When did SVB insiders begin to realize they were in trouble?
nongaap.substack.com
nongaap.substack.com
These are all fancy ways of talking about accounting tricks that banks are allowed to employ in order to hide economic losses from their financial statements. Banks would argue that their accounting tricks are blessed by the priesthood of professionals accountants, so it's perfectly legal. Which it is. It is not obvious that real-time mark-to-market accounting would have made things any better, but pretending that massive economic losses were not real was not a sustainable trajectory as soon the accounting fiction (no losses) collided economic reality (the need to sell holdings, in order allow depositors to withdraw their cash demand deposits).
Given the panicy herd psychology of humans, it has long been argued (at least since as long as the collapse of Lehman Brothers) that "head-in-the-sand" accounting is preferable to mark-to-market in order to ensure the stability of the financial system. In laymen terms, sometimes it's better for the public not to know how bad things have gotten behind the scenes. That is a kind of common sense practice for governance, and it isn't going to go away. Ironically, the answer to the SVB collapse is that you should have less informed, less rich and less well connected depositors (i.e. tame and docile customers) if you want to reduce the risk of a run on your bank, which is obvious in retrospect.
Usually in a bankruptcy, if all creditors are paid off, the equity shareholders get the remainder.
Usually they get wiped out, but sometimes they do get money back. A bankruptcy crystallizes the debts, but the assets can continue to increase in value.
I think GP may have been focussing on one part of pwc’d recoveries but overall, Lehman lost money. Dunno.
Better for whom?
It seems to me that institutions that serve the public should do so with transparency. The idea that “the experts” know better than “the public” is a dangerous and elitist one. The suggestion that “the experts” be allowed to hide their math while they fumble at the economy trying to make a buck is absurd
If we're including private companies, how far does that go? Should I be allowed to look at the financials of local restaurants?
I think you mean something different, but SVB went public in 1987.
Transparency in publicly-traded companies is obviously important.
SVB was subject to all of the usual reporting and disclosure rules.
Given this fact, should experts say things that may cause this panic?
If so, it's unlikely that more obfuscation is the solution.
1. Keep deposit rates near zero, in which case depositors would progressively realize that they could be making 4.5% on their money elsewhere and withdraw their funds. This ends up being exactly the same as the bank run that happened, just in slower motion.
2. Raise deposit rates, in which case, they would start losing money until they were forced to sell assets to pay depositors their interest. Those HTM assets would then be marked to market and the bank would be officially undercapitalized and taken over by the FDIC.
3. Raise capital or sell the bank. They tried raising capital unsuccessfully. Given this, it's questionable whether they would have been successful at selling the bank because it's unclear whether the bank had a positive value.
That’s why there’s a distinction because it gives an invalid view as well. Plus there’s a footnote in the 10K that gives the value at fair value.
Source? A report by JP Morgan contradicts your claim
https://am.jpmorgan.com/content/dam/jpm-am-aem/global/en/ins... (see "Impact of unrealized securities losses on capital ratios", all banks are comfortably above water).
Now, what could be quibbled with is who is actually an expert. Having a lot of money and having founded a successful tech company 25 years ago does not make you an expert at everything.
Not necessary
In a perfect world, exactly half of a population will be (equal to or) below any average when frequency is a normal distribution. Like IQ scores. So when they say "half of the population is below average [IQ]", it's not complete nonsense.
While that is a very vaguely defined term which is hard to measure accurately, it seem likely that it does not follow a normal distribution but is rather has a bulge at the lower end and have a long tail at the upper end. If this hand-wavey distribution is accepted, that would likely mean that fewer than half are above average. But again, that is contingent on the distribution and not a necessary truth.
> the median is the value separating the higher half from the lower half of a data sample, a population, or a probability distribution
I like to say that, too, but it's not technically true. It's confusing median with mean.
Human intelligence (usually IQ) is not something that can be measured in a vacuum, so it is generally measured in comparison to the whole. So scores are adjusted on a bell curve such that the mean and median score are the same. For IQ that is 100.
So in the case of measuring intelligence, mean always equals median.
But if we were talking about income, then of course you would be right. Way more than half of the world is below the average income.
Those standards only apply to our largest banks. But had they been applied, this disaster would not have happened.
