FDIC – SVB FAQ
fdic.gov
fdic.gov
https://www.npr.org/2009/03/26/102384657/anatomy-of-a-bank-t...
“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.
…
He agrees it almost feels like a spy movie. "They've done this before — quite a production," he says.“
And in general, for people who are understandably worried: besides the $250k available on Monday morning, my bet is on at least 50% of uninsured deposits by end of the week, and 90-100% if not next week (via acquisition) then within a pretty short time.
If Oaktree and others are offering folks 70%+ face value for their uninsured deposits, that should be a pretty strong indication of where this is heading (ie a high confidence level at those shops to make a quick 20-30% off panicky sentiment).
Edit, PS:
This whole story is so bewildering, probably the only bank I can think of that was killed by its own customers (flaky VC herd) despite being generally healthy and having picked the least worst option last year (maturity risk). VCs now banding together is laudable, but why there wasn’t a Buffett type preferred stock rescue earlier this week to save their literal community bank is kinda beyond me.
So essentially it was all just panic. Scary how fragile our financial systems can be in the face of herd mentality and irrational behavior.
Hope that panic slows down and First Bank doesn’t have to go through the same as SVB (people were lining up to withdraw their money today).
The analogy is, it doesn't matter, those who didn't leave quickly got stampeded and died. Anyone who had huge amounts of cash in excess of the FDIC limit sitting there is an idiot. Doubly so if they heard of the "run" and did nothing.
As long as Fed has rates way way above 0% checking accounts, the gravity is going to pull deposits out of banks and into US Treasuries.
I've been withdrawing personal and business account cash for months and rolling in short term treasuries, many others are too as commercial bank deposits have been declining at record pace this year. Now this bank run. Anyone over the FDIC limit + those who begin to notice the interest rate differential (so..safety plus excess returns) are going to be incentivized to pull money out. This might not be the last bank failure... even if technically there is not danger on paper, human psychology will probably dictate that more will withdraw.
The rational choice is clear in this situation: anyone with excess deposits should move quickly. Who cares if nothing else breaks? Better to do it and not need to, than to need to but not do it.
You are just plain wrong that withdrawing was the wrong choice. What about those needing to make payroll or pay other expenses in the mean time? When will they get their money back? You have no idea lol
The bank failed. It has been closed. It was a bank failure. Here's the official source that calls it a "failed bank" [0]
[0] https://www.fdic.gov/resources/resolutions/bank-failures/fai...
A bank run is a self fulfilling prophecy driven by irrational fear. It is, by definition, irrational. It also doesn’t happen much any more because most banks aren’t susceptible to them (ie. have 90%+ deposits uninsured).
The fact that VCs settled on the suboptimal Nash equilibrium actually reflects poorly on them as a community.
People often equate finance to gambling, because even the terminologies overlap: you don't make "risky investments", you "place bets". But that's too simplistic a take, because there are two MAJOR differences between finance and gambling.
1: In finance you gamble with other peoples' money. Not your own. And when your bets go the wrong way, you ruin lives of thousands of families. Not just your own.
2: If you manage to find a loophole and turn the letter of a contract against the spirit of the contract, in finance that's a cause for celebration and a big bonus. ("Well played.") In gambling, that's called a breach of regulations.
Both are amoral, highly utilitarian ecosystems.
This was inevitable, as they locked away too much capital in bonds that were losing money every month in a way they can never recover.
It’s the wrong way to bet when interest rates have been low, but are going up soon.
There was an easy and plausible scenario here where everything was fine.
Heck, the core of the problem here is that they got too many deposits over the last few years.
What is that easy and plausible scenario?
The only one I can think of is if they suddenly started getting a lot more cash deposits than withdrawals, or we entered a deflationary spiral (unlikely).
Not great, not terrible as they say, but aside from a couple of very niche specialists no bank on the planet would survive getting 25% of deposits pulled in a day.
Systemically important ones would, due to the Fed’s discount window and liability diversification.
The systems of finance are only as strong as the currency that underpins it, and when your foundation is based on nothing more than "hopes and dreams" then you will have this...
Our "financial systems" are smoke, mirrors, and heavy complex set of scams we all pull on each other everyday...
The true "irrational behavior" is the system itself, and everyone that buys into it, you have to suspend rationality to engage with the banking system, and fiat currency
How? What was “all just a panic”? The bank run? Of course, that’s what a bank run is. People panicking to not be the last ones out the door.
Do not get this story twisted. SVB wildly mismanaged their risk, and went permabull in 2021/22. This lead to buying shit MBS’ and subsequently being forced to liquidate those securities to stop the bleeding.
