cushions have been a thing for a long, long time. What's 'modern' is that the US mostly stopped having reserve requirements (though the new rules are written in such a way as to all-but force American banks to hold lots of American government debt as a sort-of reserve in disguise).
I know. I never wanted to imply otherwise. What made you think so?
> And there is a modern capital requirement, as per Basel III, in effect since 2022. Capital historically was calculated very differently.
Yes, the rules change all the time. So there's a modern incarnation of capital requirements. But capital requirements in general aren't new.
Following a link from there, I get to https://www.federalreserve.gov/monetarypolicy/reserve-mainte... and this says:
> During each reserve maintenance period an institution must satisfy its reserve requirement in the form of vault cash or, if vault cash is insufficient to satisfy the requirement, in the form of a balance maintained with a Federal Reserve Bank. The portion of the reserve requirement not satisfied by vault cash is called the reserve balance requirement.
In any case, I'm still agreeing with you!
In economic terms: the supply of reserves was so high that it was in an inelastic part of the demand curve for reserves.
The new regime (“ample reserves”) depends on administered interest rates, rather than reserve requirements, to set short-term interest rates.
It is absolutely not the case that the reserve requirements were removed to allow banks to reduce their reserves.
Imagine instead that the government was paying car manufacturers more than the cost of installation for every seat belt in a car.
You wouldn’t need to have a policy requiring seatbelts: every car would be liberally festooned with them.
https://www.federalreserve.gov/newsevents/pressreleases/mone...
Capital requirements are complicated. There are different types of equity and assets are risk-weighted, but treasuries and the types of bonds SVB bought are generally given the lowest risk-weightings.
In banking, we want a flight to quality.
Small depositors aren't finance pros, they don't have the training or network to monitor bank management, so we protect them from rogue management.
Large depositors can and should worry about their bank's solvency, so we focus their minds by leaving their deposits uninsured.
Unfortunately, when large depositors catch a whiff of insolvency, they don't help fix the problem, they're first to pull their deposits and leave everyone else to pay the bill.
So we should treat them as we treat creditors in a bankruptcy, and claw back the cash they were able to withdraw in the days leading up to the bank's closure.
Let me bite the bullet:
Flying is arguably way too safe. In the sense that flying could compromise a bit on safety, and still be much safer than cars. If that compromise would lead to lower costs and thus prices, perhaps more people would fly and fewer would drive; leading to better safety on average. Despite flying becoming less safe.
We already know cheap flying with current safety standards is economically viable, with costs approaching the cost of fuel; see low cost airlines like Ryanair. So the most effective way to lower prices is for airlines to downgrade amenities and services onboard.
I think flying could be made cheaper and massively more convenient by getting rid of airport security the way it is done right now. Imagine planes being boarded like trains: there might be a security tradeoff but it would be offset by the massive time benefit for everyone involved. I know I would take that risk, I consider my own time to be more worthy than TSA considers it to be
As an example: planes almost never crash. Which is great! So you could drop the requirement to carry life-vests, without compromising safety numbers.
(If you want, you can invest 50% of the cost savings into eg anti-malaria nets, and you'd come out way ahead in terms of lives saved.)
Similarly, airplane seats are massively over-engineered. You could loosen restrictions there, and save weight and thus costs.
I think Japan might already have different domestic regulations there. I remember being on a domestic flight between Kobe and Tokyo, and the seats in economy class used a lot of mesh over aluminium frame or so. They looked a lot lighter (and also more breathable) than your typical airplane seats. See https://photos.app.goo.gl/ZDWQTNMB93mQs5Yz5 for a picture that I took.
I also agree with vlack-vingaard, but they already gave some good examples.
That said, the FAA != TSA. We like the FAA. They solve actual problems.
So I can say: I just want planes to be as safe as, say, trains. (Or whatever other form of transportation is safer than individual cars, but not as over-burdened as planes. Perhaps busses?)
How does that work when a plane lands on my house?