See https://www.ft.com/content/c95e7708-b903-405d-a017-963844eb3... for more.
SVB might have lasted longer if their depositors had not been running for the exits. But why assume that lasting longer is a good thing? They might have got themselves into even more difficulty. In that case the VCs did SVB a favor.
In other words, those "safe investments" weren't so safe?
Yeah, but only several years later, and all the while earning a low interest rate. In other words, the net present value of the security still dropped. Sure, if the bank holds to maturity it'll get its principal back, but it would have lost out on a lot of interest. Why would you want to hold your money at a bank that's lending out at 2% (made up number) when the fed is paying 4.5%? The bank will either have to offer lower interest on deposit to compensate, or take a loss. The former case basically creates a bank run dynamic. You want to get your cash out while you still can, otherwise your money will be stuck earning low interest rates for the next half decade. In the latter case, it leads to bankruptcy of the bank as the loss eats into capital reserves.
This isn't true. Runs can only happen when a bank has insufficient liquidity. Such as when it holds long-dated bonds that it purchased at historical rock-bottom low interest rates.
> If the bonds didn't need to be sold, they would have paid out.
This is the "you don't lose money unless you sell" fallacy. Which yes, is actually a fallacy. (Note the fallacy is useful to use, psychologically speaking, to try to manipulate panic-susceptible individuals into doing the sane thing and not panic selling every dip; that doesn't make it less of a fallacy though)
SVB should have purchased more swaps or swaptions, but this is me Monday morning quarterbacking. If depositors had left their money like It's a Wonderful Life things would have been fine.
Meh. Fractional reserve banking is not without risks, but I don't see any mention from you of the fact that SVB was holding bad assets.
How is this different from, you know, most banks as they stand today?
What's unique about SVB though, is that despite it being a relatively large regional bank, a handful of its customers - tier 1 VCs have enough clout to force a bank run. These VCs have created a situation where their entire portfolio of companies depend on SVB, and as a result if they say "Get out of SVB" they can cause massive disruption. What's really funny about this though, is that these VCs -aware that this is the case - don't decide "Better be super careful about dealing with SVB and slowly diversify to de-risk this massive systemic risk to their industry. No, instead what they do is they execute the exact bank run they know will massively damage their industry.
To put it in historical context, this is like if JP Morgan, instead of gathering institutional leaders and co-ordinating a calm and orderly response to a crisis had run on to twitter and screamed "IT'S ALL GOING TO ZERO GRAB YOUR CASH NOW".
> What's really funny about this though, is that these VCs -aware that this is the case - don't decide "Better be super careful about dealing with SVB and slowly diversify to de-risk this massive systemic risk to their industry. No, instead what they do is they execute the exact bank run they know will massively damage their industry.
They can't even say that without causing a bank run because everyone with a brain in their heads would ask themselves "I wonder why they are saying that, something must be wrong" and that alone causes the bank run. Even a bank saying "everything is fine" can cause a bank run because people would wonder why they feel a need to say that.
Plus, even if they could try to quietly de-risk SVB, everyone knew that if even one person spills the beans, the whole plan is spoiled. And what are the odds that nobody would spill the beans? Plus, what if you are a VC and that happened and then all the companies whose board you serve on find out that you didn't warn them in advance even though you knew they could have spared themselves by getting out early? It would not be good for you.
Bottom line -- the incentives to quietly hide a potential bank failure and coordinate a massive (yet somehow stealthy and not scary to depositors) response just aren't there.
They do but fortunately people don’t listen because they have better things to do. We also have sitting members of Congress trying to cause a panic. [1]
[1] https://twitter.com/repthomasmassie/status/16350743784541470...
You say the incentive for co-ordination isn't there, but quite clearly this demonstrates a massive incentive for VCs to be looking at the common dependencies of their companies and mitigating them. They actually do this really frequently with start ups and cloud providers - it's a very strategic decision whether as a small company you go with Amazon vs Google vs Microsoft for your cloud, why? Because you're handing over bargaining power in what is likely to be a potential acquisition. I agree that VCs haven't been thinking about things like that, but they absolutely should. It was always crazy that founders were getting mortgages from the same guys that were doing their business banking.