Do you have any objective points on what they actually mismanaged and what they should have done instead for each point? Most of the people I see saying this don't actually understand what happened.
As someone said up thread. What SVB did was the "least bad option". The people to blame are the VCs and the fed for creating this situation by extreme devaluing of treasuries.
Ofcourse with hindsight pouring money into hedged stock positions would have been much better. But that is very much hindsight dependent.
They should have chosen a ladder of differently maturity timelines to trade off between yield and availability. For example, they could have invested more in short term treasuries instead, which yield 4.5% now.
In finance terms, they were not hedged against interest rate risk.
Ironically, that response is the herd mentality and irrational.
Depositor funds aren't fragile: They receive 100% of $250K, and a substantial amount of other funds.
The financial system isn't fragile at all: There is no systemic impact.
People perceive their bank as unsafe (whether it is or not), so lots of people start withdrawing their funds, and suddenly the bank fails because it can't fund those withdrawals.
It reminds me of the toilet paper shortages here at the beginning of the pandemic. People heard about others hoarding toilet paper, so they started doing it, and before you know it we had a huge national shortage for a while. Some folks had none or little toilet paper -- while others had tons. I knew some assholes who did that, and bragged about it like they got one over on everyone else.
That was my take as well: https://news.ycombinator.com/item?id=35103411
I'd love to see the partners of Sequoia, Union Square, YC, and other VC firms grilled by members of Congress over this.
Yup, and how Peter Thiel and his fund just so happened to say "You need to move your money out of SVB, and you need to do it TODAY", on Thursday, to all their startups...
Though granted, SVB is a ticking time bomb since all of their deposit went to low yield long term securities. So such a run would have been an eventuality in the current interest rate.
The question is, who else is doing this.
I’d rather hope that in the unlikely event of there being no private market buyer(s) and a public solution becoming necessary, that lawmakers will at least force some wider ecosystem stakeholders to chip in.
The SVB CEO’s call of basically begging for people to support them the way they tried to support them for 40 years was very emotionally relatable. It’s one story if they’d gotten back with “Greg, we really spent day and night pouring over the balance sheet etc but couldn’t get there”, but as far as I recall TPG was the only publicly known group to even seriously look and consider.
It sometimes makes me think that if there’d ever be a war in my lifetime, the very last regiment I’d want to serve in would be the Bay Area one. Imagine being in a foxhole with Sacks crying for the government, Balaji just stringing random words together, and 80% of the rest just opportunistically and led by Thiel weaseling out through the back trench…
If even one option or short position is found for anyone involved I hope they face jail time (spoiler: they won’t).
If eg Founders Fund put on a decent short right before mailing the portfolio, I wonder how one could pierce through a “how’s that different from Hindenburg / Adani” defense.
Fingers crossed for a good Matt Levine take next week…
This is actually the part that intrigued me the most. I'm no traveling salesman, but I've stayed at several different hotels over the years, and IIRC I was always asked to provide ID during check in. Cursory search seems to say that some states actually require it; in other cases it may be corporate policy.
So, do the FDIC agents (?) also have cover identities? Or are they forced to stay in no-name, possibly rundown and bedbug-ridden motels for the sake of the ruse?
Obviously not all you dear HN cuties are like this...but it's a large enough trend that it'd be misleading to say you can't clearly see it. I don't know why everyone is scared to just say: "I was wrong. I'll reflect and learn something." I mean...that's the only way anyone ever does, when they're wrong. If you just carpet over it, and forget, I mean...you're just shrinking your world. And one day your model of the world is so tiny...that all you can do is look back to the past, and say: "Those days were better." But they weren't. Cause those days set you up to fail, to head towards this inevitable present, like you did. A shrunken future. Where you're the only right thing in the world. But the real world's far away.
I think that kind of thinking is like an admission of deafeat / anathema to having a brain. But I get that everyone gets tired, and feels like they've seen it all before. And they don't want to stop, process, and integrate the new info into themselves / their lives because doing so...wouldn't be something you could just do in a 5 minutes and get on with your life. It would take time. Readjustment maybe. Reevaluation. Recalibration. It would be uncomfortable. You might have to give up some cherished beliefs. Some pet delusion. People fucking hate that. It's hard. But it's liberating.
It's the kind of thing that should be taught in schools. How to properly lose.
Many of the VCs think of themselves as 'disrupters' who live in a world of disruption and taking advantage of it. Some are trying to disrupt SV for political reasons.
Once upon a time, VC funders were looking for incredible innovations in technology and productivity, not in tearing things apart.