It's very similar to why we allow cars to crash so much in the first place. To paraphrase JumpCrisscross:
> How does that work when a [car runs me over]?
Otherwise you could make the same argument you just made, and expand it to: shareholders should be comfortable, it should be regulators (or someone else) that should be monitoring, etc.
(And really skittish depositors could switch to banks that only invest their deposits in eg government bonds. Which are probably about as safe as FDIC insurance.)
But it's an interesting thought.
No matter your capital structure, all your liabilities will be matched by assets. What matters is that after your accounting for your fixed liabilities, like deposits, you still have plenty of total assets left over to have a thick equity cushion to absorb losses.
In accounting terms, equity is also a liability. But it's a very benign one, as your shareholders can't demand their money back.
There are other forms of liabilities that act like equity in their ability to absorb losses. But equity is the simplest and generally the most import one.
See https://martin.kleppmann.com/2011/03/07/accounting-for-compu... for an intro.
Accounting might sound rather boring, but at its core its about understanding businesses (and economies) with numbers. It can be as varied and interesting as companies are.
Of course, in practice there's lots of cruft build on top of relatively simple concepts. But the simple underlying concepts are still fascinating. The link above explains double entry book keeping in terms of graph theory and network flows.
The basics of deprecation are also quite interesting (to me, at least).
To me, accountants have a better grip on reality than economists. It's an accountant who taught me real economics (I was originally pursuing a math degree with economy as a 'minor' (not really how it's working in my country but close enough)). I had to unlearn some of what I learned in my first year, but I had a way better grip on how money work after that (and decided to create value and changed course).
Accountants and economists are doing different things. Both fields are useful, and there's some small overlap between the two.
Many people could benefit from learning some 'rationalised' accounting, ie accounting without the accumulated historical accidents and tax dodges. (Those are also interesting. But less as a description of a reality, and more in the same vein that the Talmud is interesting.)
And then like 5 years ago, i learn about MMT, read about it, disagree on some points, but it overall make much, much more sense and si way closer to reality than Friedman theories to me. It seems like macroeconomics do follow the stuff i learned when i wanted to become a quantitative analyst or whatever (i only wanted to do math tbh, and didn't follow finance classes that much).
And then during Covid we have all those "expert" economists who start to talk everywhere. But now, i am sure they are talking out of their own asses. They had now idea of what production is. The simple idea that production is linked with energy is novel for them. They probably are useful, like sociologists are useful, but i'd like to hear them on medias as much as i hear sociologists. Or even less, since i do think sociologists have real-world application to their thesis, for harm reduction during stampede. Let's say as much as medievalists historians.
Have a look at https://www.econlib.org/library/Columns/y2021/Sumnermodernmo... for MMT.
I suggest having a look at market monetarism. See eg https://marketmonetarist.com/2015/07/14/the-euro-a-monetary-...
What kind of orthodox economy theory have you had a look at?
SVB had liquid assets (bonds) that it could sell to meet the demands of the depositors, but those assets fell in value creating losses. The bank was forced to crystalise those losses because it had no cash buffer to fall back on.
If some substantial part of the liquidity had been held as cash this wouldn't have happened.
But they preferred to gamble.
It's a long story, so I always recommend going down the Modern Monetary Theory rabbit hole.
Thus through the existence of competitor banks, banks are NATURALLY incentivized to keep a reserve ratio. A reserve ratio enforced by law is not necessary in a capitalist economy with healthy competition. Competition prevents banks from going crazy with creating money out of thin air via loans. The removal of the reserve ratio by the government is relatively inconsequential.
However this natural regulation through competition is negated by the existence of an entity without competition. The central bank. The central bank functions as an entity that loans money to banks with interest. It is this interest rate that is used to regulate the money supply in the US. Low interest rates are what caused inflation and high interest rates from the central bank are what are now being used to stop inflation.