Who has both 1) an interest in bank balance sheets, and 2) enough clout with Wells Fargo's depositors to cause a SVB-style collapse?
Given how large and diversified Wells Fargo is, I think the only people with the reach to get a message like that out on social media (celebrities) probably don't have the interest or credibility to send such a message and have it listened to.
With the treasury, there is a very liquid and transparent market and you will almost certainly get all of the money back on a specific date. You just have to wait long enough.
While a cynical and pragmatic take, I must remind you of the tradition of the United States as eloquently spoken by the American Bar Association, and traceable back as far as our first Presidents.
>Democracy requires not just obeying the law, though; it requires that people actively participate in the political process. This means voting, of course, but it is usually thought that not just any effort at voting will suffice—the citizen must stay informed of political affairs and make a rational choice among the options presented to her in the voting booth. Is there a duty to vote, then?
The root of all evil is info asymmetry; and it is a repeatedly self-evidently revealed truth that "Sunlight is the best disinfectant in matters of civic (or fiscal) corruption".
https://www.americanbar.org/groups/crsj/publications/human_r...
I know it's kind of a low blow to point this out, but if your point is even remotely representative of the "finance/banking" class, there are some serious problems that need to get resolved pronto; in no way, shape, or form should it even be considered a desirable end that "darn it, why can't we just keep these damn customers in the dark".
You're there to facilitate. You're there to manage risk. You're there to accurately convey the gist and nuance of financial matters in a manner that can be processed by the layman, or failing that, help elevate the layman until you can. You are not there to, nor should you ever feel good about perception managing.
Oh, man, this made me recall the "borrow, then die" strategy mega rich people use to avoid capital gains taxes:
* Step 1 is to have a large investment portfolio.
* Step 2 is to get a loan from a bank against that portfolio with a sweetheart interest rate, very long term, and interest only payments with a final balloon payment.
* Step 3 is to let the dividends and appreciation on the portfolio pay back the loan.
* Step 4 is to die, leaving the entire portfolio to your heirs. This gives them the ability to take advantage of the step up basis, so they pay no capital gains should they sell, which also gives them the ability to immediately sell a portion of the assets to pay off the loans. They can then go on to implement this same strategy themselves.
There's not a direct mapping between this and the "held-to-mortality" book, but the spirit is certainly very similar. While it's losses being hidden by banks using the "held-to-mortality" book strategy, it's gains being hidden by people using "borrow, then die." In both cases, it's essentially done by delaying realizing those losses/gains until as late as possible.
https://twitter.com/moorehn/status/1634973901230071809?t=RXV...
"The best response, ie. the dominant strategy, is to betray the other, which aligns with the sure-thing principle.[3] The prisoner's dilemma also illustrates that the decisions made under collective rationality may not necessarily be the same as those made under individual rationality. This conflict is also evident in a situation called the "Tragedy of the Commons".[3]". https://en.wikipedia.org/wiki/Prisoner%27s_dilemma
I'm not giving a tutorial about how no bank will survive a run. The bank became insolvent because of a run spurred on by people like Thiel regardless of their issues with realizing losses on their AFS securities. It became insolvent^ last Friday after 42 billion dollars walked out the door
The bank doesn't deserve a bailout, sure. But depositors certainly do, and people like Thiel will hopefully be black marks for future lenders who know the risks they bring. Here's a good thread explaining where SVB went wrong - https://twitter.com/MacroAlf/status/1634626124260028419 - but in the end, they only became both illiquid (unable to sell shares being the last straw after having exhausted AFS securities and cash/equivalents) and insolvent (unable to cover debt obligations) at the hands of the people who spurred on the bank run.
^edit to correct from "illiquid" to "insolvent"
Regulators should have forced a capital raise last year.
It became illiquid last Friday.
Here is a good thread explaining it: https://twitter.com/MacroAlf/status/1634626124260028419?s=20
True. That was the precipitating event that forced it into the hands of the FDIC. But illiquidity is not insolvency.
Insolvency means it could not pay back its depositors because it assets could not cover withdrawals. This hole did not appear last week due to the $42 billion withdrawals.