I can also recommend the movie Margin Call which includes a fictionalized account of a similar takeover. If you haven't seen it before, this may be the weekend to watch it.
Does anyone know if the 70% offer from Oaktree applies to the remaining amount after FDIC pays out what they can on Monday/Tuesday? For example, if the FDIC releases 50% of uninsured deposits on Monday, can you sell the remaining 50% to Oaktree and recoup 85% (50% + 50% * 70%)?
But it wouldn’t be very likely that anyone would give you the same terms for a junior tranche.
Not investing, legal, or any other advice, but unless my company would be in a very weird situation requiring access to 50% or more of our funds in the next 2 weeks, I wouldn’t even start entertaining offers below 95% or maybe 92%.
> The main office and all branches of Silicon Valley Bank will reopen on Monday, March 13, 2023. The DINB will maintain Silicon Valley Bank’s normal business hours. Banking activities will resume no later than Monday, March 13, including on-line banking and other services. Silicon Valley Bank’s official checks will continue to clear.
a) serve the American people (and not some shadowy cabal of billionaires intent on squeezing the average Jane and Joe in every conceivable way via capturing the tools of the state)
b) is staffed by people who are extremely qualified and truly enjoy their job (compared to the DMV in most states...)
It reminds me of this America in Decay essay [0], which goes over the rise and fall of truly great political institutions in the US before they became captured by conflicting interests, nepotism, and outright double dealing (think: revolving door between SEC and finance; don't want to put the screws too closely to your next potential employer). The FDIC is one of the last from that era it seems.
[0] https://www.foreignaffairs.com/united-states/america-decay
(the timeline is admittedly dicey but I couldn't resist)
Depending on the amount, this can possibly make things a lot better for the startups banking there.
> All depositors will have full access to their insured deposits no later than Monday morning, March 13, 2023. The FDIC will pay uninsured depositors an advance dividend within the next week. Uninsured depositors will receive a receivership certificate for the remaining amount of their uninsured funds. As the FDIC sells the assets of Silicon Valley Bank, future dividend payments may be made to uninsured depositors.
My understanding that everyone will receive anywhere from 70% to 90% of the uninsured parts of deposits eventually. Uninsured does not mean "... and it's gone". It rather means "best effort to get it back".
Beyond that, customers have "uninsured deposits"
But the FDIC is in the process of selling all the banks assets, which nearly cover all of their outstanding deposits. No one knows how much that difference will be right now. But companies should expect a lot more than just the minimally insured deposits back.
Source: https://www.netinterest.co/p/the-demise-of-silicon-valley-ba...
> As of the end of December, SVB had roughly $209 billion in total assets and $175.4 billion in total deposits
Say $80B of that is worth 83% of the HTM value on their balance sheet. That would be $14B less, or $195B in assets against $175B in deposits. I don't know the details of their holdings or exact difference between market prices and their HTM accounted value, but the important points are (1) they started with a lot more assets than deposits and (2) different portions of their balance sheet have declined different amounts. It's not all 10-year 1.5% MBS notes; only about $80B is.
edit : thanks all for coherent clear responses.
> A. The FDIC's deposit insurance fund consists of premiums already paid by insured banks and interest earnings on its investment portfolio of U.S. Treasury securities. No federal or state tax revenues are involved.
Source: https://www.fdic.gov/consumers/banking/facts/#:~:text=what%2...
In other words, IOUs to itself, like the social security “fund”
And yet: https://dfpi.ca.gov/wp-content/uploads/sites/337/2023/03/DFP...
I don't even doubt you can sell the assets and come out of it with 90% of deposits, but the wording is off.
From "1999 Repeal of Glass-Steagall was the worst deregulation enacted in US history" (2022) https://news.ycombinator.com/item?id=30206570 :
> Yeah what was the deal with that dotcom correction in the early 2000s? Did banks invest differently after GLBA said that they can gamble against peoples' savings deposits (because they created a 'sociallist' $100b credit line, called it FDIC, and things like that don't happen anymore)
> Decline of the Glass-Steagall Act: https://en.wikipedia.org/wiki/Decline_of_the_Glass%E2%80%93S...
> Dot-com bubble: https://en.wikipedia.org/wiki/Dot-com_bubble
Right. The problem is that SVB's books reported that the assets were worth more than they were actually worth.
If they weren’t forced to sell, they could collect coupons and make the exact amount of money they claim to have.
It’s not a matter of “actual” vs “paper”. Their books were correct until the run happened.