So in this case Bank A can now borrow a bunch of money from the Central Bank thereby increasing it's reserve ratio allowing it to lend more money out. In a sense, the central bank is essentially the entity where the fractional reserve ratio actually matters.
The central bank is unregulated so they can print money to loan to other banks however much they like. Thus a bank run on the central bank is impossible. The ratio in this case matters more as a metric that correlates with inflation.
What you are describing is pretty close to the free banking eras of eg Scotland and Canada.
> The central bank is unregulated [...]
That's not true. Many central banks have lots of regulations on them. However, they are not regulated by the kind of competition you outlined above.
> [...] The central bank functions as an entity that loans money to banks with interest. It is this interest rate that is used to regulate the money supply in the US. [...]
It's probably more productive to think in terms of the total money supply, and less in terms of interest rates.
For one, loaning money to banks is only one part of what the Fed does. They also outright buy and sell assets (eg in open market transactions). In many instances, the banks (technically) lend money to the Fed by having positive account balances at the Fed.
For a contrasting example on how interest rates don't need to be the focus of monetary policy, have a look at the Monetary Authority of Singapore. Instead of using interest rates as a channel to communicate and effect their monetary policy, they use the exchange rate of the Singapore dollar to a basket of foreign currencies. Crudely, instead of 'setting' the interest rate, they 'set' the exchange rate.
Simplified a bit, they 'set' the exchange rate by standing by to buy and sell Singapore dollar to any comer. They have a printing press, so they can push down the exchange rate as much as they want to, and they also have enough assets to prop it up.
Crucially, this framework doesn't need to worry about any zero bound on interest rates. It works as long as Singapore dollars are worth anything more than zero.
I'm not making an argument. I'm stating the current status quo of the US. No argument was ever made here about whether I think it's right or wrong.
>That's not true. Many central banks have lots of regulations on them. However, they are not regulated by the kind of competition you outlined above.
It is true. The central bank is overall unregulated because the central bank IS the regulator. In the same way a government is unregulated so is the central bank. In the US the central bank is more or less the fourth branch of the government.
You're talking about "many central banks." while I'm simply talking about the Federal reserve in the US. I think you're mistaken, I'm not making a general statement about how central banks across the world works.
>For one, loaning money to banks is only one part of what the Fed does. They also outright buy and sell assets (eg in open market transactions). In many instances, the banks (technically) lend money to the Fed by having positive account balances at the Fed.
This is true. However one of the primary ways they influence the money supply is through interest rates. Interest rates are also one of the triggers of the SVB bank run.
>For a contrasting example on how interest rates don't need to be the focus of monetary policy, have a look at the Monetary Authority of Singapore. Instead of using interest rates as a channel to communicate and effect their monetary policy, they use the exchange rate of the Singapore dollar to a basket of foreign currencies. Crudely, instead of 'setting' the interest rate, they 'set' the exchange rate.
They don't need to be, but they ARE quite central in the US. Additionally given how the US dollar is sort of the central peg of all other currencies, the US would rather the Dollar remain the Rate at which all other currencies are set against. That way the US in a way indirectly and collectively controls the worlds monetary value.
I didn't offer any opinions in my initial reply. I'm simply stating what's going on in the US about the nature of the reserve ratio and how it doesn't matter when applied to SVB. It seems you're trying to make an argument here against one I never made?
Even regulators are regulated. There are laws that prescribe what the Fed can and can not do, and how.
> Additionally given how the US dollar is sort of the central peg of all other currencies, the US would rather the Dollar remain the Rate at which all other currencies are set against. That way the US in a way indirectly and collectively controls the worlds monetary value.
Yes, if you wanted to do a similar system for the USD, you would probably want to peg a basket of commodities instead of the exchange rate.
Or you could have the Fed target the TIPS spread directly: https://fred.stlouisfed.org/series/T10YIE
Ron Paul campaigned for "auditing the Fed" perhaps more than he campaigned for president. Was he exaggerating, or does Congress not actually audit and otherwise oversee the Fed?
https://www.econlib.org/archives/2009/07/audit_the_fed_o.htm... and https://www.csmonitor.com/Commentary/Opinion/2009/0803/p09s0... might be interesting.