He might've done his short term job properly, but there's a social contract he stepped on and the consequence of it is a lesser likelihood that ventures with his name on them (in any capacity. Advisor, investor, founder, whatever) will get favorable terms from lenders.
He and others who pushed for rapid exits are now a high risk for lenders, especially any lenders already evaluating their exposure to startups and VCs.
VCs must act in the best financial interest of their LPs. So if a VC knew or suspected that their investments were at risk due to bank insolvency, they have a fiduciary responsibility to act. Otherwise LPs could sue for breach of fiduciary duty.
> VCs must act in the best financial interest of their LPs. So if a VC knew or suspected that their investments were at risk due to bank insolvency, they have a fiduciary responsibility to act. Otherwise LPs could sue for breach of fiduciary duty.
No VC is getting sued for not telling their startups to yank cash during a 48 hour bank run.
Does his fiduciary duty to LPs outweight the insider information? IIRC its actually illegal to encourage or push a bank run.
But an illiquid bank is not necessarily insolvent.
In this case, the bank is both illiquid and insolvent. In which case we should not blame the illiquid event because it is eventual as the bank was insolvent ever since the feds hiked rates.
> the bank was insolvent long before that.
Well, not quite. Insolvency was achieved the moment of the bank run. Until then, the bank was fully solvent based on the value of its liquid assets, including stock, against whatever obligations they had at that point in time.
Once the bank run started, that's when withdrawals outpaced what they could fulfill through the sale of their liquid assets. Hence insolvency, and illiquidity very rapidly thereafter.
---
edit:
> as the bank was insolvent ever since the feds hiked rates.
This is less "not quite" and more "not at all" as it misunderstands what insolvency is - the inability to pay debts at maturity.
What is the maturity of deposits?
That's also why CDs exist. Far easier for FIs to actually do something with the money when you lock up with them and drastically reduce the risk of you withdrawing it.
Edit: Fed source.
Are Ponzi schemes solvent until they collapse?
This is redefining insolvency based on the (legally sanctioned) accounting trickery of classifying assets as HTM.
You are assuming that the rates got hiked, and never again will fall.
Had the rates fallen in a year, then they would have no longer been insolvent. And could have recovered. Indeed once they got stuck, they would have had every incentive to hunker down and pray for that outcome.
This will happen eventually in that situation, to blame the catalyst is being disingenuous. The catalyst could've been anyone, and even in the current case it might not be Thiel - it could have been someone who did it first who then told Thiel.
Water can stay liquid below freezing, but it need just one shake to fully freeze over, and it's not the shakes fault that the water is now frozen.
Any normal, non-degnerate bond manager would would keep a significant amount of 1-3 year treasuries in their mix of bonds. Feel free to call your 401k provider to verify this.
Thiel may be guilty of various things, but SVB's failure was due to overleveraged yield chasing.
The previous CRO probably saw the writing on the wall, I wonder if she* got shut down and decided to quit and watch the fireworks from outside.
According to the linked article: "Ms. Izurieta departed the Company on October 1, 2022. The Company initiated discussions with Ms. Izurieta about a transition from the Chief Risk Officer position in early 2022. Accordingly, the Company and Ms. Izurieta entered into a separation (without cause) agreement pursuant to which she ceased serving in her role as Chief Risk Officer as of April 29, 2022 and moved into a non-executive role focused on certain transition-related duties until October 1, 2022."
I’d suspect they were already marginal and this was their only way to keep the books sound until they could solve their deeper problems.
This is why bond investors who aren't yield chasing would never overleverage into these.
At the _very_ least the fed announced interest rate rises in March of 2022 (with updates in June, Sept, Nov/Dec) and SVB could've worked out some kind of short-term credit deal with a JP Morgan type last year. Instead they did nothing but sat on assets which they knew would drop over 20% market value in a year while not ensuring short-term liquidity.
If they did do what you said i.e. "spend $80 to buy $100's worth of treasury notes", then they wouldn't be in the conundrum they're in today. Because their cost basis in that case would be $80 and they could simply sell that treasury note for $80 and they wouldn't have a capital loss at all (in fact, they would be up since they earned coupon payments). It's only because:
1. 2021: they purchased low interest treasury notes before interest rates jumped
2. 2022: interest rates jumped faster than expected
This caused SVB incurring capital losses, which meant their assets to be worth less than their deposits.
