Investor Mark Suster says a “handful” of bad actors in VC destroyed SVB | Hacker News Reader

Investor Mark Suster says a “handful” of bad actors in VC destroyed SVB

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56 pointstoss175 comments

If a "handful" of external bad actors can completely destroy your financial institute then maybe it's time to consider how these systems are built.

I think there are probably thousands, maybe even tens of thousands of financial institutions around the world that could be destroyed if a handful plucked from some of the richest people in the world decides you're their enemy. To list of the financial institutions that could handle that would be the shorter list.

You're probably correct. That's a problem.

Whether that is a problem is a rather semantic issue. This is *property* of our credit based capitalistic system.

Remove this and you are back at medieval levels of inequality, one way or another.

Part of the reason why the fed was established was because there was a run on a significant number of banks roughly every 12 years between the founding of the US and the establishment of the fed.

Not correcting you, just supplementing what you said (it at least seems plausible without looking up the claim)

Interestingly the list of some of the richest people capable of destroying such an institution would likely be highly correlated with the banks that can handle it. As it turns out the Fed's existence is due to such rich people desiring the ability to crush the mom-and-pop banks.

I think the banks that can handle it generally have diverse clientele. SVB had businesses and venture capitalists for clients. When you have a few clients who deposit billions and the relationship turns sour between the bank and some portion of the clientele, well watch out.

It doesn't need rich people. All it needs is a sizable number of customers attempting to withdraw their funds. Actually that's exactly what these "bad actors" were accused of doing, they withdrew their money and warned others that the bank had liquidity issues. Which it obviously did.

Do you know what the reserve requirement for such a bank is?

The same people will probably pick up SVB’s customers post bankruptcy.

>Enter CBDCs

Your sentiment is common, particularly among central bankers. It feels kind of by design with the current international economic trends, but at the same time this seems like a pretty natural course of events when you have strong central banks. No matter what they do, it's always their fault because they have so much power.

Solution? They actually don't have enough; now introducing CBDCs. I don't think there's an obvious stable alternative either. Tether is just waiting for the rug to get pulled on it.

A handful of people can do immense damage to many things.

I don't see many discussing that at least some of the VCs who pushed people to withdraw from SVB, such as Thiel, seem oriented toward disrupting SV, society, and the banking system (the latter in favor of cryptocurrencies).

Do those people care about burning down this bank, and starting a conflagration in their own town?

It's a small leap from literal vampirism (blood transfusions for eternal youth) to figurative vampirism (burning down a bank to breathe some life back into your bad crypto investments).

https://www.vanityfair.com/news/2016/08/peter-thiel-wants-to...

Pretty sure he has done OK with crypto

https://fortune.com/crypto/2023/01/18/peter-thiels-founders-...

Several prominent VCs retweeted debunked claims about feds taking over First Republic Bank last evening, all in sync with each other. Their collective role in this panic (including possible backchannel collusion before and after everything went down) definitely needs to be investigated.

I'm no great fan of Thiel, but it would not make financial sense for him to tank SVB (limited upside vs. the upside potential of his portfolio companies) and would likely in breach of several laws, most notably fiduciary duties as a director.

It's a fun theory but doesn't hold up to more than a few seconds' thought.

I dont know either way but none of that is convincing to me. It wouldn't have legal consequences because no one can prove he wasn't genuinely panicked. He does profit if the FDIC doesn't step in his competitors and startups' competitors are hurt. Either way everyone moved their money to Brex where he is an investor. And as an ideologue he can continue his complaints about government and the financial system.

> it would not make financial sense

I don't have evidence to accuse Thiel of anything in this event, but many like Thiel, and I think Thiel too, are more concerned with power than money. Many are trying to sieze power in society (in part by creating chaos and disruption), and spend money to do it.

if i saw a prominent investor tweeting 'More in the VC community need to speak out publicly to quell the panic about [my bank]' i would close my account there asap, because in a sense a tweet like that is stronger evidence of a bank run than a tweet in all capitals saying 'get your money out now'

so i would say mark suster is one of the people who destroyed svb

but mostly i think it's that they'd been insolvent since september and weren't going to become solvent again unless the fed dropped the prime rate again

What's the basis for that insolvent since September claim? Looking at the end of 2022 financial data shows a bank that's been hurt by interest rates rising, but definitely not insolvent. Is the an alternative definition of insolvent you're using for that statement (beyond liabilities > assets)?

as i understand it, they hadn't marked-to-market their hold-to-maturity securities (because that's why you classify securities as htm, so you don't have to mark them to market) but their market value had fallen sharply (because of interest rates rising), so that their liabilities did exceed the actual market value of their assets

in that sense their solvency after about september was just an accounting fiction

i'm not even an accountant though, so please take this with a grain of salt, and let me know if i'm wrong

I feel this is the crucial missing bit of information. The rules allow Wiley E Coyote to run over the cliff without looking down.