You might also like https://www.alt-m.org/2020/03/30/when-the-fed-tried-to-save-...
I mean sure, you can say that. The US government is regulated too. But in general the government IS the regulator of the people just as the central bank IS the regulator of monetary policy.
(1) SVB assumed low interest rates would continue, took risk.
(2) 94% of SVB's deposits are uninsured by FDIC (40-50% is typical), meaning there are big sum deposits that go past $250,000. Customers took some counterparty risk.
After the letter came in 1 + 2 -> bank run.
-- what happens --
Everyone gets the insured $250k quickly. Rest is stuck for possibly long time. Most of it will be recovered eventually, but some small percentage might be lost.
There will be local liquidity crisis in the valley in the order of $50 billion at least, but other banks can give emergency bridge loans against assets stuck in SVB once they figure out how much they are worth.
"The mood" of the market is ruined. Risk analysis tightens. Some other wheels may drop.
If I deposit a dollar in my bank account. Do I legally own that money? Or do I have a legal contract with the bank that they’ll give me back that money?
> At the moment of deposit, the funds become the property of the depository bank.
> Thus, as a depositor, you are in essence a creditor of the bank. Once the bank accepts your deposit, it agrees to refund the same amount, or any part thereof, on demand.
At least in New York state, the answer to the first question is no. I imagine it's the same everywhere else.
Even when you physically own money, let's say physical cash/bills, the counterparty could default. For instance in Nov 2016 govt of India declared that about 90% of currency in circulation stop being money within a certain deadline.
In my mind whenever I try to analyse money or different forms of money I always think in terms of counterparty.
> Money always has a counter-party [...]
That's mostly true for most forms of money. But not technically true for gold coins or bitcoin.
> For example, last year treasury announced sanctions after Ukraine conflict where they froze Russian USD assets. This is essentially the govt of United States deciding to not honour their commitment.
That's sort-of true. It's a bit simplified. The treasury isn't typically the counterparty for these commitments. What they did was ban other entities from honouring their own commitments.
So eg if a bank in Singapore didn't want to lose access to the USD ecosystem, they had to cease honouring their commitments to certain Russian entities.
That's independent of whether those commitments were specified in USD, Singapore dollars, Euros, British Pounds or pork bellies.
> But not technically true for gold coins
In so far as gold is used as money one is indeed relying on rest of humanity/society to accept it in exchange for whatever you need. Granted that for most (all?) of their existence, civilised humans have accepted gold as money because of its use as jewellery and its attractive qualities. But there's still a possibility that some tribe/community will refuse to accept gold as money as they don't have any use value of it.
In my mind, money is a promise or a contract which says here's a "thing" I'll give you in exchange for goods or services. The other party could always walk away from that contract or decide to not honour that promise.
Gold/cattle etc., have worked as money because they have an intrinsic use value which one could fall back to if it stops working as money.
Which brings me to the next point.
> ..or bitcoin.
I could never understand the intrinsic use value of Bitcoin. People think of it as store of energy or whatever but what is the intrinsic use of Bitcoin? ETH at least is used as a currency to get work done on Ethereum chain so that is its intrinsic use value.
I'd need to look that up. But I don't think Russian entities directly held assets at the federal reserve? It's mostly about the commitments of third parties?
> In so far as gold is used as money one is indeed relying on rest of humanity/society to accept it in exchange for whatever you need.
Hence my use of the term 'technically'. Yes, the industrial uses for gold are relatively limited. So its value is mostly (but not totally) a social construct.
However imagine for a second coins made of something that has enormous industrial value but hasn't acquired any social value (yet). Eg coins made of graphene or so? (Not sure about a specific example.)