Yes… so if you hold it, that is exactly what it is worth. The issue is that they are forced to sell. We’re literally talking in circles.
If you are forced to sell on most assets, you are going to take a hit on your books, that doesn’t suddenly mean that the asset was valued incorrectly.
They didn't become insolvent because of the bank run. The bank run exposed the fact that they were already insolvent.
They are worth one 2033 dollar or 0.7 2023 dollar. 2033 dollar and 2023 dollar should be considered two different currencies. The bonds are pegged to 2033 dollars but customers want 2023 dollars, and when dominated in 2023 dollars the bonds are devaluing like shit.
A bank run is a bank run, it doesn’t matter what you hold if all your customers demand their money back at once.
That is an accounting practice; it has no bearing on the actual value of the asset. The same is true with calculating cost of goods sold; you can actually choose to use LIFO or FIFO costing to alter the accounting value of your inventory for tax purposes and such. Look up "LIFO liquidation" to see an example of what I mean.
Using generally accepted accounting principles, you have some room to conceal extra value or loss on your balance sheet. But the cash flows don't lie.
Insinuating that all assets must be liquid enough for all deposits to be withdrawn simultaneously basically requires that the bank only hold cash, which makes the entire concept of a bank fall apart.
We may use fiat instead of gold now but that doesn't mean a bank can float itself by hoping no one opens the box and breaks their superposition.
A bank is expected to be able to float itself as long as a sufficiently low number of customers demand their money at any given time, a bank run will collapse a bank no matter what monetary standard you’re on.
Incorrect. The opposite is true, in fact. Todays interest rate is irrelevant with regards to future cash flows for the bond.
Bonds are fixed income, your coupons are set and you get paid what you get paid. The coupons are fixed and when the bond matures, you are paid face value.
The only difference that is due to todays interest rates is that your low interest bonds have to fall in value to meet the market clearing interest rate if you are to sell them.
Correct.
>Bonds are fixed income, your coupons are set and you get paid what you get paid. The coupons are fixed and when the bond matures, you are paid face value.
Correct.
>The only difference that is due to todays interest rates is that your low interest bonds have to fall in value
Incorrect. They fall in price compared to the purchase price, not in value. The value was low even if they had held to maturity.
If you were forced to sell a bond before maturity, and you decided to repurchase that same bond, you could regain all of those future cash flows that were supposedly worth more according to the prior book value. Now if you repurchased that same bond, what price would you be willing to pay for it? That's right, you would be willing to pay no more than the current market price, because that is what it's actually worth, given those future cash flows that you so value so much.
Why would you only want to pay market price? Because those future cash flows aren't very much compared with the yield of other bonds. You're not going to pay the same price for a 2% yield and a 5% yield, because one is clearly better. The 2% yield has less value; it had less value before you sold it, it would've had less value had you held it to maturity. The bond's value is worth roughly the market price, whether you sell it or not. Its current value has exactly nothing to do with what you paid for it.
In a firesale the market price isn't full price, because the market needs time to react to price signals. More time than you give it during a firesale.
If you don't have time to let buyers figure out what a fair price would be, you gotta sell for much less than full price to convince those buyers to buy.
So the FDIC’s responsibility is to do something with what remains. Selling it all to another bank was one option that may not be panning it out; failing that, they’ll fund depositors, creditors, and investors as individual blocks of assets are wound down.
Insured depositors are sure to get all of their insured funds and the FDIC would have provided their own funding for that if they needed to. Uninsured balances and uninsured depositors will have high priority for what remains, which should be substantial.
These advanced dividends may come from liquid capital at the bank or from some other source of funds the FDIC has access to, and will be based on what the FDIC is already confident they can recover from the assets.
The issue is that the bonds can’t be sold now for anything like npv, because nearly risk-feee government issued bonds pay 3-4x what these bonds will.
That makes them… discounted
The actual value of the bond went down, because the expected value of the payout is less, even though the actual amount of dollars returned at maturity is the same.
Which is why the market price for it went down.
If you do the work and don’t get paid soon, what’s your expectation going forward?
On the other hand, if the CEO were saying, "Gosh, our company managed our cash so poorly that problems with one bank mean the company might go under," then I'd be looking for a new job pronto. Because not only would that mean notable financial mismanagement, but would also suggest that the business was not healthy enough that they could get a bridge loan or emergency investment.
I'm under the impression that every American adult has a credit card, so I don't understand what all the fuss is about.
A worked who understands this situation and still leaves because they got paid a week late is a worker who was going to leave soon anyway.
And these startups could announce they’re going to “monthly pay period” and glide out two weeks. Questionably legality.