If you are curious and want to visualize some of the changes on a graph, you can check out VFITX [1], which is a mutual fund that holds a mix of treasury bills, bonds and notes for an average of around 7-year duration.
-2021 Jan 1: $11.63/share
-2022 Jan 1: $11.12/share = 4.4% cap loss (before factoring in coupon payments)
-2023 Jan 1: $10.15/share = 12.7% cap loss (before factoring in coupon payments)
Forget the numbers.
The long term ones are advantageous on their books because they cost less to purchase than short term ones but still record at the full HTM value.
With stable and low demand on withdrawals, using that HTM value isn’t unreasonable since the bills are sure to mature and so the difference of cost between short and long term bills means their books look better for less. There’s predictable risk to the play, but they probably needed the extra bit of wiggle room on their balance sheet and felt it should be fine as long as interest rates stay low and deposits don’t pick up.
But of course neither of those was going to hold. And so (as you noted) their bills grossly devalued and their account holders changed borrowing and withdrawl patterns as the economy shifted. Both factors built into the risk fell through and they went from probably-marginal to downright-damned.
If a company buys low interest bonds (i.e. interest is yield) in a market where interest rates are going up, at some point the cash rate will exceed their bond yield and at that point the bond price drops to match the current interest rate.
Why this happens is when the interest rate is above the bond yield, no one will purchase the bond at the original price, as they can get a much better return in the overnight cash market.
That means the price of the bond falls to a point where the bond yield now matches the cash rate plus some margin for any future risk. That lower price gives the asset it's true value.
So as the cash rate continues to rise the bond price continues to fall and without doing anything, SVG finds itself bleeding hundreds of millions in asset value, with no end in sight.
That then creates the panic and the rest is history.
Yield chasing is equally gross negligence and avarice.
I'm not sure what you mean by "what's the advantage". What's the advantage of going 100% into Tesla stock call options, rather than an SP500 index fund? There is no advantage when Tesla is returning 4x the S&P. There's a rather large disadvantage when it drops 30% in a quarter.
SVB would have been equally as lambasted for keeping the deposits in cash, as that's an equally as irresponsible thing to do.
Bond portfolios typically hold a mix of maturities from 1, 2, 3, to 10-year+ maturities. The short term ones offer liquidity and protect against interest rate risk. Because if the interest rate increases and new bonds are issued at a higher rate, your maturing bonds become cash to purchase the new, higher-yield notes.
Literally - call your 401k provider and ask to speak with an investment advisor if you don't believe me.
Holding only 10-30 year HTMs is absolutely yield chasing. SVB skipped having the short-term maturities, because they do not offer much yield. It is basically the literal definition of yield chasing.
>SVB would have been equally as lambasted for keeping the deposits in cash, as that's an equally as irresponsible thing to do.
All cash would've been foolish, but considering the primary purpose of a bank is to provide liquidity for clients, it's a bit of a reach to call it equally irresponsible as assuming your banking clients would be fine waiting 6-10 years for your investments to mature.
If the SVB bankers were "yield chasing" surely there were more effective ways of doing so at approximately the same risk.
Exactly. the 1-year notes had zero interest rate risk, and almost no yield. The 10-year notes offered very high interest rate risk (remember: rates were almost zero) and barely-more-than-no-yield.
Choosing 1.5% return at high interest rate risk vs. 0.5% return for low rate risk. Either way you are getting almost nothing, but one has the risk of putting you into a liquidity crisis. In a sense you're willing to risk it all to squeeze an extra 1%, It is the absolute definition of yield chasing.
>and apparently have lots of mechanisms by which you can borrow against them should you need to in almost any non-runlike scenario.
If your $1000 bond is worth $1005 at maturity, and it has dropped to $990 and you want to borrow from me against the bond, I will charge you at least $15 in this scenario. That's slightly oversimplified, but lenders (other than the Fed/QE) will loan at a rate where you're essentially locking in a loss, because they have what you need to offset your risk you failed to hedge against (liquidity).
>If the SVB bankers were "yield chasing" surely there were more effective ways of doing so at approximately the same risk.