In any case, there's no contractual counterpart for gold. It's an expectation, but no on in obligated to live up to that obligation.
> In my mind, money is a promise or a contract which says here's a "thing" I'll give you in exchange for goods or services. The other party could always walk away from that contract or decide to not honour that promise.
For proper contracts, there would be contract penalties. Eg if your bank refuses to pay out cash when asked.
> I could never understand the intrinsic use value of Bitcoin. People think of it as store of energy or whatever but what is the intrinsic use of Bitcoin? ETH at least is used as a currency to get work done on Ethereum chain so that is its intrinsic use value.
Network effects aren't good enough for you?
Depositing money is lending money. It's presented like some special thing, but at the end of the day you no longer have your dollar, you have an IOU for a dollar issued by the bank. Yes, you have a deal with the bank that they will give you your money back whenever you want.
Now normally there's no point in mincing words, you have 50K at the bank, whatever. But if the bank fails, you still don't have the money in your hands, you are still owed it. What normally happens when a business can't pay back its debts is there's a bankruptcy procedure and everything is frozen until a bankruptcy lawyer parachutes in to handle things. Now keep in mind they are bankrupt because they don't have a way to pay back everyone, so there are laws about how your IOUs are settled. This is called a haircut, because chances are the creditors will not get back the full amounts they're owed. (In rare cases a bankrupt business somehow manages to sell its assets for more than the liabilities.)
If it's a bank, there's insurance schemes in various countries to help out the depositors.
But the deal is basically that, you are lending money to the bank, and they are lending to other people eg mortgages, business loans, overdrafts, etc.
Getting back to your question, there's not a whole lot of meat on the "what does the law say" bone. SVB is dead, carcass is divided up between the creditors.
All publicly issued stocks in the US are technically owned by one obscure New York company. Your broker has a contractual relationship with them, and you have a contractual relationship with your broker.
See https://en.wikipedia.org/wiki/Cede_and_Company
Technically, you don't own any (public) shares.
You are right in practice that the FDIC guarantees small deposits.
If it was just a legal contract, in the worst case you'd have to sue to hold them to account.
(On the other hand, politics can change from one day to the next; but contracts are harder to unilaterally change.)
These days the value of bills is solely in being legal tender; that is, an authentic bill can be used for satisfaction of any court-ordered debt. That's not the same thing as requiring people to transact with you using those bills. But if someone sued you in court and gained a judgement against you, then you could use those bills to satisfy the judgement. Example: you ran away with a candy bar after the clerk refused to take your dirty dollar bill. They sue you. The court orders you to pay the store $1, which you can satisfy with an authentic $1 note, even the original dirty note.
Maybe the clerk refused the bill because the store only accepts Bitcoin payments. I'm not sure, but the judgment could in theory include whatever costs the store incurred (if any) by being forced to take cash, which you would could also pay in cash. Because ultimately whatever damages or costs were incurred can be satisfied by the jurisdiction's legal currency, in which such damages and costs are also typically denominated.
The new bank "Deposit Insurance National Bank of Santa Clara" (DINB) received "all _insured_ deposits of Silicon Valley Bank", and is intended to open for business on Monday.
The remainder of SVB (including loans and uninsured deposits) are now held by FDIC as conservator/receiver of the failed bank.
Even beyond that point, though, the FDIC now owns Silicon Valley Bank so even everyone else who worked for the bank that didn't transfer to DINB still now works for the FDIC (as long as they're still employed--which is probably a rapidly shrinking amount of time)
https://www.sec.gov/ix?doc=/Archives/edgar/data/719739/00011...
>On March 10, 2023, SVB Financial Group’s (the “Company”) wholly owned subsidiary, Silicon Valley Bank (the “Bank”) was closed by the California Department of Financial Protection and Innovation, and the Federal Deposit Insurance Corporation was appointed as receiver. The Company is no longer the parent company of the Bank.