I’d rather work for a job that’s most likely going to pay me in the near future and start to look around than quit and not be able to find anything else.
a) needs this lesson
b) will also be totally fine when they experience the hardship of learning it
I am having trouble finding sympathy for someone wealthy with no savings who is suddenly going to get some late marks on their credit report (who won't miss any meals and will remain wealthy).
Let them learn.
It’s not necessarily about the finances of the employees, it’s about the finances of the startups.
> It’s not necessarily about the finances of the employees, it’s about the finances of the startups.
This has nothing to do with that. This has nothing to do with the employer. They got screwed by their bank.
That should be enough for payroll, but not enough to spark a mass exodus from small and regional banks into the "systematically important banks" (ie too big to fail).
Seems like a no brainer move to shift your cash to JPM, at least until this blows over.
I am all for FDIC insuring accounts, and I'm fine with the level being as high as $250k. But anybody with a lot of cash beyond that should already understand what the word "uninsured" means. If they don't my sympathy for them is limited.
If we're going to spend billions more on improving the social safety net, people with hundreds of thousands of dollars in cash just lying around are not my first priority.
When people choose where to bank their millions of dollars, they are making a market-based choice. Markets only work when, on balance, good choices get good results and bad choices get bad results. If people can make risky choices and still make money because other people bail them out, that creates a moral hazard.
It incentives ignoring risks from grey/black swan events. Weak analogue, a CTO comes in who removes redundancy/backups from the system, saves huge costs and gets huge bonuses. Once every 5 years system fails and data is lost, CTO loses bonus but on average he is making more.
For people managing millions of dollars, though, I think they should, y'know, do their jobs and make professional-grade risk management decisions. Especially when the alternative is taxpayers coughing up money to subsidize their mistakes.
It's small though and I'm surprised there hasn't been more talk of it and other optional deposit insurance. What does this landscape look like for large companies routinely doing millions in payroll? You can't tell me they sweep it all in/out of different banks in 250k chunks. There has to be some sort of widely used insurance offerings, no?
There's a really nice threshold for measuring this: if you have more cash than can be spread conveniently amongst a number of banks such that those account balances do not exceed FDIC insurance limits, you do need to pay attention to what your bank is doing.
Please. This is not a serious argument.
You could say absolutely the same thing about buying stocks. By your logic, nobody should be allowed to buy stocks because it's just too darned complicated.
Similarly, it is quite literally -- and I do mean this literally -- impossible for anyone to conduct a meaningful and ongoing analysis of their bank.
This leaves basically three options:
* Buy private insurance, which is a fool's errand, as there's no guarantee it would make you whole in the event of a major black swan event.
* Split your account up into an absurd number of institutions. (You get FDIC insurance only per depositor, per account category, per institution. You can't open more accounts of the same category at the same institution).
* Place all your money at one of the Systemically Important Banks, where you basically get unlimited insurance.
Please explain what you thin the rational thing to do here is.
Anyhow, yes, buying stocks is too complicated to be a sure thing. But rather than banning the process, we just make sure there are decent guardrails so the average Joe doesn't get too screwed and systemic risk is limited, and then we let people do a capitalism if they want, but on their own heads be it. And whole industries have risen up to help them do it.
It's the same deal with banks. The government's job isn't to hold the hands of people trying to figure out what to do with their millions. It's to protect the small players from predation and limit systemic risk.
I am not a professional in this field, so I'm not going to pretend to give one-size-fits-all prescriptions for something that is obviously complex and context specific. Instead, I will encourage all fellow founders and would-be founders that there are many things where they should just hire an expert. Like law, or regulatory compliance, or the best way to manage millions in cash.
Just spitballing here, but since apparently a lot of people with millions of dollars who have heard their whole lives about FDIC-insured deposit limits are suddenly waking up to the fact that things above the line are uninsured, seems like a good time to innovate.
Back in 2008, the FDIC launched the Transaction Account Guarantee Program to provide unlimited insurance to uninsured deposits in non-interest bearing accounts, and then later expanded to low interest accounts, on an emergency basis.
This program protected nearly a trillion dollars in uninsured deposits, and made all of them whole.
After Dodd-Frank, the program was ended. However, if the FDIC deems a situation to have systemic risks, it's within their statutory authority to do this again. And it now seems the Government is planning to do exactly that, should they be unable to find a buyer for SVB.
That program was an always-temporary response to a major financial crisis. I expect most finance professionals knew that it was temporary.