When I was running a fund we'd always think about the current mark to market. People would get in trouble for marking their books away from the market. How is it that is allowable to pretend things are worth more than they are?

Nobody was pretending, all of the information was public. You are allowed to read about a bank's investments and then decide to join their fund i.e. deposit above the FDIC threshold - unfortunately, a lot of small business owners did not see it that way.

well, as it turned out, they were hedged with a 'fed put'

i don't really know the history of the regulation, but it makes some sense to me that, if you buy a 5-year t-bill which will pay out some fixed amount 5 years from now, and you hold it until that maturity date, you shouldn't have to care what kind of crazy irrational things the bond markets are doing during those 5 years because you don't engage with those markets at all; they don't affect you in any way

the t-bills they sold off the other day were not from the 'hold to maturity' bucket but from the other one, 'available for sale', so i'm not clear why the sale (as opposed to the presumably previous marking to market of those bonds) counted as a loss of 1.8 billion dollars

But in that situation your only risk is the thing that actually happened: you have to sell before you want at a bad price. Shouldn't the reporting rules be written so that people have to consider this?

So yeah their balance sheet calculation did not show it as marked to market, but even accounting for that, they were still solvent at the end of 2022 according to their annual report: https://d18rn0p25nwr6d.cloudfront.net/CIK-0000719739/f36fc4d... page 95 (there were $15B of unrecognized losses mentioned, but even then they were solvent: $211,793M of assets -> $196,641M of assets assuming all Hold-to-maturity marked down to market, which is still more than the $195,498 of liabilities they had.

hey thanks, i wonder where the conflicting calculations (e.g., https://archive.is/IMgxM, posted by 'ignoramous' elsewhere in this thread) came from

byrne hobart (quoted there) cites https://s201.q4cdn.com/589201576/files/doc_financials/2022/q... the quarterly report, which only mentions unrealized losses on afs securities, not htm securities

i see the total assets and liabilities numbers you mention on p. 95 of the 10-k you linked, but i don't see 15 billion dollars of unrealized losses anywhere, though i do see (for example on p. 124) 15724 million dollars of afs securities that had unrealized losses on them; but the unrealized losses themselves were only 1109 million dollars

i don't see anything in either report about unrealized losses on htm (non-afs) securities. in the 10-k (again p. 95) their htm securities are 91321 million dollars, almost 4× the size of their afs securities, and maybe they had about 20 billion dollars of loss of market value on those htm securities?

Re $15b: the line on the balance sheet about HtM notes that they're counting it as $91,321M for purposes of the balance sheet, but in a paranthetical note that it has $76,169M of fair market value (which is a difference of $15,152M).

But yeah that loss almost certainly continued going up in early 2023 as rates kept climbing.

oh, is that what the 76,169 line meant

i couldn't figure it out

thank you

> What's the basis for that insolvent since September claim?

See: https://archive.is/IMgxM / https://twitter.com/ByrneHobart/status/1628779894183272452

My understanding is that a commercial bank can be solvent as long as too many clients don’t suddenly demand too much of their assets all at once.

i think you're talking about liquidity rather than solvency

solvency is when your assets (including illiquid ones) exceed your liabilities

They made a very risky decision putting all their eggs in one basket. Sure, 10 year bonds are "safe" for the average investor. They are not an average investor.

There is nothing safe about mortgage backed securities.

I agree, and I have no idea how the "hold to maturity" accounting fiction is justified. It's very strange to me that we let a 200B bank use such different accounting rules than a 250B bank, and most other countries apply those rules to most or all of their banks.

This post facto trying to blame those exercising their fiduciary duty to those they advise, etc. to behave in ways in their own best interests for doing so is really weird. "Blacklist all the investors and directors who resigned" etc. being called for on Twitter.

The conspiracy theorist in me thinks: given the bullshit layoffs and other fabricated trends such as consistent news stories about a tech crash and a big recession around the corner and given the history,ideology and portfolio of Mr. Thiel and other "bad actors" that precipitsted SVB's collapse, this all maybe part of an attempt to crash the tech sector of the US and blame it for a recession which will allow a re-alignment of power and influence both politically and financially (including things like tech salaries but also at a much bigger scale). In other words, this looks too much like a controlled explosion by a few powerful people in reaction to covid-bailouts and 2020/2022 elections in the US.