Even if someone remains on the payroll of Silicon Valley Bank, they are an employee of the FDIC since it now owns Silicon Valley Bank
SIVB did have a holding company, so not every single employee of the company moved to the FDIC. Those at the holding company, not the actual bank, most certainly didn't transfer to the FDIC
"Anatomy Of A Bank Takeover" (2009)
On a mid-January night, some 80 agents of the Federal Deposit Insurance Corp. pull into Vancouver, Wash. Their rental cars are generic, their arrival times staggered. One by one, agents check into a hotel, each quietly offering a pseudonym to the guy at the desk.
They're here to take over the Bank of Clark County, which the FDIC has decided is insolvent. It's the agency's job to insure American bank deposits and to step in when a bank fails. The FDIC tries to keep the planning for its operations top secret, to avoid sparking a panicked run on the bank. ...
<https://www.npr.org/2009/03/26/102384657/anatomy-of-a-bank-t...>
Specifically as to who the employees of the failed bank work for:
The FDIC agents announce that, through the weekend, the staffers will be temporary employees of the FDIC. Stay and help us, the agents say.
FDIC liquidators themselves often come from previously-failed banks as well, though that's a small fraction of former banks' employees.
In this instance, the FDIC wasn't able to find a buyer so all these people work for the FDIC until final disposition of their jobs
SIVB no longer exists as an operating bank, they are going to work on Monday, who are they working for if not the FDIC?
Also, while the law may call them "fees", they are taxes – it is not like banks have a choice in paying them – just because the law doesn't call something a "tax", doesn't make it not a tax (see National Federation of Independent Business v. Sebelius)
Anyway, the only rational voice I've been hearing so far is Bob Elliott (used to be on the IC at Bridgewater/advisor to Ray Dalio and taught multiple courses on the banking system) - https://twitter.com/BobEUnlimited
Probably a good idea to just ignore all the moronic VC threads and fintwit influencers.
It seems like the most likely scenario is that depositors will be made whole quickly and equity holders will get fucked since SVB's balance sheet looks pretty strong. Matt Levine came to the same conclusion.
The Nash is to defect in the prisoner's dilemma. That's not the whole story, mind you, because there's a case for tit-for-tat and similar strategies in repeated games, but this looks like a one-shot game from what I know, so... yeah.
Valley is small. There is real loss of wealth now, because SVB is no more. And there’d be likely a ripple effect.
Incidentally there's a major moral hazard problem for bank runs in that unlike e.g. stock market or commodities panics, there isn't any ability to "buy the dip" or hold through the panic.
The above was the right answer that would have maximized the wealth generating machine.
Long term, the purchasing power of the Valley will be diminished and financial services disrupted. This might result in substantial disruption of businesses and cascades of business failures. Which may in turn affect defectors. But this seems to be the only negative feedback loop.
Insured depositors (up to $250K) will absolutely be made whole quickly. They'll get their money on Monday.
Uninsured depositors, up to some multiple of the $250K, will probably be made whole, but it will likely take a couple of weeks.
Uninsured depositors beyond whatever multiple the FDIC decides to accommodate (likely somewhere in the millions to tens of millions of $), will probably get some fraction of their deposits back, but it could take several months.
This talking point that all depositors will be made whole quickly is dangerous and almost certainly false. The FDIC needs to liquidate or find a buyer for SVB and the value of the assets isn't enough to make everyone whole, beyond that there is the FDIC insurance fund but it's likely insufficient, beyond that requires Congress passing a law to enable a further bailout.
You say it like that absolves SVB.
Banks in Scotland's free banking era used to have a capital cushion of around 1/3 of their balance sheet.
Not saying that this kind of capital cushion is viable in today's regulatory environment. Just to give an example of existing real world banks that were set up for that kind of bank run.
In any case, I agree that scarcely any bank today would be set up for that kind of run. That still doesn't absolve SVB. They put themselves in a position where it's rational for their depositors to run.