Not that I am aware of, at that scale of money. There's also high-risk lending to borrowers (which SVB did) but companies might borrow $10M, $20M, maybe $100M. When you're talking $50-100B, Bonds are the only game in town.
30 year T notes, for example, seem to have been at double the 10 year notes in return at this time. Why not go for those if we're assuming greed as the driving factor here?
It really does seem like a ludicrous bet to be so invested in long term bonds at a moment of historically low interest rates. That’s why it reads like greed. SVB seemingly did very little to reduce the risk on that absurd bet.
> There are tons of places to put money that are riskier, even billions, that would have yielded better returns
That there were many riskier alternatives doesn’t mean that there were no safer alternatives. (And by the way most of the riskier alternatives wouldn’t have actually yielded better returns in the last couple of years.)
Speculation that interest rates would go down and longer duration bonds would appreciate more?
Avoiding the hassle of managing a short-term portfolio to have more free time?
Taking risk for the sake of thrills?
Your example from other comment with 30y maturities is actually nice example - that would be "way more greedy".
Basically as long as your bet on higher yields and bigger risks does cause your bank to fail, you were too greedy.
I am not an expert, but the explanations given make sense to me.
It sounds like this was the "right decision" in retrospect. If so much startup capital has been deposited into your bank that you can't safely steward it while turning a profit, it seems the only answer is to let that money go elsewhere.
Zeltice started this thread by asking, "why is this greed and not just incompetence?" It sounds like both. The corporate officers were stuck in a mindset of "we must keep growing and turning a profit" (greed) that they took the only option to do so, which led us to today (incompetence).
This would have been "safer", but lost them money.
Instead, they bought 10-, 20-, and 30-year T-Bills which were yielding more like 2-3%. Not much by today's interest-rate standards, but significantly more than 0.25%.
That appetite for long-dated bills could, I think, be described as "yield chasing." It was a decision made for short-term financial gain in ignorance of the risks involved.
There are way better ways to "yield chase" than this, why are we presuming greed here when it seems just as likely to be incompetence?
If a doctor unknowingly took out your heart instead of your gall bladder, it may be incompetence but that's unlikely.
Such as what?
There are not, if you have $50-100B. Your options as a bank are either treasury bonds or mortgage-backed securities.
As a private sector investor (e.g. Warren Buffett) you have the additional option of equity investing, but it will take many years to move that much money.
In a short-term sense, but the point of short-dated maturities is not to produce yield but rather provide liquidity, which allows you to purchase higher-yielding 10+ year notes in the event the interest rate rises.
They would've actually gained money by (1) not being forced to sell assets at a loss, thereby leading to a run and also becoming insolvent and (2) e.g. used the maturing short-dated bonds to purchase 3-year treasuries at today's 4.1% rate, rather than their shitty 1.8% 10-year notes.
Banks make basically all their profit on lending, so they shouldn’t be making risky moves with deposits.
But did Thiel also organize runs on Silvergate Bank and Signature Bank NY? Why did those fail along with SVB in a span of days? His involvement seems to be getting exaggerated here.
If someone calls out that the emperor has no clothes and that is the reality, they have done nothing wrong.
How significant? Is 1/3rd not enough?
clearly it was not enough considering interest rates were zero at the time and the yield curve was inverted.
SVB bet it all on red and the ball landed on black. Everything after that point is not useful information.
Assuming the FDIC doesn't make everyone whole, then all of his portfolio companies using SVB will see themselves with valuations lessened by whatever amount of money was lost.
i.e his investments would burn.
That said, we may very well see an outcome where everyone's just fine and instead his investments see a more difficult lending environment. There was once a california law about encouraging bank runs, but it was struck down in 2012 apparently. So not sure what else might apply in criminal or civil code.
> Fintech startup Brex received billions of dollars in deposits from Silicon Valley Bank customers on Thursday, CNBC has learned.
>The company, itself a high-flying startup, has benefited after venture capital firms advised their portfolio companies to withdraw funds from Silicon Valley Bank this week.
It's true that there's a game theoretic problem here where it's not possible for everyone to take that advice. But... what's the solution being offered? Demand silence on the part of everyone who sees bad financial status?