But suppose you're right. Suppose all the cool kids thought they'd get bailed out no matter what. In that case, it's even more important now to not use taxpayer money to prevent the big-money SVB accountholders from taking a haircut. Because your justification here is exactly the kind of moral-hazard problem that regulators are very eager to prevent.
If the industry wants a program like that, they can create it. Indeed it already exists: https://www.difxs.com/DIF/Home.aspx
But depositors obviously have the ability to gauge risk, especially sophisticated depositors with millions of dollars of cash lying around. Otherwise people wouldn't be squawking right now about the risk of money being moved out of certain banks to certain other banks. Otherwise things like the DIF wouldn't exist. Otherwise treasury management wouldn't be a whole profession.
The problem is that many depositors are not looking just for safety, they pick other things, sometimes over that. Which is their right! But sometimes when trade safety for other things, it turns out badly for them.
Do you think all the CFO’s, accountants, and financial advisors of American industry didn’t know that until this weekend?
Yet the small and regional banks still seemed to have made it all this time.
I was aware of this regulation. I thought it was unlikely. But now that it is happened, I will be removing all my money from smaller banks over to TD (big Canadian bank).
This line needs to stop making the rounds. It’s a part of the political game playing for a bailout.
Nothing fundamental about deposit risk has changed this weekend vs the last few decades. The rules have been established, well known, and integrated into the market as it currently stands. Those small and regional banks got wherever they are in that market and the collapse of SVB doesn’t change that any more than the collapse of the other 576 banks in those decades.
There are well-established practices for managing the risks associated with your deposits. People like Ackman and other vocal VC folks just thought they could get away with cheating the system (disruption!) and are now crying for the taxpayer money they built into their risk strategy.
Because banks use deposits to fund investments, deposits have a risk of loss. That’s why there’s insurance available for them. Businesses and wealthy individuals have been navigating their way through this risk for a long time. The need to do so is not rarified knowledge and the means are not secret.
Imagine some homeowner called up Allstate saying, "Hey, my house burned down last week, can I get that covered even though I don't have insurance?" We'd laugh at them. I get that it sucks for them, and they're going to have some Kubler-Ross time ahead. But that doesn't mean that somebody else should bail them out.
And some other forms let you actually “come current” before a claim, but it varies.
Which would be like buying fire insurance after calling 911 but before the trucks arrive.
This is proceeding as it should, and despite the terrible circumstances we should be proud that there are actual functioning institutions to take care of this process. Depositors may not be made whole, but it doesn't look like SVB had a bunch of mortgages of defunct malls in Las Vegas (and similar) like back in the housing crisis. Depositors seem likely to get half their funds back this week and then most of the rest (though likely not all) over the coming weeks.
Shocked that no VC or group of them haven't stood up a short term bridge loan facility since it was them who triggered the chain reaction that took the bank down.
Several groups are. They're offering anywhere between 60 to 80 cents on the dollar for the uninsured amounts. https://www.reuters.com/business/finance/hedge-funds-offerin...
The problem is we don't know what "some percentage" and "not many days" are. If you said 99% on Tuesday, no one would care. 50% in May would suck.
Here it seems like they're just shrugging shoulders and saying "I dunno maybe you'll get some of your money back, but no promises". Good luck to anyone that had major uninsured deposits there, I hope it works out in the end but it doesn't seem like any real help is coming.
And most of all what Bank wants to adopt a bank who had a bank run? That’s scary.
I think every bank seriously fears such things.
And even FDIC leaning as hard as they can and pulling all strings can’t get a bank to eat them.
This is both why they failed even though they appeared to be still healthy and also impossible to find a buyer. All the money already ran out the door. The enticement to buy a failed bank is getting all the deposits and new customers, but there's none of that left
However, I also think this is why other more general banks are not in as much danger as everyone wants to imply. 10 VCs (or less) called their portfolio companies and told them all to pull their money. A bank with a much more diversified customer base does not have that risk
The question is why one of those banks, or Citigroup or whoever, would take on SVB's accounts if they weren't legally compelled to. SVB's financials probably aren't great and they cater to a customer base whose superpower appears to be well-coordinated bank runs.
Although I'm not looking forward to the next few weeks when the VC community will be blasting out screeds about how their bank-run-withdrawals shouldn't be subject to clawbacks...
Not sure why anyone who withdrew should be subject to clawbacks. What law did the break? SVB caused the bank run, it wasn’t some meme driven panic or coordinated effort.
AFAIK the FDIC doesn't look kindly on people who liquidate their accounts during a bank run [0]. This has two purposes. First it spreads a smaller amount of pain around to all depositors, rather than a larger amount of pain for some depositors. And second, it discourages bank runs in the first place.