I would make me very nervous if every single bank had ~50% of it's balance sheet in rock bottom rate 10Y bonds that have dropped in value 30+% in the last year
I'm pretty sure most banks have assets > liabilities even after rate hikes, which is the root cause with SVB, not the bank run
This is a separate issue. SVB is likely insolvent because of their MBS issue. But their liquidity available last week is significantly less than their assets.
Why didn't SVB borrow then? I understand they were the 18th largest US bank last week. And they had more assets than just 47B that was the bank run. But the FDIC took them over because they didn't have the liquidity to serve the needs of the bank run as of Thursday night.
I think that you can not just arbitrarily borrow from the fed, there are limits.
On purpose. Billions of their wealth depended on FED's easy monetary policy (ZIRP, NIRP, QE infinite) for last 30 years or so.
For likes of Gary Tan, Peter Thiel and Cathie Wood (and Ray Dalio) creating moral panic and trying to force FED's hand to reverse normalising monetary policy is the only possible way to keep status quo and their wealth.
Is The Fed Listening? | ITK with Cathie Wood - https://www.youtube.com/watch?v=jvL2Q0cJLyo
30% of YC companies exposed through SVB can’t make payroll in the next 30 days - https://news.ycombinator.com/item?id=35100743
Peter Thiel’s Founders Fund Advises Companies to Withdraw Money From SVB - https://www.bloomberg.com/news/articles/2023-03-09/founders-...
They DID make a bad bet, but they were still solvent as a bank. The liquidity crisis was caused due to poor communication on SVB's part and typical VC herd mentality.
Read the full article by Matt Levine for a breakdown.
The fact that they sold assets for a loss indicates that they are not.
The fact that the FDIC took over the bank indicates that they are not.
The fact that the bank is winding down with no other bank willing to buy them indicates that they are not.
What fact would you put forward to support your assertion that the bank is fully solvent. Because right now you are saying the opposite of the market, the FDIC and the banks competitors.
If they were fully solvent it would be pretty trivial to find a buyer to keep the bank to Silicon Valley startups going.
The fact that no one will take on their liabilities is very damning.
What they were not able to do was have enough cash on hand to deal with a bank run.
And it appears that wasn't market to market
Since then they have had $40B in withdrawals causing them to sell all liquid assets at a loss and not being able to furnish withdrawals
The California regulator has explicitly stated they are insolvent: https://dfpi.ca.gov/2023/03/10/california-financial-regulato...
The only reason to realise the loss is they needed the money now.
Which could take a lot longer than people seem to expect. If you look at the past 100+ years of economic history, 2009-2021 is a complete anomaly. ZIRP is not the normal state of affairs, nor are negative real rates. There was an attempt at returning to normalcy from 2017-2019 but then Covid hit. Starting last year the Fed is attempting once again to return to a normal monetary environment. Rates are likely headed higher than people think and will remain there longer than people think.
If the interest rates weren't increased they would just have sold their 2033 dollars and everything would be fine, a bank doesn't go under just because it takes a while to get billions of dollars, the whole issue is that they ran out of assets due to their assets having lost value.
Unmatched assets and liabilities (like FTX) is not insolvency, it’s fraud, and mechanically causes insolvency when the cash is gone after the run.
There's another possible stable equilibrium where no one panics because they know no one else will panic and that the bank is solvent.
However it didn't strike me as him making a case that SVB is solvent.
Their balance sheet is weak, but they kept going because some accounting tricks allowed them to defer mark-to-market on their losses.
> On March 8, 2023, the Bank announced a loss of approximately $1.8 billion from a sale of investments (U.S. treasuries and mortgage-backed securities). On March 8, 2023, the Bank's holding company announced it was conducting a capital raise. Despite the bank being in sound financial condition prior to March 9, 2023, investors and depositors reacted by initiating withdrawals of $42 billion in deposits from the Bank on March 9, 2023, causing a run on the Bank. As of the close of business on March 9, the bank had a negative cash balance of approximately $958 million. Despite attempts from the Bank, with the assistance of regulators, to transfer collateral from various sources, the Bank did not meet its cash letter with the Federal Reserve. The precipitous deposit withdrawal has caused the Bank to be incapable of paying its obligations as they come due, and the bank is now insolvent.