Honestly, just looking at random facts about what he gets up to, this person sounds like the Devil incarnate. Paying kids to drop out of school. A foundation to understand the world through mimetic theory. Promises to invest in the economy of a small country, gets complimentary citizenship then pulls investment. It goes on and on.
Not suprising he would leave people high and dry.
Classic. https://www.vanityfair.com/news/2016/08/peter-thiel-wants-to...
*includes only super-rich with money to drop on two $50,000 treatments yearly, or a gold plated medical insurance policy.
And glass, and aluminum...
It's hard to imagine a bio-related technology that can't eventually be made inexpensive.
https://twitter.com/ByrneHobart/status/1628779894183272452
https://twitter.com/RagingVentures/status/161582608803847373...
EDIT: This tweet also proposes a timeline for the collapse based on one of those tweets -
That's the exact speech made by those people, and we know it because they have money and, hence, they have ideological clout and access to our eyes and ears. Had this been a bank from fly-over-country the discourse would have been totally different.
This is a serious question, not an Internet dunk or whatever. I'm not very knowledgeable on these topics.
The point is if things threaten the functioning of upper rungs of society, it gets worked on over the weekend by the leaders. If poor children do not have access to nutritional meals in schools, this gets knocked around for decades and decades while obesity and diabetes run rampant.
A simple example is spending the money to put whole grains, vegetables, and freshly prepared non sugary foods into a child’s plate twice a day during school hours. This would only require paying a few school employees well and paying a few dollars per meal per student for ingredients, but it is not something that has happened.
It is embarrassing to say the least.
Though maybe not so much max donations, but those matter less when you can pick up so many more $25/month Actblue donations.
https://seekingalpha.com/article/4565388-svb-financial-blow-...
Banking is far, far from a free market. Especially since 2008. There is heavy regulation, stress tests, etc.
People keep talking about how we need more/better regulations but none of that matters if the regulators look at a bank doing risky stuff and don't realize that it is doing risky stuff.
One of the reasons I'm glad about the government's announcement tonight is that I suspect there are a lot of other banks that are similarly exposed to the kind of duration risk SVB was, including First Republic, and now that people are looking for that the chance of further bank runs is pretty high.
From what I read, it looks like some banks are trying to stay below $250B threshold that would trigger higher scrutiny.
[0] https://mobile.twitter.com/jamiequint/status/163395616356500...
CEO was part until Friday of SF Fed board and successfully lobbied to make SVB not have Basel III enforced.
CRO is former NY Fed and risk ratings.
Yellen is former SF Fed president.
Dale (along with Rogers) opposed Jared Cohen and Sarah Robertson on their plan to repackage the MBS products, or maybe it was the specific method of repackaging, either way... After his exit interview and packing up his desk, he's talking to Emerson - he asks "who was it?... Robertson?" which clearly points to the internal politics.
Sam was constantly having "I told you so" moments with other executives, including the one who fired Eric, implying that they all had a good understanding of what they had been doing all along but willingly chose to ignore the risk. Laying off the risk team was the next natural progression of this, because they were no longer a real part of operations at the firm.
My understanding is that insider knowledge on the risk literally precipitated the run as more and more founders were trying to move all their money out at the same time.
And there was that blog post in December.
The biggest problem SVB had was a mismatch of duration between assets and liabilities. As interest rates started jumping, they should have acted on this by hedging or some other mitigation strategy. But this article's insinuations that people must have known as early as 2021 is ridiculous. The first rate hike was March 2022, and the subsequent one in May 2022 was already after the CRO ended her term.
For SVB to have problems, it needed 2 distinct problems: 1) interest rates had to rise and 2) customers had to start withdrawing funds. #1 started in March 2022, but I think #2 probably happened later than that. I think funding probably dried up Q3, which probably took startups as a surprise which forced them to burn more cash. By then interest rates started to ratchet up by 75 basis points at a time and the stock market hit their lows in October.
One possible scenario is that the ERM team flagged all this throughout 2022, but the CFO couldn't stomach the cost of hedging their portfolio and kept hoping for a reprieve or reversal.
Regardless, I think it's definitely possible that they knew something was wrong in Q3-22. The fact they didn't act until end of Q1-23 by selling off all their AFS assets in desperation is a evidence to me that they were holding out for hope and couldn't bear it anymore until the new CRO forced it. It doesn't seem conceivable to me that they had an entire ERM team that sat around with their thumbs up their asses not understanding the problems they had in the back half of 2022.