Ask yourself who stands to benefit? Mr. Thiel and pals would surely benefit by giving their politicians ammo before elections next year and if they hedge their investments right their wealth will be minimally affected in a tech/US centric recession

The run started earlier in the week, msg's to moving money out were going on long before Thursday. Who originally triggered it, no clue... but in a bank run, those who run first make it out the door. You're not exactly taking your fiduciary responsibility seriously by thinking "oh it's probably fine! I'm sure everyone else will stay level headed and keep their money in this bank that seems to be falling over" - The FDIC in theory should to step in prior to the run, take over the bank and prevent it, they did a good job of that in many instances in 2008, not sure what happened here. It's been mentioned quite a few times in these threads, but this 60 minutes clip about 2008 is really good: https://www.youtube.com/watch?v=TAE8i40A5uI

This clip is unfortunately not available in Canada.

https://piped.video/watch?v=TAE8i40A5uI

This was the second largest bank failure in US history. The feds stepped in mid day on Friday and sorted out the entire situation by Sunday evening. And your takeaway is that the government was too slow to react and are to blame for this?

I wasn't trying to be critical of the FDIC, they're obviously really excellent at their job and it's a testament to just how down pat they have their play book given they did managed to get so much sorted out by Sunday. My only point was they managed to prevent bank runs of failing banks in the past, they have deep insight into the banking system. I'm curious what happened this time. Maybe as you said, it's related to the size of the bank, I don't know.

at this point they've promised to make svb's depositors whole, by levying a special assessment on all other banks if need be

if they had done that 60 hours earlier svb would be fine

Would be fine (an excellent outcome) and under the original ownership and leadership (arguably an undesirable outcome).

I say undesirable because if you believe they had financial troubles that cast genuine doubt on their ability to meet all withdrawals if they were spaced out over a reasonable period (say 24 months), then their management’s ability to run a bank is in question (and the owners who put that management in place should have that ownership at risk).

I don’t know with certainty that the “could meet all withdrawals” test was failed, but it seems that many people who know more finance than I do do believe that.

fair point

It's so boring to see people get blamed for taking their own money somewhere else in time.

And also rallying their dependents to do the same. How noble of them.

The article is blaming people for creating and spreading panic, not (just) for moving money out.

(And in the context of a bank run, there's a pretty good argument that the author is correct too.)

That's what a bank run is. If you don't take it out, there is no run and no problem.

And as we can see, there was nothing to be in time for, because nobody's lost any deposits. If the bank was in that much trouble it could've been wound down in a more orderly fashion than this though.

If people stop trusting banks because of good reasons they have a right to withdraw funds.

They don't have a good reason, they have a bank run. Which they have the right to do, but now there isn't a usable startup bank anymore.

You can manufacture seemingly good reasons

Like, for example, having a vast majority of deposits from an industry that is quite unstable and rumours travel extremely fast?

This is an unrealistic rationalisation after the fact.

If you have lost confidence in your bank you will not sit tight and see what happens, you will withdraw your money to protect yourself.

The article also contains quite a gem:

"Every VC I know was telling people, ‘We think your deposits are safe with SVB. It would be prudent to take some money because you could have a liquidity crisis for a week, but we don’t think a run on the bank makes sense.’"

That's a very strange thing to say. If it is prudent to take some money out then deposits are not safe and you should get everything out ASAP. Those who saw it coming did exactly that.

It doesn't matter if you have confidence in your bank. You just need confidence in the FDIC. They have a history of recovering everything including uninsured assets.

> This is an unrealistic rationalisation after the fact.

It's clearly correct that they were worried about nothing because 1. nothing bad happened to anyone who didn't withdraw funds 2. by withdrawing funds they now don't have a bank anymore. Which is a problem if it was the only one willing to handle startups.

>You just need confidence in the FDIC.

The FDIC insures up to $250k only. You are not asking for confidence but for faith that somehow they'd be willing to guarantee 100% out of their good hearts. That's an irrational thing to do when your money is at risk.

Regarding your second paragraph: hindsight is such a wonderful thing! Also strange to claim that they don't have a bank anymore...

> The FDIC insures up to $250k only.

No, they directly insure $250k and repeatedly and consistently demonstrate their ability to recover everything else by repossessing failing banks and selling them to other parties. They don't promise it's all immediately available past $250k, so it may take some time, but for you to expect a haircut you would need an example of someone getting one.

I would prefer this be more explicit policy though.

> That's an irrational thing to do when your money is at risk.

If you know what a bank run is you know this is causing it, so this is bad game theory (as we see since it caused the bank to fail). You should actually pursue a strategy of stopping everyone else from withdrawing. Screaming at all your founders and panicking in group chats is not that.

> Also strange to claim that they don't have a bank anymore...

They ain't got one. SVB no longer exists. If you want a new checking account for a new business you cannot get one from DINB of Santa Clara.