Source: https://dfpi.ca.gov/wp-content/uploads/sites/337/2023/03/DFP...
E.g. the first big bank failure in 2008, and the 3rd largest failure ever (after WaMu and now SVB), IndyMac became OneWest
https://en.m.wikipedia.org/wiki/List_of_bank_failures_in_the...
> On March 19, 2009, a seven-member investor group, IMB Holdco, led by Steven Mnuchin—which included billionaire Christopher Flowers, John Paulson, Michael Dell, and George Soros—purchased Independent National Mortgage Corporation (IndyMac Bank) of Pasadena, California for $13.65 billion from the FDIC and created OneWest from the remains of IndyMac
In one of the earlier two threads a poster linked to this segment of 60 Minutes: https://www.youtube.com/watch?v=TAE8i40A5uI . (I would link to the comment directly but I can't find it right now. Apologies to the poster.) In case of a relatively small bank, the FDIC had run a secret auction a few days earlier, and had an acquirer ready on the day.
SVB was pretty big. Lining up a buyer that can absorb and handle a balance of ~$200B might take a while, and interestingly there may be political reasons to discourage depositor haircuts. Buying at firesale prices favours those with deep enough pockets. Buying at par (or near enough) needs more than just money - it gives advantage to those who can do extensive diligence really fast.
But more importantly, you probably don't have as many highly paid bankers, lawyers, accountants and regulators trying to push the deal through. Nobody could afford that.
However, in principle, if you believe in the efficient market hypothesis, and if SVB shares would still be traded, they would be traded at a (low enough) price that makes buying their shares reasonably thing to do.
Seems pretty opposite to me -- I would think if you are a value investor then the price may have dropped low.
Let's back away from SVB, because it's not currently traded.
In 2020 the car rental company Hertz went bankrupt. Nevertheless, the stock traded a low but non-zero price.
You can either say that people were crazy, or if you take the efficient market hypothesis to heart, you can see it as an indication that there was a positive probability that Hertz stock would be worth something after the bankruptcy.
As for the value investor perspective: for SVB you would try to come up with your own valuation, compare that to the market price (and thus market capitalisation), and if the latter was low enough, you'd buy.
As an efficient market guy, you'd skip the first step, and just assume that the market price is probably fair enough; and just buy an index fund that includes a small fraction of SVB.
(SVB used to be in the S&P 500.)
This likely depends on which version of EMH you're referring to, and what information is "efficient", but typically speaking you don't care if things drop or rise because you believe that it's efficiently priced.
Can you help me understand where you and I differ?
One fairly sensible version of EMH is the notion that even an efficient market pays you to take certain risks. Eg an insurance company might be paid to take weather risk when they insure crops. If there's enough competition, that risk will be efficiently priced.
People can spend extra effort to learn more about crops or the weather, and thus get a better handle on the probabilities and variances. At some point you hit diminishing returns. Different people have different amounts of productivity, ie how much effort leads to how much improvement in understanding of risk. The market price will be driven by the most productive people and companies; because they hit diminishing returns last. (To give a silly illustration: I could spend a lot of effort trying to understand the weather better, but because I have no clue, that effort wouldn't do me much good. An expert will do much better. And so it's the experts who effectively set the price in competition with each other.)
The same applies for credit risks that a bank faces when it makes a mortgage loan.
In an efficient market, the risk for holding SVB stock would be priced efficiently. But you'd maybe want to investigate whether it's the kind of risk you want in your portfolio. Or, if your investigative abilities are at the productivity frontier, you might also want to just check out SVB in general, to see if the market price is slightly off compared to your expert judgement.
Doesn't that come with jail time at that scale?
I was just a little confused.