EDIT -
There's 3 other things I didn't think of but I just skimmed through their 10K.
1) They had the bulk of the HTM in Mortgage Backed Securities. In a falling rate environment, customers refinance, which means those loans get paid off, and their HTM asset gets converted into cash, which they need to redistribute back into another security. They could have used that cash to pay off depositors withdrawing their cash. But they could As rates go up, all the customers stopped refinancing, customers stopped buying new houses, and SVB wasn't getting those mortgages paid off, which probably cut into their cash.
2) Yes, startups must have been burning through cash, but I also how many of those customers pulling their funds out were just buying US treasuries or moving them into high interest products outside of SVB. This might have been a factor. I myself started buying US Treasuries for over half my portfolio now that 90-day T-bills are over 5%.
3) The 10K was filed on Feb 24, and SVB dumped their AFS portfolio on March 9. That's less than 2 weeks. There's no way that the auditors shouldn't have known about this sale, and they would have raised a huge stink if they knew. So either they were hiding all of this from the auditors, which sounds like fraud or something very acute occurred during those 2 weeks but I can't imagine what that is.
I'm going to be extremely interested to hear the reports from the inside because I'm sure people in SVB finance do not want to get pinned with the blame of this.
EDIT 2:
Found it. Moody's threatened to downgrade which forced the sale of AFS. So that explains it. So maybe everyone thought everything was okay and the surprise threat of the downgrade is what caused the house of cards to fall.
https://www.cnbc.com/2023/03/11/silicon-valley-banks-demise-...
https://viewpoint.pwc.com/dt/us/en/pwc/accounting_guides/der...
"The notion of hedging the interest rate risk in a security classified as held to maturity is inconsistent with the held-to-maturity classification under ASC 320, which requires the reporting entity to hold the security until maturity regardless of changes in market interest rates. For this reason, ASC 815-20-25-43(c)(2) indicates that interest rate risk may not be the hedged risk in a fair value hedge of held-to-maturity debt securities."
1. Long dated treasuries would almost certainly underperform long term if there were any interest rate increases
2. Interest rate increases were likely due to high inflation, low unemployment
3. Interest rate increases would correlate with a reduction in deposits
I’m not blaming a single person at all, but the bank in general should have been aware of this. While this seems more obvious in retrospect, it should at the very least have become obvious once the first rate hikes were announced
If you actually believed that narrative, you wouldn't think buying long term MBS was that risky. I think you'd be crazy not to doubt the narrative at least a bit given all the money dumped into the system during covid, I'm just saying it's not just one bank making questionable stupid decisions.
Jay Powell had a degree in politics and law. So, yeah.
What does this even mean? What else is there to blame other than individual people making decisions?
1 is obvious, that's CFA Level 1.
2 is also obvious but in 2021 the Fed said inflation was transitory. After over a decade of sub-2% inflation, it wasn't hard to not believe that.
3 is not true. As rates rise, more people pull money out of the stock market and park it into higher interest deposits. The problem with SVB is that they don't have a lot of retail customers that would park their investments.
3 is pretty predictable for a bank that advertised itself as banking half of all VC-backed startups in the U.S.
For "lower deposits" read "fewer startups get funded and deposit their funds at the bank."
I presume they have assets and loans to call upon. If you do the math, how much is it in the red?
Then the FDIC will sell off all the SVB assets, and from their statement and other articles, they expect to get most (if not more) of the money back that they’d pay out to the depositors. That’ll go back into the FDIC insurance fund and SVB won’t exist any more.
I don’t think anyone knows the exact math, partly because the assets are obviously illiquid. So you’re not like getting the full value of a bond, you’re just trying to get someone to buy it off you, which means the pricing is dynamic.
In 2020 and 2021 about 2.7 trillion worth of mortgages were refinanced. That gives you an idea of the scale of the problem with the Fed blithely raising rates.
From the HN Guidelines[0]:
Please don't comment on whether someone read an article. "Did you even read the article? It mentions that" can be shortened to "The article mentions that."
Why a different standard for the rich?