And honestly without the meme behavior SVB might not have collapsed. I don't think talking about holding the bonds to maturity is a great general appraisal of the situation. But on the other hand it seems SVB had lots of depositors that were actually content to park a lot of cash and not chase high yields, so it could have actually worked out if not for the run.
It deserves to be dragged through the gutter for the hubris and incompetence demonstrated by the CEO, CFO etc.
And hopefully a reminder to everyone that they should due diligence on their banks. The fact that they had no CRO and openly lobbied for deregulation should have been major warning signs.
Or could they or some part of the government buy them at face value and hold them til they mature, while making the bank depositors more whole?
SVB had billions of dollars in first-lost equity capital that was completely wiped out against those marks, hence them being insolvent. But that means there isn't a 1-to-1 lose for depositors against those underwater assets.
But it could be nobody wants to touch it. Maybe Musk wants a bank?
They won't ever HTM but they can sit on things for a bit, they do have reasonable flexibility.
Why doesn't YC pick it up? Even just as a testbed for enterprise technologies for banking, a bank managed by that culture will pay itself off in growth.
Both those technologies have yet to see real revenue… so in turn, lots of companies have been drawing down their balance for the last 18 months without 1. Making money or 2. Raising more.
TLDR the amount of money invested in speculative and unrealized companies led to unique exposure for svb
Seems so trivial compared to the scope of the rest of it.
"may"
If they get their get their money back it only reinforces the bad choices here. Let them fail. The world doesn't really need these the vast majority of these YC trinket startups anyway.
Banks are in the business of lending money to home buyers, etc - how is loaning to the US Govt. criminal?
They have a cash crunch due to interest rate rise, and VC slowdown - bad risk management, but everything is above board.
Startup lines of credit should not happen from deposits, too risky an asset class
Well. That wasn't happening. So the bank started making riskier and riskier loans rather than reduce the number of incoming deposits.
Arguably, given inflation, the value of FDIC should be increased beyond the $250,000 limit. But it's difficult to have much sympathy for companies that invested large sums of money into SVB without doing their due-diligence. If these companies need to be taken over by the federal government to prevent stock market contagion it would be nice to see some political consequences as well.
It's absurd that a Lehman Bro.s CFO chairman was an executive at this bank. There will be lawsuits that come from this, but I'd expect that the federal government should also be an aggrieved party (as in, "the People Against...") given the risk of this collapse to the finances of the larger public.
What due diligence would a bank customer do that would uncover the sort of escalating risk profile you've outlined? I ask as someone very far from finance and banking.
In any case, if you have a large amount of money you're investing in a bank as opposed to the stock market then you should be primarily concerned that the bank will have a stable return that's slightly higher than inflation with a low risk profile (ie remain solvent). That means that you need to make sure that the loan book (that is, the loans that the bank is giving out) are non-risky, the treasuries that the bank has on hand won't devalue the banks asset base if the Federal Reserve decides to raise rates (another problem that SVB had), in addition to the risk profile of any other assets on hand and how much each individual asset class affects the solvency of the bank. In short, the more money that you are investing in a bank (or any other financial vehicle) the more investigation you should be making into that bank.
In simplistic terms, if you're spending a couple dollars on a candy bar you don't examine the purchase with as much attention as compared to if you were buying a car or a house. And if you suddenly have come into large amounts of money and need to make complex financial decisions I would talk to a licensed financial professional. These guys are the financial professionals and they didn't do their homework.
If you think that we should treat the act of keeping money in banks as a risky choice, then fine, but there will be fairly substantial implications to that.
You have a source on that? Pretty sure this is incorrect. They weren't making risky loans. They bought 10 year treasury bills (a secure investment normally) that were then substantially devalued by the fed versus new treasury bills.
I'm going to backpedal (a little bit).
It will take the FDIC looking through all of their books to determine everything that happened - with bank implosions like this there were probably people on the take who knew what was happening. I suspect that more than one person will go to prison for financial fraud.
Take a look at this -
https://www.macrotrends.net/stocks/charts/SIVB/svb-financial...
So total assets of the bank doubled over a two year time period. That's bad. In the financial world having too much money is (typically) a big no-no, because it means that you have to invest that money in worse and worse performing assets (in this case assets with a worse risk profile). That's why a large number of successful small cap VC and hedge fund operations don't scale.
It also means that in this case the firm had most of it's cash from institutional investors (so they weren't FDIC insured) - which makes them more liable to bank runs.