>If you don't take it out, there is no run and no problem.

I have heard this "argument" before from people like Alex Mashinsky, who's accused of having run a ponzi scheme. One would think all customers being able to withdraw their funds should be the base minimum requirement any legitimate bank must be able to fulfill.

Why would a bank need to support withdrawing 100% of its funds at once with no warning? Nobody wants to do that.

(It's actually impossible to create a bank that allows doing that; regulators won't allow it.)

Most are under the illusion that when they give money to a bank, the bank keeps it safe for them. The FED not allowing safe banks but actually forcing them to take unnecessary risks is part of the problem¹. It's completely false that nobody wants safe banking, many asset managers do for obvious reasons because this is a huge risk for anyone dealing with accounts in excess of the insured amount.

Also if you think banks that support full withdrawals (and thus making bank runs impossible) should not exist, what percentage do you think they should support? 50%, 30%? Should they have enough money to at least handle 10% of customers withdrawing? The real legal requirement might worry you if you know the figure. I encourage you to look it up.

¹ https://www.chicagobooth.edu/review/safest-bank-fed-wont-san...

What you are describing is called a narrow bank, and it exists in Norway.

There were people trying to create narrow banks, but they were rejected by regulators, because ,,everybody would take their money out of current banks and put it there’’.

Also there is one narrow bank in Norway, if you have at least $50M, maybe big companies should think about voting with their wallets.

Very interesting, thanks for the info! I wasn't aware a narrow bank already existed. And apparently the Norwegian financial system has not collapsed :)

You can exit a theater (i.e. take your own self out of it) any time. Only if you shout "fire" and create a stampede does it become a problem.

The situation in this analogy is complicated by the fact that there _was_ a fire at the theater. However, even in that situation panic can be detrimental to the system as a whole.

Not a great analogy IMO.

This is akin to seeing a terrible movie, announcing to the markets you're selling every share you own of the company, and then everyone doing the same.

Victim blaming isn't useful here. Bank depositors are de facto investors in the bank. Pulling your money and saying "this company is terrible leave" is not illegal and not a problem. Don't have a bad business with bad business practices controlling tens of billions of people's money.

If a bank can't produce the money I gave them that's their problem. They deserve to collapse and I deserve to be made whole. This whole "forgive the banks they have to make money too" non-sense ignores the fact the fed told these same banks they don't need any reserves in march of 2020. It's borderline criminal just like the idea of fractional reserve banking itself.

You can’t wear a fireman’s uniform, walk into a theater, yell “fire” into a loudspeaker, and walk away.

These were not ordinary people just moving money around. They had public trust, authority, and an outsized voice.

This is complete and utter nonsense. If SVB had enough assets to cover liabilities they could have borrowed as much money as they needed to cover and possible bank run.

On top of that, by simply saying "we have enough assets, anyone who wants their deposits will get them", they would halt the bank run on the spot.

I keep hear about bad actors among VCs, but I don't hear about the colossal mistakes being made by SVB's executives and board of directors.

Probably the same VCs that had interest in SVP taking higher risk before hand...

SVB was clearly vulnerable.

It had a concentrated portfolio of venture industry customers many of whom were required to deposit exclusively with itself and were therefore well over the FDIC insurance limit, and its curiously structured asset portfolio had taken a major hit with the change in interest rates.

They were not healthy.

With a condition so marginal, of course there will be people insisting that they could have made it through if nobody flinched and people insisting that their collapse was just waiting for a strong gust of wind.

The difference of opinion is why people were still both buying and selling their stock until it was delisted. That’s how markets work.

But at this point, it already happened.

The only reason to make a case like this (and those with opposing perspectives) is for influential people to jockey against each other, trying to smear people who they compete with for deals. We don’t need to participate in their soap opera. There’s plenty more practical to talk about now.

I think it's likely that certain actors were pulling the strings behind the scenes to trigger the run and make a hefty profit in the process. But they are nothing more than capitalistic hyenas, the root issue lies in irresponsible SVB management and reckless tightening by FED.

No one was making a "hefty profit" off the bank run. It was a case of a panic selloff, nothing more.

And of course no one has shorted the stocks. /s

I assume you know the answer? Or are just pulling facts out of nowhere?

This is why I wrote "likely", but as for facts, I know that SVB's CEO has sold his stocks on March 1 for $3M (in addition to a number of earlier sells). And according to Bloomberg short sellers made at least $500M in profits: https://www.bloomberg.com/news/articles/2023-03-10/shorts-ma... I absolutely will not be surprised if in the future we will learn that some enterprising individuals connected to the VC crowd have helped to trigger the run in the right time for them.

Or the banks leadership saw the inevitable writing on the wall and knew someone was going to start a run.

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