Federal Reserve Path Is Murkier After Bank Blowup

The earnings call where they said they needed billions of dollars stat didn't help.

SVBs liquidity issues predate VCs telling portfolio companies to take cash out. They already had to liquidate securities at a $1.8B and sell equity to fill the hole in the balance sheet on Wednesday, which was the announcement that led to the run.

SVB likely would have made it through the immediate term if companies did not pull out money en-masse. However, they were in fairly dangerous territory no matter what, and highly susceptible to the ongoing pattern of declining deposits (as burn rates remain high but new capital is not being injected at the same rates it was 18 months ago).

All that said, there were companies (not VCs) flagging SVBs risk on the weeks and months prior to this incident. Some were already pulling money out, albeit much more slowly.

The very nature of bank runs is that as soon as the fundamental trust that we can withdraw tomorrow is gone, everyone wants to withdraw today. That can, as we just saw, happen in a very short period of time. Once that happens, it is objectively in each individual party's best interests to get money out.

So sure, you could say that everyone should have just stayed put and not reacted. But in doing so, you'd be asking depositors in a bank that just announced they were unable to meet liquidity obligations to keep their money where it is, and that as long as everyone else did the same, then we'd all be fine, knowing that:

1. We would still likely have faced problems in the months and quarters ahead, and 2. That if enough of them did not heed the advice, you'd be caught holding the bag and unable to pay employees or vendors

So I'm not quite sure what those blaming VCs were expecting here. Would you leave your money in a bank with demonstrable liquidity issues?

the bank was already experiencing a slow run as startup funding dried up. SVB got hit by interest rates twice - once because the value of their assets fell and a second time because the money spigot into tech turned off and a huge influx of deposits turned into steady net-withdrawals. they managed their risk awfully.

> Oh don't get me wrong, I do blame the bank even more. But to pretend like VCs didn't have huge interest in this blowing up in the worsts possible way, is just shutting your eyes.

What are you talking about? What possible interest would they have in killing the by far best capital partner they've ever had (and maybe will ever have had)?

The death of SVB makes things significantly harder for VC and startups in the future.

Are rare hikes stopped?

> their actions weren't to recapitalize the bank

As I understand it, VCs manage pools of money that are structured as limited partnerships. Each pool has an investment objective, and presumably “recapitalize a failing bank” is not one of them. Any VC who did this would probably have been sued by their investors.

So you are saying the bank ceo was in conspiracy with vc heavy weights to tank the bank at the expense of their startups who bank there? Made the CEO buy long term bonds right before a bank run?

This verges on conspiracy theory logic, to my eyes... no, VCs certainly did not purposefully put their entire portfolios and industries at risk in order to put a stop to interest rate rises. You'd have to presume an all-knowing and all-powerful cast of actors to pull that off. The original point was a good one -- that the overall outcome of this disaster is overly good to VCs, but that's about as far as it goes.

If I had to guess, this failure was neither complicated nor involved any sort of conspiracy on the part of the VS.

Imagine you run a largish financial company. Over the course of a year or two, your customers like your service and ask you to hold on to a few tens of billions of dollars for them. And they only ask for 0.20% interest. Wow!

You could invest this money in the usual money-market things (short term treasuries, etc), and earn very little money. Still plenty in the grand scheme of things (you're multiplying by tens of billions!), not you see dollar signs in your eyes and want more. And you look at the yield curve:

https://home.treasury.gov/resource-center/data-chart-center/...

Wow, you can get 2% net if you buy long-dated treasuries, and 2% of tens of billions is hundreds of millions of dollars a year! And those dollar signs in your eyes get really big and you ignore the fact that this shiny yield curve is in part because no one sensible actually expects rates to stay low forever. And you also think "wow, this is such a good deal that I'm not going to think about the fact that a long-dated treasury is also a short bet on interest rates". So you decide to pull the trigger and buy these things with customer money.

And then the plot actually gets a bit nefarious, because you discover that this will violate Basel III. So you lobby Congress to exempt you, and you succeed, and you go for it. And you make a killing, at least until it blows up completely.

(The whole "liquidity" story is a red herring here. If SVB had been solvent, liquidity would likely have appeared. But SVB was actually insolvent, and no one really wants to lend money to an insolvent institution.)

If the VCs had actually been paying attention, I bet some of them would have said to their portfolio companies "here are a few million dollars in capital -- kindly store it in a Basel III-compliant bank or maybe a money market operated by one of the big players" and not "SVB is down the road and they're great!". Because the VCs were not playing the "screw up the Fed's monetary policy next year" game -- they were playing the "throw lots of money at portfolio companies and hope some of them make it big" game.

Well, I'd say everyone with more than 250k deposit didn't do their due diligence. And they might have asked the question, why the SVB-conditions were better than elsewhere. I would argue that's the idea of a free market, no?

Increasing the available cash during boom times leads to inflation risk when you need to inject more cash into the economy during a downtime. While pandemic wasn't predictable and downturns do happen and should have been planned for.

I think it's any career in which your bad decisions have the potential to harm millions of people, whether you're a bank executive or a rail freight executive hauling huge amounts of poisonous chemicals through residential neighborhoods.

The difference is that in banking specifically, the regulations seem to have some amount of teeth, so it's tantalizing to see executives receiving any material consequences at all.

Meanwhile I don't see the Norfolk Southern shareholders losing money or their executives losing their jobs. The incident is barely visible in Norfolk Southern stock prices.

One can hope.

https://www.bestcashcow.com/banks/S has 24 on a page it seems, and 15 pages, so 360 out of 4778 apparently. 7%, which is higher than the expected 3%.

Well, my understanding is:

Money is loaned into existence and the Fed's funding rate affects how easy or difficult it is for banks to get that money when they need it. The banks are turning around and using that money to pay interest, to make their own loans and financial products, etc. Those products' rates will always be compared to the rate the Fed lends at.

A higher Fed rate make new money more scarce, a lower rate makes it less scarce. The market behavior follows that.

So it controls the rate at which money flows into the economy. It also indirectly affects the cost effectiveness of other loans that aren't directly connected to the Fed, and also how risky people and institutions are willing to be with their money. That's a crucial piece here, not only does the Fed's rate control how much "new" money flows into the economy, it also influences the ways people behave with existing money.

In the beginning of COVID times, the Fed lowered rates to near 0%, which meant people/institutions were getting money much more easily than before. A whole host of zero interest loans meant it was easier for people to buy cars and houses and all kinds of stuff.

They were not the cause - that was the heedless use of stimulus funds and the supply chain problems leading to (the former) an increase in demand and (the latter) a reduced supply - but now that inflation has reared its head it needs to be tamed. As it stands now it is better to purchase 'today' instead of 'tomorrow' since prices rise while there is no benefit in keeping funds in interest-bearing accounts given the low interest rates. As long as this remains true demand will stay high leading to higher prices. This can really spiral out of control as has been shown in e.g. Weimar Germany or more recently Argentina and Venezuela although the cause of the rise in inflation there is different from the subject discussed here.

Eh, this is par for the course in democratic decline… same situation in Argentina for example, central bank is supposed to be independent but in reality the government controls fiscal policy. It’s true that the US has a long way to fall though.

It'd be way worse without the Fed, we'd have a collapse of everything...

But this is a narrow interest so that depositors at least have access to their money. It does not reward the bank. So long as the bank isn't rewarded, it should be a caution flag for the other banks to take risk management more seriously. Startups have to also have to get their burn rate under control or go out of business.