I will agree with you that it looks like the firm primarily had a mismatch of ten year security treasury bills versus their responsibilities to clients. However, this is a symptom of the same problem - the bank, most especially since it was servicing mostly institutional clients - should not have been so overly sensitive to a single financial instrument. There should have been dollar cost averaging of buying securities over smaller time frames, as well as buying a mix of US treasuries with shorter maturities.
There also should have been, and this seems obvious in retrospect, a mixed basket of international treasuries and other assets to counter the risk profile of institutional investors that are primarily in the technology space. If technology stocks mirror the broader US economy but with higher volatility, then there should have been other assets held that would be counter cyclical to technology firms, such as a mixed basket of industrial stocks and commodities.
So I will say that you're right in that they weren't making riskier loans so much as they weren't diversifying their portfolio given the size of their asset base. Given that these were large sized institutional investors as opposed to FDIC insured clients, not investing in a mixed basket of asset classes is not good.
You're effectively paying for the lower rate of return that a treasury bill has because it's insured against risk, without being able to take advantage of that insurance. This is true in a roundabout way - given that the Federal government has to bail out banks during a financial crisis their return to the investor reflects that risk (not only in absolute terms but in the way the yield tracks the overall economy). Most banks should stick to treasuries because they don't service institutional clients and so can take advantage of that insurance. That wasn't the case here.
It doesn't look like diversifying their portfolio would even be possible given how fast their assets increased. I suspect that they started absorbing a large amount of crypto money because people didn't know where to put it and there should be some investigation into whether other banks are diversified enough.
It looks like possibly corrupt banking leadership and probably ignorant clientele. The intelligence of people is often inversely proportional to how fast they can make money for nothing.
In short, massive increases in assets is a huge red flag.
Here's a Barron's article on the subject which has some more numbers -
You're effectively paying for the lower rate of return that a treasury bill has because it's insured against risk, without being able to take advantage of that insurance. This is true in a roundabout way - given that the Federal government has to bail out banks during a financial crisis their return to the investor reflects that risk (not only in absolute terms but in the way the yield tracks the overall economy). Most banks should stick to treasuries because they don't service institutional clients and so can take advantage of that insurance. That wasn't the case here.
I should mention that here the risk was that the Treasury yields were increasing faster than the Treasury notes on hand because the Federal Reserve had so aggressively tightened the Federal Funds Rate. This would cause investors to take their money out of the bank and invest the money in another bank that had a higher rate of return. However, in most banks this doesn't precipitate a bank run because if most investors are under the FDIC $250,000 limit then the customers know the bank is insured against default.
Other banks that have large numbers of institutional investors that are over the FDIC $250,000 limit may also be in trouble, because they may also be liable to have bank runs, if they're primarily invested in older US Treasuries.
In essence, what the Federal Reserve has done, wittingly or not, is to destabilize those banks that have large numbers of institutional investors but are operating primarily as traditional small-scale banks holding mostly US Treasuries. This may be a good thing in the long run as it would clear out those institutions that are effectively operating as asset management companies without diversifying their portfolios as they should.
There are probably more than a couple more banks internationally that are holding ex-crypto funds that are not properly diversified. If other countries likewise quickly tighten their rates I wonder if there will be other banks that fail for similar reasons.
Why run a bank responsibly and hedge for interest rate rise, if your customers are protected over 250k anyway? Hedging lowers the yield you can give. So ignoring that, you can offer maximum yield and attract companies to do bizarre things like Roku keeping 500 million there or Circle maybe 3.3 billion. This doesn’t punish the bad behavior, it actually encourages it. Although the bank is dead so I guess there is that. But the CEO sold $3.6 million worth of stock two weeks ago so I think he will be fine.
(2) Because there are an enormous amount of regulations governing how a bank has to manage its reserves. SVB erred within those regulations and helped push for loosening of them for banks its size, but there are still a lot of constraints designed to minimize the chances of failure.
And (3) because your bank _disappears_ if you go into receivership, you're out of a job.
In theory, the reputational damage done to the CEO, CFO etc means that they will be unemployable in the future. But seems like everyone in the finance world has short memories so I doubt this will be the case.
Moreover, the advantages that come with FDIC insurance are more than worth it to the banks (otherwise they wouldn't participate) so on the whole they probably have more money under FDIC than they would without it.
Part of the problem is that people think "It's a Wonderful Life" describes how banks work (banks take deposits and lend them out) but that hasn't been true for almost a century (because of exactly what happens in "It's a Wonderful Life"). Weirdly the deposits a bank has aren't really important to the bank's health one way or the other; they're just the regulatory price the bank pays for being allowed to originate loans.